Contemporary Issues in Accounting Test Bank

Type:

Test Bank

Resource:

Contemporary Issues in Accounting

Edition:

1st Edition

Author(s):

Michaela Rankin Patricia Stanton Susan McGowan Kimberly Ferlauto Matthew Tilling

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Kim Ferlauto

Chapter 1 Introduction to contemporary issues

Chapter 1 Introduction to contemporary issues Multiple Choice Questions

1.

Which of the following statements is correct in relation to the purpose of theory? a. b. *c. d.

all theories do the same thing they make suggestions and dictate what action must be taken some theories explain, while others describe what is happening theories only make predictions about what will happen in the future

Correct answer: c Learning Objective 1.1 ~ Define ‘theory’.

2.

Accounting theory can be described as: *a. b. c. d.

description, explanation or prediction of accounting practice based on observations and/or logical reasoning a set of facts, specific in nature, against which accounting practice can be evaluated being based only on observations being irrelevant to the development of new practice and procedures

Correct answer: a Learning Objective 1.1 ~ Define ‘theory’.

3.

Which of the following statements is correct? a. b. *c. d.

if there is a theory about something, it must be correct it is impossible to assess the appropriateness of a particular theory a theory does not have to be correct to be useful a theory can only be useful if it is correct

Correct answer: c Learning Objective 1.2 ~ Explain the role of theory in financial accounting.

4.

Is it possible to have different theories on the same topic? a. *b. c. d.

no, it is impossible to have alternative theories on a topic yes, there are often many alternative theories on a topic because there are usually many possible explanations and/or solutions yes, but there is usually only one explanation and/or solution no, there can only ever be one explanation or solution

Correct answer: b Learning Objective 1.2 ~ Explain the role of theory in financial accounting.

© John Wiley and Sons Australia, Ltd 2012

1.1

Testbank to accompany Contemporary Issues in Accounting

5.

An example of how theory can predict accounting practice is: a. b. *c. d.

capital market theory asset recognition theory agency theory corporate social responsibility theory

Correct answer: c Learning Objective 1.2 ~ Explain the role of theory in financial accounting.

6.

An example of how theory can help to identify problems and deficiencies with current accounting practice and improve accounting practice is: a. b. c. *d.

the conceptual framework for accounting agency theory and the conceptual framework for accounting corporate social responsibility theory corporate social responsibility theory and the conceptual framework for accounting

Correct answer: d Learning Objective 1.2 ~ Explain the role of theory in financial accounting

7.

How can theories be of benefit in accounting? *a. b. c. d.

they assist us to improve accounting practice and they provide principles to take into account when taking action or making decisions they help to identify problems and deficiencies with current accounting practice but do not assist us in improving accounting practice they assist us in describing and explaining current accounting practice only they assist us to predict and improve accounting practice only

Correct answer: a Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

© John Wiley and Sons Australia, Ltd 2012

1.2

Chapter 1 Introduction to contemporary issues

8.

Which of the following is an example of a positive theory? a. b. c. *d.

Fair value should be used to measure assets in the financial statements, so as to provide more relevant information Cost should be used to measure assets in the financial statements because it is more reliable and accurate The conceptual framework for accounting A theory that explains why managers prefer or choose particular accounting methods or policies over others

Correct answer: d Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

9.

Deduction can best be described as: a. b. *c. d.

The process of moving from particular instances of something to a general conclusion Coming to a conclusion through a process of elimination The process of developing specific predictions from theories The process of developing numerous conclusions or theories

Correct answer: c Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

10.

Which of the following statements is incorrect, in relation to the scientific method? a. *b. c. d.

It involves starting with a limited number of observations It involves starting with a large number of observations from which a reliable conclusion can be drawn It involves analysing observations to derive a theory It involves making predictions that are tested by further observations

Correct answer: b Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

© John Wiley and Sons Australia, Ltd 2012

1.3

Testbank to accompany Contemporary Issues in Accounting

11.

A normative theory is one which: a. b. *c. d.

Describes or explains what is currently happening Predicts what might happen Prescribes or makes recommendations as to what should happen Is often referred to as an empirical theory

Correct answer: c Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

12.

Which of the following statements is correct in relation to normative theories? *a. b. c. d.

Normative theories often evolve as a result of research performed in relation to positive theories Facts about current accounting practice are not considered in the development of normative theories Normative theories are not likely to evolve from the consideration of positive theories Normative theories always evolve as a consequence or result of positive theories

Correct answer: a Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

13.

A reason why someone may accept a theory without having ‘first hand’ or direct knowledge of the topic are: a. *b. c. d.

Lack of knowledge regarding the authority of the source of the theory The theory makes sense and fits with personal experiences and beliefs Other people choose not to accept the theory Evidence exists that refutes the theory

Correct answer: b Learning Objective 1.3 ~ Explain the differences between positive theories and normative theories.

© John Wiley and Sons Australia, Ltd 2012

1.4

Chapter 1 Introduction to contemporary issues

14.

A theory can be proven to be true: a. b. c. *d.

If we are certain there are enough observations that fit or confirm the theory Regardless of how many observations fit or confirm the theory In some cases, but often there are not enough observations that fit or confirm the theory Under no circumstances, because we can never be certain that enough observations have been made that fit or confirm the theory

Correct answer: d Learning Objective 1.4 ~ Explain the reasons for evaluating and testing theories.

15.

What is the best way to use observation to test a theory? a. *b. c. d.

Try and find observations that confirm the theory Search for instances that do not fit with or disprove the theory Try to find instances that both confirm and disprove the theory and work out which outweighs the other Make as many observations as possible

Correct answer: b Learning Objective 1.4 ~ Explain the reasons for evaluating and testing theories.

16.

Which of the following statements is true in relation to research? *a. b. c. d.

By searching over and over again, each study should contribute to our understanding of the issue Most research studies will provide definitive answers to the problem examined Often, searching or investigating a topic more than once, may detract from our understanding of the issue Some research studies will not provide definitive answers to the problem, in which case further investigation should be postponed

Correct answer: a Learning Objective 1.5 ~ Explain the reasons for evaluating and testing theories.

© John Wiley and Sons Australia, Ltd 2012

1.5

Testbank to accompany Contemporary Issues in Accounting

17.

The relationship between theory and research can best be described as: a. b. c. *d.

Research must come before a theory is formed and is associated with both positive and normative theories Research must come after a theory is formed and is only associated with positive theories Research is only associated with normative theories and can come before or after a theory is formed Research can be associated with both positive and normative theories and can come before or after a theory is formed

Correct answer: d Learning Objective 1.5 ~ Describe the role of research in accounting.

18.

Research is conducted in the form of an experiment where the relative usefulness of historical cost and fair value measures are considered, and it is found that better decisions are made using fair values. This may suggest: a. *b. c. d.

A positive theory that fair value should be used to measure the items in the financial statements A normative theory that fair value should be used to measure the items in the financial statements A positive theory that historical cost is not useful and should not be used at all to measure items in the financial statements A normative theory that historical cost should be used to measure the items in the financial statements

Correct answer: b Learning Objective 1.5 ~ Describe the role of research in accounting.

19.

Research can be categorised as: *a. b. c. d.

‘Research of or about accounting’ or ‘research in accounting’ Positive or normative ‘Research of accounting’ or ‘research about accounting’ Positive or critical

Correct answer: a Learning Objective 1.5 ~ Describe the role of research in accounting.

© John Wiley and Sons Australia, Ltd 2012

1.6

Chapter 1 Introduction to contemporary issues

20.

Research of or about accounting would not consider the following question: a. b. c. *d.

Should accountability or decision usefulness be the key goal of accounting What impact does culture have on accounting What role has accounting played in environmental degradation What impact do changes in specific accounting policies have on share prices

Correct answer: d Learning Objective 1.5 ~ Describe the role of research in accounting.

21.

Which of the following statements is incorrect in relation to critical accounting? a. b. *c. d.

It aims to develop a critical understanding of the role of accounting processes and practices in the functioning of society and organisations A critical understanding of the role that accounting plays can be used to engage in change It aims to critically analyse inefficient accounting practices It aims to develop a critical understanding of the role of the accounting profession in the functioning of society and organisations

Correct answer: c Learning Objective 1.5 ~ Describe the role of research in accounting.

22.

Research in accounting focuses on: a. b. *c. d.

Issues related to accounting at a macro level Questions such as, what role has accounting played in the rise of capitalism Issues within accounting at the more micro level The bigger picture

Correct answer: c Learning Objective 1.5 ~ Describe the role of research in accounting.

23.

Research in accounting would not consider the following question: a. b. c. *d.

What measurements are being used What impact do changes in specific accounting policies have on share prices What measures should be used Should accountability or decision usefulness be the key goal of accounting

Correct answer: d Learning Objective 1.5 ~ Describe the role of research in accounting.

© John Wiley and Sons Australia, Ltd 2012

1.7

Testbank to accompany Contemporary Issues in Accounting

24.

Which of the following statements are incorrect in relation to capital market research? a. b. *c. d.

It was founded by Ball & Brown, and Beaver It is a stream of positive accounting research It is a stream of normative accounting research It investigated the use of accounting information by capital markets

Correct answer: c Learning Objective 1.6 ~ identify some of the research areas in accounting.

25.

Research that attempts to explain the motivations behind the accounting choices made by managers is: a. b. *c. d.

Capital market research Critical accounting research Accounting policy choice research International accounting research

Correct answer: c Learning Objective 1.6 ~ Identify some of the research areas in accounting.

26.

Which of the following statements is correct in relation to International accounting research? a. b. c. *d.

This research area declined in the second half of the twentieth century due to harmonisation Agency or contracting theory underlies much of this research It often adopts a social welfare perspective It includes research into differences in accounting practices and also considers contextual and cultural influences on financial accounting

Correct answer: d Learning Objective 1.6 ~ Identify some of the research areas in accounting.

© John Wiley and Sons Australia, Ltd 2012

1.8

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 2 The Conceptual Framework for Financial Reporting

Chapter 2 The Conceptual Framework for Financial Reporting Multiple Choice Questions

1.

How does the conceptual framework differ from an accounting standard? a. *b. c.

d.

The principles in the conceptual framework are specific in nature while accounting standards provide more general requirements for financial reporting The principles in the conceptual framework are general concepts while accounting standards provide specific requirements for a particular area of financial reporting The principles in the conceptual framework are designed to provide guidance and apply to a limited range of decisions relating to the preparation of financial reports while accounting standards apply to a wider range of decisions relating to the preparation of financial reports The principles in the conceptual framework provide specific requirements for a particular area of financial reporting while accounting standards are designed to provide general guidance

Correct answer: b Learning Objective 2.1 ~ Explain what a conceptual framework is.

2.

The accounting conceptual framework is what kind of theory? a. *b. c. d.

Abstract Normative Positive Emergent

Correct answer: b Learning Objective 2.1 ~ Explain what a conceptual framework is.

3.

The Conceptual Framework: a. b. *c. d.

Is based on the one Pacioli included in Particularis de Computis et Scripturis Is used by every country that has adopted the International Accounting Standards Was a joint project between the AASB and FASB Has remained unchanged for over 20 years

Correct answer: c Learning Objective 2.2 ~ Understand the history, evolution of and current developments in the Conceptual Framework for Financial Reporting.

© John Wiley & Sons Australia, Ltd 2012

2.1

Testbank to accompany Contemporary Issues in Accounting

4.

Which of the following questions does the Conceptual Framework NOT answer? a. b. c. *d.

Who are financial reports for What is the purpose of the financial reports What type of information should be included in financial reports What measurement basis should be used in financial reports

Correct answer: d Learning Objective 2.3 ~ Outline the structure, approach and components of the Conceptual Framework.

5.

Which of the following statements is correct in relation to the assumptions to be made when preparing financial reports? a. b. *c. d.

The conceptual framework requires that several assumptions be made when preparing financial reports There are no assumptions to be made when preparing financial reports There is one underlying assumption which is that financial reports are prepared on a going concern basis There is an assumption that more information is better than less

Correct answer: c Learning Objective 2.3 ~ Outline the structure, approach and components of the Conceptual Framework.

6.

