20-40.pdf Theory of Financial Accounting

## Chapter 11 - Theory of Financial Accounting ### Question 11-11 - Multiple Choice 1. Which is *incorrect* regarding notes to financial statements? * IFRS requires specific note disclosures. * IFRS requires a maturity analysis for receivables. * IFRS requires that all notes should be...

## Chapter 11 - Theory of Financial Accounting ### Question 11-11 - Multiple Choice 1. Which is *incorrect* regarding notes to financial statements? * IFRS requires specific note disclosures. * IFRS requires a maturity analysis for receivables. * IFRS requires that all notes should be clear, simple to understand and nontechnical in nature. * All of the choices are correct regarding notes. 2. The standard of adequate disclosure is best described by * All information related to operating objectives must be disclosed in the financial statements. * Information about each account balance appearing in the financial statements in included in the notes. * Enough information should be disclosed in order that a prospective investor can make a wise decision. * Disclosure of any financial facts significant enough to influence the judgment of a primary user. 3. Application of the full disclosure principle * Is theoretically desirable, but not practical. * Is violated when important financial information is buried in the notes to financial statements. * Is demonstrated by the use of supplementary information presenting the effects of changing prices. * Requires that the financial statements should be consistent and comparable. 4. An inventory accounting policy that should be disclosed in a summary of significant accounting policies is * Composition of inventory into raw materials, goods in process and finished goods. * Major backlog of inventory orders. * Method used for pricing inventory. * All of these should be disclosed. 5. Which is a method of disclosing relevant information? * Supporting schedule. * Parenthetical explanation. * Cross reference. * All of these are methods of disclosure. **Answer:** 1. c 2. d 3. c 4. c 5. d ### Question 15-9 - Multiple Choice 1. An entity shall classify a noncurrent asset or disposal group as held for sale when: * The carrying amount of the asset or disposal group is recovered through a sale transaction. * The carrying amount of the asset or disposal group is recovered through continuing use. * The noncurrent asset or disposal group is abandoned. * The noncurrent asset or disposal group is idle or retired from active use. 2. For the sale of a noncurrent asset to be highly probable, which statement is *incorrect*? * Management must be committed to a plan to sell the asset. * An active program to locate a buyer and complete the plan must have been initiated. * The asset must be actively marketed for sale at a reasonable price in relation to the current fair value. * The sale is expected to qualify for recognition as a completed sale within two years from the date of classification of the asset as held for sale. 3. An entity shall measure a noncurrent asset or disposal group classified as held for sale at: * Carrying amount * Fair value less cost of disposal * Lower between carrying amount and fair value less cost of disposal. * Higher between carrying amount and fair value less cost of disposal. 4. A noncurrent asset that is to be abandoned shall not be classified as held for sale because: * The carrying amount is recovered principally through continuing use. * It is difficult to value. * It is unlikely that the noncurrent asset is sold within twelve months. * It is unlikely that there is an active market for the noncurrent asset. **Answer:** 1. d 2. d 3. c 4. d ### Question 13-8 - Multiple Choice 1. At the end of the current reporting period, an entity carried a receivable from a major customer who declared bankruptcy after the end of reporting period and before the issuance of financial statements. What should be reported at the current year-end? * Disclose the fact that the customer has declared bankruptcy. * Make a provision for the event after reporting period in the financial statements. * Ignore the event and wait for the outcome of the bankruptcy. * Reverse the sale pertaining to the receivable in the comparative statement for the prior period. 2. An entity decided to build and operate an amusement park next year. The entity applied for a letter of guarantee which was issued before the issuance of the financial statements of the current year. What is the adjustment required at the current year-end? * Book a long-term payable for the amount of guarantee. * Disclose the guarantee as a contingent liability. * Increase the contingency reserve. * Do nothing. 3. An entity built a new factory building during the current year. Subsequent to the current year-end and before issuance of financial statements, the building was destroyed by fire and the claim against the insurance entity proved futile because the cause of the fire was negligence on the part of the caretaker of the building. What should be reported at the current year-end? * Write off the carrying amount of the building. * Make a provision for one-half of the carrying amount of the building. * Make a provision for three-fourths of the carrying amount of the building. * Disclose the nonadjusting event in the notes to financial statements. 4. An entity deals extensively with foreign currency transactions. Subsequent to the end of reporting period and before the date of authorization of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rate. What should be reported at the current year-end? * Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations. * Adjust the foreign exchange year-end balances to reflect all abnormal fluctuations and not just adverse movements. * Disclose the post-reporting period event. * Ignore the post-reporting period event. 