Deck 2: Types of Organisations and the Financial Reporting Framework

Question 1

Half-yearly reports contain more detailed information than annual reports.

Answer 1

False

Question 2

Accounting Standards set by the Australian Accounting Standards Board (AASB) apply to both the private and public sectors in Australia.

Answer 2

True

Question 3

Users of general-purpose financial reports include investors, financial advisors, employees, lenders, suppliers and customers.

Answer 3

True

Question 4

Due process is primarily concerned with producing Accounting Standards that meet managers' objectives.

Question 5

A general-purpose financial report is primarily directed toward the common information needs of a wide range of users.

Question 6

Although partnerships may have a tax advantage over companies in that it is the partners that are taxed and not the partnership, a disadvantage of partnerships is that they have unlimited liability.

Question 7

A conceptual framework can be defined as a set of interrelated objectives and fundamentals that is expected to lead to consistent standards, and that prescribes the nature, function and limits of financial accounting and reporting.

Question 8

If a company has sales of $8 million, assets of $4 million and 60 employees, then it may be classified as a small proprietary company.

Question 9

Two companies were formed on 1 January this year, with the names Pluto Pty Ltd and Neptune NL. From the names of the companies, it is clear that the former is a proprietary company and the latter is a mining company.

Question 10

The Corporations Act 2001 requires that financial statements include a directors' report, a directors' statement and an auditor's report.

Question 11

The partnership form of business organisation exists where two or more carry on a business in common with a view to profit.

Question 12

The reason why company shareholders may have the advantage of limited liability rests with the entity principle in accounting, not the legal status of the company.

Question 13

One of the objectives of a Conceptual Framework is that it is considered to be a defence against politicisation.

Question 14

Mutual agency refers to the fact that each member of the partnership form of business entity can bind the other(s) in contract within the scope of normal operations.

Question 15

The directors' report included with a company's financial statements contains an opinion on whether the financial statements and notes comply with accounting standards, and give a true and fair view of the financial position and performance of the company.

Question 16

There are several differences between the financial statements of a company and those of a partnership, not least of which is the disclosure of taxation on the balance sheet as a liability. For a company, the disclosure is a single amount as it is the company that is liable and not the owners. For a partnership, the amount of taxation is split and reported separately in accordance with each partner's liability.

Question 17

All limited-by-shares companies must have 'Ltd' in their names, but a private company is distinguishable from a public company because it has 'Pty' as well as 'Ltd' in its name.

Question 18

There are several advantages to forming a partnership, including the ease with which it can be formed and the limited rules and regulations that apply to it. However, as for a company, one of the regulations is that a partnership must prepare financial statements in accordance with Accounting Standards if it is deemed to be a reporting entity.

Question 19

A reporting entity is an entity for which there are users who rely on financial statements as their major source of information about the entity.

Question 20

All companies can raise funds through the general public but not all companies have limited liability.

Question 21

The external auditor is responsible for preparing the general-purpose financial reports of a company.

Question 22

The going concern assumption assumes that an entity will continue to operate successfully into the foreseeable future.

Question 23

Which of the following would not be considered a disadvantage of forming a partnership?

A) Limited life
B) Unlimited liability
C) Ease of formation
D) Mutual agency

Question 24

An external auditor seeks to provide reasonable assurance that the financial statements of a company are true and fair, not a guarantee that every error in the financial statements of the entity has been detected.

Question 25

An asset must have physical qualities that can be measured reliably.

Question 26

A liability must always be a legal obligation that arises from past events.

Question 27

Which of the following is not true for a partnership?

A) Suppliers can supply goods on credit to a partnership.
B) Customers can purchase goods on credit from a partnership.
C) Partners have to pay their tax yearly.
D) Partners can enter contracts on behalf of the partnership.

Question 28

The political nature of standard setting refers to the fact that, for example, preparers may lobby the standard setters to promote their own self-interest rather than the decision-making usefulness of general purpose reports.

Question 29

In accordance with the IASB Conceptual Framework, income includes both revenue and gains.

Question 30

General-purpose financial reports provide the information that is required for both internal and external user group needs.

Question 31

The fundamental element equity does not require recognition criteria, because it represents the residual interest in assets, after deducting liabilities.

Question 32

The responsibilities of the Australian Financial Reporting Council include advising the government on the process of setting accounting standards.

Question 33

Which of the following is not true of sole traders?

A) They are one-owner businesses.
B) They are not normally reporting entities.
C) They are separate legal entities.
D) They usually have limited funds at their disposal.

Question 34

In Australia the overriding responsibility for the preparation and presentation of general-purpose reports resides with the directors of a company.

Question 35

Equity is the residual interest in the assets of the entity after deduction of all its liabilities.

