Test Bank Answers nan Ch.5 Statement Of Financial Position

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 5: Statement of financial position

Learning objectives

1. Identify the financial reporting obligations of an entity

Q1, Q2, Q53

2. Explain the nature and purpose of the statement of financial position

Q3, Q4, Q5, Q54, Q55

3. Outline the effect of accounting policy choices, estimates and judgements on financial statements

Q6, Q7, Q56

4. Apply the asset definition criteria

Q8, Q9, Q10, Q57, Q58

5. Apply the liability definition criteria

Q11, Q12, Q13, Q59

6. Discuss the definition and nature of equity

Q14, Q15, Q60

7. Apply the recognition criteria to assets, liabilities and equity

Q16, Q17, Q18, Q19, Q20, Q61, Q62, Q63

8. Describe the format and presentation of the statement of financial position

Q21, Q22, Q23, Q64, Q65

9. Describe the presentation and disclosure requirements for elements on the balance sheet

Q24, Q25, Q26, Q27, Q28, Q29, Q30, Q31, Q32, Q33, Q34, Q35, Q36, Q66, Q67, Q68, Q69

10. Discuss the measurement of various assets and liabilities on the statement of financial position

Q37, Q38, Q39, Q40, Q41, Q42, Q43, Q44, Q45, Q46, Q47, Q48, Q49, Q50, Q70, Q71, Q72

11. Discuss the limitations of the statement of financial position

Q51, Q52, Q73, Q74, Q75

Multiple-choice questions

1. An Australian company is required to lodge their financial statements with which regulatory body?

a. IFRS

b. ASIC

c. ACNC

d. GAAP

Learning objective 5.1 ~ Identify the financial reporting obligations of an entity

1. The entity that is under no legal requirement to prepare a statement of financial position is a:

a. company.

b. not-for-profit business.

c. sole trader.

d. partnership.

Learning objective 5.1 ~ Identify the financial reporting obligations of an entity

1. The statement of financial position is also known as the:

a. statement of cash flows.

b. statement of comprehensive income.

c. balance sheet.

d. statement of profit or loss.

Learning objective 5.2 ~ Explain the nature and purpose of the statement of financial position

1. Which of the following statements about the statement of financial position is not true:

a. Assets are listed in order of liquidity.

b. It is reported at a particular point in time.

c. The total of the assets must equal the total of the liabilities plus equity.

d. It represents the cash received and paid during the period.

Learning objective 5.2 ~ Explain the nature and purpose of the statement of financial position

1. If total assets equal $295 000, total liabilities are $165 000 and total equity equals $130 000, then net assets equals:

a. $295 000.

b. $130 000.

c. $165 000.

d. $30 000.

Feedback: $295 000 total assets – $165 000 total liabilities = $130 000 net assets.

Learning objective 5.2 ~ Explain the nature and purpose of the statement of financial position

1. What are accounting choices applied to the measurement and recognition of financial statement elements referred to as?

a. Estimates of best practice

b. Accounting estimates

c. Accounting policies

d. Management policies

Learning objective 5.3 ~ Outline the effect of accounting policy choices, estimates and judgements on financial statements

1. An accountant is required to make choices in measuring the value of:

a. property, plant and equipment.

b. development expenditure.

c. inventory.

d. all of the above.

Learning objective 5.3 ~ Outline the effect of accounting policy choices, estimates and judgements on financial statements

1. Which of the following characteristics is essential to all assets?

a. A result of a past event

b. A resource controlled by the entity

c. A present economic resource

d. All of the above

Learning objective 5.4 ~ Apply the asset definition criteria

1. Pizza Ltd leases coded welding equipment from Hotdog Ltd. The lease is non-cancellable, and Pizza Ltd has the right to purchase the equipment at the end of the lease term for $85 000. Which of the following statements is true?

a. Pizza Ltd has legal ownership of the equipment.

b. Pizza Ltd does not have control over the equipment.

c. Pizza Ltd is the lessor of the equipment.

d. While Pizza Ltd controls the equipment, it does not have legal ownership of the equipment.

