FINANCIAL ACCOUNTING THEORY - TEST BANK

80102016 - 1
1. Which of the following is true regarding the comparison of managerial and financial accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting need not follow generally accepted accounting principles while
financial accounting must follow them.
c. Managerial accounting has a future focus.
d. The emphasis on managerial accounting is relevance and the emphasis on financial accounting
is timeliness.

2. The information provided by financial reporting pertains to

a. Individual business enterprises, industries and an economy as a whole, rather than to members
of society as consumers
b. Individual business enterprises, rather than to industries or an economy as a whole or to
members of society as consumers.
c. Individual business enterprises and an economy as a whole, rather than to industries or to
members of society as consumers
d. Individual business enterprises and industries, rather than to an economy as a whole or to
members of society as consumers

3. Which of the following relates to both relevance and faithful representation?

a. Timeliness
b. Predictive value
c. Completeness
d. Neutrality

4. Which of the following violates the concept of faithful representation?

a. Financial statements included property with a carrying amount increased to management
estimate of market value
b. Financial statements were issued nine months late
c. Report data on segments having the same expected risks and growth rates to analysts estimating
future profit
d. Management reports to shareholders regularly refer to new projects undertaken but the financial
statements never report project results

5. Comprehensive income excludes changes in equity resulting from which of the following?
a. Unrealized loss on securities classified as available for sale
b. Purchase of treasury shares
c. Loss from discontinued operations
d. Prior period error correction

6. Earnings
a. Include certain gains that are excluded from comprehensive income
b. Are the same as comprehensive income
c. Exclude certain gains and losses that are included in comprehensive income
d. Include certain losses that are excluded from comprehensive income

7. An entity records all sales using the installment method of accounting. Installment sales contracts
call for 36 equal monthly cash payments. According to the conceptual framework, the amount of
deferred gross profit relating to collections 12 months beyond the end of reporting period should be
reported in the
a. Current asset section as a contra account
b. Noncurrent liability section as deferred revenue
c. Noncurrent asset section as a contra account
d. Current liability section as a deferred revenue
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8. Which of the following is a deferred cost that should be amortized over the periods benefited?
a. Advance from customer to be returned when sale is completed
b. Prepayment of three-year insurance premiums on machinery
c. Property tax for this year payable next year
d. Security deposit representing two months rent on leased office space

9. Magazine subscriptions collected in advance should be reported as

a. A contra account to magazine subscriptions receivable
b. Deferred revenue in the liability section
c. Magazine subscription revenue in the period collected.
d. Deferred revenue in the shareholders equity section

10. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical
performance be reported in the sellers financial statements before the performance?
a. Unearned revenue to the extent of related costs expended
b. Revenue to the extent of related costs expended
c. Unearned revenue for the entire proceeds
d. Revenue for the entire proceeds.

11. An entity received royalties from the assignment of patent to other entities. In the period in which
the royalties are earned, the royalties should be
a. Netted against patent amortization expense
b. Amortized to income over the remaining useful life of the patent
c. Subtracted from the capitalizable cost of the patent
d. Reported as revenue

12. Under what condition is it proper to recognize revenue prior to the sale of the merchandise?
a. When management has a long-established policy to do so.
b. When the revenue is to be reported as an installment sale
c. When the ultimate sale of the goods is at an assured sales price
d. When the concept of internal consistency of amounts of revenue must be complied with.

13. How should an entity treat organization costs in the financial statements?
a. Never amortized
b. Amortized over forty years
c. Expensed immediately
d. Amortized over sixty months

14. Which of the following is allowable for financial reporting under IFRS?
a. Completed contract method
b. Extraordinary items
c. LIFO
d. Lower of cost or net realizable value

15. The effects of a change in accounting principle should be recorded on a prospective basis when the
change is from the
a. The correction of an error in the determination of the last years inventory
b. Straight line method of depreciation to the double declining balance method.
c. Cost recovery method of accounting to the percentage of completion method.
d. Presentation of statements of individual entities in consolidated statements.

