Accounting for employee benefits Test Bank Docx Chapter 16

Chapter 16 Testbank

1. AASB 101 permits an entity to present all items of income and expense recognised in a period to be presented in either the statement of profit or loss and other comprehensive income or the income statement.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

2. Total comprehensive income for the year is profit for the year plus other items of comprehensive income.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

3. Comprehensive income includes dividend payments to shareholders.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Introduction to the statement of profit or loss and other comprehensive income
Topic: Profit or loss disclosure
 

4. Discovery of an error from a prior period corrected retrospectively is an example of an item reportable under other comprehensive income.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Introduction to the statement of profit or loss and other comprehensive income
Topic: Profit or loss disclosure
 

5. AASB 101 requires profit or loss and the total comprehensive income for the period reported on the face of the statement of profit or loss and other comprehensive income to be disaggregated between the non-controlling interest and the owners of the parent.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

6. AASB 101 permits entities to present the components of other comprehensive income either before tax effects (gross presentation) or after their related tax effects (net presentation).  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

7. If the exercise (strike) price of a call option is greater than the current share price, the option is said to be 'in-the-money'.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

8. An entity shall recognise all items of income and expense in a period in profit or loss unless an Australian Accounting Standard requires or permits otherwise.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

9. The income statement under AASB 101 is designed to report all revenues and expenses to determine profit or loss.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

10. All expenses from operating activities must be classified according to either their nature or function.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

11. According to AASB 101, the income statement provides a total profit figure to which opening retained earnings is added and from which dividends are deducted.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

12. By focusing only on the income statement, we do not obtain a full picture of all the gains and losses that may have occurred for an entity during the period.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

13. In establishing the classification of items in the income statement, the size of an item is an appropriate basis for establishing a separate classification (by nature or function) for it.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

14. An item must be outside the ordinary operations of the business or be of a non-recurring nature to be classified as an extraordinary item under AASB 101.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-06 Understand what a 'non-recurring item' is and how it should be disclosed.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

15. All adjustments to equity other than those related to transactions with owners in their capacity as owners are disclosed in the statement of profit or loss and other comprehensive income (AASB 101).  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Statement of changes in equity
Topic: Statement of changes in equity
 

16. Profit is a measure of financial performance and therefore may not truly reflect the success or otherwise of an organisation.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

17. AASB 2 requires that the fair value of the option issued as a share-based payment to an employee, be determined and this value be deemed to be the cost of the options.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

18. As part of the process of international harmonisation, standard-setters have removed the need for professional judgement to be exercised in respect of expenses; all discretion that once existed has been removed.  

AACSB: Analytic
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

19. The choice between reporting expenses by nature or by function is extremely important, as different net profit figures are derived depending upon the choice made.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

20. All disclosure requirements that relate to an entity's profit or loss are included in AASB 101.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

21. AASB 108 requires all errors that relate to prior reporting periods to be corrected by adjusting the opening balance of retained earnings and restating comparative information.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-07 Understand what constitutes a 'prior period error'.
Learning Objective: 16-08 Understand how to account for prior period errors.
Section: Prior period errors
Topic: Prior period errors
 

22. Changes in accounting policy are to be made retrospectively or prospectively, depending upon the background to the change.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-09 Understand what constitutes a 'change in accounting policy'.
Learning Objective: 16-10 Understand how to disclose information about changes in accounting policies.
Section: Changes in accounting policy
Topic: Changes in accounting policy
 

23. Different measurement models affect the determination of income and expenses. The different measurement models include: 

A. historical cost, fair value, present value.
B. historical cost, direct costs, indirect costs.
C. current cost, historical cost, overhead cost.
D. market value, opportunity cost, historical cost.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

24. A statement displaying components of profit or loss is referred to in AASB 101 as a(n): 

A. profit and loss statement.
B. statement of income.
C. statement of financial performance.
D. income statement.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