4. An entity deals extensively with foreign currency transactions. Subsequent to the end of reporting period and before the date of authorization of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rate. What should be reported at the current year-end? * Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations. * Adjust the foreign exchange year-end balances to reflect all abnormal fluctuations and not just adverse movements. * Disclose the post-reporting period event. * Ignore the post-reporting period event. 5. Which statement is true in relation to events after reporting period? * Notes to the financial statements should give details of material adjusting events included in those financial statements. * Notes to the financial statements should give details of material nonadjusting events which could influence the economic decisions of primary users. * A decline in the fair value of trading investments would normally be classified as an adjusting event. * The settlement of a long-running court case would normally be classified as a nonadjusting event. **Answer:** 1. b 2. d 3. d 4. c 5. b ### Question 13-7 - Multiple Choice 1. Which event after the reporting period would require adjustment? * Loss of plant as a result of fire. * Change in the market price of investment. * Loss on inventory resulting from flood loss. * Loss on a lawsuit the outcome of which was deemed uncertain at year-end. 2. Events that occur after the current year-end but before the financial statements are issued and affect the realizability of accounts receivable should be * Discussed in the management annual report. * Disclosed in the notes to financial statements. * Used to record an adjustment to bad debt expense. * An adjustment directly to retained earnings. 3. Nonadjusting events include all, *except*: * A major business combination after reporting period. * Announcing a plan to discontinue an operation. * Expropriation of major asset after reporting period * Destruction of a major production plant by a fire before the end of the reporting period. 4. Nonadjusting events include all, *except*: * The entity announced a discontinued operation. * An agreement to purchase the leased building. * Destruction of a major production plant by fire. * A mistake in the calculation of allowance for doubtful accounts. 5. Which event after the end of reporting period would generally require disclosure? * Retirement of key management personnel. * Settlement of litigation when the event that gave rise to the litigation occurred in a prior period. * Strike of employees. * Issue of a large amount of ordinary shares. **Answer:** 1. d 2. c 3. d 4. d 5. d ### Question 13-6 - Multiple Choice 1. Events after the end of reporting period are favorable or unfavorable events that occur between: * The end of the reporting period and the date of the next annual financial statements. * The end of the reporting period and the date of the next interim or annual financial statements. * The end of the reporting period and the date when the financial statements are authorized for issue. * The end of reporting period and the date of the next interim financial statements. 2. Adjusting events are events that: * Provide evidence of conditions that existed at the end of the reporting period. * Are favorable and indicative of conditions that arose after the end of the reporting period. * Are unfavorable and indicative of conditions that arose after the end of the reporting period. * Provide evidence of conditions that existed after the date the financial statements were authorized for issue. 3. Which statement is true about nonadjusting events? * The entity shall disclose the nature and effect of the event in the financial statements. * The entity shall adjust the related amount in the financial statements. * The entity shall disclose the nature and effect of the event and adjust the related amount. * The entity shall disclose nothing. 4. The financial statements are authorized for issue: * When the board of directors reviews the financial statements and authorizes them for issue. * When the financial statements are made available to shareholders. * When the shareholders approve the financial statements at their annual meeting. * When the approved financial statements are filed with a regulatory body. **Answer:** 1. c 2. a 3. a 4. a ### Question 16-6 - Multiple Choice (AICPA Adapted) 1. When a component of an entity was discontinued during the current year, the loss on discontinued operation should: * Exclude the associated employee relocation cost. * Exclude operating loss for the period. * Include associated employee termination cost. * Exclude associated lease cancelation cost. 2. When an entity decided to sell a component, the gain on disposal should be: * Presented as other income. * Presented as an adjustment of retained earnings. * Netted against the loss from operations of the component as a part of discontinued operation. * Included in other comprehensive income. 3. When a component of a business has been discontinued during the year, the loss on discontinued operation should: * Include operating loss of the current period. * Exclude operating loss during the period. * Be classified an extraordinary item. * Be classified an operating item. 4. When a component of a business has been discontinued during the year, the component's operating of the current period should be included in: * Income statement as a part of revenue and expenses. * Income statement as a part of the loss on the discontinued operation. * Income from continuing operations. * Retained earnings. 