TEST BANK FINANCIAL ACCOUNTING THEORY 1. Which of the following following statements statements regarding regarding reversi reversing ng entries entries is incorrect ? a. Deferrals Deferrals are are generally generally entered entered in statement statement of financial financial positi position on accounts, accounts, thus making making reversing entries unnecessary. b. All accruals should be reversed. c. Adjusting Adjusting entrie entriess for depreciati depreciation on and bad bad debts debts are never never reverse reversed. d. d. eversing eversing entries entries change amounts amounts reported reported in the stateme statement nt of financial financial position position for the the previous period. !.As part of the objective objective of financial financial reporting, reporting, "assessing "assessing cash flow prospects# prospects# is interpreted interpreted to mean a. $ash basis basis accounting accounting is preferred preferred over over accrual accrual basis basis accounti accounting. ng. b. %nformation about the financial effects of cash receipts receipts and cash payments is generally considered the best indicator of an entity&s present and continuing ability to generate favorable cash flows. c. 'ver the the long run, run, trends trends in revenue revenue and and e(penses e(penses are generally generally more more meaningful meaningful than than trends in cash receipts and disbursements. d. All of the the choices choices are correct correct regarding regarding "assessi "assessing ng cash flow flow prospects# prospects#.. ). *inanci *inancial al account accounting ing standa standard+ rd+set settin ting g a. $an be described described as a social process process which which reflects reflects political political actions actions of various various interest interested ed user groups as well as a product of research and logic. b. %s based solely on research and empirical findings. c. %s a legalis legalistic tic process process based based on rules rules promul promulgated gated by governm governmental ental agencies agencies.. d. %s democra democratic tic in the sense sense that a majori majority ty of accountan accountants ts must must agree with with a standar standard d before it becomes enforceable. .Which of the following is not a benefit associated with the $onceptual *ramework? a.
A conceptual conceptual framework framework should should increase increase financial financial statement statement usersusers- understandi understanding ng and confidence in financial reporting. b. ractical problems should be more /uickly solvable by reference to an e(isting conceptual framework. c. A coherent coherent set set of accounting accounting standards standards and rules should result. result. d. 0usine 0usiness ss entities entities will need far less assista assistance nce from accounta accountants nts because because the financi financial al reporting process will be /uite easy to apply. . When classify classifying ing assets assets as current current and and noncurre noncurrent nt a. 2he amount amount at which which current assets assets are carried carried and reported reported must must reflect reflect reali3ab reali3able le cash value. b. repayments for items such as insurance are included in "other assets# rather than than as current assets as they will ultimately be e(pensed. c. 2he time time period by which which current current assets assets are are distinguish distinguished ed from noncurr noncurrent ent assets assets is determined by the seasonal nature of the business. d. Assets Assets are classifi classified ed as current current if they they are reasonabl reasonably y e(pected e(pected to be reali3ed reali3ed in cash cash or consumed during the normal operating cycle. 4.5ntities should separately report all of the following, except a. Assets Assets and liabilit liabilities ies with with different different general general li/uidi li/uidity ty characteri characteristics stics.. b. Assets and liabilities that have been financed with different different type of instruments. c. Assets Assets that differ differ in their their e(pected e(pected function function in the entity& entity&ss central central operations. operations. d. 6iabiliti 6iabilities es that differ differ in their their amounts, amounts, timing timing and and nature. nature.
age ! 7. Which of the following components of other comprehensive income will be reclassified to profit or loss when specific conditions are met? a. $hanges in revaluation surplus b. emeasurements of defined benefit plan c. 8ains and losses from investment in e/uity instruments measured at fair value through other comprehensive income d. 2he effective portion of gains and losses on hedging instruments in a cash flow hedge 9. Which of the following statements is incorrect regarding notes to financial statements? a. *: re/uires specific note disclosures including disaggregation of inventories into classifications such as merchandise, production supplies, work in process and finished goods. b. *: re/uires a maturity analysis for receivables. c. *: re/uires that all notes be clear, simple to understand and nontechnical in nature. d. All of the choices are correct regarding notes to financial statements. ;.2he full disclosure principle is best described by which of the following? a. All information related to an entity-s business and operating objectives is re/uired to be disclosed in the financial statements. b. %nformation about each account balance appearing in the financial statements is to be included in the notes to financial statements. c. 5nough information should be disclosed in the financial statements so a person wishing to invest in the shares of the entity can make a profitable decision. d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader. 1<. An entity deals e(tensively with foreign entities and the financial statements reflect these foreign currency transactions. :ubse/uent to the end of reporting period and before the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. =ow should the entity account for this event? a. Adjust the foreign e(change year+end balances to reflect the abnormal adverse fluctuations in foreign e(change rate. b. Adjust the foreign e(change year+end balances to reflect all the abnormal fluctuations in foreign e(change rate and not just adverse movements. c. Disclose the post+reporting period event as a nonadjusting event. d. %gnore the post+reporting period event. 11. Which of the following disclosures is not a mandated related party disclosure? a. elationship between parent and subsidiaries irrespective of whether there have been transactions between those related parties. b. >ames of all the associates that an entity has dealt with during the year. c. >ame of the entity&s parent and, if different, the ultimate controlling party. d. %f neither the entity&s parent nor the ultimate parent produces financial statements available for public use, then the name of the ne(t most senior parent that does so. 1!. Which of the following is a re/uirement for a component of an entity to be classified as a discontinued operation? a. b. c. d.