25. Profit is not defined in the AASB framework: 

A. because it is simply the difference between income and expenses, both of which are defined.
B. as it is an intangible item and therefore cannot be properly defined.
C. because different measurement methods will give different profits, therefore there cannot be one definition.
D. as it is clearly defined under AASB 101.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Introduction
Section: Summary
Topic: Introduction to the statement of profit or loss and other comprehensive income
Topic: Summary
 

26. Under AASB 101 additional line items, headings and subtotals: 

A. are precluded as they provide unnecessary information that may confuse the user.
B. shall be presented on the face of the statement when such presentation is relevant to an understanding of the entity's financial performance.
C. shall be presented on the face of the statement when such items can be measured reliably and it is probable these events will occur.
D. will only be included in the notes to the income statement if they are relevant to an understanding of the entity's financial performance.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

27. Examples of classification of expenses by their nature are: 

A. employee expenses and distribution expenses.
B. depreciation and marketing expenses.
C. borrowing costs and distribution expenses.
D. employee expenses and depreciation expenses.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

28. The choice of classification between nature and function of expenses from ordinary activities depends on: 

A. the size of the items that would be reported under the possible classifications.
B. the historical evidence about the probability of the items recurring.
C. the classification that provides information that is reliable and more relevant.
D. the classification that best reflects the way expenses vary directly or indirectly with the entity's level of activity.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

29. Extraordinary items will be included in the statement of profit or loss and other comprehensive income: 

A. when they are material and need to be disclosed separately.
B. when an item of revenue or expense is attributable to an event outside the ordinary course of business.
C. when an expense or revenue is of a non-recurring nature.
D. none of the given answers is correct.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-06 Understand what a 'non-recurring item' is and how it should be disclosed.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

30. An entity is required in AASB 101 to produce: 

A. a statement of changes in equity.
B. a statement of financial position.
C. a statement of profit or loss and other comprehensive income.
D. all of the given answers.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Statement of changes in equity
Topic: Statement of changes in equity
 

31. The statement of changes in equity is required: 

A. because AASB 101 deals with income and does not define profit.
B. to show profit and loss for the period.
C. to summarise the large number of transactions that take place on the income statement.
D. to provide a reconciliation of opening and closing equity, and also to provide details of the various equity accounts that are impacted by the period's total comprehensive income.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Statement of changes in equity
Topic: Statement of changes in equity
 

32. If it is found that an error had been made in a prior period: 

A. the error should be rectified by including the item of income or expense in the period in which the error was discovered.
B. AASB 101 does not cover this concept and so no entry is required.
C. AASB 108 requires that errors are corrected via an adjustment to opening balance of retained earnings.
D. material errors discovered in the current reporting period must be included in that period's statement of profit or loss and other comprehensive income, while non-material errors may be corrected with an adjustment to opening retained earnings.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-07 Understand what constitutes a 'prior period error'.
Learning Objective: 16-08 Understand how to account for prior period errors.
Section: Prior period errors
Topic: Prior period errors
 

33. 'Comprehensive income' refers to: 

A. the statement of total recognised income and expense.
B. the statement of changes in equity.
C. the net profit figure shown at the bottom of the statement of profit or loss.
D. none of the given answers.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

34. The notes to the accounts that relate to income and expense should include: 

A. only commentary on issues covered by AASB 101.
B. a variety of information that incorporates the disclosures required in all standards related to income and expenses.
C. only information that would have resulted in a different profit or loss figure if it had been included on the face of the statement.
D. only items that were deemed non-material when selecting items to place on the face of the accounts.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

35. The effect of a revision of an accounting estimate must be recognised in profit and loss in which reporting periods? 

A. In the present, prior (by adjusting retained earnings) and future periods affected.
B. In the present and future periods affected.
C. In the present and prior reporting periods (by adjusting retained earnings).
D. Not recognised in any period.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Learning Objective: 16-05 Understand how we account for changes in accounting estimates.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