The conceptual framework states that it is concerned with general purpose financial reports. What are general purpose financial reports? a. *b. c. d.

Financial reports that are tailored to the particular information needs of users Financial reports intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs Financial reports which do not meet the needs of users None of the above

Correct answer: b Learning Objective 2.4 ~ Explain and evaluate the purpose, objective and underlying assumption of the Conceptual Framework.

© John Wiley & Sons Australia, Ltd 2012

2.2

Chapter 2 The Conceptual Framework for Financial Reporting

7.

According to the conceptual framework the primary objective of financial information is *a. b. c. d.

Decision Usefulness Prediction Stewardship Accountability

Correct answer: a Learning Objective 2.4 ~ Explain and evaluate the purpose, objective and underlying assumption of the Conceptual Framework.

8.

The Conceptual Framework identifies a limited range of primary users of financial statements. Which of the following best describes these users? a. *b. c. d.

Current investors Existing and potential investors, Lenders, Other creditors Investors, Creditors, Overseers, Customers, General Public Resource providers

Correct answer: b Learning Objective 2.4 ~ Explain and evaluate the purpose, objective and underlying assumption of the Conceptual Framework.

9.

According to the Conceptual Framework which of the following are included in the fundamental qualitative characteristics that accounting information should have?

I. Relevance II. Reliability III. Faithful Representation IV. Understandability

a. b. *c. d.

I. I. and II. II. and III. I., II., III. and IV.

Correct answer: c Learning Objective 2.5 ~ Explain the qualitative characteristics of useful financial information in the Conceptual Framework.

© John Wiley & Sons Australia, Ltd 2012

2.3

Testbank to accompany Contemporary Issues in Accounting

10.

A key aspect of relevance is that information is a. b. c. *d.

Complete Neutral Forward looking Material

Correct answer: d Learning Objective 2.5 ~ Explain the qualitative characteristics of useful financial information in the Conceptual Framework.

11.

The four enhancing qualitative characteristics recognised by the conceptual framework are: a. b. *c. d.

Materiality, comparability, timeliness, cost versus benefit Relevance, materiality, reliability, comparability Understandability, verifiability, timeliness, comparability Understandability, cost versus benefit, verifiability, comparability

Correct answer: c Learning Objective 2.5 ~ Explain the qualitative characteristics of useful financial information in the Conceptual Framework.

12.

The constraints on financial reporting identified under the conceptual framework are: *a. b. c. d.

Cost versus benefit Timeliness and neutrality Understandability and materiality Understandability and cost versus benefit

Correct answer: a Learning Objective 2.5 ~ Explain the qualitative characteristics of useful financial information in the Conceptual Framework.

© John Wiley & Sons Australia, Ltd 2012

2.4

Chapter 2 The Conceptual Framework for Financial Reporting

13.

Which of the following elements in the financial statement is NOT defined by reference to other elements?

a. b. *c. d.

Equity Expenses Liabilities Income

Correct answer: c Learning Objective 2.6 ~ Explain the elements of financial statements in the Conceptual Framework.

14.

Which of the following are key parts of the definition of an asset?

I. Probability II. Control III. Ownership IV. Past Transaction or Event V. Reliable Measurement VI. Future Economic Benefits

a. b. c. *d.

I., III. & VI. II., IV. & V. III., V. & VI. II., IV. & VI.

Correct answer: d Learning Objective 2.6 ~ Explain the elements of financial statements in the Conceptual Framework.

15.

An element is considered probable if the chance of the flow associated with it occuring is greater than: a. *b. c. d.

30% 50% 75% 90%

Correct answer: b Learning Objective 2.6 ~ Explain the elements of financial statements in the Conceptual Framework.

© John Wiley & Sons Australia, Ltd 2012

2.5

Testbank to accompany Contemporary Issues in Accounting

16.

A key political benefit that may arise from a conceptual framework in accounting is: a. b. *c. d.

Individuals and groups are able to influence the standard setters Protection of the professional status of accountants and accounting Prevention of political interference in setting accounting standards All of the above

Correct answer: c Learning Objective 2.7 ~ Explain the benefits of conceptual frameworks.

17.

Accounting standards are seen to be political because a. b. c. *d.

They can create wealth transfers between different groups in society They can affect the competitiveness of organisations They can influence perceptions about organisations All of the above

Correct answer: d Learning Objective 2.7 ~ Explain the benefits of conceptual frameworks.

18.

Which of these is not a criticism of conceptual framework projects? *a. b. c. d.

The measurement of the elements of financial reporting is too highly specified It is ambiguous and open to interpretation It is too descriptive Faithful representation and relevance conflict with each other

Correct answer: a Learning Objective 2.8 ~ Explain and evaluate the problems and criticisms of conceptual frameworks, including the Conceptual Framework.

19.

It is argued that the conceptual framework is descriptive, not prescriptive, because: a. b. *c. d.

Its purpose is to try to improve practice rather than simply reflecting and giving approval to existing accounting principles and practice It describes what should happen in practice It simply describes accounting principles as currently practiced and applied None of the above

Correct answer: c Learning Objective 2.8 ~ Explain and evaluate the problems and criticisms of conceptual frameworks, including the Conceptual Framework.

© John Wiley & Sons Australia, Ltd 2012

2.6

Chapter 2 The Conceptual Framework for Financial Reporting

20.

Faithfull representation has been criticised because *a. b. c. d.

It does not reflect the inherent uncertainty in accounting It is not an important issue for accountants It does not capture the true value of accounting transactions It leads to a single measurement model dominating accounting

Correct answer: a Learning Objective 2.8 ~ Explain and evaluate the problems and criticisms of conceptual frameworks, including the Conceptual Framework.

© John Wiley & Sons Australia, Ltd 2012

2.7

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 3 Standard setting

Chapter 3 Standard setting Multiple Choice Questions

1.

Financial Reporting Council are responsible for: standard setting. a. b. c. *d.

Broad oversight of the standard-setting process Providing strategic direction and advice to the AASB Appointing board members to the AASB all of the above

Correct answer: d Learning Objective 3.1 ~ Understand the institutional framework of Australian accounting

2.

Which of the following is NOT a function of the AASB? standard setting. a. b. c. *d.

Making accounting standards Promoting international accounting standards Participate in the development of international accounting standards Enforcing compliance with accounting standards

Correct answer: d Learning Objective 3.1 ~ Understand the institutional framework of Australian accounting

3.

Which of the following can the AASB NOT do when adopting IFRSs? *a. b. c. d.

Change or remove requirements that are seen as anti-competitive Change words to take into account Australian legislation Require additional disclosure Limit the number of optional treatments

Correct answer: a Learning Objective 3.2 ~ Explain and define an accounting standard.

4.

Which if the following is an advantage of rules-based accounting standards? a. *b. c. d.

Reduced complexity of standards Reduced opportunities for earnings management through judgements Can cover most situations Improve representational faithfulness of financial statements

Correct answer: b Learning Objective 3.3 ~ Evaluate the distinction between rules-based and principles-based standards.

© John Wiley & Sons Australia, Ltd 2012

3.1

Testbank to accompany Contemporary Issues in Accounting

5.

One of the rules-based standard disadvantages can be: *a. b. c. d.

They can be very complex They can be very simple They allow for no manipulation None of the above

Correct answer: a Learning Objective 3.3 ~ Evaluate the distinction between rules-based and principles-based standards.

6.

One of the advantages of principles-based standard is: a. *b. c. d.

They allow for no professional judgement They are generally simpler They do not improve representational faithfulness of financial statements None of the above

Correct answer: b Learning Objective 3.3 ~ Evaluate the distinction between rules-based and principles-based standards.

7.

Disadvantage of principles-based standards is: *a. b. c. d.

They allow mangers to select policies that may not reflect the substance of a transaction They allow accountants to use professional judgement They supply broad guidelines All of the above

Correct answer: a Learning Objective 3.3 ~ Evaluate the distinction between rules-based and principles-based standards.

8.

Which of the following is NOT a key element of regulation? a. b. *c. d.

An intention to intervene A restriction on choice Regulation should be biased The exercise of control

Correct answer: c Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

© John Wiley & Sons Australia, Ltd 2012

3.2

Chapter 3 Standard setting

9.

Signalling Theory postulates that: a. b. *c. d.

Non-disclosing entities will do better in the market for finance Regulation decreases the cost of capital Regulation is largely unnecessary Financial reporting is a pointless activity

Correct answer: c Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

10.

Which of the following is a fundamental assumption of public interest theory? a. *b. c. d.

People rationally advance their own self-interest Economic markets are fragile Regulation is costly There is an efficient market

Correct answer: b Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

11.

Which of the following is a fundamental assumption of Capture Theory? *a. b. c. d.

People rationally advance their own self interest Economic markets are fragile Regulation is costly The is an efficient market

Correct answer: a Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

12.

Which of the following is a fundamental assumption of Bushfire theory? a. *b. c. d.

People are proactive when it comes to regulation People are reactive when it comes to regulation People are not influenced by media when it comes to regulation People are apathetic when it comes to regulations

Correct answer: b Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

13.

Which of the following is NOT an advantage of accounting regulation? a. b. *c. d.

Increased efficiency in allocating capital Cheaper production of accounting disclosure Reduced lobbying to produce favourable outcomes Increased public confidence

Correct answer: c Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

© John Wiley & Sons Australia, Ltd 2012

3.3

Testbank to accompany Contemporary Issues in Accounting

14.

Which of the following is NOT a disadvantage of regulation? a. *b. c. d.

It can be difficult to reverse It leads to standardisation It can restrict communication It can be difficult to determine the optimal regulations

Correct answer: b Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

15.

Research into accounting regulation: a. b. *c. d.

Is extensive Shows that accounting is independent of political influence Supports capture theory Looks after the interests of a wide range of stakeholders

Correct answer: c Learning Objective 3.4 ~ Apply the concept of regulation to the production of accounting information.

16.

Which of the following have been blamed for the Global Financial Crisis? a. b. c. *d.

Corporate governance structures Accounting standards Auditor-Client relationships All of the above

Correct answer: d Learning Objective 3.5 ~ Analyse standard setting as a political process.

17.

Which of the following groups benefits most from rules based accounting regulation? a. *b. c. d.

Managers Auditors Shareholders Accountants

Correct answer: b Learning Objective 3.5 ~ Analyse standard setting as a political process.

18.

Which of the following groups have been criticised for their failure to respond to exposure drafts? a. *b. c. d.

Auditors Academics Large Australian companies Analysts

Correct answer: b Learning Objective 3.5 ~ Analyse standard setting as a political process.

© John Wiley & Sons Australia, Ltd 2012

3.4

Chapter 3 Standard setting

19.

Which of the following was identified as a benefit when Australia accepted the international harmonisation of its accounting standards? a. b. c. *d.

International comparability of financial statements would increase The cost of capital would decrease Reporting costs would be lowered All of the above

Correct answer: d Learning Objective 3.6 ~ Understand the benefits of harmonisation of accounting standards.

20.

Which of the following has NOT been identified as a problem with Australia accepting the international harmonisation of its accounting standards? a. b. *c. d.

IFRS standards tend to be more complex Compromises sometimes need to be made when creating standards Too few countries have adopted international accounting standards None of the above, they are all problems

Correct answer: c Learning Objective 3.6 ~ Understand the benefits of harmonisation of accounting standards.

© John Wiley & Sons Australia, Ltd 2012

3.5

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 4 Measurement

Chapter 4 Measurement Multiple Choice Questions

1.

Measurement in an accounting context involves a. b. c. *d.

Determining the quantities of assets held by an entity Estimating the amounts to be derived from assets Apportioning costs between items All of the above

Correct answer: d Learning Objective 4.1 ~ Analyse the concept of measurement in the context of financial reporting and demonstrate an understanding of its many benefits and limitations.

2.

Which of the following is NOT a benefit of measurement in accounting? *a. b. c. d.

Dissimilar items can be easily combined into meaningful totals It makes information more decision useful It allows users to assess the performance of the entity It allows users to compare entities

Correct answer: a Learning Objective 4.1 ~ Analyse the concept of measurement in the context of financial reporting and demonstrate an understanding of its many benefits and limitations.

3.

Which of the following is NOT a limitation of measurement in accounting? a. b. *c. d.