%ts activities must cease permanently prior to the issue of the financial statements. %t must comprise a separate reportable segment. %ts assets must have been classified as held for sale in the previous financial statements. %t must have been a cash+generating unit while being held for use
age ) 1). Which of the following is the best e(planation why accounting changes are classified into different categories? a. 2he materiality of the changes involved. b. 5ach category involves different method of recogni3ing changes in the financial statements. c. 2he fact that some treatments are considered 8AA and some are not. d. A survey of managers and their need to provide a favorable profit picture. 1. Which is the reason why entities are permitted to change accounting policy? a. 2he change would allow the entity to present a more favorable profit picture. b. 2he change would result in the financial statements providing more reliable and relevant information about an entity&s financial position, financial performance and cash flows. c. 2he change is made by the internal auditor. d. 2he change will be long+term. 1. Why is retrospective treatment of changes in accounting estimate prohibited? a. $hanges in estimate are normal recurring corrections and adjustments which are the natural result of the accounting process. b. 2he retrospective treatment for any type of presentation is not allowed. c. etrospective treatment of changes in accounting estimate is prohibited because *: re/uires it. d. 2he *: does not prohibit retrospective treatment of changes in accounting estimate but is silent on this issue. 14. Which of the following statements is true concerning the 7 overall si3e test for operating segments? a.
2he total e(ternal and internal revenue of all reportable segments is 7 or more of the entity&s e(ternal revenue. b. 2he total e(ternal revenue of all reportable segments is 7 or more of the entity&s total e(ternal and internal revenue. c. 2he total e(ternal revenue of all reportable segments is 7 or more of the entity&s e(ternal revenue. d. 2he total internal revenue of all reportable segments is 7 or more of the entity&s internal revenue. 17. %nterim financial reports should include as a minimum a. b. c. d.
A complete set of financial statements. A condensed set of financial statements and selected notes. A statement of financial position and income statement only. A condensed statement of financial position, income statement and statement of cash flows.
19.A cash e/uivalent is a short+term, highly li/uid investment that is readily convertible into known amount of cash and a. %s acceptable as a means to pay current liabilities. b. =as a current market value that is greater than original cost c. 0ears an interest rate that is at least e/ual to the prime rate of interest at the date of li/uidation. d. %s so near maturity that it presents insignificant risk of change in interest rate. 1;. Which of the following methods of determining bad debt e(pense does not properly match e(pense and revenue? a. $harging bad debts with a percentage of sales under the allowance method. b. $harging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. c. $harging bad debts with an amount derived from aging accounts receivable under the allowance method. d. $harging bad debts as accounts are written off as uncollectible.
age !<. Which of the following statements is true about factoring of accounts receivable without recourse? a. 2he transaction may be accounted for either as a secured borrowing or as a sale. b. 2he receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. 2he factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. d. 2he financing cost should be recogni3ed ratably over the collection period of the receivables. !1. *: re/uires all of the following when classifying receivables, except a. b. c. d.
%ndicate the receivables classified as current and noncurrent. Disclose any receivables pledged as collateral. Disclose all significant concentrations of credit risk arising from receivables. All of the choices are re/uired by *: when classifying receivables.
