CHAPTER 12 Section: Qualitative characteristics of financial reporting

ACCOUNTING CONCEPTS AND PRINCIPLES

12.A company should change its accounting method if a new
method will increase reported revenue for the period.
True/false Answer: F
Objective: 4
Section: Qualitative characteristics of financial reporting
1. Generally accepted accounting principles are
considered to have "substantial authoritative support." 13.Constraints on the accounting process mean that relevant and
Answer: T reliable information may not, in practice, always be able
Objective: 1 to be provided.
Section: Generally accepted accounting principles Answer: T
Objective: 4
2. The International Accounting Standards Board has Section: Qualitative characteristics of financial reporting
developed a conceptual framework that serves as a basis
to help resolve accounting and reporting problems. 14.A business expensing the cost of small tools is an application
Answer: T of the materiality principle.
Objective: 1 Answer: T
Section: The Framework of accounting Objective: 4
Section: Qualitative characteristics of financial reporting
3.Generally accepted accounting principles are uniform
throughout the world. 15.In most annual reports the first note to the financial
Answer: F statements is the summary of significant accounting
Objective: 1 policies.
Section: The Framework of accounting Answer: T
Objective: 4
4.The Framework begins by looking at the objectives of Section: Qualitative characteristics of financial reporting
financial reporting.
Answer: T 16.Decreases in economic benefits during the accounting period
Objective: 2 in the form of outflows or depletions of assets or
Section: Objective of financial reporting incurrences of liabilities that result in a decrease in equity,
other than those relating to contributions from equity
5.The objective of financial reporting is to provide information participants, is the Framework’s definition of liabilities.
that is useful to a wide range of users in making economic Answer: F
decisions and which shows the results of management’s Objective: 5
stewardship. Section: Elements of financial statements
Answer: T
Objective: 2 17.Because equity is defined as a residual interest it cannot be
Section: Objective of financial reporting determined without reference to assets and liabilities.
Answer: T
6.Accrual accounting means recognising transactions in the Objective: 5
accounting period in which the revenue is earned and the Section: Elements of financial statements
expenses are incurred.
Answer: T 18. The percentage-of-completion method should be used for
Objective: 3 long-term construction projects where it is possible to
Section: Assumptions underlying financial statements reliably estimate total construction costs.
Answer: T
7.Under accrual accounting, for the purpose of measuring profit, Objective: 6
the life of a business can be divided into time periods. Section: Recognition criteria for the elements
Answer: T
Objective: 3 19.The recognition criteria for liabilities help to answer
Section: Assumptions underlying financial statements questions such as: should a liability for an unresolved court
case be recorded?
8. The full disclosure principle requires that events that make Answer: T
a difference to financial statement users be disclosed. Objective: 6
Answer: T Section: Recognition criteria for the elements
Objective: 4
Section: Qualitative characteristics of financial reporting 20.The monetary unit assumption states that only data capable
of being expressed in terms of money should be included
9.To be timely accounting information should be free from error in the accounting records.
and bias and be verifiable. Answer: T
Answer: F Objective: 7
Objective: 4 Section: Measurement of the elements
Section: Qualitative characteristics of financial reporting
21.When considering capital maintenance, maintaining financial
10. An item is material if its inclusion or omission has no impact capital refers to ending the period with the same amount of
on a decision-maker. money that existed at the start of the period.
Answer: F Answer: T
Objective: 4 Objective: 8
Section: Qualitative characteristics of financial reporting Section: Concepts of capital and capital maintenance

11.Comparability of accounting information is more likely to 22.Maintenance of physical capital refers to having the identical
occur when the same accounting principles are applied items of property, plant and equipment at the end of the
consistently year after year. period that were owned at the beginning of the period.
Answer: T Answer: F
Objective: 4 Objective: 8
 Section: Concepts of capital and capital maintenance 7.Determining the objectives of financial reporting requires
answers to each of the following except
a. who uses financial statements?
Multiple Choice Questions b. what information do financial statement users
need?
c. how knowledgeable about accounting are
1."Generally accepted" in the phrase generally accepted financial statement users?
accounting principles, means that the principles d. how should financial information be recorded in
a. are proven theories of accounting. the accounting records?
b. have substantial authoritative support. Answer: d
Objective: 2
c. have been approved by the Taxation
Section: Objective of financial reporting
Department.
d. have been approved for use by management. 8.Which of these statements is not an objective of financial
Answer: b reporting, as set out in the Framework?
Objective: 1 a. To provide information useful for a wide range
Section: Generally accepted accounting principles of users making economic decisions.
b. To provide information that is consistent across
2.The lack of uniformity in GAAP from country to country all accounting entities.
results from differences in c. To provide information about the financial
position, financial performance and cash flows
a. legal systems of an entity
b. cultures d. To provide information that shows the results of
c. economic environments the stewardship and accountability of management for
d. all of the above. the resources entrusted to them.
Answer: d Answer: b
Objective: 1 Objective: 2
Section: Generally accepted accounting principles Section: Objective of financial reporting

