Test Bank

to accompany

Fundamentals of Intermediate Accounting

prepared by

Janice Loftus The University of Sydney

Test Bank to accompany Fundamentals of Intermediate Accounting

John Wiley & Sons Australia Ltd !""#

CHAPTER 1
Financial Accounting and Accounting Standards

SUMMARY OF LEAR ! " OB#ECT!$ES BY %UEST!O S

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Chapter 1: Financial Accounting and Accounting Standards

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$% Users of financial reports include all of the follo4ing e2cept a% creditors% b% government agencies% c% unions% d% none of the above i%e% all of these are users% The financial statements most fre5uently provided are the a% balance sheet income statement and statement of changes in e5uity% b% balance sheet and income statement% c% balance sheet income statement cash flo4 statement and statement of change in e5uity% d% balance sheet income statement and cash flo4 statement % Financial statements report on a% economic entities rather than on industries or members of society as consumers% b% industries rather than on economic entities or members of society as consumers% c% economic entities and industries rather than on members of society as consumers% d% economic entities members of society as consumers and industries% Whether a business is successful and thrives is determined by a% mar6ets% b% free enterprise% c% competition% d% all of these% Which of the follo4ing is not an outcome of an effective capital allocation process7 a% An efficient li5uid mar6et for obtaining and granting credit% b% 8igh levels of transparency in financial reporting% c% A li5uid mar6et for buying and selling securities% d% ,ncouragement of innovation% Financial statements in the early !"""s have been criticised because they a% provide too many non9financial measurements% b% do not provide enough information about hard assets :inventory and plant assets;% c% do not provide enough for4ard9loo6ing data% d% all of the above% Which of the follo4ing statements is not an ob<ective of financial reporting7 a% =rovide information on the li5uidation value of an entity% b% =rovide information about an entity>s resources claims to those resources and changes to them% c% =rovide information that is useful in investment and credit decisions% d% =rovide information that is useful in assessing cash flo4 prospects%

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Test Bank to accompany Fundamentals of Intermediate Accounting #% A common set of accounting standards and procedures is called a% financial accounting standards% b% generally accepted accounting principles% c% ob<ectives of financial reporting% d% statements of financial accounting concepts% International Financial ?eporting Standards are issued by a% the Financial Accounting Standards @oard% b% the Australian Accounting Standards @oard% c% the International Accounting Standards @oard% d% the International Accounting Standards 'ommittee Foundation% Australian Accounting Standards are issued by the a% AAS@% b% FAS@% c% AuAS@% d% F?'% The body responsible for overseeing compliance 4ith securities legislation in Australia is the a% ASI'% b% S,'% c% IAS'A% d% AAS@% IAS'A is a% an independent organisation for setting accounting concepts statements% b% a body that represents the 4orld>s national capital mar6et regulators% c% and international organisation of accounting standard setters% d% an international organisation of stoc6 e2changes% In $..* IAS'A and the IAS' agreed a% to develop a core set of stoc6 e2change listing rules for global adoption% b% to develop a common set of accounting concepts statements% c% to develop a common set of corporate governance guidelines for global adoption% d% to develop a core set of accounting standards for listed entities% Australian la4 re5uires compliance 4ith Australian ,5uivalents of International Financial ?eporting Standards by a% public companies large private companies and government sector entities% b% public companies and large private companies only% c% public companies and government sector entities only% d% public companies and other listed entities only%