There is little agreement on what measurement methods should be used Measurement can be quite subjective It is impossible to compare entities over a period of time There are some accounting items that are not easily measured

Correct answer: c Learning Objective 4.1 ~ Analyse the concept of measurement in the context of financial reporting and demonstrate an understanding of its many benefits and limitations.

© John Wiley & Sons Australia, Ltd 2012

4.1

Testbank to accompany Contemporary Issues in Accounting

4.

The statement in relation to current trends in accounting that is NOT correct is: a. *b. c. d.

There is a movement towards a ‘fair value’ approach There is a movement towards a more traditional approach The concepts of capital and profit have changed and evolved over time.

More emphasis is now being placed on the relevance of information rather than its reliability’

Correct answer: b Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

5.

Which of these is NOT a criticism of historical cost accounting? a. *b. c. d.

It is not objective and is open to manipulation It has been used by business over many centuries Historical cost overstates profit in times of rising prices Cost information is not always available

Correct answer: b Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

6.

The statement that is true with respect to current cost accounting is: a. b. *c. d.

Gains are recorded only when the assets are disposed of Holding gains are not included in current operating profits Current operating profit is the excess of the current value of the output sold over the current cost of the related inputs None of the above is true

Correct answer: c Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

© John Wiley & Sons Australia, Ltd 2012

4.2

Chapter 4 Measurement

7.

Which of these is a defence of current cost accounting? a. *b. c. d.

It is the most objective of the proposed accounting methods Relevant current events of the accounting period should be accounted for to maintain the usefulness of accounting information for decision-making It specifically recognises future technological changes in profit determination All of the above are defences

Correct answer: b Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

8.

Which of the following is NOT an argument in favour of exit price accounting? a. b. *c. d.

Valuing all elements in the financial statements at their money equivalents provides one rule that can be applied consistently.

The financial statements are allocation-free Rather than measuring past events the method measures those that might happen if a firm does something other than what was planned Exit price accounting involves references to real-world examples therefore it is more grounded in reality than historical cost accounting

Correct answer: c Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

9.

Deprival value is: *a. b. c. d.

The loss that would be incurred if the asset was removed An objective measure of value Considered relevant as theft of business assets is common All of the above

Correct answer: a Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

© John Wiley & Sons Australia, Ltd 2012

4.3

Testbank to accompany Contemporary Issues in Accounting

10.

Under the Conceptual Framework the preferred measurement model is: a. b. c. *d.

Historical Cost Current Cost Present Value None of the above

Correct answer: d Learning Objective 4.2 ~ Describe the standard setters’ approach to measurement and evaluate different measurement approaches.

11.

Information produced using historical cost as the measurement base is considered *a. b. c. d.

Less relevant Less faithfully represented More comparable All of the above

Correct answer: a Learning Objective 4.3 ~ Evaluate the impact of measurement choice on the quality of accounting information.

12.

Information produced using fair value as the measurement base is considered a. b. c. *d.

More relevant More faithfully represented Less Neutral All of the above

Correct answer: d Learning Objective 4.3 ~ Evaluate the impact of measurement choice on the quality of accounting information.

13.

Information produced using current cost as the measurement base is considered a. *b. c. d.

Less relevant Less understandable More comparable between different companies All of the above

Correct answer: b Learning Objective 4.3 ~ Evaluate the impact of measurement choice on the quality of accounting information.

© John Wiley & Sons Australia, Ltd 2012

4.4

Chapter 4 Measurement

14.

Information produced using deprival value as the measurement base is considered a. b. c. *d.

Less relevant Less faithfully represented Less understandable All of the above

Correct answer: d Learning Objective 4.3 ~ Evaluate the impact of measurement choice on the quality of accounting information.

15.

An argument against fair value measurement in accounting is: a. b. *c. d.

Market prices are too objective It does not allow enough professional judgement It can lead to volatility in earnings It reflects the value of the item today

Correct answer: c Learning Objective 4.4 ~ Explain the controversial nature of fair value as a measurement approach and consider the arguments for and against a shift toward fair value under the accounting standards.

16.

Which measurement system would seem most relevant to investors? a. *b. c. d.

Historic cost Fair value Current cost Deprival value

Correct answer: b Learning Objective 4.5 ~ Explain the political nature of accounting measurement by developing an understanding of the different stakeholders in the financial reporting process.

© John Wiley & Sons Australia, Ltd 2012

4.5

Testbank to accompany Contemporary Issues in Accounting

17.

Which measurement system would seem most relevant to creditors? a. *b. c. d.

Historic cost Fair value Current cost Deprival value

Correct answer: b Learning Objective 4.5 ~ Explain the political nature of accounting measurement by developing an understanding of the different stakeholders in the financial reporting process.

18.

Which of the following is NOT a reason measurement is a controversial accounting issue? a. *b. c. d.

It can be quite subjective It is not a political issue It can affect how entities are perceived It does not lead to consistent recording

Correct answer: b Learning Objective 4.6 ~ Describe the issues which contribute to the controversial nature of accounting measurement.

19.

Accounting for the environment is a difficult area because a. b. c. *d.

It is difficult to measure the accounting consequences of environmental issues Environmental issues extend beyond the entity boundary As a common good it is hard to value the environment All of the above

Correct answer: d Learning Objective 4.7 ~ Analyse current measurement challenges faced by the accounting profession with particular reference to environmental sustainability, green assets, intangible assets and water assets.

© John Wiley & Sons Australia, Ltd 2012

4.6

Chapter 4 Measurement

20.

Intangible assets have been identified as one of the hardest area to value because: a. b. *c. d.

They are one of the most important assets on the balance sheet There are too many markets to choose from It is difficult to measure an asset with no physical substance All of the above

Correct answer: c Learning Objective 4.7 ~ Analyse current measurement challenges faced by the accounting profession with particular reference to environmental sustainability, green assets, intangible assets and water assets.

© John Wiley & Sons Australia, Ltd 2012

4.7

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 5 Theories in accounting

Chapter 5 Theories in accounting Multiple Choice Questions

1.

Theories in accounting can help us to understand the decisions of: a. b. c. *d.

Financial information preparers Financial information users Financial information regulators All of the above

Correct answer: d Learning Objective 5.1 ~ Evaluate how theories can enhance our understanding of accounting practice.

2.

Accounting theory helps us understand accounting better as: a. *b. c. d.

A fundamental part of the natural universe A human endeavour A random process A representation of truth

Correct answer: b Learning Objective 5.1 ~ Evaluate how theories can enhance our understanding of accounting practice.

3.

A normative theory a. b. *c. d.

Is completely divorced from reality Describes, explains or predicts activities Is based on what should be the case given a certain objective Only focuses on normal activities

Correct answer: c Learning Objective 5.2 ~ Identify the types of theories used in accounting.

© John Wiley & Sons Australia, Ltd 2012

5.1

Testbank to accompany Contemporary Issues in Accounting

4.

A positive theory a. *b. c. d.

Is completely divorced from reality Describes, explains or predicts activities Is based on what should be the case given a certain objective Only focuses on rewarding activities

Correct answer: b Learning Objective 5.2 ~ Identify the types of theories used in accounting.

5.

Which of these is NOT an assumption on which positive accounting theory is based? a. b. *c. d.

People are rational People are wealth maximisers People prefer to act altruistically None of the above, i.e. they are all assumptions of positive accounting theory?

Correct answer: c Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine how it explains accounting practice and disclosures.

6.

According to agency theory the following are examples of bonding costs: a. b. *c. d.

Auditing the financial reports Putting in place operating rules Linking remuneration to performance All of the above

Correct answer: c Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine how it explains accounting practice and disclosures.

7.

Which of the following has been identified as a problem in owner-manager relationships? a. b. c. *d.

Short-term focus Risk aversion Dividend retention All of the above

Correct answer: d Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine how it explains accounting practice and disclosures.

© John Wiley & Sons Australia, Ltd 2012

5.2

Chapter 5 Theories in accounting

8.

Which of the following has been identified as a problem in owner-lender relationships? a. *b. c. d.

Dividend retention Asset substitution Over-investment All of the above

Correct answer: b Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine how it explains accounting practice and disclosures.

9.

Which of the following is NOT an important role for accounting in the agency relationship? *a. b. c. d.

Identifying excessive perquisite consumption Signalling good news to the market Determining performance Protecting lenders’ interests

Correct answer: a Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine how it explains accounting practice and disclosures.

10.

A key underlying assumption of Institutional Theory is that people are: a. *b. c. d.

Self-interested Likely to conform to external norms Risk-adverse All of the above

Correct answer: b Learning Objective 5.4 ~ Explain institutional theory and examine how it explains organisational structures.

© John Wiley & Sons Australia, Ltd 2012

5.3

Testbank to accompany Contemporary Issues in Accounting

11.

According to institutional theory which of the following statements is NOT true about corporate social and environmental disclosure a. b. *c. d.

It will be heavily influenced by regulation Well organised external stakeholders will lead to increased disclosure Within industries the nature of the disclosure is likely to diverge over time None of the above, i.e. they are all true.

Correct answer: c Learning Objective 5.4 ~ Explain institutional theory and examine how it explains organisational structures.

12.

Legitimacy theory argues that disclosure practice. *a. b. c. d.

Organisations can only continue to exist if they demonstrate values consistent with society at large.

Organisations should focus on wealth maximisation for their owners The business of business is business Consumers are only interested in minimising costs to themselves.

Correct answer: a Learning Objective 5.5 ~ Explain legitimacy theory and examine how it explains accounting

13.

Which of the following is NOT one of the four ways an organisation can obtain or maintain organisational legitimacy according to Lindblom? disclosure practice. a. b. c. *d.

Change perceptions of society, without changing its own behaviour Manipulate perceptions by deflecting attention from societal concerns Change its behaviour None of the above, i.e. they are all ways an organisation can obtain or maintain legitimacy

Correct answer: d Learning Objective 5.5 ~ Explain legitimacy theory and examine how it explains accounting

© John Wiley & Sons Australia, Ltd 2012

5.4

Chapter 5 Theories in accounting

14.

Stakeholder theory accounting disclosure practice. a. b. *c. d.

Is completely different to legitimacy theory Focuses on government power Has both a normative and positive version All of the above

Correct answer: c Learning Objective 5.6 ~ Explain stakeholder theory and examine how it prescribes and explains

15.

Which of the following is NOT considered a stakeholder according to the managerial branch of stakeholder theory? accounting disclosure practice. a. *b. c. d.

Communities Competitors Customers None of the above, i.e. they are all considered stakeholders

Correct answer: b Learning Objective 5.6 ~ Explain stakeholder theory and examine how it prescribes and explains

16.

According to stakeholder theory accounting information accounting disclosure practice. a. b. c. *d.

is seen as largely advertising is unimportant to most stakeholders is usually misleading is an important way to communicate with stakeholders

Correct answer: d Learning Objective 5.6 ~ Explain stakeholder theory and examine how it prescribes and explains

© John Wiley & Sons Australia, Ltd 2012

5.5

Testbank to accompany Contemporary Issues in Accounting

17.

The central proposition of contingency theory is: accounting disclosure practice. a. b. *c. d.

Institutional norms drive organisational structure.

Organisational performance is largely random and poorly understood Organisational performance depends on the fit between organisational context and structure.

Organisations are simply a nexus of contractual agreements.

Correct answer: c Learning Objective 5.7 ~ Explain contingency theory and examine how it prescribes and explains

18.

Contingency theory proposes that accounting disclosure practice. a. b. c. *d.

Accounting policies are likely to be consistent within industries.

Size is not an important factor when considering management accounting systems.

Shareholder needs drive accounting system choices.

No universally consistent accounting system can apply to all organisations.

Correct answer: d Learning Objective 5.7 ~ Explain contingency theory and examine how it prescribes and explains

19.

Agency theory would hold that managers on compensation contracts which have bonuses tied to a current measure of performance would prefer to: a. b. c. *d.

Be indifferent to expensing or capitalising transactions Expense transactions rather than capitalise them.

Smooth income using either expensing or capitalising.

Capitalise transactions rather than expense them.

Correct answer: d Learning Objective 5.8 ~ Outline the different decisions made by accounting practitioners.