!!.When the cost of goods sold method is used to record inventory at net reali3able value a. 2here is a direct reduction in the selling price of the product that results in a loss being recorded in the income statement prior to the sale. b. A loss is recorded by debiting loss on inventory decline and crediting directly the inventory account c. 'nly the portion of the loss attributable to inventory sold during the period is recorded. d. 2he net reali3able value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold. !).Which of the following statements is true regarding inventory writedown and recovery of writedown? a. b. c. d.
ecovery of inventory writedown is prohibited under *:. *: re/uires separate reporting of reversal of inventory writedown. *: re/uires entities to record writedown in a separate loss account. All of the choices are correct.
!. An entity had a plantation forest that is likely to be harvested and sold in )< years. =ow should income be accounted for? a. b.
>o income should reported annually until first harvest and sale in )< years. %ncome should be measured annually and reported using a fair value approach that recogni3es and measures biological growth. c. 2he eventual sale proceeds should be estimated over the )<+year period. d. 2he plantation forest should be valued every five years and the increase in value should be reported as component of other comprehensive income.
!. Which of the following information should be disclosed in relation to biological asset and agricultural produce? a.
:eparate disclosure of the gain or loss relating to biological asset and agricultural produce. b. 2he aggregate gain or loss arising on the initial recognition of biological assets and agricultural produce and from the change in fair value less estimated cost of disposal of biological asset. c. 2he total gain or loss from biological asset, agricultural produce, and from change in fair value less estimated costs of disposal of biological asset. d. 2here is no re/uirement to disclose separately any gain or losses. !4. When activities involve production through natural growth or aging of biological asset, revenue is earned as the plant or living animal grows. a. b. c. d.
$ompletion of production basis ercentage of completion approach Accretion approach @ero+profit approach
age !7. 2he criteria for recognition of revenue at the completion of production of precious metals include which of the following? a. b. c. d.
:ale price is reasonably assured. >o significant costs are involved in distributing the product. nits are interchangeable. All of these are re/uired for revenue recognition at the completion of production
!9.*: re/uires entities to measure financial assets based on all of the following, except a. b. c. d.
2he business model for managing financial assets. Whether the financial asset is a debt or an e/uity investment. 2he contractual cash flow characteristics of the financial asset. All of the choices are *: re/uirements.
!;. What is the effective interest rate of a debt instrument measured at amorti3ed cost? a. 2he stated rate of the debt instrument. b. 2he interest rate currently charged by the entity or by others for similar debt instrument. c. 2he interest rate that e(actly discounts estimated future cash payments through the e(pected life of the debt instrument to the net carrying amount of the instrument. d. 2he basic, risk+free interest rate. )<.When an entity holds between !< and < of the outstanding ordinary shares of an investee, which of the following statements applies? a. 2he investor should always use the e/uity method to account for the investment. b. 2he investor should use the e/uity method to account for the investment unless circumstances indicate that it is unable to e(ercise significant influence over the investee. c. 2he investor must use the fair value method unless it can clearly demonstrate the ability to e(ercise significant influence over the investee. d. 2he investor should always use the fair value method to account for the investment. )1. =ow is the impairment test carried out for an investment in associate? a. 2he goodwill is separated from the rest of the investment and is impairment tested individually. b. 2he entire carrying amount of the investment is tested for impairment by comparing the recoverable amount with the carrying amount. c. 2he carrying amount of the investment should be compared with the market value. d. 2he recoverable amounts of all investments in associates should be assessed together to determine whether there has been an impairment on all investments. )!. Which of the following instruments would not be classified as a financial liability? a. A preference share that will be redeemed by the issuer for cash at a future date. b. A contract for the delivery of as many of the entity&s ordinary shares as are e/ual in value to a fi(ed amount at a future date. c. A written call option that gives the holder the right to purchase a fi(ed number of the entity&s ordinary shares in return for a fi(ed price. d. An issued perpetual debt instrument )). What are the conditions for offsetting of financial assets and financial liabilities? a. A legal right of set+off. b. A legal right of set+off and an intention to settle net or simultaneously. c. 2he e(istence of a clearing mechanism or other market mechanism for net settlement and an e(pectation of net settlement. d. A netting agreement and an e(pectation of net settlement.
age 4 ). %n which of the following circumstances is derecognition of a financial asset not appropriate? a. b.
2he contractual rights to the cash flows of the financial asset have e(pired. 2he financial asset has been transferred and substantially all of the risks and rewards of ownership of the transferred asset have also been transferred. c. 2he financial asset has been transferred and the entity has retained substantially all of the risks and rewards of ownership of the transferred asset. d. 2he financial asset has been transferred and the entity has lost control of the transferred asset.