16. A change in the residual value of an asset depreciated on a straight-line basis arising because
additional information has been obtained is
a. A correction of an error
b. Not an accounting change
c. An accounting change that should be reflected in the period of change and future periods if the
change affects both
d. An accounting change that should be reported by restating the financial statements of all prior
periods presented.
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17. Presenting consolidated financial statements this year when statements of individual entities were
presented last year is
a. An accounting change that should be reported by restating the financial statements of all prior
periods presented.
b. An accounting change that should be reported prospectively
c. Not an accounting change
d. A correction of an error

18. During the current year, the entity voluntarily changed its accounting method because the new
method will provide more reliable and relevant information. The entity can estimate the effects of
the change. How should the entity treat the change in accounting policy?
a. On a prospective basis
b. By restating the financial statements
c. By a cumulative adjustment on the income statement
d. On a retrospective basis

19. An entity changed from an accounting principle that is not generally accepted to one that is
generally accepted. The effect of the change should be reported, net of tax, in the current
a. Retained earnings statement as an adjustment of the opening balance
b. Retained earnings statement after net income but before dividends
c. Income statement after extraordinary items
d. Income statement after income from continuing operations

20. Which of the following describes a change in reporting entity?

a. A manufacturing entity expands its market from regional to nationwide.
b. An entity presents consolidated financial statements in place of individual financial statements.
c. An entity acquires additional shares of an investee and changes to the equity method of
accounting
d. An entity discontinues a product line

21. In which of the following situations should an entity report a prior period adjustment?
a. The correction of a mathematical error in the calculation of prior years depreciation
b. A change in the estimated useful life of property, plant and equipment purchased in prior years
c. A switch from the straight line to double declining balance method of depreciation
d. The scrapping of an asset prior to the end of the expected useful life

22. Under IFRS, changes in accounting policies may occur

a. Either when a change is required by an IFRS or when it provides reliable and more relevant
information
b. Neither when a change is required by an IFRS nor when it provides reliable and more relevant
information
c. Only when a change is required by an IFRS
d. Only when a change provides reliable and more relevant information

23. Under IFRS, a change in accounting estimate is accounted for

a. Retrospectively
b. As a cumulative effect of an accounting change in the income statement
c. Currently in the financial statements.
d. Prospectively in the period of change and future periods.

24. When an investor uses the equity method to account for an investment in ordinary shares and the
fair value option of reporting financial assets is not elected after the date of acquisition. the
investment account of the investor would
a. Be increased by its share of the earnings of the investee but would not be affected by its share
of the losses of the investee.
b. Be increased by its share of the earnings of the investee and decreased by its share of the losses
of the investee.
c. Not be affected by its share of the earnings or losses of the investee.
d. Not be affected by its share of the earnings of the investee but would be decreased by its share
of the losses of the investee.
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25. An entity purchased shares of another entity and classified the investment as trading securities. The
entity should report these trading securities at
a. Lower of cost or market with holding gains included in earnings only to the extent of
previously recognized holding losses.
b. Lower of cost or market with holding gains and losses included in earnings.
c. Fair value, with holding gains and losses included in earnings.
d. Fair value with holding gains included in earnings only to the extent of previously recognized
holding losses.

26. An investor uses the equity method to account for investments in ordinary shares. The purchase
price implies a fair value of the investees depreciable asset in excess of the investees net asset
carrying amounts. The investors amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Does not affect the investment account
d. Increases the investment revenue account

27. The composite depreciation method

a. Does not recognize gain or loss on the retirement of single asset in the group
b. Does not subtract residual value from the base of the depreciation calculation
c. Is an accelerated method of depreciation
d. Is applied to a group of homogenous assets

28. Which depreciation method is computed in the same way as depletion?

a. Productive output
b. Sum of the years digits
c. Straight line
d. Double declining balance

29. What valuation model should an entity use to value property, plant and equipment?
a. The revaluation model or the fair value model
b. The cost model or the revaluation model
c. The cost model or the fair value through profit or loss model
d. The cost model or the fair value model