© John Wiley & Sons Australia, Ltd 2012

5.6

Chapter 5 Theories in accounting

20.

Which of the following theories have been used to explain voluntary disclosure in the annual report? a. b. c. *d.

Stakeholder Theory Legitimacy Theory Institutional Theory All of the above

Correct answer: d Learning Objective 5.8 ~ Outline the different decisions made by accounting practitioners.

© John Wiley & Sons Australia, Ltd 2012

5.7

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 6 Products of the financial reporting process

Chapter 6 Products of the financial reporting process Multiple Choice Questions

1.

What is the key element of the IASB definition of the reporting entity? a. b. *c. d.

The existence of a broad range of users who want information The legal requirements of the country in which the entity resides The existence of investors and creditors who cannot directly obtain information The existence of scarce resources

Correct answer: c Learning Objective 6.1 ~ Evaluate the importance of the identification of the reporting entity.

2.

What is NOT one of the key elements of control? *a. b. c. d.

Ownership Variable returns Influence over returns None of the above, i.e. they are all elements of control

Correct answer: a Learning Objective 6.1 ~ Evaluate the importance of the identification of the reporting entity.

3.

Which of the following is NOT an argument for a standardised annual reporting period? a. b. *c. d.

It allows investors to compare entities more easily It is necessary to calculate an annual dividend Most businesses operate on a natural 12 month cycle Various laws require regular information be produced by the entity

Correct answer: c Learning Objective 6.2 ~ Outline the debate surrounding the length and frequency of reporting periods.

© John Wiley & Sons Australia, Ltd 2012

6.1

Testbank to accompany Contemporary Issues in Accounting

4.

Which of the following is an argument for more flexible reporting periods? *a. b. c. d.

It makes it less attractive for entities to manipulate profits It enhances comparability It makes dividend calculation easier It is widely supported

Correct answer: a Learning Objective 6.2 ~ Outline the debate surrounding the length and frequency of reporting periods.

5.

AASB 134 Interim Reporting mandates: *a. b. c. d.

The minimum contents of interim financial reports Who must prepare interim financial reports That interim financial reports should be prepared at least once per year All of the above

Correct answer: a Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the production of financial information.

6.

Manipulation of reported earnings: a. b. c. *d.

Can be both legal and illegal Includes income smoothing Affects wealth transfers between the company and others All of the above

Correct answer: d Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the production of financial information.

7.

Earnings Management: a. *b. c. d.

is always illegal depends on timing difference between cash and accrual accounting is always bad for shareholders None of the above

Correct answer: b Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the production of financial information.

© John Wiley & Sons Australia, Ltd 2012

6.2

Chapter 6 Products of the financial reporting process

8.

Income smoothing a. b. c. *d.

Aims to produce a steady growth in the profit stream Transfers wealth from new shareholders to management Is only possible when sufficient profits are regularly made All of the above

Correct answer: d Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the production of financial information.

9.

Pro forma reports a. b. c. *d.

Are simply IFRS compliant reports Are GAAP compliant reports Usually show a lower profit figure than those prepares in accordance with accounting standards Usually show a higher profit figure than those prepares in accordance with accounting standards

Correct answer: d Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the production of financial information.

10.

Approximately what percentage of the real value of companies is thought to be the result of intangible assets? a. b. c. *d.

10% 30% 50% 70%

Correct answer: d Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and intellectual capital from the financial reporting process.

© John Wiley & Sons Australia, Ltd 2012

6.3

Testbank to accompany Contemporary Issues in Accounting

11.

Intangible assets are defined as a. b. *c. d.

One-sided financial assets Unidentifiable assets without physical Identifiable non-monetary assets without physical substance All of the above

Correct answer: c Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and intellectual capital from the financial reporting process.

12.

Which of the following is specifically prohibited from recognition as an intangible asset according to AASB138? a. b. c. *d.

Internally generated brands Research Training All of the above

Correct answer: d Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and intellectual capital from the financial reporting process.

13.

Which of the following intellectual capital could be included in the Statement of Financial Position? a. b. *c. d.

Training of programmers employed by a company Development of software by the company for internal use Development of software by the company for external use None of the above

Correct answer: c Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and intellectual capital from the financial reporting process.

© John Wiley & Sons Australia, Ltd 2012

6.4

Chapter 6 Products of the financial reporting process

14.

The annual report a. *b. c. d.

May have significant additional voluntary disclosure in the financial statements Is used for impression management Is thought to have little influence on stakeholder perceptions Is not thought to be an important information avenue for organisations

Correct answer: b Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary disclosures.

15.

The kinds of information likely to be included in the annual report includes a. b. c. *d.

Corporate governance Environmental performance Occupational health and safety disclosures All of the above

Correct answer: d Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary disclosures.

16.

Annual reports contain many financial graphics, it has been noted that a. b. *c. d.

They are mostly unhelpful in summarising data They are irrelevant to most users They are frequently distorted to improve perceptions of performance All of the above

Correct answer: c Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary disclosures.

17.

Extensible business reporting language (XBRL) is expected to a. b. c. *d.

Benefit all businesses, large to small Ease the burden of reporting to governments Facilitate better corporate analysis All of the above

Correct answer: d Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary disclosures.

© John Wiley & Sons Australia, Ltd 2012

6.5

Testbank to accompany Contemporary Issues in Accounting

18.

Which of the following has NOT been identified as a reason that management might voluntarily disclose information in annual reports *a. b. c. d.

To mislead competitors To manage powerful stakeholders To win reporting awards To forestall regulation

Correct answer: a Learning Objective 6.6 ~ Identify three theories that explain the motivation for voluntary disclosures in annual reports.

19.

Corporate social responsibility a. b. c. *d.

Is concerned about the environmental impact of organisations Suggests that companies can build shareholder value by engaging other stakeholders Still means organisations should pursue profit All of the above.

Correct answer: d Learning Objective 6.6 ~ Identify three theories that explain the motivation for voluntary disclosures in annual reports.

20.

Legitimacy theory suggests that corporate social disclosure will be used to a. *b. c. d.

Signal deeply held ethical values of the entity Manage the concerns of key stakeholders Disclose all firm activities, good or bad The minimal degree possible

Correct answer: b Learning Objective 6.6 ~ Identify three theories that explain the motivation for voluntary disclosures in annual reports.

© John Wiley & Sons Australia, Ltd 2012

6.6

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 7 Corporate governance

Chapter 7 Corporate governance Multiple Choice Questions

1.

Which of the following problems has contributed to the growth in corporate governance over the past decades? a. b. c. *d.

Managers using the resources of the company to benefit themselves Corporations taking actions shareholders consider undesirable Corporations misleading shareholders to avoid consequences All of the above

Correct answer: d Learning Objective 7.1 ~ Explain the interest in corporate governance.

2.

Which of the following examples is NOT advantage of good corporate governance? a. b. *c. d.

Expanding the company’s shareholder base Reducing perceived risks to investors Increasing the cost of capital Increased market confidence

Correct answer: c Learning Objective 7.1 ~ Explain the interest in corporate governance.

3.

Corporate governance is: a. b. *c. d.

A coherent system of concepts that underlie financial reporting A term referring to management’s choosing to voluntarily disclose non-compulsory information in annual reports The system by which corporations are directed and controlled.

A set of broad principles that provide the basis for guiding actions or decisions

Correct answer: c Learning Objective 7.2 ~ Explain what corporate governance is and why good corporate governance systems are needed.

© John Wiley & Sons Australia, Ltd 2012

7.2

Testbank to accompany Contemporary Issues in Accounting

4.

According to the ‘Anglo-Saxon’ model whose interest should be the focus of corporate governance? a. *b. c. d.

Employees Shareholders Community Environment

Correct answer: b Learning Objective 7.2 ~ Explain what corporate governance is and why good corporate governance systems are needed.

5.

Which of these costs is NOT associated with an agency relationship between managers and shareholders? a. *b. c. d.

Monitoring Cost Taxation Loss Bonding Cost Residual Loss

Correct answer: b Learning Objective 7.3 ~ Discuss the relationship between positive accounting theory and corporate governance.

6.

The OECD Principles of Corporate Governance link manages’ remuneration to shareholder interest to address which agency problem? a. b. c. *d.

Risk aversion Dividend retention Horizon problem All of the above

Correct answer: d Learning Objective 7.3 ~ Discuss the relationship between positive accounting theory and corporate governance.

© John Wiley & Sons Australia, Ltd 2012

7.3

Chapter 7 Corporate governance

7.

Which of the following is NOT an example of corporate governance practice? a. b. c. *d.

Codes of conduct for directors Requirements that most board directors be independent Formation of a nominating committee to identify potential new directors None of the above, i.e. they are all examples of corporate governance

Correct answer: d Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

8.

Which of the following is NOT one of the ASX’s Principles of Corporate Governance? *a. b. c. d.

The majority of directors should be executive Promote ethical and responsible decision making Establish an audit committee Ensure level and composition of remuneration is sufficient and reasonable

Correct answer: a Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

9.

Which of the following is NOT an example of good corporate governance in relation to shareholders? a. b. *c. d.

Treat all shareholders equally Have rules that allow shareholders to call extraordinary meetings Provide shareholders with all information made available to directors All of the above

Correct answer: c Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

10.

To ensure shareholders are sufficiently informed good governance practices include: a. b. c. *d.

Prepare regular reports Have annual reports audited Detail related party transactions All of the above

Correct answer: d Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

© John Wiley & Sons Australia, Ltd 2012

7.4

Testbank to accompany Contemporary Issues in Accounting

11.

Which of the following is NOT a requirement of the Sarbanes-Oxley Act: a. *b. c. d.

No loans by company to directors The use of checklists Audit partner rotation every 5 years The disclosure of whether there is a code of ethics for senior financial officers

Correct answer: b Learning Objective 7.5 ~ Explain and evaluate the alternative approaches to corporate governance.

12.

An advantage of a principles-based approach to corporate governance is that: *a. b. c. d.

It places a higher level of duty on directors to determine which corporate governance practices are required It requires a corporation to prepare an annual report and provide them to shareholders It bans loans to directors All of the options are correct

Correct answer: a Learning Objective 7.5 ~ Explain and evaluate the alternative approaches to corporate governance.

13.

Which of the following is NOT a significant influence on actual corporate governance practice? a. b. c. *d.

The nature of the requirements The environment in which the entity operates The commitment of management None of the above, they are all significant

Correct answer: d Learning Objective 7.5 ~ Explain and evaluate the alternative approaches to corporate governance.

© John Wiley & Sons Australia, Ltd 2012

7.5

Chapter 7 Corporate governance

14.

Which of the following were examples of risk management deficiencies that lead to the GFC: i. risk being monitored at the individual level rather than the entity level. ii. information about risks not reaching the board. iii. the organisational culture of ‘pursuing growth in profits’ iv. remuneration packages for high risk activities v. alerting shareholders to a potential investment with a high return a. b. *c. d.

i, ii, iii, v ii, iii, iv, v i, ii, iii, iv i, ii., iii., iv., v.

Correct answer: c Learning Objective 7.6 ~ Discuss recent developments and issues in corporate governance.

15.

What element of executive remuneration has been argued to have contributed to the global financial crisis? a. *b. c. d.

Share options Bonuses on the basis of short-term profits Bonuses on non-financial key performance indicators High fixed salary components

Correct answer: b Learning Objective 7.6 ~ Discuss recent developments and issues in corporate governance.

16.

The Dodd-Frank Wall Street Reform and Consumer Protection act includes provisions that require: a. b. c. *d.

Executive compensation to be submitted for shareholder approval via a nonbinding vote Increased disclosure about the nature of compensation packages and payments related to financial performance That compensation can be rescinded if it was paid based on inaccurate financial statements All of the above

Correct answer: d Learning Objective 7.6 ~ Discuss recent developments and issues in corporate governance.

© John Wiley & Sons Australia, Ltd 2012

7.6

Testbank to accompany Contemporary Issues in Accounting

17.

What is one of the ways that accounting is used to direct and control the manager of a corporation? *a. b. c. d.

Linking of a mangers performance to a bonus that depends on accounting profit Making decisions based on the accounting information regardless of managerial input.