). Which of the following is not a relevant consideration when evaluating whether to derecogni3e a financial liability? a. b. c. d.
Whether the obligation has been discharged. Whether the obligation has been canceled. Whether the obligation has e(pired. Whether substantially all of the risks and rewards of the obligation transferred.
have been
)4. Which embedded derivative should not be accounted for separately? a. An investment in a convertible bond that is designated as at fair value through other comprehensive income. b. An investment in a bond whose interest payments are linked to the price of gold and the bond is designated as at fair value through other comprehensive income. c. An investment in a bond whose interest payments are linked to the price of silver and the bond is classified as at fair value through profit or loss. d. A call option in an investment in an e/uity instrument that allows the issuer to repurchase the instrument. )7.Which of the following nonmonetary e(change transactions has commercial substance? a. 5(change of assets with no difference in future cash flows. b. 5(change of products by entities in the same line of business with no difference in future cash flows. c. 5(change of assets with a difference in future cash flows. d. 5(change of an e/uivalent interest in similar productive assets that causes the entities involved to remain in essentially the same economic position. )9.%n accounting for plant assets, which of the following outlays made subse/uent to ac/uisition should be fully e(pensed in the period the e(penditure is made? a. 5(penditure made to increase the efficiency or effectiveness of an e(isting asset b. 5(penditure made to e(tend the useful life of an e(isting asset beyond the time frame originally anticipated c. 5(penditure made to maintain an e(isting asset so that it can function in the manner intended d. 5(penditure made for major replacement );.An e(penditure made in connection with a machine being used should be a. 5(pensed immediately if it merely e(tends the useful life but does not improve the /uality. b. 5(pensed immediately if it merely improves the /uality but does not e(tend the useful life. c. $apitali3ed if it maintains the machine in normal operating condition. d. $apitali3ed if it increases the /uantity of units produced by the machine.
age 7 <. 0orrowing costs can be capitali3ed as part of the cost of an asset when a. 2he asset is a /ualifying asset b. 2he asset is a /ualifying asset and it is not probable that the borrowing costs will result in future economic benefits to the entity c. 2he asset is a /ualifying asset and it is probable that the borrowing costs will result in future economic benefits to the entity but the costs cannot be measured reliably. d. 2he asset is a /ualifying asset and it is probable that the borrowing costs will result in future economic benefits to the entity and the costs can be measured reliably. 1. Which of the following assets could be treated as /ualifying asset for the purpose of capitali3ing interest costs? a. %nvestment property b. %nvestments in financial instruments c. %nventories that are manufactured or produced in large /uantity on a repetitive basis and take a substantial period of time to get ready for use or sale d. 0iological assets !. Which of the following statements is true regarding capitali3ation of interest? a. %nterest cost in connection with the purchase of land to be used as a building site should be debited to the land account. b. 2he amount of interest cost capitali3ed during the period should not e(ceed the actual interest cost incurred. c. When e(cess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be recorded as interest revenue. d. 2he minimum amount of interest to be capitali3ed is determined by multiplying a weighted average interest rate by the amount of average accumulated e(penditures on /ualifying assets during the period. ). Which of the following is true regarding government grant related to asset? a. b. c. d.
Depreciation is higher and net income lower if the grant is recorded as deferred revenue. Depreciation is higher and net income lower if the grant is an adjustment to the asset. Depreciation is higher if the grant is a deferred revenue and net income is not affected. Depreciation is higher if the grant is adjustment of the asset.
. Which of the following statements is incorrect in relation to government grant? a. Any adjustment needed when a government grant becomes repayable is accounted for as a change in accounting estimate. b. %n respect of loan from the government at 3ero interest rate, an imputed interest charge should be recogni3ed in profit or loss. c. Where conditions apply to a government grant, it should only be recogni3ed when there is reasonable assurance that the conditions will be met. d. A government grant that becomes receivable as compensation for losses already incurred should be recogni3ed as income of the period in which it becomes receivable .2he major difference between the service life of an asset and the physical life is that a. :ervice life refers to the time an asset will be used and physical life refers to how long the asset will last. b. hysical life is the life of an asset without consideration of residual value and service life re/uires the use of residual value. c. hysical life is always longer than service life. d. :ervice life refers to the length of time an asset is of use to the original owner, while physical life refers to how long the asset will be used by all owners. 4.'f the following costs related to the development of mineral resources, which one should not be included in depletable cost? a. b. c. d.