Learning objective 5.4 ~ Apply the asset definition criteria

1. When is a resource considered to produce economic benefits?

a. Only if the benefits are certain

b. Only if the benefits are probable

c. If the resource is in the form of being able to satisfy human wants

d. Only if the resource is used to provide goods or services

Learning objective 5.4 ~ Apply the asset definition criteria

1. Which of these is not a current liability?

a. Dividend payable

b. Accounts payable

c. General reserve

d. Accrued expenses

Learning objective 5.5 ~ Apply the liability definition criteria

1. Which of the following is not an essential characteristic of a liability?

a. It has arisen as a result of a past transaction or event.

b. It represents an internal claim on the entity’s assets.

c. It represents a present obligation to another entity.

d. It requires the transfer of an economic resource to another entity.

Learning objective 5.5 ~ Apply the liability definition criteria

1. Which of the following statements is true?

a. Liabilities are claims owing to an entity’s shareholders.

b. Liabilities are claims owing to an entity’s debtors.

c. Liabilities are claims owing to an entity’s owners.

d. Liabilities are claims owing to an entity’s creditors.

Learning objective 5.5 ~ Apply the liability definition criteria

1. Which of the following statements regarding equity is not true?

a. It is increased by profit.

b. It can be increased by additional contributions by the owners.

c. It is defined independently of assets and liabilities.

d. It includes the retained earnings of the entity.

Learning objective 5.6 ~ Discuss the definition and nature of equity

1. C. Mickelborough purchases 1500 shares of McPherson Ltd that were listed on the stock exchange. As a result of this transaction, what will be the effect on the total equity of McPherson Ltd?

a. Total equity will remain unchanged

b. Total equity will increase

c. Total equity will decrease

d. Total equity will be greater than total assets

Learning objective 5.6 ~ Discuss the definition and nature of equity

1. Which of the following is not part of shareholders’ equity in the statement of financial position?

a. Dividends payable

b. Share capital

c. Retained earnings

d. General reserve

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. Which of the following does not affect equity?

a. Cash at bank

b. Sales

c. Expenses

d. Revaluation reserve

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. What does the ‘monetary concept’ refer to?

a. Recognising cash in the financial statements

b. Recognising only cash transactions in the financial statements

c. Recognising all items in the financial statements even if they cannot be measured in monetary terms

d. Measuring all items in the financial statements in monetary terms

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. When making a recognition decision, which of the following factors must be considered?

a. Uncertainty as to the reliable measurement of a monetary value

b. Uncertainty as to whether a liability exists

c. Probability of an inflow or outflow of economic benefits

d. All of the above

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. Toys Pty Ltd is currently under investigation for providing defective products to their customers. If found guilty, Toys Pty Ltd may be required to compensate their customers for approximately $850 000. The court case is still pending and the outcome will not be known until later in the next financial year. For the current financial year, the amount of $850 000 will be:

a. disclosed in the notes to the financial statements as a contingent liability.

b. recognised in the statement of financial position as an asset.

c. recognised in the statement of financial position as a liability.

d. recognised in the statement of financial position as a contingent liability.

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. The statement of financial position usually reports the entity’s financial position for both the current period and the previous period. This information is known as:

a. comparative information.

b. comprehensive information.

c. financial reporting.

d. narrative information.

Learning objective 5.8 ~ Describe the format and presentation of the statement of financial position

1. How are assets, liabilities and equity presented in a statement of financial position prepared in a narrative format?

a. Assets on the left and liabilities and equity on the right

b. Assets followed by liabilities then equity down the page

c. Assets followed by equity then liabilities down the page

d. Assets on the right and liabilities and equity on the left

Learning objective 5.8 ~ Describe the format and presentation of the statement of financial position

1. How would you refer to financial statements prepared for a parent entity and all its subsidiaries?

a. General financial statements

b. Economic financial statements

c. Consolidated financial statements

d. Parent financial statements

Learning objective 5.8 ~ Describe the format and presentation of the statement of financial position

1. In the statement of financial position, how is inventory categorised?

a. Current liability

b. Non-current asset

c. Non-current liability

d. Current asset

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Assets and liabilities are listed in the statement of financial position in order of:

a. marketability.

b. liquidity.

c. tangibility.

d. profitability.

