Regulation & Framework | Ch10 – Test Bank – 10e

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Testbank

to accompany

Financial accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 10: Regulation and the Conceptual Framework

Multiple-choice questions

1. GAAP stands for:

a. government approved accounting policy.

b. generally accepted accounting principles.

c. generally accepted accounting practices.

d. general auditing and accountancy practices.

Correct answer: b

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

2. Which of the following have been a significant influence on the development of modern accounting principles?

1. Global warming
2. Globalisation
3. Series of high-profile company failures
4. The rise of the multinational corporation

a. II, III and IV

b. I, II and III only

c. II and IV only

d. III and IV only

Correct answer: a

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

3. Which is the correct historical order for the development of these accounting standards?

a. AASB series, AAS series, SACs

b. SACs, AASB series, AAS series

c. AAS series, AASB series, SACs

d. AAS series, SACs, AASB series

Correct answer: c

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

4. In 2009 which group was set-up in the Asia–Oceania region as part of the establishment of global accounting standards?

a. Group of 100

b. Asian-Oceanian Audit-Setting Board (AOASB)

c. International Accounting Standards Board (IASB)

d. Asian-Oceanian Standard-Setting Group (AOSSG)

Correct answer: d

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

5. In relation to the conceptual framework, SAC stands for:

a. Sensible Accounting Constructs.

b. Standard Auditing Controls.

c. Statements from Accounting Committees.

d. Statements of Accounting Concepts.

Correct answer: d

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

6. Which regulatory authority acts as overseer and advisor to the AASB?

a. Australian Accounting Research Foundation.

b. Financial Reporting Council.

c. The Accounting Professional and Ethical Standards Board.

d. Australian Securities and Investments Commission.

Correct answer: b

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

7. Which of these Australian accounting standards has no IASB equivalent?

a. AASB 1031 Materiality

b. AASB 110 Events After the Reporting Period

c. AASB 136 Impairment of Assets

d. AASB101 Presentation of Financial Statements

Correct answer: a

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

8. Which is the following statements concerning the Australian Securities and Investments Commission (ASIC) is incorrect?

a. ASIC acts as an overseer and advisory body to the accounting standard setters.

b. ASIC is responsible for administering company law throughout Australia.

c. ASIC is required to provide information about companies to the public as soon as is practicable.

d. One of ASIC’s functions is to monitor and promote market integrity and consumer protection in regards to the Australian financial system.

Correct answer: a

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

9. The major reason for the existence of generally accepted accounting principles is to:

a. limit the amount of professional judgement required by accountants in the preparation of financial reports.

b. increase business disclosures.

c. improve the standard of accounting information for decision-making.

d. make accountants legally accountable for material errors.

Correct answer: c

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

10. The AASB has developed a set of accounting standards which, when applied, ,allow entities to assert that their financial statements comply with IASB standards. Which of the following is a way in which Australian standards remain different to international standards?

1. The AASB has continued to issue accounting standards where no IASB equivalent exists, e.g. AASB 1031 Materiality.
2. Some Australian standards require more information to be disclosed than the equivalent IASB standard.
3. Australian standards contain, where applicable, extra paragraphs relevant to entities in the public and not-for-profit sectors.

a. III only

b. II and III only

c. I and III only

d. I, II and III

Correct answer: d

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

11. The body in Australia which issues legally enforceable accounting standards that apply to companies is:

a. CPA Australia.

b. Financial Reporting Council.

c. Australian Accounting Standards Board.

d. Australian Securities and Investments Commission.

Correct answer: c

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

12. Which body currently has the role of supervising real-time trading on the Australian Stock Exchange and enforcing laws against misconduct?

a. The Financial Reporting Council

b. The Australian Securities Exchange

c. The Australian Accounting Standards Board

d. The Australian Securities and Investments Commission

Correct answer: d

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

13. Which organisation is concerned with improving disclosure in financial reports of companies listed on the various exchanges throughout Australia?

a. Australian Securities Exchange

b. Australian Stock Exchange

c. Accounting Standards Board

d. Australian Companies Exchange

Correct answer: a

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

14. Which of the following statements concerning accounting standards is incorrect?

a. Accounting standards only apply to companies.

b. Accounting standards guide the preparation of reliable financial reports.

c. Accounting standards evolve with changes in business requirements.

d. Accounting standards improve the comparability of financial reports.