Ac/uisition cost of the mineral resource deposit 5(ploration cost 2angible e/uipment cost associated with machinery used to e(tract the mineral resource %ntangible development cost such as drilling cost, tunnel, and shaft
age 9 7. An entity is re/uired to consider which of the following in developing accounting policy for e(ploration and evaluation activities? a. 2he re/uirements and guidance in :tandards and %nterpretations dealing with similar and related issues. b. 2he definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and e(penses in the $onceptual *ramework . c. ecent pronouncements of standard+setting bodies, accounting literature and accepted industry practices. d. Whether the accounting policy results in information that is relevant and reliable. 9. When calculating the estimate of future cash flows, which of the following cash flows should not be included? a. b. c. d.
$ash flows from disposal %ncome ta( payments $ash flows from the sale of assets produced by the asset. $ash outflows incurred to generate the cash inflows from the continuing use of the asset.
;. An entity is considering to apply an impairment test to an individual asset or to the cash generating unit to which the asset belongs. Which of the following statements is true? a.
%f the individual asset does not generate cash inflows that are largely independent from other assets, the cash generating unit should be identified. b. %f the individual asset generates a significant proportion of cash inflows of the entity as a whole, the cash generating unit should not be identified. c. %f the individual asset generates an insignificant proportion of cash inflows to the entity as a whole, the cash generating should not be identified. d. All of these statements are true. <. Which of the following items would /ualify as an intangible asset? a. Advertising and promotion on the launch of a huge product. b. $ollege tuition fees paid to employees who decide to enroll in an e(ecutive B.0.A program at =arvard niversity while working with the entity. c. 'perating losses during the initial stages of the project. d. 6egal costs paid to intellectual property lawyers to register a patent. 1. Which of the following disclosures is not re/uired with respect to intangible assets? a. b. c. d.
seful lives of the intangible assets. econciliation of carrying amount at the beginning and the end of the year. $ontractual commitments for the ac/uisition of intangible assets. *air value of similar intangible assets used by competitors.
!.2he reason goodwill is referred to as a master valuation account is that a. %t represents the purchase price of a business that is about to be sold. b. %t is the difference between the fair value of the net identifiable assets as compared with the purchase price of the ac/uired business. c. 2he value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation. d. %t is the only account in the financial statements that is based estimated value. ). Which of the following is not one of the criteria which must be met before development costs can be capitali3ed? a. 2he entity has sufficient financial resources to complete the project. b. 2he entity intends to complete the project and either use or sell the intangible asset. c. 2he entity can reliably identify the research costs incurred to bring the project to economic feasibility. d. 2he project has achieved technical feasibility.
age ; . 'perating losses incurred during the start+up years of a new business should be a. b. c. d.
Accounted for and reported like the operating losses of any other business. Written off directly against retained earnings. $apitali3ed as a deferred charge and amorti3ed over five years. $apitali3ed as an intangible asset and amorti3ed over a period not to e(ceed !< years.
. What is the relationship between present value and the concept of a liability? a. b. c. d.
resent value is used to measure certain liabilities. resent value is not used to measure liabilities. resent value is used to measure all liabilities. resent value is only used to measure noncurrent liabilities.
4. Which of the following is not considered when evaluating whether or not to record a liability for pending litigation? a. b. c. d.
2ime period in which the underlying cause of action occurred. 2he type of litigation involved. 2he probability of an unfavorable outcome. 2he ability to make a reasonable estimate of the amount of the loss.
7. A provision is recogni3ed a.
When there is a legal obligation arising from a past obligating event, the probability of the outflow of resources is more than remote but less than probable, and a reliable estimate of the amount can be made. b. When there is a constructive obligation as a result of a past obligating event, the outflow of resources is probable, and a reliable estimate of the amount can be made. c. When there is a possible obligation arising from a past event, the outflow of resources is probable, and an appro(imate amount can be set aside toward the obligation. d. When management decides that it is essential that a provision should be made. 9. An entity operates chemical plants and has a commitment of making good any damage caused to the environment by its operations. Which of the following scenarios relating to the entity would give rise to an environmental provision? a. 'n past e(perience it is likely that a chemical spill which would result in having to pay fines and penalties will occur in the ne(t year. b. ecent research suggests there is a possibility that the entity-s actions may damage surrounding wildlife. c. 2he government has outlined plans for a new law re/uiring all environmental damage to be rectified. d. A chemical spill from one of the entity-s plants has caused harm to the surrounding area and wildlife. ;. Which statement is incorrect where some or all of the e(penditure re/uired to settle a provision should be reimbursed by another party? a. 2he reimbursement shall be recogni3ed only when it is virtually certain that the reimbursement would be received if the entity settles the obligation. b. 2he amount of the reimbursement shall not e(ceed the amount of the provision. c. 2he e(pense relating to the provision may be presented net of the reimbursement. d. 2he reimbursement shall not be treated a as separate asset and therefore "netted# against the estimated liability for the provision. 4<. When the effective+interest method is used to amorti3e bond premium or discount, the periodic amorti3ation would a. b. c. d.
