Financial Reporting and Analysis
Chapter Exam Questions
Course Introduction
Financial Reporting and Analysis provides students with a comprehensive understanding of how financial statements are prepared, presented, and interpreted within a business context. The course covers the key concepts and frameworks underlying financial accounting, the regulatory environment, and the principles of accurate disclosure. Students learn to analyze balance sheets, income statements, cash flow statements, and equity reports to assess an organization's financial health and performance. Emphasis is placed on the application of various analytical tools and ratio analysis to evaluate profitability, liquidity, solvency, and operational efficiency, equipping students with the skills necessary for informed decision-making by internal and external stakeholders.
Recommended Textbook
Issues in Financial Accounting 16th Australia Edition by Scott Henderson
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Page 2
Chapter 1: Institutional Arrangements for Setting Accounting Standards in Australia
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Q1) The role of the Australian Securities and Investments Commission is to:
A) issue accounting standards
B) administer and ensure compliance with the Corporations Act
C) develop the conceptual framework
D) supervise the AASB
Answer: B
Q2) Give an overview of the present institutional arrangements for standard setting in Australia.
Answer: In the private sector,the most important legislation specifying financial reporting requirements isthe Corporations Act 2001,which replaced the Corporations Act 1989.This legislation may be foundat <www.legislation.gov.au>.The Corporate Law Economic Reform Program (CLERP)wascommenced in 1998 as part of the Commonwealth Government's ongoing program to modernisebusiness regulation in Australia.As part of this program,the Corporations Act was simplifiedthrough substantial amendments made in 1998,some of which affected financial reporting.Section292 of the Corporations Act requires the preparation of financial statements for each financialyear by all disclosing entities,all public companies,all large proprietary companies and allregistered schemes
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Chapter 2: The Conceptual Framework: Purpose, reporting
Entity, the Objective of Financial Reporting, and Qualitative
Characteristics
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Q1) Distinguish between general purpose and special purpose financial statements.Give examples of each type of report.
Answer: General purpose financial statements are prepared to meet the common interests of a wide range of stakeholders,with no particular stakeholder's information needs taking priority.Special purpose financial statements are prepared for specific users who have the power to demand that the entity provides financial information directly relevant to that user's specific needs.For example,a small family-owned business may be seeking a loan from a bank.
Q2) Which term defines a 'financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy,specifically,all of the information needs'.
A) Balance Sheet
B) Auditor's Report
C) General Purpose Financial Statements
D) Management Discussion and Analysis
Answer: C
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Chapter 3: The Conceptual Framework:
Definition,
and Measurement of the Elements in General
Purpose Financial Statements
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Q1) Discuss the different theories concerning how liabilities should be measured. Answer: Paton and Littleton wrote,for example,that: Liabilities,like assets,represent bargained prices In other words,the standard of recorded cost applies on both sides of the balance sheet (statement of nancial position)[words in brackets added].26Bennett,Grant and Parker stated: the amount of a liability in the balance sheet (statement of nancial position)ought to represent the present value of the future cash payment to which the company would not be committed if the debentures had not been issued The interest rate should be the current market rate of interest for securities of a similar type [words in brackets added].27Sprouse and Moonitz suggested: to measure a liability is to determine the 'weight' or 'burden' of the obligation on the balance sheet (statement of nancial position)date.This 'burden' is the lowest amount for which the obligation could be effectively discharged [words in brackets added].28 Chambers suggested: it is possible to compute the current cash equivalent of these obligations by discounting the sum payable in the future to a present sum using the rate of interest payable for the immediate use of the money necessary to enable settlement to be made.
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Chapter 4: Fair Value Measurement
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Q1) A wide bid-ask spread is indicative of
A) An increase on market volume or activity
B) A decrease in market volume or activity
C) A Level 1 input in the fair value hierarchy
D) Highly developed price quotations
Q2) Which valuation technique uses option pricing models to determine fair value?
A) Income approach
B) Cost approach
C) Market approach
D) Asset approach
Q3) Explain the valuation premise and discuss how it is used,depending on what is identified as the highest and best use.
Q4) Which of the following is not a criticism of fair value measurement?
A) Fair value measures can be unreliable
B) Fair value measurements caused the global financial crisis of 2007
C) The measurements are not always relevant
D) The measurements impact the statement of financial position
Q5) Discuss the three widely used valuation techniques utilised to determine the appropriate fair value measurement.
