Profit Loss and Equity Verified Test Bank Chapter 6 - Accounting for Decisions 7e | Test Bank by Jacqueline Birt by Jacqueline Birt. DOCX document preview.
Testbank
to accompany
Accounting: business reporting for decision making
7th edition
by
Birt et al.
Not for distribution. Instructors may assign selected questions in their LMS
© John Wiley & Sons Australia, Ltd 2020
Chapter 6: Statement of profit or loss and statement of changes in equity
Learning objectives
1. Explain the purpose and importance of measuring financial performance
Q1, Q2, Q3, Q4, Q46, Q47
2. Explain the reporting period concept and the difference between accrual accounting and cash accounting
Q5, Q6, Q7, Q8, Q9, Q10, Q48, Q49
3. Outline the effect that accounting policy choices, estimates and judgements can have on the financial statements
Q11, Q12, Q13, Q14, Q50, Q51
4. Describe the measurement of financial performance
Q52
5. Discuss the definition and classification of income
Q15, Q16, Q17, Q53
6. Discuss the definition and classification of expenses
Q18, Q19, Q20, Q21, Q22, Q54, Q55
7. Apply the recognition criteria to income and expenses
Q23, Q24, Q25, Q56, Q57
8. Identify presentation formats for the statement of profit or loss
Q26, Q27, Q28, Q29, Q30, Q31, Q58, Q59
9. Differentiate between alternative financial performance measures
Q32, Q33, Q34, Q35, Q36, Q37, Q38, Q60, Q61
10. Explain the nature of the statement of comprehensive income and statement of changes in equity
Q39, Q40, Q41, Q42, Q62, Q63
11. Explain the relationship between the statement of profit or loss, the statement of financial position, the statement of comprehensive income and the statement of changes in equity
Q43, Q44, Q45, Q64, Q65
Multiple-choice questions
- The statement of profit or loss:
a. reports the assets, liabilities and equity at a specific point in time.
b. summarises the change in retained earnings over a specific period of time.
c. presents the income and expenses of an entity for a specific period of time.
d. reports the changes in assets, liabilities and equity over a period of time.
Learning objective 6.1 ~ Explain the purpose and importance of measuring financial performance
- Under the current accounting standards, which of the following items is not included in the measurement of profit in the statement of profit or loss?
a. Loss on the disposal of non-current assets
b. Gain on asset revaluation
c. Cost of sales
d. Dividends received
Learning objective 6.1 ~ Explain the purpose and importance of measuring financial performance
- What is equity decreased by?
a. Assets
b. Liabilities
c. Expenses
d. Income
Learning objective 6.1 ~ Explain the purpose and importance of measuring financial performance
- In triple bottom line reporting, what do entities report on?
a. Their social performance
b. Their financial performance
c. Their environmental performance
d. All of the above
Learning objective 6.1 ~ Explain the purpose and importance of measuring financial performance
- Preparing financial statements on the basis of recognising transactions when they occur is referred to as:
a. accrual accounting.
b. management accounting.
c. cash accounting.
d. financial accounting.
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- What effect will a transaction recording accrued income have?
a. It will increase cash and decrease sales income
b. It will increase accounts receivable and sales income
c. It will increase accounts receivable and accounts payable
d. It will have no effect on total assets
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Cars Cars Cars Ltd serviced a motor vehicle on 30 April and issued the invoice to the owner when the motor vehicle was picked up at the end of the day. The owner sends a cheque to Cars Cars Cars Ltd on 2 May which is received and banked by Cars Cars Cars Ltd on 6 May. On what date will Cars Cars Cars Ltd recognise income?
a. 2nd May
b. 6th May
c. 30th April
d. 31st May
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Office supplies are purchased in bulk and recorded as an asset. They are used by staff on a daily basis. An expense recognising the use of the office supplies will normally be recorded:
a. when the supplies are purchased.
b. when supplies are paid for.
c. at the end of the accounting period when an end-of-period adjustment is prepared for supplies used.
d. on a daily basis when supplies are taken from storage.