30. An asset is being constructed for an entitys own use. The asset has been financed with a specific
new borrowing. The interest cost incurred during the construction period is
a. A part of the historical cost of acquiring the asset to be written off over the estimated useful life
of the asset
b. A prepaid asset to be written off over the estimated useful life of the asset
c. A part of the cost of the asset to be written off over the term of the borrowing
d. Interest expense in the construction period

31. When should a long-lived asset be tested for recoverability?

a. When external financial statements are being prepared.
b. When events indicate that carrying amount may not be recoverable.
c. When the assets carrying amount is less than fair value.
d. When the assets fair value has decreased and the decrease is judged to be permanent.

32. Which of the following conditions must exist in order for an impairment loss to be recognized?
a. The carrying amount of the asset is less than fair value.
b. The carrying amount of the asset is not recoverable.
c. The carrying amount of the asset is less than value in use.
d. The carrying amount of the asset is less than recoverable amount.

33. The required disclosures for the impairment of long-lived assets include all, except
a. The business segment affected, if applicable
b. The amount of the impairment loss and how fair value was determined
c. The recommendation of the auditor, signed and dated as of the date of discovery
d. The facts and circumstances leading to the impairment
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34. When the fair value is determinable, a nonreciprocal transfer of a nonmonetary asset to another
entity should be recorded at the
a. Recorded amount of the asset transferred
b. Recorded amount of the asset received
c. Fair value of the asset transferred and a gain or loss should be recognized on the disposition
of the asset
d. Fair value of the asset received but no gain or loss should be recognized on the disposition of
the asset

35. Which of the following statements describes the proper accounting for loss when nonmonetary
asset is exchanged for other nonmonetary asset?
a. A loss can occur only when asset is sold or disposed of in a monetary transaction
b. A loss which is unrelated to the determination of the amount of the asset received should be
recorded
c. A loss is deferred so that the asset received in the exchange is properly valued
d. A loss is recognized immediately because asset received should not be valued at more than
the cash equivalent price.

36. Which of the following accurately describes the appropriate accounting for goodwill acquired
through a business combination?
a. It should be recorded at cost and amortized over 40-year period
b. It should be recorded at cost and amortized over a 10-year period
c. It should be recorded at cost and tested for impairment every three years
d. It should be recorded at cost and tested for impairment on an annual basis and more often if
certain events occur

37. Which of the following statements is correct concerning start up costs?

a. Costs of start up activities including organization costs should be expensed as incurred
b. Costs of start up activities including organization costs should be capitalized and amortized
on a straight-line basis over the economic life of the entity
c. Costs of start up activities including organization costs should be capitalized and expensed
only if an impairment exists
d. Costs of start up activities should be capitalized and amortized on a straight-line basis over
the economic life of the entity while organization costs should be expensed as incurred.

38. Goodwill should be tested for impairment at which of the following levels?
a. Each reporting unit
b. Each acquisition unit
c. Each identifiable long-term asset
d. Entire business as a whole

39. Which of the following is an example of activities that would typically be excluded from research
and development costs?
a. Quality control during commercial production including routine testing of products
b. Laboratory research aimed at discovery of new knowledge
c. Design, construction and testing of production prototypes and models
d. Testing in search for or valuation of product or process alternatives

40. An activity that would be expensed currently as research and development costs is the
a. Engineering follow-through in an early phase of commercial production
b. Legal work in connection with patent application and the licensing of patent
c. Testing in search for or evaluation of product or process alternatives
d. Adaptation of an existing capability to a particular requirement or customer need as a part of
continuing commercial activity.