36. Estimations are frequently made in the financial statements in relation to items such as bad debts, inventory obsolescence, an asset's useful life and the expected pattern of consumption of economic benefits of depreciable assets. The effect of these estimations on the financial statements is to: 

A. increase the variability of profits.
B. make the statement unreliable.
C. reduce the relevance of the profit figures reported.
D. none of the given answers is correct.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Statement of changes in equity
Topic: Statement of changes in equity
 

37. Where a change in accounting estimates occurs, the following should be disclosed: 

A. the fact that the amount of the effect on future periods will not be disclosed because estimating that amount is impracticable.
B. the reason for the change and comparative data to show the effect with and without the change.
C. the nature of the change and the impact on previous income statements.
D. the fact that the amount of the effect on future periods will not be disclosed because estimating that amount is impracticable and the reason for the change and comparative data to show the impact with and without the change.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-05 Understand how we account for changes in accounting estimates.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

38. Profit is: 

A. an ideal measure of the 'well-offness' of a firm because income and expenses are clearly defined.
B. only a measure of financial performance and therefore not useful in decision-making.
C. directly affected by the accounting policy choices implemented by management.
D. comparable across all firms as it is simply calculated by subtracting expense from revenues.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-09 Understand what constitutes a 'change in accounting policy'.
Learning Objective: 16-10 Understand how to disclose information about changes in accounting policies.
Section: Changes in accounting policy
Topic: Changes in accounting policy
 

39. AASB 118 Revenue requires a number of disclosures, including information about: 

A. rents, interest, royalties and dividends.
B. accounting policies adopted for the recognition of revenues.
C. methods adopted to determine the stage of completion of contracts involving the rendering of services.
D. all of the given answers.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-10 Understand how to disclose information about changes in accounting policies.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

40. Traditional financial accounting calculations of profit ignore the cost of externalities. One reason for this is: 

A. negative impacts on environmental resources not controlled by an entity (e.g. air and oceans) are not considered impacts on assets of the entity.
B. negative impacts on environmental resources not controlled by an entity do not fall into the definition of extraordinary items.
C. negative impacts on environmental resources not controlled by an entity may cover more than one future accounting period.
D. negative impacts on environmental resources not controlled by an entity are by-products of ordinary activities and are not therefore disclosed in the statement of profit or loss and other comprehensive income.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

41. Government departments are now required to embrace traditional financial accounting methods. Opponents of this requirement suggest that: 

A. it is not a good move as it makes managers more accountable for their department's performance.
B. it is not a good move as it emphasises the use of cash accounting by government departments.
C. it is not a good move as it distracts managers from pursuing their proper goals: the provision of social services.
D. it is not a good move as it introduces value added reporting.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

42. Government departments are now required to embrace traditional accounting methods. The broad effect of this requirement is to: 

A. emphasise the reporting of the service role of government departments.
B. emphasise the use of cash accounting by government departments.
C. introduce accrual accounting and an emphasis on profit.
D. introduce value added reporting.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

43. Hicks' notion of income is that: 

A. an individual's income is what they consume.
B. an individual's income is the minimum value that they can consume during a period and still be as well off at the end as they were in the beginning.
C. an individual's income is the difference between their revenues and expenses.
D. an individual's income is the maximum value that they can consume during a period and still be as well off at the end as they were in the beginning.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

44. Profit is calculated as the difference between income and expenses as defined by the AASB conceptual framework. As a result: 

A. the matching principle is of prime importance in calculating profit.
B. profit is influenced directly by the definitions and measurement rules for assets and liabilities.
C. there is no need for separate recognition criteria for profit.
D. profit is influenced directly by the definitions and measurement rules for assets and liabilities and there is no need for separate recognition criteria for profit.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

45. A statement of profit or loss and other comprehensive income that includes revenue, other income, employee benefits and costs and motor vehicle expenses would have been prepared using the: 

A. nature of expense method.
B. narrative method.
C. revenues and gains approach.
D. function of expense approach.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

46. A statement of profit or loss and other comprehensive income that includes revenue, cost of sales, selling expenses and financial expenses would have been prepared using the: 