Page 6
Q6) List and give examples of the inputs of the fair value hierarchy.
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Chapter 5: The Choice of Accounting Methods
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Q1) Costs incurred to reduce opportunistic behaviour plus the costs of opportunistic behaviour that it is not economic to eliminate are known as:
A) political costs
B) bonding costs
C) agency costs
D) opportunity costs
Q2) What is not considered an earnings benchmark?
A) Sustaining a smooth income stream
B) Meeting analysts' forecasts of earnings
C) Avoiding losses
D) Mimimising taxes
Q3) In relation to agency theory the statement that is not correct is:
A) The self-interest of various parties is often in conflict
B) It assumes that managers act opportunistically all of the time
C) It assumes that individuals act primarily to advance their own self-interest
D) None of the statements is incorrect, i.e., all are correct statements
Q4) Explain the income smoothing hypothesis.In your answer discuss the reluctance of Chief Financial Officers to use accounting policy choice to achieve income smoothing post-Enron.
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Chapter 6: The Statement of Financial Position
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Q1) The availability of assets to meet financial commitments as they fall due is known as:
A) solvency
B) control over resources
C) gearing
D) asset turnover
Q2) Identify and discuss the requirements concerning the classification of liabilities contained in AASB 101.
Q3) Current assets,as defined in AASB 101,are those that:
A) are expected to be realised within the normal course of the operating cycle
B) are held primarily for the purpose of being traded
C) are expected to be realised within 12 months after the end of the accounting period
D) any of the above
Q4) Entities are required to disclose comparative information the previous period.Discuss how the correction of prior period errors may impact on the presentation of the financial statements.
Q5) Discuss the concept of reserves and the sources from which they arise.
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8
Chapter 7: Accounting for Current Assets
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Q1) Which of the following is classified as a current asset according to AASB 101?
A) Inventory
B) Accounts receivable
C) Short-term deposits
D) Each of the listed choices are considered current assets
Q2) The AASB 101 definition of current assets has made which term virtually obsolete?
A) Fixed assets
B) Inventory
C) Current assets
D) Non-current assets
Q3) AASB 102 requires that any write down to net realisable value:
A) must be recognised as an expense in the period that the write down occurs
B) must be reversed when there is clear evidence of an increase in value
C) must be applied only on an item by item basis
D) A and B above
Q4) Explain and discuss the criteria contained in AASB 101 for distinguishing between current and non-current assets.
Q5) Explain the concept of the lower of cost and net realisable value rule.
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Chapter 8: Accounting for Property, plant and Equipment
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Q1) AASB 136 requires that assets are carried at no more than which amount?
A) Original cost
B) Current market value
C) Cost less accumulated depreciation
D) Recoverable amount
Q2) Under AASB 123 'Borrowing Costs',a qualifying asset is defined as:
A) an asset that takes more than twelve months to complete
B) an asset that necessarily takes a substantial period of time to get ready for its intended use or sale
C) a long-term construction project for the construction of ships, dams, roads or buildings
D) an asset that necessarily takes more than two years to complete
Q3) What are defined as immovable public facilities that are necessary to sustain living standards and concerned with essential services?
A) Current assets
B) Heritage assets
C) Property, plant and, equipment
D) Infrastructure assets
Q4) Explain and discuss how donated assets should be recorded in the accounts.
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Chapter 9: Accounting for Company Income Tax
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Q1) Empirical research on whether tax-effect accounting should continue to be applied indicates that:
A) share prices are more highly associated with taxable income, and therefore financial reports should conform to the taxation treatments
B) share prices are more highly associated with accounting income, and therefore accounting standards should not be changed
C) share prices are equally associated with both accounting and taxable income, and therefore both accounting and taxation income should be reported in the financial reports
D) share prices are unrelated to either accounting or taxation income
Q2) The lack of relevance to users of financial statements is seen as:
A) an advantage of the statement of financial position approach to income tax allocation
B) a criticism of the statement of financial position approach to income tax allocation
C) a detriment when conducting empirical research on tax-effect accounting
D) necessary in an attempt to avoid transparency in financial reporting
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Chapter 10: Accounting for Intangible Assets
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Q1) Which of these accounting standards applies to goodwill?
A) AASB 3
B) AASB 136
C) AASB 138
D) All of the above
Q2) Purchased computer software should be:
A) recognised as an asset and recorded at cost
B) amortised over its useful life
C) subject to an impairment test
D) all of the above
Q3) How is the accounting treatment different for purchased intangible assets as opposed to internally-generated intangible assets?