Question 36

The elements of financial statements are always measured using the historical cost method.

Question 37

Which of the following statements regarding partnerships is incorrect?

A) There are no legal formalities required to form a partnership and it can be an oral agreement.
B) Partnerships have unlimited liability not subject to the amount contributed by each partner.
C) The partnership is subject to income tax, not the individual partners.
D) Each partner has the authority to enter contracts on behalf of the partnership, provided the contracts relate to normal operations.

Question 38

Accrual accounting refers to the method of measuring profit on the basis of cash flow, rather than when revenues and expenses occur.

Question 39

Revenue means the gross inflows arising from normal operations plus all gains during the accounting period.

Question 40

The Australian Financial Reporting Council is not able to directly influence the content of the AASB's accounting standards, but has the capacity to do so given its control of the budget and priorities of the AASB.

Question 41

Jack and Jill Repairers is founded by partners Jack, Jill and Jolly. Jack, Jill and Jolly contributed $3000, $5000 and $8000 respectively. For the year ending 31 December, Jack and Jill Repairers produced a profit of $12 000. If the profits are distributed in accordance with the initial investment which of the following is true?

A) Jack gets $2250 and Jill gets $6000.
B) Jack gets $3750 and Jolly gets $6000.
C) Jack gets $2250 and Jill gets $3750.
D) Jack gets $2250 and Jolly gets $8000.

Question 42

The primary purpose of an audit is to:

A) assure investors of the wealth of the entity.
B) assure investors of the future profitability of the entity.
C) express an opinion on the truth and fairness of the entity's financial statements.
D) detect fraud by the entity's employees.

Question 43

Equity on the balance sheet of a sole proprietorship is normally referred to as:

A) owner's equity.
B) shareholders' equity.
C) reserves.
D) ordinary shares.

Question 44

In which section of a balance sheet would a general reserve be found?

A) Current Assets
B) Current Liabilities
C) Non-current Assets
D) Shareholders' Equity

Question 45

Which of the following items of information would not be found in the balance sheet of a partnership?

A) Assets
B) Liabilities
C) Dividends payable
D) Distribution of profits to partners

Question 46

Gamma Pty Ltd would be a small proprietary company as its records show:

A) assets of $15m, sales of $26m and 40 employees.
B) assets of $6m, sales of $26m and 60 employees.
C) assets of $15m, sales of $9m and 55 employees.
D) assets of $4.5m, sales of $12m and 45 employees.

Question 47

The separation of ownership and control is normally a characteristic of:

A) companies.
B) partnerships.
C) sole traders.
D) partnerships and companies.

Question 48

The ability of a partner to enter into a contract on behalf of all partners is called:

A) voluntary association.
B) mutual agency.
C) the partnership agreement.
D) unlimited liability.

Question 49

Due process involves:

A) the opportunity for interested parties to comment on the draft of a proposed accounting standard.
B) the selection and discussion of emerging issues of accounting.
C) a process of fast-tracking the implementation of accounting standards.
D) adequate consultation between the FRC and the AASB before an accounting standard is issued.

Question 50

The advantages of the corporate form of business organisation do not include:

A) ready transferability of shares.
B) limited liability.
C) mutual agency.
D) continuity of existence.

Question 51

A large proprietary company must have its financial statements audited and lodged with the:

A) Australian Securities Exchange.
B) Australian Securities and Investments Commission.
C) Financial Reporting Council.
D) Australian Accounting Standards Board.

Question 52

It can be determined that Alpha Pty Ltd is a proprietary company as its records show that:

A) no approach has been made to the public for funds.
B) it has fewer than 50 employees.
C) it is a family company.
D) it has 'Pty Ltd' in its name.

Question 53

An advantage that a company typically has over a partnership is:

A) mutual agency.
B) access to greater amounts of capital.
C) avoidance of moral hazard.
D) smaller size.

Question 54

A small proprietary company is one that has:

A) less than $25 million sales and fewer than 50 employees.
B) less than $5 million liabilities and fewer than 50 employees.
C) less than $5 million expenses and less than $12.5 million assets.
D) less than $10 million equity and less than $12.5 million assets.

Question 55

Which one of the following is not an advantage of a company?

A) Separate legal entity
B) Access to capital
C) Continuous existence
D) No regulation

Question 56

Which of the following is true of companies? All companies:

A) are limited liability companies.
B) are separate legal entities.
C) have a limited life.
D) are bound by the contracts signed by shareholders.

Question 57

Which of the following types of business organisation has a legal identity separate from those of the owners?

A) Sole proprietorships
B) Companies
C) Partnerships
D) All of the above

Question 58

Limited liability is a feature of what form(s) of business organisation?