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Chapter 1: Financial Accounting and Accounting Standards $*% =rofessional accounting bodies in each country typically a% issue accounting standards and enforce professional ethics% b% enforce professional ethics and participate in developing domestic BAA=% c% enforce professional ethics but are independent of the development of domestic BAA=% d% remain independent of development of domestic BAA= and professional ethics% A basic premise of the IAS@>s in establishing standards is that a% privacy and confidentiality must be maintained for all discussions of accounting issues% b% it should operate in full vie4 of the public% c% it should operate in full vie4 of the IAS' Foundation% d% a combination of :a; and :b; depending on the sensitivity of the issue as determined by the IAS'% Which of the follo4ing is not a step in the due process of the IAS@7 a% An e2posure draft must be approved by at least # votes of the IAS@% b% An e2posure draft must be made public% c% A discussion document must be issued prior to the release of an e2posure draft% d% All comments received on a discussion document and e2posure draft must be considered by the IAS@% &embers of the International Accounting Standards @oard are appointed by and ans4erable to a% IAS'A% b% its founders 4hich are a group of professional accounting bodies% c% the International Accounting Standards 'ommittee Foundation% d% a representative body of national standard setters% In developing accounting standards the IAS@ relies upon a% IAS@ staff only% b% IAS@ staff and tas6forces formed for various pro<ects% c% specialist advisory groups% d% both :b; and :c; above% The role of the Standards Advisory 'ouncil is to a% advise the IAS@ on priorities for its 4or6% b% advise the IAS@ on priorities for its 4or6 and implications of proposed standards% c% advise the IAS@ on priorities for its 4or6 and approve standards% d% advise the IAS@ on priorities for its 4or6 and implications of proposed standards and approve standards% The main types of pronouncements that are issued by the IAS@ are a% standards and interpretations% b% standards and the frame4or6% c% standards interpretations and the frame4or6% d% standards interpretations the frame4or6 and technical bulletins% Interpretations issued by the IAS@ a% cover ne4ly identified issues not addressed by IF?S% b% cover issues 4here conflicting interpretations have developed% c% both :a; and :b; above% d% none of the above%

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Test Bank to accompany Fundamentals of Intermediate Accounting !(% Australia>s adoption of International Financial ?eporting Standards a% involved verbatim adoption of all standards% b% 4as verbatim but partial because it only applies to a reduced set selected by the AAS@% c% involved modification to some of the 4ording and applied to a reduced set of standards selected by the AAS@% d% involved modification to some of the 4ording but included all IAS@ standards% Accounting Interpretations are a% developed by IF?I' and approved by a ma<ority of the IAS@% b% developed by the IAS@ and approved by a ma<ority of the IF?I'% c% developed by IAS@ staff and approved by a ma<ority of the IF?I'% d% developed by IAS@ staff and approved by a ma<ority of the IAS@% The International Financial ?eporting Interpretations 'ommittee a% provides prescriptive guidance to reduce the need for professional <udgement% b% does not provide implementation guidance because IF?S are principles9based% c% acts as a court of appeal for management 4ho have ob<ections to implementing IF?S% d% provides interpretations to assist accountants to apply e2isting standards to ne4 situations% In Australia interpretations of IF?S are considered by a% panels of e2perts% b% the AAS@ 4ith assistance from panels providing e2pert advice% c% the Urgent Issues Broup% d% the ,merging Issues Tas6 Force% Which of the follo4ing statements about the IAS@ Framework is false7 a% The role of the Framework is diminished because the IAS@ has e2plicitly adopted a rules9 based approach to accounting standards% b% The purpose of the Framework is to provide fundamental ob<ectives and concepts to guide the development of accounting standards% c% The Framework is an important source of information about the intent of a standard% d% An entity adopting IF?S should consider the Framework in the absence of a specific accounting standard covering an issue% International Benerally Accepted Accounting =rinciples comprise a% income statements balance sheets and cash flo4 statements% b% accounting standards and interpretations issued by the IAS@% c% Framework for the Preparation and Presentation of Financial Statements d% both :b; and :c;%

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Chapter 1: Financial Accounting and Accounting Standards !.% Accounting standard setting a% is described as a political process in Australia because the members of the AAS@ are appointed by the F?' 4hich in turn is appointed by the federal Treasurer% b% is described as a political process because interested parties attempt to influence and persuade those 4ho formulate the standards by lobbying% c% is described as a political process because it involves voting% d% is based entirely on research and empirical findings% Which of the follo4ing statements is false7 a% 'hallenges of competition and emphasis on short9term results may give rise to ethical conflicts and pressure% b% ,thical considerations are more li6ely to arise in the e2ercise of professional <udgement in implementing IF?S because they are principles9based% c% ,thical considerations only arise for accountants 4ho are engaged as auditors% d% =rofessional ethics codes are enforced by professional accounting bodies on their members but do not apply to managers 4ho are not members%

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Test Bank to accompany Fundamentals of Intermediate Accounting