%ncrease if the bonds were issued at a discount. Decrease if the bonds were issued at a premium. %ncrease if the bonds were issued at a premium. %ncrease if the bonds were issued at either a discount or a premium.
age 1< 41.A debt instrument with no ready market is e(changed for property whose fair value is currently indeterminable. When such a transaction takes place a. 2he present value of the debt instrument must be appro(imated using an imputed interest rate. b. %t should not be recorded on the books of either party until the fair value of the property becomes evident. c. 2he board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. d. 2he directors of both entities involved in the transaction should negotiate a value to be assigned to the property. 4!. Which of the following situations would prima facie lead to a lease being classified as an operating lease? a. b. c. d.
2ransfer of ownership to the lessee at the end of the lease term. 'ption to purchase at a value below the fair value of the asset. 2he lease term is for a major part of the asset&s life. 2he present value of the minimum lease payments is < of the fair value of the asset.
4). Which of the following is a correct statement of one of the lease capitali3ation criteria? a. b. c. d.
2he lease transfers ownership of the property to the lessor. 2he lease contains a purchase option. 2he lease term is e/ual to or more than 7 of the economic life of the leased property. 2he minimum lease payments e(cluding e(ecutory costs e/ual or e(ceed ;< of the fair value of the leased property.
4. %n a defined contribution plan, a formula is used that a. b. c. d.
Defines the benefits that the employee will receive at the time of retirement. 5nsures that pension e(pense and the cash funding amount will be different. e/uires an employer to contribute a certain sum each period based on the formula. 5nsures that employers are at risk to make sure funds are available at retirement.
4. %n a defined benefit plan, a formula is used that a. e/uires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee. b. Defines the benefits that the employee will receive at the time of retirement. c. e/uires that pension e(pense and the cash funding amount be the same. d. Defines the contribution the employer is to make and no promise is made concerning the ultimate benefits to be paid out to the employees. 44.%n accounting for a defined benefit plan a. An appropriate funding pattern must be established to ensure that enough money would be available at retirement to meet the benefits promised. b. 2he employer-s responsibility is simply to make a contribution each year based on the formula established in the plan. c. 2he e(pense recogni3ed each period is e/ual to the cash contribution. d. 2he liability is determined based upon known variables that reflect future salary levels promised to employees. 47. Which of the following is taken into account when determining the discount rate for a defined plan? a. b. c. d.
Barket yields at the end of reporting period on high+/uality corporate bonds. %nvestment or actuarial risk. :pecific risk associated with the entity&s business. isk that future e(perience may differ from actuarial assumptions.
age 11 49. 2a(able income of a corporation a. Differs from accounting income due to differences in interperiod allocation between the two methods of income determination. b. Differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. c. %s based on international financial reporting standards. d. %s reported in the income statement. 4;. All of the following would result to deferred ta( asset, e(cept a. %nterest e(pense is accrued but included in ta(able income on a cash basis. b. 2he accumulated depreciation on an asset is greater than accumulated ta( depreciation c. Development costs have been capitali3ed and amorti3ed but were deducted in determining ta(able income in the period incurred. d. 2he ta( base for a machine is greater than the carrying amount. 7<. 5ntities allocate income ta( e(pense to all of the following, e(cept a. Discontinued operation b. rior period adjustment c. 8ross profit d. 'ther comprehensive income 71.:hareholders are said to be the residual owners which means that the shareholders a. Are entitled to a dividend every year in which the business earns a profit. b. =ave the rights to specific assets of the business. c. 0ear the ultimate risks and uncertainties and receive the benefits of ownership. d. $an negotiate individual contracts on behalf of the entity. 7!. %n accordance with %$ %nterpretation, costs of public offering or stock market listing of shares should be a. 5(pensed immediately b. $onsidered as component of other comprehensive income c. Deducted from e/uity d. Deducted from e/uity, net of any related income ta( benefit. 7). At the date of declaration of a small ordinary share dividend, the entry should not include a. A credit to ordinary share dividend payable. b. A credit to share premiumCordinary. c. A debit to retained earnings. d. All of these are acceptable. 7. =ow should an entity recogni3e the change in the fair value of the liability in respect of a cash+settled share+based payment transaction? a. :hould not recogni3e in the financial statements but disclose in the notes b. :hould recogni3e in the statement of changes in e/uity c. :hould recogni3e in other comprehensive income d. :hould recogni3e in profit or loss 7. *or share appreciation rights, the measurement date for computing compensation is the a. Date the rights mature b. Date the share reaches a predetermined amount c. Date of grant d. Date of e(ercise 74. 5arnings per share is calculated before accounting for which of the following items? a. reference dividend for the period b. 'rdinary dividend c. 2a(ation d. Binority interest 77. When there are two dilutive convertible securities, the one that should be used first to recalculate earnings per share is the security with the a. 8reater earnings adjustment. b. 8reater earnings per share adjustment. c. :maller earnings adjustment. d. :maller earnings per share adjustment.