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Which of the following assets is not an identifiable intangible asset?

a. Brand name

b. Trademark

c. Goodwill

d. Development expenditure

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Which of the following statements concerning goodwill is true?

a. Internally generated goodwill cannot be recognised.

b. Goodwill must be tested for impairment at least annually.

c. Goodwill is an unidentifiable intangible asset.

d. All of the above.

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Living animals or plants, such as trees in a plantation, dairy cattle or sheep, are known under the accounting standards as:

a. current assets.

b. intangible assets.

c. agricultural assets.

d. natural assets.

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Stealth Health Pty Ltd transfers $75 000 from the retained earnings account to a general reserve account. What is the effect of this transfer on the company’s statement of financial position?

a. Total shareholders’ equity remains unchanged

b. Total shareholders’ equity will decrease

c. Total shareholders’ equity will increase

d. Total shareholders’ equity will decrease and assets will decrease

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. A revaluation surplus is a reserve account that arises when:

a. an entity uses fair value rather than cost to measure its long-term assets.

b. an entity uses cost rather than fair value to measure its long-term assets.

c. management transfer funds out of retained earnings to put aside for future use.

d. an entity has an overseas subsidiary.

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements

on the statement of financial position

1. How are current and non-current liabilities categorised?

a. Based on whether the liability is secured or unsecured

b. Based on the size of the liability

c. Based on to whom the liability is owed

d. Based on when the liability is due for payment

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Which of the following would not be classified as ‘cash and cash equivalents’?

a. Accounts receivable

b. Short-term deposits

c. Cash at bank

d. Petty cash

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. The amount recognised in the asset class ‘investments accounted for using the equity method’ represents:

a. cost of shares acquired less share of other entity’s profits.

b. share of other entity’s profits only.

c. cost of shares acquired less share of other entity’s profits plus dividends received from other entity.

d. cost of shares acquired plus share of other entity’s profits less dividends received from other entity.

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Deep Blue Sea Lodge Ltd acquired all the shares in Snorkel Ltd for $750 000. The fair value of the assets acquired was $1 000 000 and the fair value of the liabilities assumed was $300 000. What is the amount of goodwill acquired by Deep Blue Sea Lodge Ltd?

a. $50 000

b. $750 000

c. $700 000

d. $300 000

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Which of the stakeholders listed below would have the highest priority claim over a company’s assets in the event of a company liquidation?

a. Ordinary shareholders

b. Providers of secured debt

c. Preference shareholders

d. Providers of unsecured debt

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Chandler and Co Pty Ltd was set up with share capital of $500 000. In year 1 a loss of $50 000 was recorded; in year 2 a profit of $175 000; and in year 3 a profit of $350 000. Also in year 3 a dividend of 5% of paid up capital was paid to shareholders and $20 000 was transferred from retained earnings to a general reserve. What was the retained earnings balance of Chandler and Co Pty Ltd at the end of year 3?

a. $930 000

b. $530 000

c. $430 000

d. $475 000

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. At the end of the financial period the cost of an entity’s inventory on hand is $25 500. The net realisable value of the inventory is deemed to be $28 000. What value for inventory must be shown on the entity’s statement of financial position for the reporting period?

a. $28 000

b. $25 500

c. $2500

d. None of the above

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Which of the assets listed below is not required to be depreciated/amortised?

a. Trademarks

b. Machinery

c. Motor vehicles

d. Land

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Office furniture was purchased for $15 000 and its useful life is estimated to be 7 years. The residual value of the furniture is $1000. What is the annual depreciation amount?