Threatening to tell shareholders a mangers income if a manager makes a ‘poor financial’ decision.

Using income smoothing to assure a manager that they can invest in a low risk investment.

Correct answer: a Learning Objective 7.7 ~ Explain the role and impact of accounting in and on corporate governance.

18.

In what ways can accounting cause financial reporting problems? i. disclosure can lead to constraining of the behaviour of a manager ii. accounting information may lead a manager to making a different approach to a company’s original financial approach iii. there is a drive or desire to meet share market expectations based on these accounting results iv. the manipulation of earnings to meet market expectations a. *b. c. d.

i, ii iii, iv i, ii, iii iv, iii, ii, i

Correct answer: b Learning Objective 7.7 ~ Explain the role and impact of accounting in and on corporate governance.

19.

When it comes to corporate governance many commentators have argued the most important factor is: a. b. *c. d.

Strong accounting systems Harsh legal penalties Personal ethics Codes of practice

Correct answer: c Learning Objective 7.8 ~ Discuss and analyse the role of ethics in corporate governance.

© John Wiley & Sons Australia, Ltd 2012

7.7

Chapter 7 Corporate governance

20.

Which of the following statements is most correct? a. b. c. *d.

Corporate governance is only relevant to listed entities Corporate governance is only relevant to developed economies Corporate governance not relevant to family entities Corporate governance is relevant to most companies globally.

Correct answer: d Learning Objective 7.9 ~ Discuss international perspectives and developments in corporate governance.

© John Wiley & Sons Australia, Ltd 2012

7.8

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 8 Capital Markets Research and Accounting

Chapter 8 Capital Markets Research and Accounting Multiple Choice Questions

1.

Capital markets research focuses on the relationship between: *a. b. c. d.

Accounting information and capital markets Capital markets and the economy Accounting information and standards setting Standards setting and accounting information

Correct answer: a Learning Objective 8.1 ~Explain the role of capital market research for accounting.

2.

One of the criticisms of capital markets research is a. *b. c. d.

It focuses too much on social preferences It is mainly focussed on US data It is only normative research It is mainly qualitative

Correct answer: b Learning Objective 8.1 ~Explain the role of capital market research for accounting.

3.

Which of the following is NOT one of the three key assumptions underlying capital markets research: a. b. c. *d.

Accounting information can be used to form expectations about profitability Expectations about profitability inform expectations about dividends Expectations about dividends determine market price for shares None of the above, i.e. they are ALL assumptions underlying capital markets research.

Correct answer: d Learning Objective 8.1 ~Explain the role of capital market research for accounting.

© John Wiley & Sons Australia, Ltd 2012

8.1

Testbank to accompany Contemporary Issues in Accounting

4.

Which of the following factors are commonly considered by capital markets research? i. Accounting earnings ii. Unexpected earnings iii. Asset pricing iv. Market efficiency

a. b. c. *d.

None of them i. and iv. only i., ii. and iv. only All of them

Correct answer: d Learning Objective 8.1 ~Explain the role of capital market research for accounting.

5.

To test whether accounting information and capital markets researchers examine: a. *b. c. d.

The statements of shareholders about their decisions to sell shares The relationship between unexpected earnings and share returns The relationship between expected earnings and share returns The relationship between shareholder expectations and share price

Correct answer: b Learning Objective 8.2 ~ Differentiate between an event study and an association study.

6.

The kind of study used to examine how quickly accounting measures capture changes in the information that is reflected in share prices over a given period is: a. *b. c. d.

An events study An association study A qualitative study A normative study

Correct answer: b Learning Objective 8.2 ~ Differentiate between an event study and an association study.

7.

Information perspective studies have shown us that when compared to sophisticated investors, unsophisticated investors: *a. b. c. d.

Overreact to good news and underreact to bad news Overreact to news, both good and bad Underreact to good new and overreact to bad news Are little different to their reactions.

Correct answer: a Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial performance and share prices.

© John Wiley & Sons Australia, Ltd 2012

8.2

Chapter 8 Capital Markets Research and Accounting

8.

It has been found that prices often lead earnings. Why is this thought to be the case: a. b. c. *d.

Accounting conservatism 'garbles' earning signals about firm value Accounting statements are poor at incorporating information about human capital and other intangibles Accounting recognition criteria are less stringent for losses than for gains All of the above

Correct answer: d Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial performance and share prices.

9.

What phenomenon has been suggested as one of the most puzzling anomalies in accounting research and calls into question the efficient markets hypothesis? a. *b. c. d.

Income smoothing Post-earnings announcement drift Signalling theory Big bath write-offs

Correct answer: b Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial performance and share prices.

10.

Which of the following has been found to suggest that the users of financial statements are either unwilling or unable to unravel the effects of earnings management? a. b. c. *d.

Managers using discretionary accounting to increase their compensation Managers using income smoothing to increase share price Management engaging in 'big bath' accounting.

All of the above

Correct answer: d Learning Objective 8.3 ~ Outline the relationship between accounting measures of financial performance and share prices.

11.

Which of the following is NOT a conclusion of capital markets research? @Feedback - Learning Objective 8.3 Outline the relationship between accounting measures of financial performance and share prices. a. b. *c. d.

Accounting earnings are poor measures of relevant events that are incorporated into share price Investors react more quickly to bad news than to good Accounting information is not used by investors Forecasts of future performance are core to valuation

© John Wiley & Sons Australia, Ltd 2012

8.3

Testbank to accompany Contemporary Issues in Accounting

12.

Which of the following is NOT a finding or assumption of capital markets research? a. *b. c. d.

Capital providers consider auditors increase accounting information credibility The qualification of a financial report will have a significant impact on share price The work of financial intermediaries impacts on share prices Analysts' earnings forecasts are more accurate than time-series models of earnings

Correct answer: c Learning Objective 8.4 ~ Identify findings of capital market research relevant to accounting.

13.

Voluntary disclosure theory predicts: a. *b. c. d.

Increased disclosure lowers information asymmetry, thus increasing the cost of capital.

Disclosure will be biased but on average credible Shareholders will always want increased and more accurate information None of the above

Correct answer: b Learning Objective 8.4 ~ Identify findings of capital market research relevant to accounting.

14.

Value relevance studies attempt to assess the role of which qualitative characteristic of the Conceptual Framework? a. b. *c. d.

Relevance Faithful representation Relevance and faithful representation None of the above

Correct answer: b Learning Objective 8.5 ~ Explain the role of information and information intermediaries in capital markets.

15.

Which of the following is NOT one of the three assumptions underlying value relevance literature? *a. b. c. d.

Accounting earnings are not highly associated with equity market value changes Equity users are the dominant users of financial reports Share prices adequately represent investors' use of information in valuing equity securities Share-price-based tests can measure relevance and reliability as defined by accounting bodies.

Correct answer: c Learning Objective 8.5 ~ Explain the role of information and information intermediaries in capital markets.

© John Wiley & Sons Australia, Ltd 2012

8.4

Chapter 8 Capital Markets Research and Accounting

16.

Value relevance studies have shown that a. *b. c. d.

Reported earnings are good measures of value-relevant events Any relationship between accounting earnings and share returns is weak.

Losses are strongly associated with a firms ability to generate future cash flows None of the above

Correct answer: a Learning Objective 8.6 ~ Distinguish between behavioural finance findings and mainstream finance findings.

17.

Value relevance research suggests which measurement model best links share price and accounting information? a. *b. c. d.

Accrual accounting Fair value accounting Historic cost accounting Cash accounting

Correct answer: b Learning Objective 8.6 ~ Distinguish between behavioural finance findings and mainstream finance findings.

18.

Accounting studies testing market efficiency have conclusively found that a. b. c. *d.

Markets are highly efficient Markets are more efficient in the short term Markets are efficient in the long term There is not conclusive evidence about market efficiency

Correct answer: b Learning Objective 8.7 ~

19.

Which of the following is not an anomaly that has been noted to the efficient markets hypothesis *a. b. c. d.

Market prices appear to react to more than just accounting information Returns of firms followed by analysts are superior to those that are not Investor interest varies according to the market the share is traded in The returns of small listed firms appear to be smaller than those of larger firms

Correct answer: d Learning Objective 8.7 ~ Discuss how behavioural research contributes to an understanding of decision making.

© John Wiley & Sons Australia, Ltd 2012

8.5

Testbank to accompany Contemporary Issues in Accounting

20.

Which of the following is NOT an assumption behavioural finance? a. *b.

d.

People make systematic errors in their thinking People anchor on long term experience and under appreciate recent experience b c. People are over confident People avoid realising paper losses but seek to realise paper gains

Correct answer: a Learning Objective 8.7 ~ Discuss how behavioural research contributes to an understanding of decision making.

© John Wiley & Sons Australia, Ltd 2012

8.6

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 9 Earnings Management

Chapter 9 Earnings Management Multiple Choice Questions

1.

Earnings are important because: a. b. c. *d.

Increased earnings signal an increase in equity value Earnings are used to assess management performance Earnings assist in predicting future cash flows All of the above

Correct answer: d Learning Objective 9.1 ~Describe the importance of earnings in assessing the success of an organisation.

2.

Which of the following is NOT likely to be interested in earnings information a. b. c. *d.

Shareholders Lenders Customers None of the above, i.e. they are all interested in earnings information

Correct answer: d Learning Objective 9.1 ~Describe the importance of earnings in assessing the success of an organisation.

3.

Earnings management a. b. *c. d.

Is illegal Is considered to always be harmful to shareholders Has a range of meanings None of the above

Correct answer: c Learning Objective 9.2 ~ Explain what earnings management is.

4.

With regards to inventory which of the following would be classed as conservative accounting? a. b. *c. d.

Being slow to write down slow-moving inventory Still recording obsolete inventory as an asset Consistently and quickly applying the lower of cost and net realisable value rule Overstating inventory by including non-existent inventory in accounts.

Correct answer: c Learning Objective 9.2 ~ Explain what earnings management is.

© John Wiley & Sons Australia, Ltd 2012

9.1

Testbank to accompany Contemporary Issues in Accounting

5.

Which of the following would be considered fraudulent accounting? a. *b. c. d.

Recognising revenue when services are prepaid but only partially performed Capitalising advertising costs Liberal credit terms and estimation of provision for doubtful debts Restating useful life and residual value of non-current assets upwards

Correct answer: b Learning Objective 9.2 ~ Explain what earnings management is.

6.

Which of the following methods is NOT commonly used to manipulate earnings: a. b. *c. d.

Accounting policy choice Accelerating expenses Incorrect classification of current liabilities as non-current Aggressive accounting for accruals

Correct answer: c Learning Objective 9.3 ~ Describe a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing, real activities management and big bath write-offs.

7.

An entity can change its accounting policy: *a. b. c. d.

Provided it can argue that the new method provides better information for users Only with the approval of its auditors Never once the decision is made As often as it likes

Correct answer: a Learning Objective 9.3 ~ Describe a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing, real activities management and big bath write-offs.

8.

Which of the following is NOT an accrual accounting technique that could be used to manage earnings? a. b. c. *d.

Under-provisioning for bad debts Delaying asset impairments Adjusting closing inventory valuations None of the above, they could all be used to manage earnings

Correct answer: d Learning Objective 9.3 ~ Describe a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing, real activities management and big bath write-offs.

© John Wiley & Sons Australia, Ltd 2012

9.2

Chapter 9 Earnings Management

9.

Which of the following techniques is NOT generally useful to smooth income a. b. *c. d.

Varying the provision for warranties Hedging of financial instruments Using fair value accounting None of the above, they could all be used to smooth income

Correct answer: c Learning Objective 9.3 ~ Describe a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing, real activities management and big bath write-offs.

10.

Which of the following is NOT an example of real activities management that could be used to manage earnings? a. *b. c. d.

Reducing discretionary spending Adjusting loan loss provisions Accelerating sales Delaying research and development

Correct answer: b Learning Objective 9.3 ~ Describe a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing, real activities management and big bath write-offs.

11.

Big bath accounting is generally used to drop earnings when a. b. c. *d.

There is a change in management team When operations are restructured When the economy is poor All of the above

Correct answer: d Learning Objective 9.3 ~ Describe a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing, real activities management and big bath write-offs.