Correct answer: a

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

15. The mandate of the IFRS Interpretations Committee is to:

a. provide authoritative guidance on accounting issues.

b. review on a timely basis widespread accounting issues that have arisen within the context of current IFRS.

c. both a. and b.

d. option b. only

Correct answer: c

Learning objective 10.1 ~ describe the development of accounting regulation in Australia resulting in the issue of accounting standards.

16. The primary reason for developing a conceptual framework was to:

a. assist in the development of the accounting standards.

b. reduce the number of accounting standards needed.

c. provide an alternative view to the accounting standards.

d. enable regulators to develop accounting standards that are consistent and logically formulated.

Correct answer: d

Learning objective 10.2 ~ explain the nature of the Conceptual Framework for Financial Reporting, and the history of the development of the framework.

17. The accounting standard setting body in the USA is the:

a. IASB.

b. AASB.

c. FASB.

d. USAASB.

Correct answer: c

Learning objective 10.2 ~ explain the nature of the Conceptual Framework for Financial Reporting, and the history of the development of the framework.

18. In which year did Australia adopt the IASB’s international accounting standards?

a. 2001

b. 2005

c. 2009

d. 2015

Correct answer: b

Learning objective 10.2 ~ explain the nature of the Conceptual Framework for Financial Reporting, and the history of the development of the framework.

19. Under SAC 1, which entity is the least likely to have users dependent on general-purpose financial reports?

a. A company which is listed on the stock exchange.

b. A small proprietary company whose shareholders also run the business.

c. A company with a large number of shareholders.

d. A company which issues debentures to the public.

Correct answer: b

Learning objective 10.3 ~ describe the nature of a reporting entity under the Conceptual Framework.

20. An entity where it is reasonable to expect the existence of users who depend on general-purpose financial reports for information to enable them to make and evaluate economic decisions is known as a :

a. public entity.

b. company.

c. financial entity.

d. reporting entity.

Correct answer: d

Learning objective 10.3 ~ describe the nature of a reporting entity under the Conceptual Framework.

21. Which of these is not an indicator listed in SAC 1 to help assess the existence of a reporting entity?

a. Revenue greater than $2 million.

b. Control over large amounts of resources and/or a large amount of borrowings.

c. A high degree of separation between management and owners.

d. Economic or political influence.

Correct answer: a

Learning objective 10.3 ~ describe the nature of a reporting entity under the Conceptual Framework.

22. Whist judgement is required to distinguish between a reporting entity and a non-reporting entity, it is expected that a reporting entity will include:

1. government departments
2. small-medium proprietary companies
3. statutory authorities
4. public companies

a. I and III only

b. II, III and IV

c. I, III and IV

d. II and IV

Correct answer: c

Learning objective 10.3 ~ describe the nature of a reporting entity under the Conceptual Framework.

23. Which of the following statements about the objective of general purpose financial reports (GPFRs), as contained in the IASB’s Conceptual Framework, is correct?

a. GPFRs will generally satisfy user’s needs for information.

b. The IASB’s Conceptual Framework deliberately emphasises sustainability as an objective of GPFRs.

c. The entity perspective has been adopted when defining the objectives of GPFRs.

d. The primary users of GPFRs are seen as being a diverse group including shareholders, creditors, regulators, members of the public, etc.

Correct answer: c

Learning objective 10.4 ~ describe the objectives of general purpose financial reporting under the Conceptual Framework.