age 1! 79. Which of the following statements about the method of presenting the statement of cash flows is correct? a. 2he indirect method starts with income before income ta(. b. 2he direct method is known as the reconciliation method. c. 2he direct method is more consistent with the primary purpose of the statement of cash flows. d. All of these statements are correct. 7;. %n preparing a statement of cash flows, cash flows from operating activities a. Are always e/ual to accrual accounting income. b. Are calculated as the difference between revenue and e(penses. c. $an be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. d. $an be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash. 9<. =ow should an unreali3ed gain on foreign currency transaction be presented in a statement of cash flows? a. As an inflow under financing activities. b. %t should be ignored as it is an unreali3ed gain. c. %t should be disclosed in the notes to financial statements by way of abundant precaution. d. As an adjustment to the net income under operating activities. 91. During the current year, an entity discovered that ending inventory reported in the preceding year was understated. =ow should the entity account for this understatement? a. Adjust the beginning inventory balance in the current year. b. estate the financial statements with corrected balances for all periods presented c. Adjust the ending balance of retained earnings account in the current year+end. d. Bake no entry because the error will self+correct. 9!. Which disposal could /ualify as discontinued operation? a. Disposal of a component that is similar in nature to other components but has operations and cash flows distinguishable from the rest of the entity. b. Disposal of a component due to a major change in business strategy. c. Disposal of a small component within the current business strategy. d. Disposal of a component with distinguishable operations and cash flows from the rest of the entity 9). Which is a true statement regarding disclosure for subse/uent events? a. ecogni3e a loss for all recogni3ed and unrecogni3ed subse/uent events in the current year b. ecogni3e a gain or loss for any recogni3ed subse/uent event in the current year c. ecogni3e a loss for a recogni3ed subse/uent event in the financial statements in the year when the subse/uent event occurs. d. ecogni3e a loss for a recogni3ed subse/uent event in the current year financial statements 9. Which statement regarding fair vaue t!rou"! profit or o## F$%LE is true? a. An asset that is classified as *F6 is remeasured to fair value each reporting period and the profit or loss is recogni3ed in income for the period. b. An election can be made to use the fair value through profit or loss method when an entity security has no active market. c. An election can be made to use the *F6 method for a held to maturity security re/uiring the security to be recorded at cost and subse/uently measured at amorti3ed cost d. An asset that is classified as *F6 is remeasured to fair value each reporting period and the profit or loss is recogni3ed in other comprehensive income. 9. An entity has investment property that is held to earn rental income. 2he entity uses the fair value model for reporting the investment property. Which of the following statements is true? a. $hanges in fair value are reported in profit or loss in the current period b. $hanges in fair value are reported as an e(traordinary gain c. $hanges in fair value are reported in other comprehensive income for the period d. $hanges in fair value are reported as deferred revenue for the period
age 1) 94. Which of the following provides the holder the ri"!t to #e at an e(ercise or strike price anytime during a specified period a gain accrues to the holder as the market price of the underlying falls below the strike price? a. b. c. d.
*orward contract ut option :waption $all option
97. Which of the following instruments is not considered a derivative financial instrument? a. $urrency futures b. :tock inde( option c. 0ank certificate of deposit d. %nterest rate swap 99. At current year+end, an entity was holding long+lived assets that it intended to sell. 2he entity appropriately recogni3ed a loss in the current year related to these assets. %n the income statement for the current year, the loss should be reported as a. b. c. d.