A) Internally-generated assets are amortised over a shorter useful life
B) Cost is recorded gradually for internally-generated intangible assets but at acquisition for purchased assets
C) Act of registering patents is more detailed for an internally-generated intangible asset
D) There are no differences in the accounting treatment for purchased or internally generated intangible assets
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Page 12
Chapter 11: Accounting for Leases
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Q1) What is a possible future event that can be excluded toward a supplier's substantive substitution rights?
A) A change in the expected useful life of the asset to the lessor
B) The introduction of new technology that is not substantially developed at the inception of the contract
C) A change in the amount in the minimum lease payments
D) An agreement to pay a below-market rate for the use of the assets
Q2) What are the two elements in identifying whether a contract contains a lease?
A) The type of lease and the identified asset
B) The identified asset and the minimum lease payments
C) Identified asset and the right to control the use of an identified asset
D) The type of lease and the minimum lease payments
Q3) What is a requirement listed in AASB 16 that addresses the exception of all leases to be listed on the balance sheet?
A) A right-of-use asset must be recognised
B) A lease liability must be recognised
C) Underlying asset is of low value
D) No exceptions are listed in AASB 16
Q4) What are the main characteristics of a sale-and-leaseback agreement?
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Chapter 12: Accounting for Employee Benefits
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Q1) Discuss the rationale for AASB 119 recognising long service leave as a liability during the preconditional period.How would you account for the possibility that an employee may not remain in your employ long enough to collect long service leave.
Q2) Which of the following is not considered a post-employment benefit by AASB 119?
A) Superannuation
B) Termination benefits
C) Administrative support
D) Free travel
Q3) Gassy Pty Ltd pays Andy $80 000 per annum in cash,plus a car that cost $50 000 a year.The company income tax rate is 30% and the average personal income tax rate is 45%.There are no other taxes (ignore Fringe Benefits Tax for the purposes of this calculation).Personal income tax is not paid on non-cash benefits.The after-tax cost of employing Andy for the year and the after-tax benefits received by Andy are,respectively:
A) $80 000; $71 500
B) $28 000; $71 500
C) $80 000; $94 000
D) None of the above
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Page 14
Chapter 13: Accounting for Financial Instruments
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Q1) A futures contract can be arranged:
A) only on financial measures such as stock market price indices
B) only through an established stock exchange
C) only on commodities such as agricultural products
D) on virtually any commodity or financial measure
Q2) The buyer of a put option on shares:
A) obtains the right to sell the shares at an agreed future time at their market price at that time
B) must sell the shares at an agreed future time at a price determined now
C) obtains the right to sell the shares at an agreed future time at a price determined now
D) must sell the shares at an agreed future time at their market price at that time
Q3) Which of the following is not one of the five categories of financial instruments?
A) Held to maturity investments
B) Hedging instrument
C) Loans and receivables
D) Financial assets or financial liabilities at fair value through profit or loss
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15
Chapter 14: The Statement of Comprehensive Income
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Q1) The concept of profit that is generally regarded as the most useful in predicting future profits is:
A) the comprehensive income approach
B) the operating-profit approach
C) the all-inclusive approach
D) No difference is seen in the usefulness of the different profit approaches in predicting future profits
Q2) AASB 101 allows preparers two options in the classification of items for the statement of comprehensive income statements.Discuss.
Q3) The approach where profit is measured as the revenue from operations minus expenses from operations is known as:
A) the all-inclusive approach
B) the operating-profit approach
C) the comprehensive income approach
D) the working profit approach
Q4) Explain and discuss the advantages and disadvantages of the operating-profit and the comprehensive income approaches to profit measurement.Which approach do you think is the most useful for decision making?
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Chapter 15: Revenue
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Q1) What term describes the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer,excluding amounts collected on behalf of third parties?
A) Settlement price
B) Contract price
C) Fair value
D) Transaction price
Q2) Which of the following criteria would facilitate the combining of contracts in accordance with AASB 15 'Revenue from Contracts with Customers'?
A) The contracts are negotiated as a package with a single commercial objective.
B) The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
C) Either A or B is acceptable
D) Both A and B are required
Q3) Which of the following method(s)could estimate a stand-alone price?