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Fairstuart College pays wages on a fortnightly basis and the next payroll date is 8 September. If wages expense is not accrued at 31 August, what will the effect on the financial statements for August be?
a. An understatement of liabilities and an overstatement of profit
b. An overstatement of liabilities and an understatement of profit
c. An overstatement of assets and profit
d. An understatement of assets and profit
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Gas Supply Ltd’s financial year ends on 30 June. On 1 May it pays a 12-month insurance premium of $24 000. Under the accrual system of accounting, how much of the premium will be recognised as an expense for the current year ended 30 June and how much will be treated as an asset (prepaid insurance)?
a. $12 000 expense and $12 000 prepaid insurance.
b. $6 000 expense and $18 000 prepaid insurance.
c. $4 000 expense and $20 000 prepaid insurance.
d. $20 000 expense and $4 000 prepaid insurance.
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Equipment is purchased for $50 000. It is to be depreciated on a diminishing balance basis using a rate of 10%. How much will be charged for depreciation expense for year 3 of the machine’s life?
a. $4050
b. $5000
c. $4500
d. $15 000
Feedback: Diminishing balance depreciation = the carrying value of the asset x rate.
Year | Depreciation amount | Carrying amount |
$50 000 | ||
1 | $50 000 x 10% = $5000 | $45 000 |
2 | $45 000 x 10% = $4500 | $40 500 |
3 | $40 500 x 10% = $4050 | $36 450 |
Learning objective 6.3 ~ Outline the effect that accounting policy choices, estimates and judgements can have on the financial statements
- Machinery is purchased for $140 000. It is estimated that it has a useful life of 5 years and a residual value of $20 000. Using the straight-line method, calculate the amount of annual depreciation to be charged.
a. $12 000
b. $24 000
c. $28 000
d. $14 000
Feedback: Annual depreciation expense = (cost of asset – expected residual value)/expected useful life = ($140 000 – $20 000)/5 = $24 000.
Learning objective 6.3 ~ Outline the effect that accounting policy choices, estimates and judgements can have on the financial statements
- Machinery is purchased for $140 000. It is estimated that it has a useful life of 5 years and a residual value of $20 000. Using the straight-line method, the balance in the accumulated depreciation account at the end of the third year of the machine’s useful life is:
a. $140 000
b. $68 000
c. $24 000
d. $72 000
Feedback: Annual depreciation expense = (cost of asset – expected residual value)/expected useful life = ($140 000 – $20 000)/5 = $24 000. Accumulated depreciation end of year 1 = $24 000, year 2 = $48 000 and end of year 3 = $72 000.
Learning objective 6.3 ~ Outline the effect that accounting policy choices, estimates and judgements can have on the financial statements
- Machinery is purchased for $80 000. It is estimated that it has a useful life of 5 years and a residual value of $5000. Using the straight-line method, calculate the carrying value of the machine at the end of the fourth year of the machine’s useful life.
a. $15 000
b. $80 000
c. $20 000
d. $60 000
Feedback: Annual depreciation expense = (cost of asset – expected residual value)/expected useful life = ($80 000 – $5000)/5 = $15 000. Accumulated depreciation end of year 4 = $15 000 x 4 = $60 000. Carrying amount end of year 4 = asset $80 000 less accumulated depreciation $60 000 = $20 000 (one more year of depreciation of $15 000 would leave a carrying amount of $15 000, which is the expected sale amount).
Learning objective 6.3 ~ Outline the effect that accounting policy choices, estimates and judgements can have on the financial statements
- Which of the following will be classified as income?
a. Interest received
b. Fees charged for services provided
c. Gain on sale of equipment
d. All of the above
Learning objective 6.5 ~ Discuss the definition and classification of income
- An owner contributes $88 000 to expand the business. What effect would this transaction have on the business?
a. Increase income
b. Increase expenses
c. Increase capital
d. Decrease income
Learning objective 6.5 ~ Discuss the definition and classification of income
- Which of these would not be recorded as increasing income on 13 January?