24. Which of the following statements about general purpose financial reports (GPFRs) is correct?

a. Neither the IASB’s Conceptual Framework or SAC 2 contain a definition of GPFRs.

b. The IASB’s Conceptual Framework and SAC2 have the same definition of GPFRs.

c. The IASB’s Conceptual Framework and SAC 4 have different definitions of GPFRs.

d. There is no clear definition of GPFRs in the IASB’s Conceptual Framework.

Correct answer: d

Learning objective 10.4 ~ describe the objectives of general purpose financial reporting under the Conceptual Framework.

25. As identified by the IASB’s Conceptual Framework, which of the following groups are the prime users of financial reports?

a. Investors and their advisors

b. Governments, regulatory bodies and parties performing an overseeing function

c. Existing and potential investors and creditors

d. The public and consumers of goods and services

Correct answer: c

Learning objective 10.4 ~ describe the objectives of general purpose financial reporting under the Conceptual Framework.

26. In the current Conceptual Framework the fundamental qualitative characteristic of faithful representation requires information to be:

a. neutral: without bias

b. complete: includes all necessary descriptions and explanations

c. free from material error.

d. all of these options.

Correct answer: d

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

27. The Conceptual Framework states that an important implication of the qualitative characteristic of comparability is that:

a. it will allow different users of the information to come to a consensus.

b. it will be used to predict outcomes of past, present or future events.

c. users will be informed of the accounting policies used in the preparation of the financial reports, plus any changes to those policies and the effects of those changes.

d. if there is a choice of accounting methods one method should be chosen and then applied throughout the life of the entity.

Correct answer: c

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

28. Under the Conceptual Framework, the qualitative characteristic where information is available and capable of influencing decisions sooner rather than later is:

a. timeliness.

b. relevant.

c. comparable.

d. material.

Correct answer: a

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

29. Materiality is an aspect of the fundamental characteristic of relevance and:

a. means exercising due care and caution.

b. means attention to detail.

c. is linked to the qualitative characteristic of faithful representation.

d. provides a cut-off point in determining whether information is relevant.

Correct answer: d

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

30. Which of the following is not a cost of financial reporting?

a. Cost of preparing the annual report.

b. Cost of complying with accounting standards.

c. Cost of preparing the organisation’s annual budgets for all departments.

d. Loss of competitive position as a result of the disclosure of financial information outside the business.

Correct answer: c

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

31. Changing from straight line to reducing balance depreciation in one year, then back to straight line in the next, and then back again to reducing balance, is a violation of which qualitative characteristic?

a. comparability.

b. relevance.

c. reliability.

d. timeliness.

Correct answer: a

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

32. Accountants must use when deciding if an item is material.

a. a set of rules.

b. a text book.

c. professional judgement.

d. the code of conduct.

Correct answer: c

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

33. Which statement relating to comparability is correct?

a. It means a company can never change an accounting method.

b. It means all firms in the same industry should use the same accounting methods.

c. It means the same depreciation method must be employed for all classes of non-current assets.

d. It requires an entity, as far as possible, to use the same accounting method from year to year.

Correct answer: d

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

34. The test to determine whether information which is otherwise relevant and faithfully represented, can be omitted, misstated or not disclosed separately without adversely affecting economic decision-making, is known as:

a. understandability.

b. materiality.

c. consistency.

d. comparability.

Correct answer: b

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

35. Accounting information that is representative of the real-world is likely to meet the Conceptual Framework’s criteria of:

a. relevance.

b. comparability.

c. understandability.

d. faithful representation.

Correct answer: d

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

36. What are the enhancing qualitative characteristics for financial reporting contained in the Conceptual Framework?

a. I, III, VII and VIII

b. II, IV, VI and VIII

c. IV, V, VI and VII

d. I, III, V and VII

Correct answer: a

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

37. Which statement relating to the Conceptual Framework’s concept of understandability is incorrect?

a. Information about complex matters should be included in the reports if it is considered relevant to decision making.

b. It is expected that users of financial statements will be willing to study the information with reasonable diligence.

c. The financial reports are required to be simple to read and understand.

d. It is assumed that readers of financial reports have a reasonable knowledge of business and economic activities.