A) An approach based on observable prices for similar goods or services
B) An expected cost plus margin approach
C) A residual approach
D) All of the listed methods could estimate a stand-alone price
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Page 17
Chapter 16: The Statement of Cash Flows
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Q1) Activities described as relating to the acquisition and/or disposal of non-current assets under AASB 107 are classified as:
A) investing activities
B) financing activities
C) operating activities
D) none of the above
Q2) All of these are possible definitions of 'funds' except:
A) working capital
B) investment
C) total resources
D) cash
Q3) Which transaction would be included in a cash flow statement?
A) Receipts from customers
B) Credit sales
C) Acquisition of assets in exchange for shares
D) All of the above
Q4) Distinguish between the three concepts of funds which can be used to construct a cash flow statement: cash,working capital and total resources.Which concept do you think provides the most useful information for decision making?
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) Which of the following statements relating to AASB 8 is not true?
A) It adopts a management approach
B) It applies to all for profit entities
C) Reconciliations are required for revenues, profit and loss and other material items
D) None; all of the statements are true
Q2) Explain and illustrate,with simple examples,both the usefulness and any possible dangers in using the:
rate-of-returnon total assets ratio
rate-of-returnon equity ratio times dividends earned ratio
Why are these described as 'efficiency ratios'?
Q3) When evaluating whether to calculate diluted earnings per share (EPS),a company issuing convertible notes should consider:
A) the time weighting factor
B) if the notes potentially convert to ordinary shares
C) if conversion of the notes is likely to increase earnings, or decrease losses, per share
D) both B and C must be considered
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Page 19
Chapter 18: Further Financial Reporting Issues
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Q1) Concise financial reports:
A) must be drawn up in accordance with AASB's
B) must achieve consistency with the changes in terminology contained in AASB 101
C) must include a statement of comprehensive income, a statement of financial position, a statement of cash flows and a statement of changes in equity
D) all of the above
Q2) Which of the following statements is not true of Special Purpose financial statements?
A) They are implicitly the reports prepared by non-reporting entities
B) They must state that the financial statements are special purpose financial statements
C) They must disclose the significant accounting policies adopted in the preparation and presentation of the Special Purpose Financial Statements
D) None; all statements are true
Q3) Why have accountants always put so much emphasis on the concept of materiality? How does this concept affect accountants,if at all,in their day-to-day work and in the preparation of periodical financial reports?
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Chapter 19: Accounting for Extractive Industry
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Q1) The accountant for a mining exploration company presents the following figures to the directors of the company as being possible values that could be assigned to its total non-current assets (comprising exploration and evaluation costs and purchases of plant and machinery to date)- $750 000,$1 600 000,or $2 350 000.Use of the figure $2 350 000 indicates that the company is probably using which of the following methods of accounting for exploration and evaluation costs?
A) Expense
B) Full-cost
C) Successful-efforts
D) Area-of-interest
Q2) Extractive industries should value inventory held by businesses at:
A) lower of cost and net realisable value, including amortisation of pre-production cost
B) net realisable value less an allowance for future rehabilitation costs
C) net realisable value
D) lower of cost and net realisable value, excluding amortisation of pre-production costs
Q3) Describe the units-of-production method of amortizing pre-production costs that have been capitalized.
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Chapter 20: Accounting for Agricultural Activity
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Q1) On 1 September 20XX,Beuno Vista Ltd purchased an established forest for a total cost of $2 000 000.During the year ended 30 June 20XX,Beuno Vista spent $300 000 on maintaining the forest and $100 000 on office administration costs.In March 20XX,the company cut logs from the forest that had an estimated net realisable value of $800 000.Costs of logging were $150 000.The logs were sold in June 20XX for \( \$ 850000 \) .On 30 June 20XX the forest had an estimated net realisable value of $1 300 000.The total profit (or loss)from operations for the year ended 30 June 20XX is:
A) $400 000 Profit
B) $(400 000) Loss
C) $350 000 Profit
D) $700 000 Profit
Q2) Agricultural activity under the heading of Biological assets such as animals is most appropriately measured for accounting purposes at:
A) standard value
B) net realisable value
C) discounted market value
D) historical cost
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Chapter 21: Accounting for Superannuation Entities
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Q1) In the notes section of a Future Annulation plan,insurance liabilities can do all of the following except that it
A) can elect to take out term life cover with FS Plan up to a maximum of $1.5 million per member
B) uses the services of an actuary to determine its insurance contract liabilities.