5. When an entity discontinued an operation and disposed of the discontinued operation, the transaction should be reported in the income statement as: * A prior period error. * Other income and expense item. * An amount after income from continuing operations and before net income. * A bulk sale of assets included in income from continuing operations. **Answer:** 1. c 2. c 3. a 4. b 5. c ### Question 16-5 - Multiple Choice 1. Which statement is *incorrect* concerning the presentation of the discontinued operation in the statement of financial position? * Assets of the component held for sale are presented separately under current assets. * Assets of the component held for sale are measured at the lower between fair value less cost of disposal and carrying amount. * Liabilities of the component held for sale are presented separately under current liabilities. * Depreciable assets of the component held for sale shall be depreciated. 2. Which of the following criteria is *not* required for the results of a component of an entity to be classified as discontinued operation? * Management must have entered into a sale agreement. * The component is available for immediate sale. * The operations and cash flows of the component shall be eliminated from the operations of the entity as a result of the disposal. * The entity shall not have any significant continuing involvement in the operations of the component after disposal. 3. Which disposal could qualify as discontinued operation? * Disposal of a component that is similar in nature to other components but has operations and cash flows distinguishable from the rest of the entity. * Disposal of a component due to a major change in business strategy. * Disposal of a small component within the current business strategy. * Disposal of a component with distinguishable operations and cash flows from the rest of the entity. **Answer:** 1. d 2. a 3. d ### Question 16-5 - Multiple Choice 1. Which criterion does *not* have to be met in order for an operation to be classified as discontinued? * The operation shall represent a separate major line of business or geographical area. * The operation is part of a single plan to dispose of a separate major line of business or geographical area. * The operation is a subsidiary acquired exclusively with a view to resale. * The operation must be sold within three months of the year-end. 2. An entity manufactures and sells household products. The entity experienced losses associated with the small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of the entity's operations. The entity decided to sell the small appliance group. What is the earliest point at which the entity shall report the small appliance group as a discontinued operation? * When the entity classifies it as held for sale. * When the entity receives an offer for the segment. * When the entity first sells any of the assets of the segment. * When the entity sells the majority of the assets of the segment. 3. Which is a requirement for a component of an entity to be classified as a discontinued operation? * The activities must cease permanently prior to the financial statements being authorized for issue. * The component must be a reportable segment. * The assets must have been classified as held for sale in the previous financial statements. * The component must have been a cash generating unit while being held for use. 4. What is the treatment of any gain on a subsequent increase in the fair value less cost of disposal of a noncurrent asset classified as held for sale? * The gain shall be recognized in full. * The gain shall not be recognized. * The gain shall be recognized but not in excess of the cumulative impairment loss previously recognized. * The gain shall be recognized but only in retained earnings. 5. An entity recently moved to a new building. The old building is being actively marketed for sale and the sale is expected to be completed in four months. Which statement is *incorrect* regarding the old building? * It will be reclassified as an asset held for sale. * It will be classified as a current asset. * It will no longer be depreciated. * It will be measured at historical cost. 6. An entity classified a noncurrent asset accounted for under the cost model as held for sale at the current year-end. Because no offers were received at an acceptable price, the entity decided at the end of next year not to sell the asset but to continue to use it. The asset shall be measured at the end of next year at what amount? * The lower of carrying amount and recoverable amount. * The higher of carrying amount and recoverable amount. * The lower between carrying amount on the basis that the asset had never been classified as held for sale and recoverable amount. * The higher between carrying amount on the basis that the asset had never been classified as held for sale and recoverable amount. **Answer:** 1. d 2. a 3. d 4. c 5. d 6. c ### Question 17-16 - Multiple Choice (IFRS) 1. Which is the first step within the hierarchy of guidance when selecting accounting polices? * Apply a standard from IFRS if it specifically relates to the transaction. * Apply the requirements in IFRS dealing with similar and related issues. * Consider the applicability of the definitions, recognition criteria and measurement concepts in the Conceptual Framework. * Consider the most recent pronouncements of other standard setting bodies. 2. In the absence of an accounting standard that applies specifically to a transaction, what is the most authoritative source in developing and applying an accounting policy? * The requirement and guidance in the standard or interpretation dealing with similar and related issues. * The definition, recognition criteria and measurement of asset, liability, income and expense in the Conceptual Framework. * Most recent pronouncement of other standard setting body. * Accounting literature and accepted industry practice. 