Correct answer: c

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

38. According to the Conceptual Framework information that is free from material error and bias has greater:

a. relevance.

b. faithful representation.

c. decision making usefulness.

d. verifiability.

Correct answer: b

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

39. Which of the following statements are incorrect about the Conceptual Framework’s qualitative characteristic of verifiability?

a. Direct verification is through direct observation such as counting cash.

b. It means that different knowledgeable and independent observers will be able to reach complete agreement that the information is faithfully presented.

c. Indirect verification requires checking the inputs of a model, formula or technique and recalculating the outputs using the same methodology.

d. A consequence is that it may not be possible to verify budgeted information until a future period of time.

Correct answer: b

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

40. Which of the following pairs of qualitative characteristics are most likely to be in conflict?

a. Comparability and verifiability

b. Relevance and comparability

c. Understandability and timeliness

d. Relevance and faithful representation

Correct answer: d

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

41. In the Conceptual Framework, materiality is an aspect of:

a. relevance.

b. timeliness.

c. faithful representation.

d. understandability.

Correct answer: a

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

42. According to the Conceptual Framework faithful representation does not include which of the following?

a. Neutrality

b. Freedom from material errors

c. Verifiability

d. Completeness

Correct answer: c

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

43. is the qualitative characteristic that simplifies complex transactions in external financial reports without sacrificing the relevance or faithful representation of those reports.

a. timeliness.

b. verifiability.

c. comparability.

d. understandability.

Correct answer: d

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

44. The two types of qualitative characteristics specified in the Conceptual Framework are:

a. relevance and reliability

b. faithful representation and relevance

c. comparability and verifiability

d. understandability and timeliness

Correct answer: b

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

45. Which of the following is not a constraint of the Conceptual Framework’s qualitative characteristic of timeliness?

a. The longer the delay in publication of the financial reports after the end of the financial period, the less relevant the information for decision-making purposes.

b. The frequency of the reporting period.

c. Preparing financial reports for a 12-month period.

d. Having information available in time to influence decisions.

Correct answer: c

Learning objective 10.5 ~ identify the qualitative characteristics for the selection and presentation of financial information.

46. Under the current Conceptual Framework which of the following is not an essential characteristic of an asset?

a. It must have physical substance.

b. The resource must be controlled by the entity.

c. It must have the potential to contribute to the flow of cash and cash equivalents to the entity.

d. The event giving rise to the entity’s control over the resource must have occurred.

Correct answer: a

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

47. In accordance with the Conceptual Framework, income includes both:

a. gains and losses.

b. returns and profits.

c. revenue and gains.

d. gains and profits.

Correct answer: c

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

48. Which of the following statements concerning the definition of expenses in the Conceptual Framework is incorrect?

a. An expense arises whenever the economic benefits in an asset are consumed or lost.

b. All expenses must be matched with their associated income in the same financial period.

c. An expense occurs simultaneously with a decrease in an asset or an increase in a liability.

d. An expense is recognised when the decrease in future economic benefits can be measured reliably.

Correct answer: b

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

49. If an entity receives a deposit in advance of goods or services being supplied, the deposit is initially classified as:

a. an asset.

b. revenue.

c. a liability.

d. an expense.

Correct answer: c

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

50. Under the Conceptual Framework, ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’, is the definition of:

a. income.

b. equity.

c. assets.

d. contributions.

Correct answer: a

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

51. The Conceptual Framework characterises equity as:

a. a result of a profitable business operation.

b. being influenced by the measurement systems adopted for assets and liabilities.

c. a residual.

d. All of these options

Correct answer: d

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

52. Under the Conceptual Framework, which of the following is not a characteristic of a liability?

a. It must be a legal debt.

b. It must result from a past transaction or event.

c. It must be a present obligation of the entity.

d. It is expected to result in an outflow of economic resources.