A) Company
B) Sole proprietorship
C) Partnership
D) Both a company and a partnership

Question 59

The factors that should be considered before forming the partnership and company forms of entity would include:

A) income taxation implications.
B) the liability of the equity participants for the debts of the business.
C) the scale/magnitude of the operations involved and the access to finance.
D) all of the above.

Question 60

Which of the following items does not appear on the balance sheet of a partnership?

A) Accounts Receivable
B) Equipment
C) Accounts Payable
D) Income tax payable

Question 61

Revenues result when a business:

A) creates resources by selling goods or services.
B) borrows money.
C) receives money from owners of the business.
D) pays its employees.

Question 62

FeelGood Limited has been set up specifically for the building of an inner-city women's refuge. When the building has been erected and becomes operational (estimated time four months), the company will be liquidated. Which basic assumption underlying the preparation of general-purpose financial reports will not apply in preparing the reports for FeelGood Limited?

A) The business entity principle.
B) The principle of duality.
C) The going-concern principle.
D) The period assumption.

Question 63

Which of the following sets of entities are not likely to meet the definition of a reporting entity?

A) Small proprietary companies, large proprietary companies and partnerships
B) Small proprietary companies and sole traders
C) Large proprietary companies, sole traders and partnerships
D) Small proprietary companies and large professional accounting practices

Question 64

Which of the following statements is incorrect?

A) Compliance with the conceptual framework is non-mandatory in general purpose financial statements.
B) Compliance with Accounting Standards is mandatory in general purpose financial statements.
C) Compliance with the conceptual framework is mandatory in general purpose financial statements.
D) Accounting Standards are more specific than the conceptual framework.

Question 65

Assets are best defined as a:

A) resource owned by the entity as a result of current event, from which future economic benefits are expected to flow.
B) resource owned by the entity as a result of past event, from which future economic benefits are expected to flow.
C) resource controlled by the entity as a result of past event, from which future economic benefits are expected to flow.
D) resource controlled by the entity as a result of a future event, from which future economic benefits are expected to flow.

Question 66

Which of the following accounts is not a liability?

A) Wages Payable
B) Prepaid Rent
C) Accounts Payable
D) Notes Payable

Question 67

Objectives of a conceptual framework include:

A) providing a defence against lobby groups.
B) fewer and more consistent Accounting Standards.
C) improved communication.
D) all of the above.

Question 68

Which of the following elements does not require recognition criteria in order to decide whether it should be recognised in the financial statements?

A) Assets
B) Revenues
C) Equity
D) Expenses

Question 69

If the conceptual framework sets out the concepts that underlie the preparation and presentation of financial statements for external users, which of the following questions is the conceptual framework not attempting to answer?

A) Who are the users of general-purpose financial reports?
B) Which entities should prepare special-purpose financial reports?
C) How should the elements of the financial statements be measured and displayed?
D) What are assets, liabilities, income, expenses and equity?

Question 70

Which of the following accounts is a liability?

A) Interest Expense
B) Interest Payable
C) Interest Revenue
D) Interest Receivable

Question 71

Which of the following are likely to be reporting entities?

A) I only
B) I and IV only
C) II, III and IV only
D) I, III and IV only

Question 72

Which of the following is not a liability?

A) Accounts payable
B) Loan payable
C) Investment by owner
D) Unearned revenue

Question 73

Which of the following is not an attribute of a liability?

A) Present obligation to transfer resources to another entity.
B) The transfer is unavoidable by the entity.
C) The transfer results in reduced economic benefits to the entity making the transfer.
D) The event creating the responsibility has not yet occurred.

Question 74

Which one of the following is not an asset?

A) Inventory
B) Accounts receivable
C) Revenue
D) Cash

Question 75

Which of the following is not a primary characteristic of the accounting definition of an asset?

A) The capacity to provide benefits to the entity
B) Control but not necessarily ownership
C) Representing past events
D) The ability to be reliably measured

Question 76

Liabilities are:

A) resources under an organisation's legal control.
B) obligations owed by an organisation to its suppliers of goods and services on credit creditors.
C) the amount of investment made by owners in a business.
D) the profits earned by a corporation.

Question 77

Which of the following is not an asset?

A) Equipment
B) Accounts receivable
C) Accounts payable
D) Inventory

Question 78

An example of a reporting entity is likely to be a:

A) public company.
B) partnership.
C) family trust.
D) small proprietary company.

Question 79

Which one of the following groups is not generally regarded as an external user of the accounting information of an enterprise?

A) Employees
B) Customers
C) Management
D) Lenders

Question 80

In terms of the conceptual framework, an asset is recognised on a balance sheet if it:

A) is capable of reliable measurement and it is probable that the asset will be realised.
B) is owned by the entity and is capable of reliable measurement.
C) results from a past event and is owned by the entity.
D) provides future economic benefits.