41. Which of the following is a research and development cost?

a. Research and development performed under contract for others
b. Development or improvement of techniques and processes
c. Offshore oil exploration that is the primary activity of an entity
d. Market research related to a major product for the entity
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42. Which of the following describes the appropriate accounting for intangible asset with finite
useful life?
a. The cost of the asset is not amortized but is periodically tested for impairment
b. The cost of the asset is amortized over the useful life and the asset is never tested for
impairment
c. The cost of the asset is amortized over 40 years.
d. The cost of the asset is amortized over the useful life and the asset is periodically tested for
impairment

43. What valuation methods are used for intangible assets?

a. The cost model and the fair value model
b. The revaluation model and the fair value model
c. The cost model and the fair value through profit or loss model
d. The cost model and the revaluation model

44. An entity has investment property that leases to another entity. The entity uses the fair value
model to report investment property. Which of the following statements is true?
a. The entity should value the equipment at cost less accumulated depreciation and less
accumulated impairment losses.
b. The entity should report the increase in fair value in other comprehensive income for the
period.
c. The entity depreciates the equipment using normal depreciation method.
d. The entity does not record depreciation on the investment property

45. An entity purchased land for future use and appropriately classifies the land as investment
property. What valuation model may be used to report the land?
a. Fair value model or revaluation model
b. Fair value through other comprehensive income or revaluation model
c. Cost model or fair value model
d. Cost model or revaluation model

46. When practicable to estimate, an entity must disclose the value of financial instruments at
a. Historical cost
b. Net realizable value
c. Fair value
d. Carrying amount

47. Which of the following provides the holder the right to sell at an exercise or strike price anytime
during a specified period a gain accrues to the holder as the market price of the underlying falls
below the strike price?
a. Forward contract
b. Put option
c. Swaption
d. Call option

48. Which of the following instruments is not considered a derivative financial instrument?
a. Currency futures
b. Stock index option
c. Bank certificate of deposit
d. Interest rate swap

49. A derivative financial instrument is best described as

a. A contract that conveys to a second entity a right to future collections on accounts receivable
from a first entity
b. Evidence of an ownership interest in an entity such as ordinary shares
c. A contract that has its settlement value tied to an underlying and a notional amount
d. A contract that conveys to a second entity a right to receive cash from a first entity.
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50. Any financial or physical variable that has either observable changes or objectively verifiable
changes qualifies as
a. Notional amount
b. Hedge
c. Financial instrument
d. Underlying

51. The most relevant measure for reporting financial instruments is

a. Historical cost
b. Net realizable value
c. Fair value
d. Lower of cost or market

52. Hybrid instruments must be accounted for

a. At the present value of the cash flows of the instrument
b. At amortized cost, at fair value through profit or loss, or at fair value through other
comprehensive income if an entity is not required to bifurcate the hybrid instrument
c. By bifurcating the instrument and valuing the components separately
d. At net realizable value of the instrument

53. Which of the following does not qualify as an underlying?

a. Insurance index
b. Equity shares
c. Exchange rate
d. Commodity price

54. When accounting for income taxes, a temporary difference occurs when
a. An item is included in the calculation of net income in one year and taxable income in a
different year.
b. An item is included in the calculation of net income but is neither taxable nor deductible.
c. The accrual method of accounting is used.
d. An item is no longer taxable due to a change in the tax law.

55. When temporary difference will result in taxable amounts in future years
a. A deferred tax liability is recognized in the current year.
b. A deferred tax asset is recognized in the current year.
c. A deferred tax asset may be recognized in the current year if certain conditions are met.
d. A deferred tax liability may be recognized in the current year if certain conditions are met.

56. At the most recent year-end, a noncurrent deferred income tax asset exceeded a current deferred
income tax liability. Which of the following should be reported at the most recent year-end?
a. The excess of the deferred tax asset over the deferred tax liability as a current asset.
b. The excess of the deferred tax asset over the deferred tax liability as a noncurrent asset
c. The deferred tax asset as a noncurrent asset
d. The deferred income tax asset as a current asset.