Correct answer: a

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

53. Which of these is not a characteristic of equity as specified in the Conceptual Framework?

a. It ranks after liabilities as a claim on assets.

b. It must be controlled by the entity.

c. It is diminished by unprofitable operations.

d. It cannot be calculated independently of assets and liabilities.

Correct answer: b

Learning objective 10.6 ~ define assets, liabilities, equity, income and expenses, as established under the Conceptual Framework.

54. Under the Conceptual Framework Exposure Draft, the proposed definition of an ‘economic resource’ would be:

a. a right that is exchanged for cash.

b. a right that provides benefits to the entity.

c. a right that resulted from a past event.

d. a right that has the potential to produce economic benefits.

Correct answer: d

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

55. According to the Conceptual Framework which statement concerning the recognition of liabilities is incorrect?

a. A recognition criteria is that it is probable that a sacrifice of future economic benefits will be required.

b. A recognition criteria is that the amount of the liability must be able to be measured reliably.

c. All liabilities that meet the definition of a liability should be recognised in the accounting records.

d. Liabilities that do not satisfy the recognition criteria can be recognised in the notes attached to the accounts.

Correct answer: c

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

56. The common recognition criteria for each of assets, liabilities, income and expenses is that they must be:

a. reliable.

b. measured reliably.

c. faithfully represented.

d. matched in the period they occur.

Correct answer: b

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

57. In accounting, recognition refers to:

1. the inclusion of dollar amounts into an entity’s accounting system.
2. the process of incorporating the important elements into the financial statements.
3. that information is acknowledged in the reports.
4. that the meaning of information can be comprehended by users.

a. I and II

b. II and III

c. I and IV

d. III and IV

Correct answer: a

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

58. Under IAS 18/AASB 118 interest income should be recognised:

a. at the date of agreement.

b. when the contract for the loan is signed.

c. at the end of the loan period.

d. proportionately over time, as the interest is earned.

Correct answer: d

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

59. Income that arises from contributions of assets without having to give approximately equal value in return are referred to as non-reciprocal transfers. Which of the following is not an example of a non-reciprocal transfer?

a. a contribution made by the owner to the entity.

b. a cash donation to a charity.

c. a cash donation for the purposes of future research.

d. donations of furniture to a charity.

Correct answer: a

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

60. Under IAS 20/AASB 120, Accounting for Government Grants, it is true that:

a. government grants relating to assets are to be credited directly to equity.

b. a government grant relating to income must be recognised in full at the time the grant is received.

c. subsidies for agricultural activities are discussed in the appendix to IAS 20/AASB 120.

d. a government grant relating to an asset may be presented as a reduction in the carrying amount of the asset concerned.

Correct answer: d

Learning objective 10.7 ~ describe the recognition criteria, established in the Conceptual Framework, for assets, liabilities, income and expenses.

61. The Conceptual Framework includes a number of different measurement bases for assets, liabilities, income and expenses. Which of the following is not one of the measurement bases that may be used?

a. Present value

b. Fulfilment value

c. Realisable value

d. Current cost

Correct answer: b

Learning objective 10.8 ~ explain the importance of measurement in the preparation of financial statements.

62. Under the financial capital concept, profit exists:

a. only after the entity has set aside enough capital to maintain the operating capability of its assets.

b. only when the effects of inflation have been considered.

c. only when the entity’s assets are higher than their liabilities.

d. only after the entity has maintained it capital, measured at the dollar value of equity, or the purchasing power of those dollars, at the beginning of the period.

Correct answer: d

Learning objective 10.8 ~ explain the importance of measurement in the preparation of financial statements.

63. The concept of capital where capital is seen as the operating capability of the assets is:

a. operational capital.

b. physical capital.

c. financial capital.

d. purchasing power capital.

Correct answer: b

Learning objective 10.8 ~ explain the importance of measurement in the preparation of financial statements.

64. In accounting in Australia the most common measurement basis used is:

a. historical cost.

b. realisable value.

c. present value.

d. current value.

Correct answer: a

Learning objective 10.8 ~ explain the importance of measurement in the preparation of financial statements.