3. Firms that conduct their operations in more than 9.The accounting period assumption states that
one country through subsidiaries or branches are referred a. the economic life of a business can be artificially
to as divided into time periods for the purpose of
a. large corporations.
b. national corporations. reporting.
c. multinational corporations. b. activities of an entity are separate from the
d. foreign corporations. activities of the owner
Answer: c c. the accounting period should not exceed one
Objective: 1 year.
Section: Generally accepted accounting principles
d. it is assumed that the business will operate
4.An organisation that is working toward uniformity in indefinitely.
accounting practices throughout the world is the Answer: a
a. World Bank Objective: 3
b. United Nations. Section: Assumptions underlying financial statements
c. International Accounting Standards Board.
d. RSPCA 10.Acceptance of the going concern assumption gives
Answer: c credibility to the
Objective: 1 a. historical cost principle.
Section: Generally accepted accounting principles b. reliability principle.
c. monetary unit assumption
5.The Conceptual Framework includes all of the following, d. full disclosure principle.
Answer: a
except Objective: 3
a. the objectives of financial reporting. Section: Assumptions underlying financial statements
b. the elements of financial statements.
c. auditing guidelines. 11.The going concern principle is inapplicable when
a. the business is just starting-up.
d. quantitative characteristics of accounting
b. liquidation is imminent
information. c. fair market values are higher than costs.
Answer: c d. net realisable values cannot be obtained.
Objective: 1 Answer: b
Section: The Framework of accounting Objective: 3
Section: Assumptions underlying financial statements
6.The institution responsible for setting international
accounting standards is the: 12.If General Motors uses the FIFO method of inventory
a. GAAP costing while all other firms in the auto industry use
the Weighted Average method, it is violating the
b. IASB a. comparability characteristic.
c. FASB b. relevance characteristic.
d. IFRS c. reliability characteristic.
Answer: b d. none of the qualitative characteristics is being
Objective: 1 violated.
Section: The Framework of accounting Answer: d
Objective: 4
Section: Qualitative characteristics of financial reporting
 20.A common application of the principle of prudence
13.Which of these is not a qualitative characteristic of (conservatism) is the use of the
accounting information, as set out in the a. lower of cost or net realisable value rule to value
Framework? inventories.
a. Relevance b. straight-line depreciation method for plant
b. Reliability assets.
c. Truth and fairness c. weighted average method of inventory
d. Comparability valuation.
Answer: c d. all of the above are common applications of the
Objective: 4 principle of prudence.
Section: Qualitative characteristics of financial reporting Answer: a
Objective: 4
14.In order for accounting information to be relevant, it must Section: Qualitative characteristics of financial reporting
a. have very little cost.
b. have predictive or feedback value. 21. “Last year's report is useless because it is out of date and
c. be reported to the public. has it lost its capacity to influence decisions," said
d. be used by a lot of different firms. Grumpy to Dopey. What characteristic of relevancy is
Answer: b Grumpy trying to explain to Dopey?
Objective: 4 a. Matching costs with revenue.
Section: Qualitative characteristics of financial reporting b. Reliability.
c. Verifiable value.
15.A company can change to a new method of accounting if d. Timeliness
management can justify that the new method Answer: d
results in Objective: 4
a. better information for decision-making. Section: Qualitative characteristics of financial reporting
b. a higher profit.
c. a lower taxable income. 22.The statement that is not true is:
d. all of the above. a. Financial reports are produced for users who
Answer: a
Objective: 4 have no knowledge of accounting.
Section: Qualitative characteristics of financial reporting b. Reliability is the quality of information that
gives assurance that it is free of error or bias.
16.Using the same accounting principles and methods from c. Information that is difficult to understand should
year to year within a company is upholding the
be excluded from the financial reports.
qualitative characteristic of
a. reliability. d. a. and c are not true
b. timeliness. Answer: d
c. relevance. Objective: 4
d. comparability. Section: Qualitative characteristics of financial reporting
Answer: d
Objective: 4 23.Characteristics associated with the relevance of accounting
Section: Qualitative characteristics of financial reporting information are
a. prudence and faithful representation.
17.The information provided in the notes that accompany
b. predictive value and feedback value
financial statements is required because of the
a. historical cost principle. c. neutrality and reliability.
b. full disclosure principle. d. going concern and historical cost principle
c. matching principle. Answer: b
d. going concern principle. Objective: 4
Answer: b Section: Qualitative characteristics of financial reporting
Objective: 4
Section: Qualitative characteristics of financial reporting 24. Zendejas Company purchased a ruler for $2.00. The
ruler is expected to last for ten years. Tony, the
18.Constraints in accounting include each of the following, accountant, expensed the cost of the ruler in the year
except of the purchase. Which principle has Tony taken into
a. timeliness. account when making his accounting decision?
b. matching costs with revenue. a. Going concern
c. cost verus benefits. b. Faithful representation
d. all of the above are constraints. c. Neutrality
Answer: b d. Materiality
Objective: 4 Answer: d
Section: Qualitative characteristics of financial reporting Objective: 4
Section: Qualitative characteristics of financial reporting
19.An item is considered material if
a. it costs a lot of money. 25.Prudence in accounting means
b. it is of a tangible nature. a. to understate assets.
c. it is likely to influence the decision of a b. to understate liabilities.
reasonably prudent investor or creditor. c. old fashioned
d. the cost of reporting the item is greater than its d. to choose the method that will be least likely to
benefits. overstate assets and profit.
Answer: c Answer: d
Objective: 4 Objective: 4
Section: Qualitative characteristics of financial reporting Section: Qualitative characteristics of financial reporting