57. Deficits accumulated during the development stage of an entity should be

a. Reported as a part of shareholders equity
b. Reported as organization costs
c. Capitalized and written off in the first year of principal operations
d. Capitalized and amortized over a 5-year period
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58. An entity wishes to raise funds by issuing either bonds or cumulative preference shares. How will
the annual interest or dividend affect annual net earnings available to ordinary shareholders?
a. Annual net earnings available to ordinary shareholders are reduced by preference dividends
but not by annual interest.
b. Annual net earnings available to ordinary shareholders are reduced by annual interest but not
by preference dividends.
c. Annual net earnings available to ordinary shareholders are not reduced by annual interest or
preference dividends.
d. Annual net earnings available to ordinary shareholders are reduced by annual interest and
preference dividends.

59. Which of the following would be reported as an investing activity in a statement of cash flows?
a. Collection of tax refund from the government
b. Collection of an overdue account receivable from a customer
c. Collection of proceeds from a note payable.
d. Collection of a note receivable from a related party.

60. Deferred tax expense resulting from temporary differences related to depreciation should be
presented in a statement of cash flows using indirect approach as
a. Financing activity
b. Deduction from net income
c. Noncash financing and investing activity reported in a separate schedule.
d. Addition to net income.

61. Which is included under financing activities in the statement of cash flows?
a. Cash effects of transactions obtaining resources from owners and providing them with a
return on their investment.
b. Cash effects of transactions that enter into the determination of net income.
c. Cash effects of transactions involving making and collecting loans.
d. Cash effects of acquiring and disposing of property, plant and equipment.

62. Under IFRS, all of the following are thresholds for determining if an operating segment is a
reportable segment, except
a. The segment revenue is 10% or more of combined revenue of all segments.
b. The segment assets are 10% or more of the combined assets of all segments.
c. The segment assets are 15% or more of the combined assets of all segments.
d. The amount of segment profit or loss is 10% or more than the greater of the combined profit
of all profitable segments or combined loss of all nonprofitable segments.

63. Which of the following types of entities are required to report on business segments?
a. Publicly traded enterprises
b. Not for profit enterprises
c. Joint ventures
d. Nonpublic business enterprises

64. Which is a required enterprise-wide disclosure regarding external customers?

a. The identity of any external customer considered to be major by management.
b. The identity of any external customer providing 10% or more of a particular operating
segment revenue
c. Information on major customers is not required in segment reporting
d. The fact that transactions with a particular external customer constitute 10% or more of the
total enterprise revenue.

65. Enterprise-wide disclosures include information about

a. Products and services
b. Geographical areas
c. Major customers
d. Products and services, geographical areas and major customers
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66. Which of the following statements is correct regarding how the entity should value inventory in
the interim financial statements?
a. Gains from valuation in previous interim periods should be fully recognized
b. Only the cost method of valuation should be used.
c. Inventory losses generally should be recognized in the interim statements.
d. Temporary market declines should not be recognized in the interim statements.

67. In general, an entity preparing interim financial statements should

a. Defer recognition of seasonal revenue.
b. Use the same accounting principles followed in preparing the latest annual financial
statements
c. Allocate revenue and expenses evenly over the quarters regardless of when they occurred
d. Disregard permanent decreases in the market value of inventory.

68. How should an entity report the decision to change from cash basis to accrual basis?
a. As a prior period adjustment net of tax by adjusting the beginning retained earnings.
b. Prospectively, with no amounts related and no cumulative adjustment.
c. As an extraordinary item net of tax.
d. As a change in accounting estimate.

69. During the current year, the entity discovered it had overstated sales in the prior year. How
should the entity handle this issue?
a. Adjust current sales for the entire adjustment.
b. Spread the adjustment over future periods.
c. Spread the adjustment over current and future periods.
d. Restate the prior year financial statements presented for comparative purposes.

70. Which of the following characteristics does not relate to prior period adjustments?
a. They have a material effect on income from continuing operations of the prior year.
b. They can be specifically identified with business activity of a prior period.
c. They are attributable to economic events occurring subsequent to prior financial statements.
d. They could not have been reasonably estimated in a prior period.