a. Cash sale on 13 January
b. Cash sale on 31 January
c. Credit sale on 13 January
d. Sale where $2000 is paid on 13 January and the balance of $3000 is paid on 5 February
Learning objective 6.5 ~ Discuss the definition and classification of income
- How would expenses classified by function be categorised?
a. As selling and distribution expenses
b. As marketing expenses
c. As borrowing expenses
d. All of the above
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- For a retail entity, how is cost of sales calculated?
a. Ending inventory + purchases – beginning inventory
b. Purchases – ending inventory – beginning inventory
c. Beginning inventory + purchases – ending inventory
d. Beginning inventory – purchases + ending inventory
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- For the month of October: total sales = $125 000, total purchases = $80 000, beginning inventory = $32 000 and ending inventory = $44 000. What is the cost of sales for October?
a. $8000
b. $68 000
c. $125 000
d. $45 000
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- To comply with accounting standards, how are reporting entities required to classify expenses?
a. By function only
b. In no particular way
c. Without aggregation
d. By nature or function
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- Which of the following expenses must be disclosed by a reporting entity?
a. Amortisation expense
b. Lease costs
c. Auditors’ fees
d. All of the above
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- Of the following transactions, which should be recorded as income?
a. Harry’s Hats sold inventory on credit for $3000.
b. Chandler & Co Plumbing’s owner contributes $10 000 of personal funds to the business.
c. M. Witham borrowed $80 000 from the bank.
d. T. O’Toole pays $5500 for goods sold to her on credit last month.
Learning objective 6.7 ~ Apply the recognition criteria to income and expenses
- Which of the following must exist before income can be recognised?
a. Income recognition must occur at the same time as the recognition of increases in assets or reductions in liabilities.
b. The increase in future economic benefits related to an increase in an asset or a decrease in a liability must have arisen.
c. The increase in future economic benefits must be able to be measured reliably.
d. All options must exist.
Learning objective 6.7 ~ Apply the recognition criteria to income and expenses
- For a business selling magazine subscriptions and preparing financial reports on a monthly basis, when should it recognise the revenue from the sale of annual subscriptions?
a. When a customer pays the annual subscription.
b. Monthly, on a straight-line basis over the 12-month subscription period.
c. Evenly, from the month of payment up to the end of the current financial year.
d. When the annual subscription period expires.
Learning objective 6.7 ~ Apply the recognition criteria to income and expenses
- Which of the following must be considered when determining whether an item of expenditure is material?
a. Whether a related asset has been impaired
b. The size and/or nature of the expense
c. Whether its non-disclosure could have an impact on users’ decision making
d. All of the above options must be considered
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- For a retailing or manufacturing entity, gross profit is equal to sales less:
a. purchases.
b. all expenses.
c. cost of sales.
d. all expenses other than cost of sales.
Learning objective 6.8 ~ Identify presentation formats for the income of profit or loss
- If an entity has discontinued part of its operations during the financial year, the entity must:
a. not show the profit or loss from the discontinued operation on the financial statements for the year.
b. show only the profit or loss from the discontinued operation on the financial statements for the year.
c. show the profit or loss from the discontinued operation separately to the profit or loss from continued operations.
d. include the profit or loss from the discontinued operation as part of continued operations.
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- According to the accounting standard governing the presentation of the statement of profit or loss, which of the following items is not required to be presented on the face of the statement for a retail entity?
a. cost of sales.
b. finance costs.
c. tax expense.
d. depreciation.
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- Which of the following would not be classified as an administrative expense?
a. Salaries and wages of sales staff
b. Stationery
c. Depreciation of office equipment
d. Rates
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- Which of the following statements relating to the presentation of the statement of profit or loss by non-reporting entities is not true?
a. There is no prescribed format.
b. The statement of profit or loss must be prepared in accordance with the AASB accounting standards.
c. The purpose of the statement of profit or loss is to report the profit or loss for the entity for the reporting period.
d. Income is usually more detailed and less aggregated than that prepared for a reporting entity.