26.Which statement is incorrect?

 a. costs are the source of expenses
b. costs that will generate revenue only in the
current period are expensed immediately
c. costs that will generate revenue in future periods
are recognised as negative expenses
d. none of the statements is incorrect
Answer: c
Objective: 5
Section: Elements of financial statements
27.The public road outside a company’s premises is not
included as an asset on its balance sheet because:
a. It does not provide the company with economic
benefits.
b. It cannot be sold by the company for cash.
c. It is not controlled by the company.
d. For all of the above reasons.
Answer: c
Objective: 5
Section: Elements of financial statements
28.Axel Construction signed a long-term construction contract
to build a sports stadium for $300,000,000. During the
current year, $60,000,000 in costs were incurred of an
estimated total cost of $240,000,000 for the project.
The amount of revenue to be recognised in the current
year if the percentage-of-completion method is
employed is
a. $60,000,000.
b. $48,000,000.
c. $15,000,000.
d. $75,000,000.
Answer: d
Objective: 6
Section: Recognition criteria for the elements
29.A credit sale of groceries by a grocery store first satisfies
the definition and recognition criteria for revenue
in the accounting period in which
a. the cash from the sale is collected.
b. the sale occurs.
c. the goods are ordered
d. none of the above
Answer: b
Objective: 6
Section: Recognition criteria for the elements
Use the following information for questions 30 and 31.
Foley Constructions signed a long-term construction contract to
build a new business school for Metro University for $40
million. During the current year, $5 million in costs were
incurred of an estimated total cost of $25 million.
30.The amount of revenue that Foley Constructions recognised
in the current year if the percentage-of-completion
method is employed is
a. $40 million.
b. $5 million.
c. $35 million.
d. $8 million.
Answer: d
Objective: 6
Section: Recognition criteria for the elements
31.The amount of gross profit recognised by Foley
Constructions in the current year if the percentage-
of-completion method is employed is
a. $8 million.
b. $5 million.
c. $3 million.
d. $35 million.
Answer: c
Objective: 6
Section: Recognition criteria for the elements
32.If dependable estimates of costs and progress are not
available in a long-term contract situation, then
a. the contract will make a loss.
b. profit should be recognised at the completion
date.
c. the percentage-of-completion method should be
used.
d. the contract should not be accepted.
Answer: b
Objective: 6
Section: Recognition criteria for the elements
33.The historic cost principle states that assets are recorded at
their cost because cost is
a. confirmable
b. reliable.
c. objectively measurable.
d. all of these.
Answer: d
Objective: 7
Section: Measurement of the elements
34.Which statement concerning the measurement of assets
under the Framework is correct?
a. The Framework specifies that all assets will be
measured at their historical cost.
b. The Framework specifies that all assets will be
measured at their realisable value
c. The Framework specifies that all assets will be
measured at their current cost.
d. The Framework does not specify a particular
measurement basis for assets.
Answer: d
Objective: 7
Section: Measurement of the elements
35.In their accounting reports, most entities use which concept
of capital?
a. financial capital
b. physical capital
c. purchasing power capital
d. accrual capital
Answer: a
Objective: 8
Section: Concepts of capital and capital maintenance
36.Which statement is correct?
a. Under the financial concept of capital increases
in the prices of assets are not treated as part of
profit
b. Under the financial concept of capital increases
in the prices of assets are treated as part of profit
c. Under the physical concept of capital increases
in the prices of assets are treated as part of profit
d. Both a and c are correct.
Answer: b
Objective: 8
Section: Concepts of capital and capital maintenance
37.Assume that the entity has $300,000 of assets at the start of
the period and that the price of the assets increases by
5% during the period. In order to maintain its
physical capital the entity would need to have how
much in net assets at the end of the period?
a. $300,000.
b. $285,000
c. $305,000
d. $315,000
Answer: d
Objective: 8
Section: Concepts of capital and capital maintenance