71. Under IFRS, which statement about borrowing costs is true?

a. Borrowing costs must always be capitalized.
b. Borrowing costs can never be capitalized.
c. Borrowing costs must be capitalized if they meet certain criteria and must be expensed if they
do not meet certain criteria.
d. All the statements are true

72. A pension liability must be recorded equal to the unfunded

a. Projected benefit obligation less the fair value of plan assets.
b. Projected benefit obligation less the previously recognized accrued pension cost.
c. Accumulated benefit obligation plus the previously recognized accrued pension cost
d. Accumulated benefit obligation less the previously recognized accrued pension cost.

73. Under IFRS, how is the discount rate for pensions determined?
a. It is determined by the market yield at the end of the reporting period for high-quality
corporate bonds having a similar term or maturity.
b. It is equal to the rate of return on plan assets.
c. It is determined by the weighted-average interest rate.
d. It is equal to the settlement rate.

74. The employees accepted a termination offer which provided for lump sum payments and future
payments at the end of the next two years. The expense this year should include
a. The lump sum payments and the total of the future payments
b. One third of the lump sum payments and one third of the present value of the future payments
c. Only the lump sum payments
d. The lump sum payments and the present value of the future payments
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75. At the end of the accounting period, the current market value of a purchase commitment was less
than the fixed purchase price. Which treatment is most appropriate?
a. Neither describe the purchase obligation nor recognize a loss.
b. Describe the nature of the contract in a note to the financial statements, recognize a loss and
recognize a reduction in inventory equal to the amount of the loss
c. Describe the nature of the contract and the estimated amount of the loss in a note.
d. Describe the nature of the contract in a note to the financial statements and recognize a
liability for the accrued loss.

76. Which of the following statements is true with respect to inventory accounting under IFRS?
a. Biological assets (agricultural inventory) inventory accounting is exempt from lower of cost
or net realizable value valuation
b. Specific identification can be used for all types of inventory
c. LIFO is an acceptable method for inventory valuation
d. FIFO is not an acceptable method for inventory valuation

77. Which of the following statements regarding inventory accounting system is true?
a. A disadvantage of the perpetual inventory system is that inventory amounts used for interim
reporting purposes are estimated amounts.
b. A disadvantage of the periodic inventory system is that the cost of goods sold used for
financial reporting purposes includes both the cost of inventory sold and inventory shortages.
c. An advantage of the perpetual inventory system is that the record keeping is simple.
d. An advantage of the periodic system is that it provides a continuous record of inventory.

78. Reserves for contingencies for general or unspecified risks should

a. Be accrued in the financial statements and disclosed in the notes.
b. Not be accrued in the financial statements and need not be disclosed in the notes.
c. Not be accrued in the financial statements but should be disclosed in the notes.
d. Be accrued in the financial statements but need not be disclosed in the notes.

79. Under IFRS, a provision is

a. An event which is not recognized because it is not probable or cannot be measured reliably.
b. An event which is probable and measurable
c. An event which is probable, possible or remote and measurable
d. An event which is probable but not measurable

80. An entity is the plaintiff in a patent infringement case. The entity has a high probability of a
favorable outcome and can reasonably estimate the amount of the settlement. What is the proper
accounting treatment of the patent infringement case?
a. No reporting is required at this time
b. A gain contingency for the minimum estimated amount of the settlement
c. Disclosure in the notes only
d. A gain contingency for estimated probable settlement
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1. B 21. A 41. B 61. A

2. B 22. A 42. D 62. C
3. A 23. D 43. D 63. A
4. A 24. B 44. D 64. D
5. B 25. C 45. C 65. D
6. C 26. A 46. C 66. C
7. A 27. A 47. B 67. B
8. B 28. A 48. C 68. A
9. B 29. B 49. C 69. D
10. C 30. A 50. D 70. C
11. D 31. B 51. C 71. C
12. C 32. B 52. B 72. A
13. C 33. C 53. B 73. A
14. D 34. C 54. A 74. D
15. B 35. D 55. A 75. D
16. C 36. D 56. C 76. A
17. A 37. A 57. A 77. B
18. D 38. A 58. D 78. B
19. A 39. A 59. D 79. B
20. B 40. C 60. D 80. C

END