C) entity has reinsured all direct insurance risks with ABC Reinsurance (Australia)
D) all of the above
Q2) A superannuation fund to which employees can make voluntary contributions so as to increase the value of their benefits is known as a/an:
A) defined contribution fund
B) defined benefit fund
C) externally managed fund
D) contributory fund
Q3) Discuss some of the changes to MS Plan's Income Statement under the AASB 1056 requirements.
Q4) Discuss the roles of APRA,Asic and the ATO in the regulation of the superannuation industry.
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Chapter 22: Accounting for Insurance
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Q1) Which accounting standard covers accounting for the life insurance industry?
A) AASB 1023
B) AASB 1038
C) AASB 9
D) AASB 4
Q2) List and explain the three broad classes of assets insurers have.
Q3) Underwriting and investment are the two activities of ________.
A) Fixed-fee service contracts
B) Life insurance
C) General insurance
D) All insurance categories
Q4) Which of the following is not considered an underwriting activity?
A) Arbitration
B) Reinsurance
C) Claims
D) Premiums
Q5) Differentiate the types of insurance liabilities that arise from events that have already occurred.
Q6) Explain the solvency requirements as outlined by the Insurance Act of 1973 and Prudential Standard GPS 110 'Capital Adequacy'.
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Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) A notable exception was the accounting treatment of intangible assets for the IFRS resulted in a significant _________ in the recognition of internally generated intangibles compared to the Australian standard.
A) increase
B) reduction
C) elimination
D) procurement
Q2) In 2005,the adoption of IFRSs had led to:
A) greater transparency and comparability in financial reporting
B) an increase in the cost of capital
C) less market liquidity and cross-border investment
D) an increase in equity
Q3) Discuss the significance of the Norwalk Agreement and the relationship between the IASB and various national standard setters.
Q4) Describe and explain the strategies adopted by the AASB in order to achieve the objective of international harmonisation of accounting standards in Australia.
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Chapter 24: Foreign Currency Translation
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Q1) A way in which a foreign currency transaction can be hedged is:
A) Buy (or sell) foreign currency at the date of the initial transaction
B) Enter into a forward rate agreement to fix the cost of the currency at a fixed date in the future
C) Enter into a transaction which neutralises the risk (e.g., have accounts receivable and accounts payable in the same currency with the same payment dates)
D) All of the above
Q2) Explain,using simple numerical examples,the hedging of currency risk.
Q3) Once an entity has designated the hedging relationship and it qualifies for hedge accounting,it is classified as which one of three types of relationships:
A) a fair value excess capital
B) a cash flow analysis
C) the hedge of a net investment in a foreign operation as defined in AASB 121 (para. 86)
D) a fair value statement
Q4) Explain,using simple numerical example(s),how hedging a foreign currency transaction can remove uncertainty about the outcome of the transaction.
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Chapter 25: Accounting for Corporate
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Q1) The IRC identifies which of the following as capital?
A) production capital
B) human capital
C) waste capital
D) all of the above
Q2) Explain the three components of the Emissions Reduction Fund (ERF).
Q3) The quantitative reporting of a company's socially responsible activities may not be especially useful because:
A) there can be difficulty in allocating cost accurately to different activities
B) it provides no indication of the effectiveness of the expenditure incurred
C) much of the expenditure incurred may simply be the result of complying with legal requirements or enforcement action by government authorities
D) all of the above
Q4) When an entity's net emissions are greater than the permits they hold,at the end of the year they may:
A) purchase approved carbon offsets
B) purchase unused emission permits from other entities
C) have to pay an emissions fee to the government
D) all of the above
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Chapter 26: Ethics in Accounting
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Q1) Briefly describe three classes of deontological theories that have been used to examine ethical behaviour.
Q2) Teleological theories of ethics:
A) determine whether behaviour is ethical or unethical by observing the consequences of that behaviour
B) suggest that people behave with varying degrees of self-interest
C) are based on religious principles
D) can be all of the above
Q3) The advantage of professions,such as accountants,having self-regulatory codes of ethics is:
A) they are likely to be more lenient than legal rules and regulations enforced by the courts
B) they can forestall action by government regulatory bodies such as the Australian Securities and Investments Commission
C) they are developed and imposed by professionals who understand the problems of practitioners
D) All of the above are advantages
Q4) Briefly describe the classes of teleological theories that have been used to examine ethical behaviour.
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