A. nature of expense method.
B. narrative method.
C. revenues and gains approach.
D. function of expense approach.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

47. When selecting a presentation format for the statement of profit or loss and other comprehensive income, management must select the one that is: 

A. most relevant.
B. most reliable.
C. most consistent.
D. most relevant and the most reliable.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

48. Reports in the financial press that a particular company reported healthy profits despite increased wage costs are indicative of: 

A. the negative impact of reporting payments to employees as expenses while payments to owners are treated as distributions of profits.
B. the implied emphasis on the returns to owners being good and returns to other stakeholders such as employees as being bad.
C. the effect of reporting employees as expenses and not reporting the social costs of unemployment on decisions to restructure companies to reduce the workforce.
D. all of the given answers.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

49. AASB 2 lists a number of factors that need to be considered when valuing an executive share option. They include: 

A. the expected volatility of the share price.
B. the exercise price of the share.
C. the life of the underlying share.
D. the expected volatility of the share price and the exercise price of the share.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

50. The problem with a 'blanket rule' requiring all expenditure of a particular type to be written off as incurred (e.g. expenditure on research), is that: 

A. it is too much like US GAAP.
B. it does not enable readers of financial reports to differentiate between entities that have generated future economic benefits from particular activities and those who have not.
C. it does not enable readers of financial reports to differentiate between entities that have managed their earnings and those that have not.
D. it does not enable readers of financial reports to differentiate between entities that are going to continue to be successful and those that are not.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

51. Which of the following is not required to be shown on the face of the statement of profit or loss and other comprehensive income? 

A. Tax expense.
B. Revenue.
C. Share of profit or loss of associates and joint ventures using the equity method.
D. Share of profit or loss of associates and joint ventures using the proportional consolidation method.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

52. When items of income and expense are material, and their nature and amount are separately disclosed, this could indicate the existence of: 

A. an extraordinary item.
B. an abnormal item.
C. an adjusting item.
D. an unusual item.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

53. Paragraph 98 of AASB 101 lists some circumstances that may give rise to separate disclosure of items of income and expense. They include: 

A. reversals of inventory write-downs.
B. extraordinary items.
C. finance costs.
D. distribution costs.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

54. Components of 'other comprehensive income' would include: 

A. net profit reported in the statement of profit or loss and other comprehensive income.
B. net operating cash flows reported on the statement of cash flows.
C. changes in revaluation surplus.
D. net operating cash flows reported on the statement of cash flows, plus total of all income and expenses recognised directly in equity.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

55. Which of the following would not be considered a 'prior period error' for the purposes of AASB 108? 

A. Mathematical mistakes.
B. Fraud.
C. Misinterpretations of fact.
D. None of the given answers.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-07 Understand what constitutes a 'prior period error'.
Learning Objective: 16-08 Understand how to account for prior period errors.
Section: Prior period errors
Topic: Prior period errors
 

56. When there is a change made to the useful life of an asset: 

A. it must be recognised as a change in an accounting estimate and the impact of the reported change must be disclosed in the notes to the accounts.
B. it must be recognised as an error and all previous financial statements must be restated.
C. it must be recognised as an error and opening retained earnings and opening balances of the asset must be restated.
D. it is recognised as a change in an accounting estimate and the opening retained earnings and opening balances of the asset must be restated.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-05 Understand how we account for changes in accounting estimates.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

57. Which of the following is not a required disclosure pertaining to payments made to auditors? 

A. The amounts paid to an auditor for an audit of financial statements of the entity.
B. The amounts payable to an auditor for a review of financial statements of the entity.
C. The amounts paid to assurors of corporate sustainability reports.
D. The nature of each of the non-audit services provided by the auditor.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

58. An implication of the fact that traditional financial accounting is based on a model that emphasises property rights is that: 

A. fair values become of critical importance.
B. such rights are recognised as intangible assets.
C. many social costs are ignored.
D. these financial reports are always prepared on a '

and fair' basis.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Learning Objective: 16-11 Appreciate that while 'profit or loss' does provide an indication of the financial performance of an organisation, it does not reveal much about other aspects of performance, such as the social and environmental performance of a reporting entity.
Section: Profit as a guide to an organisation's success
Topic: Profit as a guide to an organisation's success
 

59. Which of the following statements is not in accordance with AASB 101 Presentation of Financial Statements with respect to the statement of profit or loss and other comprehensive income? 