12.

Which of the following earning management reasons would NOT be viewed as a positive for shareholders? a. *b. c. d.

To accurately convey private information To increase short term profits To meet analysts' expectations To avoid violating debt covenants

Correct answer: b Learning Objective 9.4 ~ Explain why entities manage earnings.

© John Wiley & Sons Australia, Ltd 2012

9.3

Testbank to accompany Contemporary Issues in Accounting

13.

Why does income smoothing generally lead to a higher share value? *a. b. c. d.

It reduces the perceived risk of the company It leads to higher perceived income It is perceived as increasing the chance of insolvency None of the above

Correct answer: a Learning Objective 9.4 ~ Explain why entities manage earnings.

14.

Which of the following is NOT thought to reflect earnings quality? a. *b. c. d.

Trend in profit results Total income tax expense for the period Operating/non-operating mix Earnings base

Correct answer: b Learning Objective 9.4 ~ Explain why entities manage earnings.

15.

Research into income smoothing has concluded that a. b. *c. d.

Smoothed income indicates high earnings quality Smoothed income indicates low earnings quality The findings are mixed with regards to earnings quality There is no relationship between income smoothing and earnings quality

Correct answer: c Learning Objective 9.4 ~ Explain why entities manage earnings.

16.

Which of the following components of managerial compensation are thought to most encourage earnings management a. *b. c. d.

Their base salary Their cash bonuses Shares or share options Various perquisites

Correct answer: b Learning Objective 9.4 ~ Explain why entities manage earnings.

© John Wiley & Sons Australia, Ltd 2012

9.4

Chapter 9 Earnings Management

17.

Which of the following is most likely to be true a. b. *c. d.

An existing CEO facing removal is likely to manage earnings downwards An incoming CEO following a forced departure will find it easier to manage earnings upwards An incoming CEO would prefer to manage earnings downward in their first year None of the above

Correct answer: c Learning Objective 9.4 ~ Explain why entities manage earnings.

18.

Researchers examining share price reactions to evidence of fraudulent reporting have concluded that: a. b. *c. d.

Markets are highly efficient Markets interpret the discovery as good news Markets are generally surprised by the information Share prices are generally unaffected

Correct answer: c Learning Objective 9.5 ~ Identify the consequences of earnings management.

19.

Research into IPOs and earnings management have indicated: *a. b. c. d.

Investors expect upwards earning management Firms do not engage in upwards earnings management The market does discover upwards earning management None of the above

Correct answer: a Learning Objective 9.5 ~ Identify the consequences of earnings management.

20.

Which of the following board characteristics are likely to reduce earnings management a. b. c. *d.

A mix of monitoring and expertise skills More independent directors The existence of an audit committee All of the above

Correct answer: d Learning Objective 9.6 ~ Assess the role corporate governance plays in controlling earnings management.

© John Wiley & Sons Australia, Ltd 2012

9.5

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 10 Fair Value Accounting

Chapter 10 Fair Value Accounting Multiple Choice Questions

1.

Fair value accounting: a. b. *c. d.

Is a new concept Is currently rare in accounting standards Appears in many accounting standards Is simply a refinement to the definition of historic cost

Correct answer: c Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

2.

AASB 13 Fair Value Accounting has an effective date of: a. b. *c. d.

July 2005 July 2011 January 2013 January 2015

Correct answer: c Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

3.

Traditionally what measurement technique has been most commonly used *a. b. c. d.

Modified historical cost Fair value Replacement cost Sales value

Correct answer: a Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

4.

Which part of the asset definition supports the use of fair value accounting? a. b. *c. d.

Control Relevance and reliability Future economic benefit Past transaction

Correct answer: c Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

© John Wiley & Sons Australia, Ltd 2012

10.1

Testbank to accompany Contemporary Issues in Accounting

5.

Which of the following is NOT part of the old definition of fair value? a. b. c. *d.

The amount an asset could be exchanged for The amount a liability could be settled for An arms-length transaction At measurement date

Correct answer: d Learning Objective 10.2 ~ Evaluate the traditional definition of fair value.

6.

Which of the following has NOT been identified as a problem with the old definition of fair value a. b. c. *d.

The word exchange is unclear The word settle is potentially misleading The word willing is not always ideal None of the above, i.e. they are all criticisms

Correct answer: d Learning Objective 10.2 ~ Evaluate the traditional definition of fair value.

7.

Which of the following is NOT one of the reasons given for issuing IFRS 13? *a. b. c. d.

To replace the use of historical cost To enhance disclosure To clarify the definition of fair value To provide a single source of guidance on the use of fair value

Correct answer: a Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

8.

IFRS 13 is considered a. b. *c. d.

To clarify our current use of fair value To be a revolutionary standard To be an evolutionary standard To be a regression from previous practice

Correct answer: c Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

9.

Which of the following is not part of the definition of fair value under AAASB 13? a. b. *c. d.

Price received to sell an asset Price paid to sell a liability Knowledgeable and willing parties At measurement date

Correct answer: c Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

© John Wiley & Sons Australia, Ltd 2012

10.2

Chapter 10 Fair Value Accounting

10.

Why does the new definition focus on an exit price when valuing and asset or liability? a. b. c. *d.

It focuses on the current value It is specific to the item being considered It introduces the concept of an external party into the transaction All of the above

Correct answer: d Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

11.

Which two economic concepts are fundamental to the relevance of fair values to accounting? i. The Efficient Markets Hypothesis ii. Supply and Demand iii. Economic Rationalism iv. Marginal Utility

a. b. *c. d.

i. & ii. ii. & iv. i. & iii. iii. & iv.

Correct answer: c Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

12.

Which of the following would NOT indicate that market is inactive? a. b. *c. d.

Little information is publicly available Price quotations don't reflect current information The bid-ask spread is narrow Indices are demonstrably uncorrelated with recent indications of fair valuation

Correct answer: c Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

13.

When fair valuing a motor vehicle which of the following is least likely to be important? a. b. *c. d.

Age Make and model Colour Kilometres travelled

Correct answer: c Learning Objective 10.4 ~ Explain how fair value should be determined for assets and liabilities.

© John Wiley & Sons Australia, Ltd 2012

10.3

Testbank to accompany Contemporary Issues in Accounting

14.

When valuing non-financial assets which use for the asset should be considered *a. b. c. d.

The asset's highest and best use The asset's current use The asset's expected use None of the above

Correct answer: a Learning Objective 10.4 ~ Explain how fair value should be determined for assets and liabilities.

15.

When fair valuing a liability which factor should NOT be considered? a. b. c. *d.

Non-performance risk The fair value of the corresponding asset Expectations of the market about fulfilling the obligation None of the above, i.e. they are all factors to consider

Correct answer: d Learning Objective 10.4 ~ Explain how fair value should be determined for assets and liabilities.

16.

Which of the following is not an acceptable valuation technique a. b. *c. d.

The income approach The cost approach The expert evaluation approach None of the above, i.e. they are all acceptable valuation techniques

Correct answer: c Learning Objective 10.5 ~

17.

Which of the following would most likely be valued using a level 2 valuation? a. *b. c. d.

Gold A building Shares A business unit

Correct answer: b Learning Objective 10.5 ~ Describe the three valuation techniques and the importance of the input hierarchy.

© John Wiley & Sons Australia, Ltd 2012

10.4

Chapter 10 Fair Value Accounting

18.

Which of the following information must be provided in the financial report about level 3 fair valuations a. b. c. *d.

A description of the valuation technique used If the asset is not being used for its highest and best use why this is the case Quantitative information on the inputs used in the model All of the above

Correct answer: d Learning Objective 10.6 ~ Apply the general disclosure requirements for items measured at fair value.

19.

Which of the following is NOT a transaction cost that should be considered in the calculation of fair value? *a. b. c. d.

Transport costs Agent's selling fees Costs associated with marketing the item None of the above, i.e. they are all transaction costs

Correct answer: a Learning Objective 10.5 ~ Describe the three valuation techniques and the importance of the input hierarchy.

20.

Where there is a difference between fair value at initial recognition and cost, assuming no other standard prohibits it, the entity should a. b. *c. d.

Ignore the difference as there should be no day one gain or loss Amortise the difference over the useful life of the item Immediately adjust the value and recognise profit or loss Pay more or less for the item to make the figures equal

Correct answer: c Learning Objective 10.6 ~ Apply the general disclosure requirements for items measured at fair value.

© John Wiley & Sons Australia, Ltd 2012

10.5

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 11 Sustainability and Environmental Accounting

Chapter 11 Sustainability and Environmental Accounting Multiple Choice Questions

1.

The Brundtland report defined sustainable development as “development that…”: a. b. *c. d.

allows all people to meet their needs to an equal degree. meets the needs of the future without compromising the ability of current generations to meet their own needs. meets the needs of the present without compromising the ability of future generations to meet their own needs. continues at the current pace, neither increasing nor decreasing into the foreseeable future.

Correct answer: c Learning Objective 11.1 ~ Explain the meaning of sustainability and why an entity might embrace sustainable development practices.

2.

Which of the following statements about Intragenerational Equity is NOT true: *a. b. c. d.

It means that future generations should not have a lower quality of life.

It is concerned with poverty and access to food, water and shelter.

It is an important component of eco-justice.

None of the above, i.e. they are all true.

Correct answer: a Learning Objective 11. ~ 1 Explain the meaning of sustainability and why an entity might embrace sustainable development practices.

3.

Which of the following terms is commonly used to mean Sustainability Reporting? a. b. c. *d.

Corporate Social Reporting Environmental, Social and Governance Reporting Triple Bottom Line Reporting All of the above

Correct answer: d Learning Objective 11.2 ~ Explain sustainability reporting and describe a range of methods used to report on sustainability and environmental performance.

4.

The three parts of the triple bottom line are: a. *b. c. d.

Financial, Economic and Government Economic, Environmental and Social Economic, Stakeholder and Employee Financial, Customer and Government

Correct answer: b Learning Objective 11.2 ~ Explain sustainability reporting and describe a range of methods used to report on sustainability and environmental performance.

© John Wiley & Sons Australia, Ltd 2012

11.1

Testbank to accompany Contemporary Issues in Accounting

5.

The International Integrated Reporting Committee was formed by which two bodies? a. b. *c. d.

NGO and GRI UNHCR and IASB GRI and A4S IASB and FASB

Correct answer: c Learning Objective 11.2 ~ Explain sustainability reporting and describe a range of methods used to report on sustainability and environmental performance.

6.

According to the research undertaken to date, what is the relationship between environmental performance and disclosure of corporations? a. b. c. *d.

Poor performers have poor disclosure, but no relationship has been found for good performers Good performers have good disclosure, but no relationship has been found for poor performers Poor performers have good disclosure, but no relationship has been found for good performers Research has not drawn any clear conclusions

Correct answer: d Learning Objective 11.2 ~ Explain sustainability reporting and describe a range of methods used to report on sustainability and environmental performance.

7.

The UN’s Principles of Responsible Investment have main been adopted by which types of organisations? a. *b. c. d.

Mining Companies Institutional Investors Governments Builders

Correct answer: b Learning Objective 11.3 ~ Describe the commonly used guidelines for sustainability reporting, and articulate how they can assist corporate reporting of sustainability performance.

8.

Which of the following is NOT a use for sustainability reports prepare under the GRI framework? a. b. c. *d.

Demonstrating organisational commitment to sustainable development Comparing organisational performance over time Measuring organisational performance with respect to laws None of the above, i.e. they are all uses for sustainability reports under GRI

Correct answer: d Learning Objective 11.3 ~ Describe the commonly used guidelines for sustainability reporting, and articulate how they can assist corporate reporting of sustainability performance.

© John Wiley & Sons Australia, Ltd 2012

11.2

Chapter 11 Sustainability and Environmental Accounting

9.

Which of the following is an Environmental Performance Indicator under the GRI framework? a. *b. c. d.

Rates of injury Impacts of transport Anti-corruption policies None of the above

Correct answer: b Learning Objective 11.3 ~ Describe the commonly used guidelines for sustainability reporting, and articulate how they can assist corporate reporting of sustainability performance.

10.

Which of the following is NOT a Labour Practices and Decent Work performance indicator under GRI? a. *b. c. d.