3. A change in accounting policy shall be made when: * I. Required by law. * II. Required by an accounting standard or an interpretation of the standard. * III.. The change will result in more relevant or reliable information about the financial position, financial performance and cash flows of the entity. * I and III only * II and III only * I and II only * I, II and III 4. Which statement is *incorrect* concerning the presentation of the discontinued operation in the statement of financial position? * Assets of the component held for sale are presented separately under current assets. * Assets of the component held for sale are measured at the lower between fair value less cost of disposal and carrying amount. * Liabilities of the component held for sale are presented separately under current liabilities. * Depreciable assets of the component held for sale shall be depreciated. 5. Which of the following criteria is *not* required for the results of a component of an entity to be classified as discontinued operation? * Management must have entered into a sale agreement. * The component is available for immediate sale. * The operations and cash flows of the component shall be eliminated from the operations of the entity as a result of the disposal. * The entity shall not have any significant continuing involvement in the operations of the component after disposal. 6. The change in accounting policy inseparable from a change in accounting estimate should be reported: * By restating the financial statements of all prior periods. * As a correction of an error. * In the period of change and future periods if the change affects both. * As a disclosure after income from continuing operations. 7. Which should be reported when an entity changed from straight line depreciation to double declining? * Cumulative effect of change in accounting policy * Proforma effect of retroactive application * Prior period error * An accounting change that should be reported currently and prospectively. 8. Which is *not* a justification for a change in depreciation method? * A change in the estimated useful life . * A change in the pattern of the estimated future benefit. * To conform with the depreciation method prevalent in a particular industry. * A change in the estimated future benefit. 9. Which of the following should be reported when an entity changed the expected service life of an asset? * Cumulative effect of change in accounting policy * Proforma effect of retroactive application * Prior period error * An accounting change that should be reported in the period of change and future periods. 10. Which is the best explanation why accounting changes are classified into accounting policy and accounting estimate? * The materiality of the change. * Each change involves different method of recognition in the financial statements. * The fact that some treatments are considered GAAP. * The need to provide a favorable profit picture **Answer:** 1. a 2. a 3. d 4. d 5. a 6. c 7. d 8. c 9. d 10. b ### Question 17-15 - Multiple Choice (AICPA Adapted) 1. How should the effect of a change in accounting estimate be accounted for? * By restating amounts reported in prior periods. * By reporting proforma amounts for prior periods. * As a prior period adjustment of retained earnings. * In the period of change and future periods if the change affects both. 2. Which is characteristic of a change in accounting estimate? * It usually need not be disclosed. * It does not affect the financial statements of prior period. * It should be reported through the restatement of the financial statements. * It makes necessary the reporting of proforma amounts. 3. A change in the periods benefited by a deferred cost because additional information has been obtained is: * An accounting change reported in the period of change and future periods if the change affects both. * An accounting change that should be reported by restating the financial statements of all prior periods presented. * A correction of an error. * Not an accounting change. 4. A change in the residual value of an asset arising because additional information has been obtained is: * An accounting change reported in the period of change and future periods if the change affects both. * An accounting change that should be reported by restating the financial statements of all prior periods presented. * A correction of an error. * Not an accounting change. 5. Why is retrospective treatment of change in accounting estimate *prohibited*? * A change in accounting estimate is a normal recurring correction or adjustment. * The retrospective treatment is not allowed. * Retrospective treatment of a change in accounting estimate is required by IFRS. * IFRS is silent on the issue. **Answer:** 1. d 2. a 3. b 4. b 5. b ### Question 18-10 - Multiple Choice (IFRS) 1. Interim financial reports shall be published: * Once a year at any time during the year. * Within a month of the half year-end. * On a quarterly basis. * Whenever the entity wishes. 2. If an entity does not prepare interim financial reports: * The year-end financial statements are deemed not to comply with IFRS. * The year-end financial statements’ compliance with IFRS is not affected. * The year-end financial statements shall not be acceptable under local jurisdiction. * Interim financial reports shall be included in the year-end financial statements. 3. Interim financial reports shall include as a minimum: * A complete set of financial statements. * A condensed set of financial statements and selected notes. * A condensed statement of financial position and an income statement. * A condensed statement of financial position, income statement and statement of cash flows. 4. An interim financial report shall include as a minimum all of the following components, *except*: * Condensed statement of financial position and statement of comprehensive income. * Condensed statement of cash flows. * Condensed statement of changes in equity. * Accounting policies and explanatory notes. 