A. All items of income and expense recognised in a period are to be presented in a single statement of profit or loss and other comprehensive income.
B. All items of income and expense recognised in a period are permitted to be presented in two statements: 1) a separate income statement and 2) a statement beginning with profit or loss and displaying components of other comprehensive income.
C. An entity shall present an analysis of expenses in profit or loss using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant.
D. Components of other comprehensive income include gain on sale of property plant and equipment.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

60. Which of the following statements is not in accordance with AASB 101 Presentation of Financial Statements with respect to the statement of profit or loss and other comprehensive income? 

A. An entity shall not present any items of income or expense as extraordinary items, in the statement of profit or loss and other comprehensive income or the separate income statement (if presented), or in the notes.
B. An entity shall disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in the statement of profit or loss and other comprehensive income or in the notes.
C. As a minimum, the statement of profit or loss and other comprehensive income shall include line items of each component of other comprehensive income classified by nature.
D. An entity shall recognise all items of income and expense in a period in profit or loss unless an Australian Accounting Standard requires or permits otherwise, for example, the financial effect of changes in accounting estimates.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Learning Objective: 16-05 Understand how we account for changes in accounting estimates.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

61. Which of the following items is not an example of items reportable under other comprehensive income? 

A. Changes in revaluation surplus.
B. Actuarial gains and losses on defined contribution plans.
C. Gains and losses arising from translating the financial statements of a foreign operation.
D. The effective portion of gains and losses on hedging instruments in a cash flow hedge.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

62. Following are the items of income and expense recognised during the period by Gordon Field Ltd:

Which of the following combinations identify all items permitted in AASB 101 Presentation of Financial Statements to be presented under other comprehensive income?

 
A. I, II, IV, V and VI
B. I, II, IV, and V
C. II, III, V and VI
D. II, V and VI

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

63. Following are the items of income and expense recognised during the period by Murray Ltd:
 

Which of the following combinations identify all items permitted in AASB 101 Presentation of Financial Statements to be presented under other comprehensive income?

 
A. I, II, V and VI
B. II, III, VI and V
C. I, III, and VI
D. III, IV and V

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

64. Which of the following items does not give rise to a reclassification adjustment from components of other comprehensive income to profit and loss? 

A. Disposal of a foreign operation.
B. Derecognition of revalued assets.
C. Sale of a foreign subsidiary.
D. Derecognition of available-for-sale financial assets.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

65. Amounts reclassified to profit or loss in the current period that were recognised in 'other comprehensive income' in the current or previous periods are known as a: 

A. disposal of revenue or expenses.
B. derecognition of transactions.
C. reclassification adjustment.
D. reprocessed transaction.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-03 Understand what 'other comprehensive income' comprises and how it shall be disclosed within a statement of profit or loss and other comprehensive income.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

66. When initial application of an Australian Accounting Standard has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose: 

A. the title of the Australian Accounting Standard.
B. the nature of the change in accounting policy.
C. when applicable, a description of the transitional provisions.
D. all of the given answers.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-09 Understand what constitutes a 'change in accounting policy'.
Learning Objective: 16-10 Understand how to disclose information about changes in accounting policies.
Section: Changes in accounting policy
Topic: Changes in accounting policy
 

67. Changes in an entity's equity between the beginning and the end of the reporting period reflect the increase or decrease in its: 

A. liabilities during the period.
B. net profit for the period.
C. assets during the period.
D. net assets during the period.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Section: Statement of changes in equity
Topic: Statement of changes in equity
 