E:ercises
E:8 1817'hallenges facing financial accounting ,2plain each of the follo4ing challenges facing financial accounting0 soft assets timeliness Solution 181 Financial reports focus on hard assets such a property plant and e5uipment but provide insufficient information about an entity>s soft assets such as 6no49ho4 and mar6et dominance 4hich may be more important in driving corporate value% ?eports are provided half9yearly or in 5uarterly in some cases but there is no real9time financial statement information available% E:8 18,CAb<ectives of financial reporting What are the ob<ectives of financial reporting by business enterprises7 Solution 18, The ob<ectives of financial reporting are to provide information :a; that is useful to present and potential investors and creditors and other users in ma6ing rational investment credit and similar decisions% :b; to help users in assessing the amounts timing and uncertainty of prospective cash flo4s% :c; clearly portraying the economic resources of an entity the claims to those resources and the effects of transactions events and circumstances that change its resources and obligations% E:8 18-CAAS@% Describe role of the AAS@ and its approach to adoption of IF?S% Solution 18The AAS@ formulates accounting standards 4hich are Australian e5uivalents of IF?S% The AAS@ adopts the content and 4ording of IF?S 4here possible% It also retains some accounting standards that cover areas of accounting not covered by IF?S% The AAS@ also participates in the development of IF?S% It provides guidance on urgent issues and considers the application of IF?I' interpretations% E:8 18.CBAA= 'lassify the follo4ing IAS@ documents according to the type of guidance it provides% :d; International Financial ?eporting Standards :IF?S; :e; Interpretations :f; International Accounting Standards not replaced by more recent IF?S :g; Framework for the Preparation and Presentation of Financial Statements Use the follo4ing categories of guidance if applicable0 $% &ost detailed guidance on specific issues !% 'onceptual guidance (% Implementation guidance

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Chapter 1: Financial Accounting and Accounting Standards Solution 18. :a; IF?S E :$; most detailed guidance on specific issues :b; Intepretations E :(; implementation guidance :c; International Accounting Standards not replaced by more recent IF?S E :$; most detailed guidance on specific issues :d; Framework for the Preparation and Presentation of Financial Statements E :!; conceptual guidance E:8 18/CThe /eed to Develop Accounting Standards The users of financial accounting statements ha!e coinciding and conflicting needs for statements of !arious types To meet these needs" and to satisfy the financial reporting responsi#ility of management" accountants prepare different sets of financial statements for different users ,valuate this statement e2plaining 4hy the reasoning is correct or incorrect% Solution 18/ It is true that users of financial accounting statements have coinciding and conflicting needs for statements of various types% 8o4ever to meet these needs accountants generally prepare a single set of general9 purpose financial statements rather than a number of different types of financial statements% It may be argued that accountants often do prepare special statements for particular purposes but in general the accounting profession has relied on general purpose financial statements prepared in conformity 4ith generally accepted accounting principles to cater for the common information needs of a variety of users% E:8 180CIAS@ The IASB should #e responsi!e to the needs and !iewpoints of the entire economic community" not $ust the pu#lic accounting profession The IASB therefore will succeed #ecause it will deal effecti!ely with all interested groups ,valuate the statement identifying any fallacious reasoning% Solution 180 The statement is logically fla4ed% While a basic premise of the IAS@ is that it should be responsive to the needs of the entire economic community the intention of responsiveness to the economic community is insufficient to ensure its success% The IAS@ 4ill ho4ever have a better chance of survival if it deals 4ith problems promptly sets proper priorities ta6es 4hatever action it thin6s is right and in the public interest and handles pressures responsibly 4ithout overreacting to them% E:8 181CStandard Setting in a =olitical ,nvironment The financial community and preparers :management; are identified as t4o groups that may apply pressure on accounting standard setting% =rovide a reason 4hy each group 4ould be concerned about the content of accounting standards% Solution 181 The financial community is interested in accounting standards because they determine ho4 items are reported and the level of transparency and comparability of financial statements% 3 John Wiley & Sons Australia Ltd $%.

Test Bank to accompany Fundamentals of Intermediate Accounting =reparers :managers; may face numerous concerns about the content of financial standards because they affect 6ey performance measures used in various decision conte2ts including assessing the performance of the entity determining management bonuses and assessing 4hether an entity is in breach of debt covenants%

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