5. There is a presumption that anyone reading interim financial reports shall: * Understand all International Financial Reporting Standards. * Have access to the records of the entity. * Have access to the most recent annual report. * Not make decisions based on the report. **Answer:** 1. c 2. b 3. d 4. d 5. c ### Question 17-20 - Multiple Choice (IFRS) 1. During the current year, an entity discovered that ending inventory reported in the prior year was understated. How should the entity account for this understatement? * Adjust the beginning inventory in the prior year. * Adjust the ending inventory in the prior year. * Adjust the ending balance in retained earnings at current year-end. * Make no entry because the error will self-correct. 2. On March 15, 2023, the entity discovered that depreciation expense for 2022 was overstated. The 2022 financial statements were authorized for issue on April 1, 2023. What must the entity do? * Correct the 2022 financial statements before issuing them. * Reduce depreciation for 2023. * Restate the depreciation expense reported for 2022 in the comparative figures of the 2023 financial statements. * Do nothing. 3. On April 1, 2023, the entity discovered that depreciation expense for 2022 was overstated. The 2022 financial statements were authorized for issue on March 15, 2023. What must the entity do? * Reissue the 2022 financial statements with the correct depreciation expense. * Reduce depreciation for 2023. * Restate the depreciation expense reported for 2022 in the comparative figures of the 2023 financial statements. * Do nothing. **Answer:** 1. b 2. a 3. c ### Question 17-19 - Multiple Choice (AICPA Adapted) 1. A change in reporting entity is actually a change in: * Accounting policy * Accounting estimate * Accounting method * Accounting concept 2. Which is *not* a change in reporting entity? * Changing the entities in combined financial statements. * Disposition of a subsidiary or other business unit. * Presenting consolidated statements in place of the separate financial statements of individual entities. * Changing specific subsidiaries that constitute the group for which consolidated financial statements are presented. 3. What is the proper accounting treatment for a change in reporting entity? * Restatement of financial statements of all prior periods presented. * Restatement of current period financial statements. * Note disclosure and supplementary schedule. * Adjustment of retained earnings and note disclosure. 4.. An entity has included in the consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. How should this change be reported? * An accounting change that should be reported prospectively. * An accounting change that should be reported retrospectively. * A correction of an error. * Neither an accounting change nor a correction of an error. **Answer:** 1. a 2. b 3. a 4. b ### Question 17-18 - Multiple Choice (AICPA Adapted) 1. Prior period errors: * Do not include the effect of a mistake in the application of accounting policy. * Do not affect the presentation of prior period comparative financial statements. * Do not require further disclosure. * Are reflected as an adjustment of the opening balance of retained earnings of the earliest period presented. 2. An example of a correction of an error in previously issued financial statements is a change: * From FIFO method of inventory valuation to the average method. * In the service life of property, plant and equipment. * From cash basis to accrual basis of accounting. * In the tax assessment related to a prior period. 3. An entity that changed from cash basis to accrual basis of accounting during the current year should report: * Prior period adjustment resulting from the correction of an error. * Prior period adjustment resulting from the change in accounting policy. * Component of income from continuing operations. * Component of income from discontinued operations. 4. A change from an accounting principle that is not generally accepted to one that is generally accepted should be reported as: * Component of income from continuing operations. * Component of discontinued operations. * An adjustment of retained earnings. * Component of other comprehensive income. **Answer:** 1. d 2. c 3. a 4. c ### Question 17-17 - Multiple Choice (IFRS) 1. An entity that changed an accounting policy voluntarily should: * Inform shareholders prior to taking the decision. * Account for the change retrospectively. * Treat the effect of the change as a component of OCI. * Treat the change prospectively. 2. Which statement best describes prospective application? * Recognizing a change in accounting policy in the current and future periods affected by the change. * Correcting the financial statements as if a prior period error had never occurred. * Applying a new accounting policy to transactions occurring after the date the policy is changed. * Applying a new accounting policy to transactions as if that policy had always been applied. 3. Which describes applying a new accounting policy to transactions as if that policy had always been applied? * Retrospective application. * Retrospective restatement. * Prospective application. * Prospective restatement. 4. This means correcting the recognition, measurement and disclosure of of amounts of elements of financial statements as if a prior period error had never occurred. * Retrospective application. * Retrospective restatement. * Prospective application. * Prospective restatement. 5. If it is impracticable to determine the cumulative effect of an accounting change to any of the prior periods, the accounting change should be accounted for: * As a prior period error. * On a prospective basis. * As a cumulative effect change in the income statement. * As an adjustment of retained earnings. **Answer:** 1. b 2. c 3. a 4. b 5. b