Workforce by gender Assessment of product life cycle stages for health and safety risks Education and training programs in place None of the above, i.e. they are all Labour Practices and Decent Work performance indicators.

Correct answer: b Learning Objective 11.3 ~ Describe the commonly used guidelines for sustainability reporting, and articulate how they can assist corporate reporting of sustainability performance.

11.

Which of the following statements is most correct regarding Environmental, Social and Governance Reports? *a. b. c. d.

They are becoming mandatory in an increasing number of countries They are not currently required in any country They are required as part of the IASB’s accounting standards Norway is leading the way with regards to requiring reporting

Correct answer: a Learning Objective 11.3 ~ Describe the commonly used guidelines for sustainability reporting, and articulate how they can assist corporate reporting of sustainability performance.

12.

Which of the following is NOT considered a stakeholder with potential interests in corporate sustainability? a. b. c. *d.

Banks Government Media None of the above, ie. They are all potential interested in corporate sustainability.

Correct answer: d Learning Objective 11.4 ~ Evaluate the range of stakeholders that can influence sustainable business practice, and how entities can engage with these stakeholders.

© John Wiley & Sons Australia, Ltd 2012

11.3

Testbank to accompany Contemporary Issues in Accounting

13.

Stakeholder power is general considered to relate to which of the following factors? a. b. *c. d.

The amount of impact the organisation has on them How vocal they are prepared to be The degree of control they have over resources required by the organisation None of the above

Correct answer: c Learning Objective 11.4 ~ Evaluate the range of stakeholders that can influence sustainable business practice, and how entities can engage with these stakeholders.

14.

Ethical investment funds might be concerned about how individual companies address climate change because a. *b. c. d.

They don’t want to invest money on companies that waste money They believe companies that address environmental risks will perform better in the long run They believe carbon emissions proxy for economic performance None of the above

Correct answer: b Learning Objective 11.4 ~ Evaluate the range of stakeholders that can influence sustainable business practice, and how entities can engage with these stakeholders.

15.

An EMS is a: a. b. *c. d.

Emissions Measurement Scheme Ecological Maintained Source Environmental Management System Ethical Mission Statement

Correct answer: c Learning Objective 11.5 ~ Explain how entities can use environmental management systems to improve environmental performance and reporting.

16.

ISO 14001 Environmental Management requires certifying companies to assess environmental performance against *a. b. c. d.

Internally developed policies, objectives and targets Industry benchmarks Government set standards Internationally established values

Correct answer: a Learning Objective 11.5 ~ Explain how entities can use environmental management systems to improve environmental performance and reporting.

© John Wiley & Sons Australia, Ltd 2012

11.4

Chapter 11 Sustainability and Environmental Accounting

17.

The Kyoto Protocol: a. *b. c. d.

Sets standards on corporate reporting of carbon emissions Commits countries to achieving specific greenhouse gas emissions reductions Forbids trading in greenhouse gases All of the above

Correct answer: b Learning Objective 11.6 ~ Evaluate the implications of climate change for accounting.

18.

An emissions trading scheme: a. b. c. *d.

Can also be referred to as a ‘cap and trade’ scheme Allows the trade of excess emissions permits Usually involves substantial fines for excessive polluters All of the above

Correct answer: d Learning Objective 11.6 ~ Evaluate the implications of climate change for accounting.

19.

As of 2012, the IASB project on Accounting for Carbon Emissions a. b. *c. d.

Is complete with the release of IFRS 4 Is currently an Exposure Draft (ED133/A) Is currently paused Does not exist

Correct answer: c Learning Objective 11.6 ~ Evaluate the implications of climate change for accounting.

20.

Climate change has the ability to impact on traditional financial accounting in what way? a. b. c. *d.

Liability valuation Asset Impairment Risk disclosure All of the above

Correct answer: d Learning Objective 11.6 ~ Evaluate the implications of climate change for accounting.

© John Wiley & Sons Australia, Ltd 2012

11.5

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 12 International Accounting

Chapter 12 International Accounting Multiple Choice Questions

1.

To what does International Accounting refer? a. b. c. *d.

Descriptions of accounting practices in different countries Comparison of accounting practices between countries Accounting for international transactions All of the above

Correct answer: d Learning Objective 12.1 ~ Discuss the nature of international accounting.

2.

Which of the following is NOT a level that can be used to define international accounting? a. b. c. *d.

Supranational Company Comparative None of the above, i.e. they are all levels of international accounting.

Correct answer: d Learning Objective 12.1 ~ Discuss the nature of international accounting.

3.

With harmonisation of accounting practices globally a. *b. c. d.

International accounting differences have all but disappeared Environmental and cultural factors still lead to diversity in practice Financial reporting is becoming simpler All of the above

Correct answer: b Learning Objective 12.2 ~ Outline evidence of the diversity of international accounting practice.

4.

Which of the following is likely to influence accounting systems at a national level? a. b. c. *d.

Tax system Political system Capital market structures All of the above

Correct answer: d Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

© John Wiley & Sons Australia, Ltd 2012

12.1

Testbank to accompany Contemporary Issues in Accounting

5.

In countries where finance is mainly provided by banks we would expect: a. *b. c. d.

More lenient bankruptcy laws Greater emphasis on the balance sheet More public disclosure All of the above

Correct answer: b Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

6.

The accounting regulation is heavily influenced by the legal system in which is operates. In Australia laws are based on which legal system? a. *b. c. d.

Civil Law Common Law Codified Roman Law Case Law

Correct answer: b Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

7.

The work of Hofstede has been very important to the study of international accounting, which of the following was NOT one of his cultural characteristics used to describe cultures around the world? a. *b. c. d.

Masculinity versus Femininity Organised versus laid-back Individualism versus Collectivism None of the above, i.e. they are all cultural characteristics

Correct answer: b Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

8.

Gray adapted Hofstede’s categories for accounting, which of the following is not one of his four accounting values? a. b. c. *d.

Uniformity versus Flexibility Secrecy versus Transparency Conservatism versus Optimism Short-term versus Long-term Orientation

Correct answer: d Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

© John Wiley & Sons Australia, Ltd 2012

12.2

Chapter 12 International Accounting

9.

One of Gray’s accounting values is Professionalism versus Statutory Control. Which country would you expect to be closest to the Statutory Control end of the spectrum? a. *b. c. d.

Australia France UK USA

Correct answer: b Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

10.

One significant barrier to the adoption of international accounting standards in Islamic countries has been: *a. b. c. d.

The prohibition on charging interest Refusal to compartmentalise religious and secular life The requirement to pay zakat (a religious levy) All of the above

Correct answer: a Learning Objective 12.3 ~ Explain the environmental, cultural and religious factors that lead to diversity of international accounting practice.

11.

Which of the following is NOT considered a challenge for international business operations when faced with accounting diversity?

a. b. *c. d.

It is costly to restate financial statements It reduces access to international investments National accounting regimes are inferior to international accounting None of the above, i.e. they are all a challenge

Correct answer: c Learning Objective 12.4 ~ Discuss international adoption of IFRSs, explain the difference between harmonisation and convergence and identify the benefits and limitations of IFRSs adoption.

12.

The international Accounting Standards Board’s objective for International Accounting Standards would be best described as *a. b. c. d.

Adoption Harmonisation Convergence Adaption

Correct answer: a Learning Objective 12.4 ~ Discuss international adoption of IFRSs, explain the difference between harmonisation and convergence and identify the benefits and limitations of IFRSs adoption.

© John Wiley & Sons Australia, Ltd 2012

12.3

Testbank to accompany Contemporary Issues in Accounting

13.

Which of the following is NOT an advantage to IFRS adoption? a. b. *c. d.

It is a cost effective way to have a comprehensive set of standards It makes financial statements more comparable It makes accounting standard development more flexible None of the above, i.e. they are all advantages

Correct answer: c Learning Objective 12.4 ~ Discuss international adoption of IFRSs, explain the difference between harmonisation and convergence and identify the benefits and limitations of IFRSs adoption.

14.

Which of the following elements or standards has been raised as a significant problem with the adoption of IFRS in certain countries? a. b. c. *d.

Consolidation requirements Fair value accounting Profit focus All of the above

Correct answer: d Learning Objective 12.4 ~ Discuss international adoption of IFRSs, explain the difference between harmonisation and convergence and identify the benefits and limitations of IFRSs adoption.

15.

In Australia IFRSs are required to be used by: *a. b. c. d.

All reporting entities All listed entities Consolidated entities only Multinational Entities

Correct answer: a Learning Objective 12.4 ~ Discuss international adoption of IFRSs, explain the difference between harmonisation and convergence and identify the benefits and limitations of IFRSs adoption.

16.

China’s acceptance of international accounting standards would be best described as: a. b. *c. d.

Adoption Harmonisation Convergence Indifference

Correct answer: c Learning Objective 12.4 ~ Discuss international adoption of IFRSs, explain the difference between harmonisation and convergence and identify the benefits and limitations of IFRSs adoption.

© John Wiley & Sons Australia, Ltd 2012

12.4

Chapter 12 International Accounting

17.

The SEC allows non-US companies listed on a US stock exchange to report using: a. b. *c. d.

Their home country’s standards International Accounting Standards, with a reconciliation to US-GAAP International Accounting Standards None of the above, they must use US-GAAP only

Correct answer: c Learning Objective 12.6 ~ Evaluate the impact of international accounting and tax issues on multinational enterprises.

18.

As of 2012 which US – IFRS convergence projects are a priority? *a. b. c. d.

Leases Accounting for Income Taxes Emissions trading schemes All of the above

Correct answer: a Learning Objective 12.6 ~ Evaluate the impact of international accounting and tax issues on multinational enterprises.

19.

Multinational entities a. b. c. *d.

Are largely unaffected by the culture of individual countries Operate independently of any national legal framework Use IFRS exclusively None of the above

Correct answer: d Learning Objective 12.6 ~ Evaluate the impact of international accounting and tax issues on multinational enterprises.

20.

Transfer pricing has been identified as a major problem for multi-national entities.

This refers to: a. *b. c. d.

Setting up parent entities in tax havens The pricing of goods and services exchanged within a corporate group Paying local workers less than expatriate employees Manufacturing cheaply in the third world to sell at high profit in the first world

Correct answer: b Learning Objective 12.6 ~ Evaluate the impact of international accounting and tax issues on multinational enterprises.

© John Wiley & Sons Australia, Ltd 2012

12.5

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 13 Corporate Failure

Chapter 13 Corporate Failure Multiple Choice Questions

1.

The definition of corporate failure is: a. b. *c. d.

When a company becomes bankrupt or insolvent The appointment of a receiver or administrator Unclear and ill-defined When a company delists and liquidates

Correct answer: c Learning Objective 13.1 ~ Outline what is understood by the term ‘corporate failure’

2.

Companies in Australia may only enter voluntary administration under what circumstances? a. *b. c. d.

Their creditors agree in a non-binding vote They are able to pay all their debts in full The court orders it At least 75% of the shareholders agree to it

Correct answer: b Learning Objective 13.1 ~ Outline what is understood by the term ‘corporate failure’

3.

Though there are many potential causes of corporate failure what has been suggested as the common underlying problem? a. b. *c. d.

Changes in technology Economic recession Management inadequacies Changes in import protections

Correct answer: c Learning Objective 13.2 ~ Examine the causes of corporate failure

4.

Which of the following has been identified as a major cause of corporate failure? a. b. c. *d.

Overexpansion Dominant CEO Failure of internal controls All of the above

Correct answer: d Learning Objective 13.2 ~ Examine the causes of corporate failure

© John Wiley & Sons Australia, Ltd 2012

13.1

Testbank to accompany Contemporary Issues in Accounting

5.

Poor figures in which financial statement is usually the trigger of corporate failure? a. b. *c. d.

Statement of Comprehensive Income – Falling revenues Statement of Financial Position – Increasing liabilities Statement of Cash Flows – Poor operating cash flows Statement of Changes in Equity – Increasing retained losses

Correct answer: c Learning Objective 13.3 ~ Identify the costs of corporate failure

6.

Which of the following is NOT an indirect cost of corporate failure? a. b. *c. d.