5(traordinary item $omponent of income from continuing operations before ta( $omponent of discontinued operations net of ta( $omponent of selling or administrative e(penses net of ta(
9;. 2he impairment rules for long+lived assets apply to all of the following, except a. 0uilding currently used in the business b. *inancial instruments c. 6and d. Binicomputers used to run a production process ;<. 2he re/uired disclosures for the impairment of long+lived assets include all of the following, except a. b. c. d.
2he business segment affected, if applicable 2he amount of the impairment loss and how fair value was determined 2he recommendation of the auditor, signed and dated as of the date of discovery 2he facts and circumstances leading to the impairment
;1. Which of the following accurately describes the appropriate accounting for goodwill ac/uired through a business combination? a. b. c. d.
%t should be recorded at cost and amorti3ed over <+year period %t should be recorded at cost and amorti3ed over a 1<+year period %t should be recorded at cost and tested for impairment every three years %t should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur
;!. Which of the following is a research and development cost? a. b. c. d.
esearch and development performed under contract for others Development or improvement of techni/ues and processes 'ffshore oil e(ploration that is the primary activity of an entity Barket research related to a major product for the entity
;). Which of the following statements is incorrect regarding internal+use software? a. 2he application and development costs should be amorti3ed on a straight line basis unless another systematic and rational basis is more appropriate. b. %nternal+use software is considered to be software that is marketed as a separate product or as part of a product or process. c. 2he costs of testing and installing computer hardware should be capitali3ed as incurred. d. 2he costs of training and application maintenance should be e(pensed as incurred.
age 1 ;. Which of the following /ualifies as an operating segment? a. $orporate head/uarters b. >orth American segment whose assets are 1! of the combined assets of all segments and management reports to the chief operating officer. c. 5astern 5urope segment which reports its results directly to the manager of the 5uropean division, and has !< of the entity&s assets, 1! of revenue and 11 of the profit d. :outh American segment whose results of operations are reported directly to the chief operating officer, and has of the entity&s assets, ; of revenue and 9 of the profit. ;. Which of the following is an inherent difficulty in the determination of the results of operations on an interim basis? a. $ost of sales reflects only the amount of product e(pense allocable to revenue recogni3ed as of the interim date. b. $osts e(pensed in one interim period may benefit other periods. c. Depreciation on an interim basis is a partial estimate of the actual annual amount. d. evenues from long+term construction contracts accounted for by the percentage of completion method are based on annual completion and interim estimates may be incorrect. ;4. 2he most relevant measurement of liabilities at initial recognition and fresh start measurement should always reflect a. b. c. d.
2he e(pectation of the management =istorical cost 2he credit standing of the entity 2he single most likely minimum or ma(imum possible amount
;7. An entity is the plaintiff in a patent infringement case. 2he entity has a high probability of a favorable outcome and can reasonably estimate the amount of the settlement. What is the proper accounting treatment of the patent infringement case? a. b. c. d.
>o reporting is re/uired at this time A gain contingency for the minimum estimated amount of the settlement Disclosure in the notes only A gain contingency for estimated probable settlement
;9. Which is a true #tate&ent for electing the fair value option for valuing bonds payable? a. b. c. d.
2he effective interest method of amorti3ation must be used to calculate interest e(pense. Discount or premium is disclosed in the notes to the financial statements. 2he fair value of the bond and the principal obligation value must be disclosed. %f the fair value option is elected, it must be applied to all bonds.
;;. An entity uses %*: for financial reporting purposes and has several pension plans covering various classes of employees. When may the entity net assets and liabilities of the various plan? a. b. c. d.
When the estimated cash inflows and outflows are similar in pattern When the assets and liabilities are both financial Assets and liabilities may always be netted Assets and liabilities may be netted when there is a legally enforceable right to use the assets of one plan to settle the obligations of another plan.
1<<. At the middle of the current year, an entity granted employees compensatory share options. =ow should the entity account for the outstanding options in calculating earnings per share for the current year if the options are not antidilutive? a. %nclude the options in the denominator of basic and diluted earnings per share for the entire year. b. %nclude the options in the denominator of diluted earnings per share weighted by the number of months outstanding. c. %gnore the options in the calculation of diluted earnings per share. d. %nclude the options in the denominator of diluted earnings per share for the entire year.
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