a. $1000

b. $14 000

c. $2000

d. $1400

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Which of the following statements concerning asset valuation is incorrect?

a. Subject to a few exceptions, non-current assets, after acquisition, can be measured at either cost or fair value.

b. If non-current assets are measured using the cost basis, they cannot be valued at less than their recoverable amount.

c. If non-current assets are measured using the fair value basis, fair value must be regularly reassessed.

d. Assets and liabilities are recorded initially at their historical cost.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. The amount paid to acquire an asset is known as its:

a. market cost.

b. current cost.

c. present value.

d. historical cost.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. The present value of expected cash flows that an entity expects to incur to satisfy a liability is referred to as the:

a. fulfilment value.

b. value-in-use.

c. market value.

d. current value.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. How is the accumulated depreciation account reported?

a. As an expense on the statement of financial position

b. As an expense on the statement of profit or loss

c. As a contra asset account on the statement of financial position

d. As a liability on the statement of financial position

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Which of the following statements is correct regarding the use of the first-in first-out (FIFO) method of valuing inventory?

a. Cost of sales for the period is calculated using weighted average cost of the goods acquired.

b. Closing inventory consists of goods purchased earlier in the period.

c. Closing inventory consists of the most recently purchased goods.

d. Cost of sales for the period is calculated using the most recent inventory cost per item.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Peeters Ltd’s inventory purchases for the month of January are summarised below. Using the weighted-average method of valuing inventory, what is the weighted unit cost?

a. $7960

b. $10 500

c. $7750

d. $8500

Feedback: [($5000 x 8) + ($8500 x 12) + ($7000 x 35) + ($10500 x 20)] / 75 = $7960.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Angel Campers purchased a motor vehicle at a cost of $40 000. The motor vehicle’s fair value is assessed to be $10 000 and its carrying amount is $12 000. TTC Ltd purchased the motor vehicle from Angel Campers for $14 000. What value is recorded for this motor vehicle in the statement of financial position of TTC Ltd?

a. $40 000

b. $14 000

c. $12 000

d. $10 000

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. In a manufacturing company’s statement of financial position, which of the following would be included as part of the asset inventories?

a. Raw materials

b. Finished goods available for sale

c. Work-in-progress

d. All of the above

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Which of the following statements about the measurement of ‘fair value’ is incorrect?

a. It is an exit value.

b. A liability’s fair value takes into consideration the time value of money.

c. In an active market, as asset’s fair value is observable and verifiable.

d. It is an entry value.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. At acquisition date, the cost price and fair value of an asset will be fairly equivalent. However, over the life of the asset, the:

a. fair value will always be greater than the cost price.

b. cost price will always be greater than the fair value.

c. fair value and cost price will most likely diverge.

d. fair value and cost price will remain fairly equivalent.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. Which of the following statements is correct?

a. In the statement of financial position, all assets will reflect the amount that would be received if the assets were sold at the date of the statement.

b. In the statement of financial position, the value of assets will most likely be a mixture of values of historical cost and fair values.

c. In the statement of financial position, all assets will be valued at historical cost.

d. In the statement of financial position, all assets will be valued at fair value.

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. While they’re all important for decision making, which of the following items can be reliably measured and included on the statement of financial position?

a. The cost of bad publicity

b. The value of employee’s skills and abilities

c. Internally generated goodwill

d. Identifiable intangible assets

Learning objective 5.11 ~ Discuss the limitations of the statement of financial position

1. Which of the following is a limitation of an entity’s statement of financial position?
2. If the business is cyclical, the statement of financial position prepared at the end of the financial period may not be representative of the financial position at other times during the financial period.
3. The statement of financial position may not include all items that create value for the entity.

c. The statement of financial position is a historical representation of an entity’s financial position and does not consider future growth potential.

d. All of the above are considered limitations of an entity’s statement of financial position.