Loss of corporate reputation Loss of key employees Additional interest on debt that cannot be paid off None of the above, i.e. they are all indirect costs of corporate failure

Correct answer: c Learning Objective 13.3 ~ Identify the costs of corporate failure

7.

Which of the following statements is most correct when it comes to predicting corporate distress: a. *b. c. d.

The Altman Z-Score has been shown to be 90% accurate There are many models in use To date there has been no success in predicting corporate failure The majority of inputs in the majority of corporate distress models are qualitative

Correct answer: b Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

8.

In the Altman’s Z-score one financial accounting measure appears in 4 of the 5 ratios used, what is it? a. b. *c. d.

Sales Revenue Operating Cash Flow Total Assets Number of Independent Directors

Correct answer: c Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

© John Wiley & Sons Australia, Ltd 2012

13.2

Chapter 13 Corporate Failure

9.

One test of Altman’s Z-score in Australia found that its success at predicting financial distress was: a. *b. c. d.

Useless, being no better than guessing Below Altman’s original study Above Altman’s original study Excellent, almost perfect at predicting 1 year before failure

Correct answer: b Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

10.

Research indicates that lenders making predictions of corporate failure relied: a. b. *c. d.

Almost exclusively on accrual information More on accrual information than cash flow information More on cash flow information than accrual information Almost exclusively on cash flow information

Correct answer: c Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

11.

Which of the following has ASIC identified as a practice that indicates risk of corporate insolvency? a. b. c. *d.

Disorganised internal accounting procedures Judgement debts Loss of key management personnel All of the above

Correct answer: d Learning Objective 13.5 ~ Assess the likely indicators of corporate failure

12.

Which of the following has ASIC NOT identified as a practice that indicates risk of corporate insolvency? a. b. *c. d.

Absence of corporate plans Entering into instalment arrangements to pay debts Decreased monitoring by financier None of the above, i.e. they have all been identified by ASIC

Correct answer: c Learning Objective 13.5 ~ Assess the likely indicators of corporate failure

© John Wiley & Sons Australia, Ltd 2012

13.3

Testbank to accompany Contemporary Issues in Accounting

13.

Corporate governance has been suggested to be at the heart of corporate failure. It has been suggested that companies are less likely to get in financial trouble if their boards: a. *b. c. d.

Let management run the company with minimal oversight Are active in their roles Also manage the company Have good political connections

Correct answer: b Learning Objective 13.6 ~ Evaluate the relationship between corporate governance and failure

14.

Business Week considers which of the following to be good governance when rating boards? a. *b. c. d.

Directors should do business with the company Directors should own shares in the company Directors should always meet with management present None of the above

Correct answer: b Learning Objective 13.6 ~ Evaluate the relationship between corporate governance and failure

15.

The corporate collapse in Australia that happened in the 1980’s were thought to be a result of: a. *b. c. d.

Poor corporate governance Inadequate accounting disclosures Economic downturn Audit failures

Correct answer: b Learning Objective 13.7 ~ Evaluate how regulation has been used to alleviate the effects of corporate failure

16.

Following a number of corporate failures in 2001 legislative changes in Australia: a. b. *c. d.

Prohibited audit firms from providing other services to clients Required the rotation of audit firms every 5 years Required disclosure of the nature and value of non-audit services provided by auditors to be disclosed Forced the Australian government to enact the Sarbanes-Oxley Act

Correct answer: c Learning Objective 13.7 ~ Evaluate how regulation has been used to alleviate the effects of corporate failure

© John Wiley & Sons Australia, Ltd 2012

13.4

Chapter 13 Corporate Failure

17.

A common factor identified as an issue in both the HIH and Enron collapses was: *a. b. c. d.

Deficiencies in the audit process Over reliance on complex financial instruments Lack of board independence None of the above

Correct answer: a Learning Objective 13.8 ~ Evaluate the anatomy of a corporate failure

18.

It has been noted that remuneration packages for CEOs in failed companies: a. *b. c. d.

Tend to include more options Have a substantially lower proportion of ‘at risk’ components Are generally much higher Are generally much lower

Correct answer: b Learning Objective 13.8 ~ Evaluate the anatomy of a corporate failure

19.

A bubble in which class of assets has generally been claimed as the trigger for the global financial crisis? a. b. c. *d.

Shares Precious metals Consumables Housing

Correct answer: d Learning Objective 13.9 ~ Critically evaluate the causes and consequences of the global financial crisis (GFC) and evaluate how governments have intervened to alleviate the effects of the GFC.

20.

Which of the following mechanisms transferred the financial crisis from the US to the rest of the world? a. b. c. *d.

Exposure of the world’s financial system to sub-prime debt Decline in US demand for imports Contagion of concerns about the housing market in other countries All of the above

Correct answer: d Learning Objective 13.9 ~ Critically evaluate the causes and consequences of the global financial crisis (GFC) and evaluate how governments have intervened to alleviate the effects of the GFC.

© John Wiley & Sons Australia, Ltd 2012

13.5

Testbank to accompany

Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling, Kimberly Ferlauto & Carol Tilt Prepared by Matt Tilling

© John Wiley & Sons Australia, Ltd 2012

Chapter 14 Special Reporting Issues

Chapter 14 Special Reporting Issues Multiple Choice Questions

1.

The market value of a company often: *a. b. c. d.

Exceeds its book value because certain assets are not recognised under accounting rules Appears to be random distributed with regards to book value Is less than its book value because certain assets are not recognised under accounting rules None of the above

Correct answer: a Learning Objective 14.1 ~ Analyse the background leading to the issue of whether intangible assets and heritage assets should be recognised in financial statements

2.

Historically internally generated intangible assets have not been recognised in the financial statements for what reason? a. b. *c. d.

The difficulty in measuring the associated costs Failure to meet the old asset definition The perceived lack of usefulness in assessing future earnings capacity.

They did not exist as a concept until recently

Correct answer: c Learning Objective 14.2 ~ Explain why capitalisation is contentious and apply the asset definition and recognition tests of the Conceptual Framework

3.

Which of the following is NOT part of the Conceptual Framework definition of an asset? a. *b. c. d.

Control Seperability Future economic benefit None of the above, i.e. they are all part of the definition

Correct answer: b Learning Objective 14.2 ~ Explain why capitalisation is contentious and apply the asset definition and recognition tests of the Conceptual Framework

© John Wiley & Sons Australia, Ltd 2012

14.1

Testbank to accompany Contemporary Issues in Accounting

4.

Which of the following attributes are important in determining whether an asset exists? a. b. c. *d.

Tangibility Ownership Existence of a market for the asset None of the above

Correct answer: d Learning Objective 14.2 ~ Explain why capitalisation is contentious and apply the asset definition and recognition tests of the Conceptual Framework

5.

Which of the following is NOT a criticism that has been levelled at the current definition of an asset under the Conceptual Framework? a. b. *c. d.

It is too complex to operationalise It is too vague to be used to solve problems It excludes too many potential assets None of the above, i.e. they have all been identified as problems

Correct answer: c Learning Objective 14.2 ~ Explain why capitalisation is contentious and apply the asset definition and recognition tests of the Conceptual Framework

6.

Which of the following is NOT a feature of intangibles that differentiates them from other assets? a. b. c. *d.

They are largely knowledge based assets Many are not separable items They often do not have well-defined property rights None of the above, i.e. they are all features of intangible assets

Correct answer: d Learning Objective 14.3 ~ Analyse whether intangibles pass the definition and recognition tests

7.

Which of the following in NOT part of the AASB 138 definition of an intangible asset? a. *b. c. d.

Non-monetary Unidentifiable Controlled None of the above, i.e. they are all part of the definition

Correct answer: b Learning Objective 14.3 ~ Analyse whether intangibles pass the definition and recognition tests

© John Wiley & Sons Australia, Ltd 2012

14.2

Chapter 14 Special Reporting Issues

8.

Which of the following internally generated intangible assets can be recognised in accordance with AASB 138? a. b. c. *d.

Mastheads Customer lists Registered brand names None of the above

Correct answer: d Learning Objective 14.3 ~ Analyse whether intangibles pass the definition and recognition tests

9.

Differential treatment of purchased versus internally generated intangible assets is said to not make economic sense because: a. b. *c. d.

It violates the efficient market hypothesis It isn’t economically rational It creates information asymmetry All of the above

Correct answer: c Learning Objective 14.4 ~ Explain the implications of non-recognition of intangibles

10.

Internally generated goodwill is not accounted for because it is difficult to: a. b. c. *d.

Identify Measure Isolate All of the above

Correct answer: d Learning Objective 14.4 ~ Explain the implications of non-recognition of intangibles

11.

How is purchased goodwill valued? a. b. *c. d.

At fair value As the balancing item between the fair value of assets and their carrying amount As the balancing item between purchase consideration and the fair value of identifiable net assets acquired At historic cost

Correct answer: c Learning Objective 14.4 ~ Explain the implications of non-recognition of intangibles

© John Wiley & Sons Australia, Ltd 2012

14.3

Testbank to accompany Contemporary Issues in Accounting

12.

It has been argued that when it comes to intangible assets capital markets would be better served by: a. b. *c. d.

Requiring all intangibles, internally generated or purchased, to be expensed Only allowing purchased intangibles to be capitalised Giving discretion to management on when to capitalise intangible assets Requiring all intangibles, internally generated or purchased, to be capitalised

Correct answer: c Learning Objective 14.4 ~ Explain the implications of non-recognition of intangibles

13.

Lev has suggested that by not including internally generated intangible assets companies’ book values may be understated by as much as: a. *b. c. d.

100% 75% 50% 25%

Correct answer: b Learning Objective 14.4 ~ Explain the implications of non-recognition of intangibles

14.

Which of the following is NOT part of the definition of a heritage asset? *a. b. c. d.

Intangible Of historic, artistic, scientific etc. value Held and maintained for its contribution to knowledge and culture None of the above, i.e. they are all part of the definition

Correct answer: a Learning Objective 14.5 ~ Analyse whether heritage assets pass the definition and recognition tests

15.

Which of the following is NOT an example of a heritage asset? a. *b. c. d.

Stonehenge Aboriginal oral history The Great Barrier Reef None of the above, i.e. they are all heritage assets

Correct answer: b Learning Objective 14.5 ~ Analyse whether heritage assets pass the definition and recognition tests

© John Wiley & Sons Australia, Ltd 2012

14.4

Chapter 14 Special Reporting Issues

16.

Which part of the Conceptual Framework definition of an asset makes recognition of Heritage Assets difficult? a. b. c. *d.

Future economic benefit Control Past transaction or event Both future economic benefit and control

Correct answer: d Learning Objective 14.5 ~ Analyse whether heritage assets pass the definition and recognition tests

17.

Which part of the Conceptual Framework definition of a liability makes it unlikely that Heritage Assets should be recognised as liabilities? a. *b. c. d.

Future economic sacrifice Present obligation Past transaction or event Measurability

Correct answer: b Learning Objective 14.5 ~ Analyse whether heritage assets pass the definition and recognition tests

18.

Which of following methods have NOT been proposed to measure the value of Heritage Assets? a. b. c. *d.

Valuation at nominal amounts Travel cost method Contingent valuation None of the above, i.e. they are all proposed measurement approaches

Correct answer: d Learning Objective 14.5 ~ Analyse whether heritage assets pass the definition and recognition tests

19.

One important question regarding the recognition of Heritage Assets is whether they fall within SAC 2. Which of the following questions would address this concern? a. b. *c. d.

Are the entities holding the assets reporting entities?

Do the assets meet the formal definition of an asset?

Are there identifiable users who require financial information about the assets?

Can the value of the assets be accurately measured?

Correct answer: c Learning Objective 14.6 ~ Explain the implications of recognition of heritage assets.

© John Wiley & Sons Australia, Ltd 2012

14.5

Testbank to accompany Contemporary Issues in Accounting

20.

Which objective of financial accounting most closely aligns with the concept of Heritage Assets? *a. b. c. d.

Stewardship Corporate governance Decision usefulness Financial valuation

Correct answer: a Learning Objective 14.6 ~ Explain the implications of recognition of heritage assets.

© John Wiley & Sons Australia, Ltd 2012

14.6