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- Which of the following statements concerning a company’s income tax expense is correct?
a. Income tax expense is calculated as pre-tax accounting profit multiplied by the company tax rate.
b. Income tax expense will only rarely differ from the amount of tax paid to the ATO.
c. Income tax expense often differs from the amount of tax paid to the ATO.
d. Income tax expense will be the same as the amount of tax paid to the ATO.
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- The profit measure representing the raw operating earnings of an entity is:
a. earnings before interest, taxation, depreciation and amortisation (EBITDA).
b. profit after taxation.
c. earnings before interest and taxation (EBIT).
d. gross profit.
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- If profit after tax and interest is $400 000, interest expense is $50 000 and taxation expense is $84 000, what is profit before interest and tax?
a. $450 000
b. $291 000
c. $534 000
d. $484 000
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- Which of these is the best measure of an entity’s profitability?
a. Pro forma earnings
b. Profit before tax
c. Profit post material items
d. There is no one ‘best’ profit measure; it depends on the requirements of the user
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- In which of the measures listed below is a financial analyst more interested?
a. Post-tax profit as it reflects outcomes solely controlled by the entity
b. Post-tax profit as a means of assessing profitability
c. Pre-tax profit as it reflects the outcomes of investing activities
d. Pre-tax profit as it reflects the taxation variable
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- If sales revenue is $600 000 and cost of sales is $450 000, what is the gross profit margin?
a. 67%
b. 75%
c. 25%
d. 33%
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- A business has sales of $455 000, purchases of $225 000, a beginning inventory of $150 000 and an ending inventory of $118 000. Calculate gross profit.
a. $257 000
b. $75 000
c. $230 000
d. $198 000
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- Which of the following is not disclosed in the statement of comprehensive income?
a. Transactions with owners as owners
b. Income and expenses recognised in the statement of profit or loss
c. Income and expenses recognised directly in equity
d. All of the above options are disclosed in the statement of comprehensive income
Learning objective 6.10 ~ Explain the nature of the statement of comprehensive income and statement of changes in equity
- Which of the following are included in a statement of changes in equity?
a. All changes in equity arising from equity contributions and dividends paid
b. All changes in equity arising from shares purchased
c. All changes in equity arising separately from non-owner changes in equity (e.g. profit)
d. All options are included in a statement of changes in equity
Learning objective 6.10 ~ Explain the nature of the statement of comprehensive income and statement of changes in equity
- For the financial year ending 30 June, Daily Ltd had a beginning balance for equity of $180 000 and an ending balance of $175 000. During the year, the owner withdrew $120 000 for private use. How much profit did Daily Ltd earn during the year?
a. $60 000
b. $5000
c. $115 000
d. $125 000
Learning objective 6.10 ~ Explain the nature of the statement of comprehensive income and statement of changes in equity
- How does the statement of changes in equity show closing capital?
a. Beginning capital + capital contribution + profit – drawings
b. Beginning capital + capital contribution – profit – drawings
c. Beginning capital + capital contribution + profit + drawings
d. Beginning capital – capital contribution + profit – drawings
Learning objective 6.10 ~ Explain the nature of the statement of comprehensive income and statement of changes in equity
- Which of the following is an example of other comprehensive income?
a. Dividends received
b. Sales income
c. Royalties
d. Revaluations of assets recorded directly in the revaluation surplus account
Learning objective 6.11 ~ Explain the relationship between the statement of profit or loss, the statement of financial position, the statement of comprehensive income and the statement of changes in equity
- When is the statement of profit or loss normally completed?
a. At any time — the order of completion for these two statements is irrelevant
b. At the same time as the statement of financial position
c. Before the statement of financial position
d. After the statement of financial position
Learning objective 6.11 ~ Explain the relationship between the statement of profit or loss, the statement of financial position, the statement of comprehensive income and the statement of changes in equity
- Calculator Pty Ltd has a beginning balance of equity of $82 000; an ending balance of $37 000; and a loss for the period of $33 000. Calculate how much the owner of Calculator Pty Ltd withdrew during the period for personal use.