68. Changes in accounting estimates include: 

A. changes in expected warranty costs on goods sold under guarantee.
B. changes in the expected pattern of consumption of economic benefits of depreciable assets.
C. changes in the provision for inventory obsolescence.
D. all of the given answers.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Learning Objective: 16-04 Understand that a reporting entity is required to produce both a statement of profit or loss and other comprehensive income, and a statement of changes in equity, and appreciate that both of these statements need to be read in order to appreciate more fully the financial performance of a reporting entity.
Learning Objective: 16-05 Understand how we account for changes in accounting estimates.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

69. McKay Ltd purchased 1000 units of inventory costing $40 per unit at the beginning of the period, and 100 units of inventory later in the period at $90 per unit. The ending inventory for the period contained 50 units. The selling price per unit was $200 and remained constant over the period. McKay Ltd decided to adopt FIFO for inventory valuation purposes and provided the following data for the period ended 30 June: office staff salaries $6000; delivery salaries $4500; depreciation of office equipment $400; depreciation of delivery truck $200; inventories purchased for the period, 10 of the $40 units and 3 of the $90 units; sales of 10 units at a $200 per unit selling price.

Which of the following would be line items in the statement of profit or loss and other comprehensive income for the period if they present their expenses by nature?

A. Employee benefits costs $10 500
B. Administrative expenses $6400
C. Cost of sales $400
D. Distribution costs $4700

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

70. McKay Ltd purchased 1000 units of inventory costing $40 per unit at the beginning of the period, and 100 units of inventory later in the period at $90 per unit. The ending inventory for the period contained 50 units. The selling price per unit was $200 and remained constant over the period. McKay Ltd decided to adopt FIFO for inventory valuation purposes and provided the following data for the period ended 30 June: office staff salaries $6000; delivery salaries $4500; depreciation of office equipment $400; depreciation of delivery truck $200; inventories purchased for the period, 10 of the $40 units and 3 of the $90 units; sales of 10 units at a $200 per unit selling price.

Which of the following would be line items in the statement of profit or loss and other comprehensive income for the period if they present their expenses by function?

 A. Employee benefits costs $10 500
B. Depreciation and amortisation expense $600
C. Cost of sales $400
D. Distribution costs $200

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

71. Hunter Ltd has purchased a set of wine-tasting glasses. They expect to use them extensively, and will dispose of them within 12 months. The glasses cost $130. What would be included in the journal entry to record the purchase of the wine-tasting glasses set? 

A. DR Wine-tasting glasses (asset) 130
B. DR Wine-tasting glasses (expense) 130
C. DR Loss on wine-tasting glasses 130
D. CR Gain on sale of glasses 130

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

72. Hunter Ltd has purchased a set of wine-tasting glasses, which are expected to have a useful life of three years. The glasses cost $130. What would be included in the journal entry to record the purchase of the wine-tasting glasses set? 

A. DR Wine-tasting glasses (asset) 130
B. DR Wine-tasting glasses (expense) 130
C. DR Loss on wine-tasting glasses 130
D. DR Winery (asset) 130

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-02 Appreciate that the determination of the profits for a given period is heavily dependent upon both professional judgement and on the particular accounting measurement model that has been adopted.
Section: Introduction
Topic: Introduction to the statement of profit or loss and other comprehensive income
 

73. The definition of expenses indicates that the decrease in economic benefits during the accounting period will be associated with either an outflow or depletion of assets or incurrence of liabilities that results in a decrease in equity. Which of the following describes this kind of view that is embodied in the definition? 

A. A statement of financial position view.
B. A profit or loss statement view.
C. A cash flow statement view.
D. A profit or loss and other comprehensive income statement view.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 16-01 Understand how profit is calculated and how the profit of an organisation should be disclosed in the financial statements of a reporting entity.
Section: Profit or loss disclosure
Topic: Profit or loss disclosure
 

Chapter 16 Testbank Summary