Learning objective 5.11 ~ Discuss the limitations of the statement of financial position

Fill in the blanks

1. ____________ (General/Special)-purpose financial statements are prepared by a reporting entity to meet the decision-making needs of its managers.

a. Special

Learning objective 5.1 ~ Identify the financial reporting obligations of an entity

1. _______________ decisions are decisions relating to an entity’s mix of debt and equity.

a. Financing

Learning objective 5.2 ~ Explain the nature and purpose of the statement of financial position

1. Liabilities are known as ______________ claims on the assets of an entity.

a. external

Learning objective 5.2 ~ Explain the nature and purpose of the statement of financial position

1. Accounting choices applied to the recognition and measurement of financial statement elements are referred to as accounting __________.

a. policies

Learning objective 5.3 ~ Outline the effect of accounting policy choices, estimates and judgements on financial statements

1. An asset is defined in the revised _________________ ___________________ as a ‘present economic resource controlled by the entity as a result of past events’.

a. Conceptual Framework

Learning objective 5.4 ~ Apply the asset definition criteria

1. An essential characteristic of an asset is that the resource must be _________________ by the entity.

a. controlled

Learning objective 5.4 ~ Apply the asset definition criteria

1. The existence of a(n) _____________ event is one of the essential elements of a liability.

a. past

Learning objective 5.5 ~ Apply the liability definition criteria

1. Retained earnings are ______________ ______________ made by a company that have not been distributed as dividends or transferred to a reserve account.

a. cumulative profits

Learning objective 5.6 ~ Discuss the definition and nature of equity

1. The ______________ concept refers to the principle that items quantified in the financial statements are measured in monetary terms.

a. monetary

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. ______________ refers to recording items in the financial statements with a monetary value assigned to them.

a. Recognition

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. A factor to be considered before recognising an asset in the statement of financial position is the ______________ of an inflow of an economic benefit.

a. probability

Learning objective 5.7 ~ Apply the recognition criteria to assets, liabilities and equity

1. The statement of financial position format that lists assets on the left and liabilities and equity on the right is the ______________-format.

a. T

Learning objective 5.8 ~ Describe the format and presentation of the statement of financial position

1. An economic entity that refers to a parent entity and its subsidiaries is also known as a(n) ______________.

a. group

Learning objective 5.8 ~ Describe the format and presentation of the statement of financial position

1. The accrual of annual leave and long-service leave for employees is classed as a(n) ______________ in the liabilities section of the statement of financial position.

a. provision

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Accounts payable, GST payable and accrued expenses are classified as _____________ and _____________ _____________ in the statement of financial position.

a. trade, other payables

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. ________________ assets are non-monetary assets without physical form.

a. Intangible

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Goodwill is regarded as a(n) ______________ intangible asset.

a. unidentifiable

Learning objective 5.9 ~ Describe the presentation and disclosure requirements for elements on the statement of financial position

1. Financial information that is complete, neutral and free from error is providing a(n) __________ representation for its users in their decision making.

a. faithful

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. If an asset’s carrying amount is greater than its recoverable amount, a(n) __________ loss will need to be recognised immediately in the statement of profit or loss.

a. impairment

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. An entity must identify its measurement choices in the accounting policy__________ to the financial statements.

a. note

Learning objective 5.10 ~ Discuss the measurement of various assets and liabilities on the statement of financial position

1. A limitation of the balance is that the historical cost measurement of an asset does not consider the __________ __________ of money.

a. purchasing power

Learning objective 5.11 ~ Discuss the limitations of the statement of financial position

1. When preparing a statement of financial position various choices, __________ and estimations are made on behalf of the users of the financial information.

a. assumptions

Learning objective 5.11 ~ Discuss the limitations of the statement of financial position

1. The statement of financial position does not reflect an entity’s full __________ as some economic benefits do not satisfy the definition of an asset.

a. value

Learning objective 5.11 ~ Discuss the limitations of the statement of financial position