a. $12 000
b. $45 000
c. $49 000
d. $78 000
Learning objective 6.11 ~ Explain the relationship between the statement of profit or loss, the statement of financial position, the statement of comprehensive income and the statement of changes in equity
Fill in the blanks
- The statement of profit or loss measures an entity’s financial _________.
a. performance
Learning objective 6.1 ~ Explain the purpose and the importance of measuring financial performance
- An entity’s profit or loss is measured over a(n) _________ period of time.
a. specified
Learning objective 6.1 ~ Explain the purpose and the importance of measuring financial performance
- Accrued income is recognised _________ the cash has been received.
a. before
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Two expenses that are recognised under accrual accounting but which do not involve any cash flows _________ and _________.
a. depreciation, amortisation
Learning objective 6.2 ~ Explain the reporting period concept and the difference between accrual accounting and cash accounting
- Managers’ use of accounting discretion allowable under accounting policy choices and estimates to portray a desired level of profit in a particular reporting period is referred to as ___________________ management.
- earnings
Learning objective 6.3 ~ Outline the effect of accounting policy choices, estimates and judgements can have on the financial statements
- The ______________ of _____________ depreciation method measures depreciation based on an asset’s activity or output relative to the total activity or output expected.
a. units, production
Learning objective 6.3 ~ Outline the effect of accounting policy choices, estimates and judgements can have on the financial statements
- For a transaction to be recognised as income in the statement of profit or loss the elements must satisfy both the ________________ and ________________criteria as specified in the revised Conceptual Framework.
a. definition, recognition
Learning objective 6.4 ~ Describe the measurement of financial performance
- Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims, is the revised Framework’s definition of ____________________.
a. income
Learning objective 6.5 ~ Discuss the definition and classification of income
- The main expense incurred by a retail business is __________ of __________.
a. cost, sales
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- When an asset’s __________ amount is lower than its carrying amount, the asset is deemed to have been __________.
a. recoverable, impaired
Learning objective 6.6 ~ Discuss the definition and classification of expenses
- A(n) ______________ expense is recognised when the value of an asset is determined to be lower than its carrying amount.
a. impairment
Learning objective 6.7 ~ Apply the recognition criteria to income and expenses
- If an item meets the definition of an expense, to be reported in the statement of profit or loss it must also meet the recognition criteria of being probable that the decrease in economic benefits has arisen and that the amount is able to be reliably _______________.
a. measured
Learning objective 6.7 ~ Apply the recognition criteria to income and expenses
- Gains from the disposal of non-current assets are recognised as ____________ income.
a. other
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- An expense is considered to be __________________ if its non-disclosure could affect decisions made by the users of the statement of profit or loss.
a. material
Learning objective 6.8 ~ Identify presentation formats for the statement of profit or loss
- The relevant profit measure that isolates the returns associated with investment decisions is ______________ ______________ ______________ and ______________.
a. earnings before interest, taxation
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- Profit performance measures can be referred to on a pre- and/or post-___________ basis.
a. tax
Learning objective 6.9 ~ Differentiate between alternative financial performance measures
- The accounting standards require a statement of changes in ______________ to be prepared by all reporting entities.
a. equity
Learning objective 6.10 ~ Explain the nature of the statement of comprehensive income and statement of changes in equity
- Other ______________ income represents all changes in equity other than profit or loss, and transactions associated with owners such as dividends and capital contributions.
a. comprehensive
Learning objective 6.10 ~ Explain the nature of the statement of comprehensive income and statement of changes in equity
- An entity’s ___________________ profits can also be referred to as retained earnings, retained profits or accumulated profits.
a. undistributed
Learning objective 6.11 ~ Explain the relationship between the statement of profit or loss, the statement of financial position, the statement of comprehensive income and the statement of changes in equity
- A loss reported on the statement of profit or loss decreases the __________ section of the statement of financial position.
a. equity
Learning objective 6.11 ~ Explain the relationship between the statement of profit or loss, the statement of financial position, the statement of comprehensive income and the statement of changes in equity
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Accounting for Decisions 7e | Test Bank by Jacqueline Birt
By Jacqueline Birt