Deck 6: Constructing Financial Statements: IFRS and the Framework of Accounting

Question 1

Accounting standards reflect

A) How a particular company standardises its financial statements from year to year
B) Laws that govern how financial statements are presented
C) The basic principles generally accepted by the accounting profession
D) A consensus between international and USA standard-setting agencies

Answer 1

The basic principles generally accepted by the accounting profession

Question 2

The three most important financial statements are the:

A) Profit & Loss, Balance Sheet and Statement of Changes in Equity
B) Statement of Financial Position, Income Statement and Statement of Cash Flows
C) Income Statement, Statement of Cash Flows and Explanatory Notes to the Financial Statements
D) Statement of Financial Position, Statement of Cash Flows and Statement of Changes in Equity

Answer 2

Statement of Financial Position, Income Statement and Statement of Cash Flows

Question 3

The IASB's Framework for the Preparation and Presentation of Financial Statements is mostly concerned with:

A) The format of financial statements
B) The setting of accounting standards
C) Satisfying shareholders' demands for information
D) The definition, recognition and measurement of the elements in financial statements

Answer 3

The definition, recognition and measurement of the elements in financial statements

Question 4

The matching principle is concerned with matching:

A) Income earned with expenses incurred in earning that income
B) Assets acquired with liabilities owed in acquiring those assets
C) Matching cash received with cash paid
D) Profits with shareholders' funds

Question 5

The difference between the cost of buying goods and the income generated from selling those goods is most properly classified as;

A) Revenue
B) Cost of sales
C) Gross profit
D) Net profit

Question 6

A product which costs £125 is sold for £200. The gross margin is

A) 35%
B) 37.5%
C) 60%
D) 62.5%

Question 7

A business has the following balances in its financial records: Income tax £30,000; Selling & administration expenses £80,000; Revenue £350,000; Interest expenses £15,000; Cost of Sales £190,000. Which of the following is correct? $\text { Gross profit } \quad \text { Operating profit } \quad \text { Net profit after tax }$

A) $£ 160,000 \quad \quad\quad £ 80,000 \quad \quad \quad \quad \quad £ 35,000$
B) $£ 80,000 \quad \quad\quad £ 65,000 \quad \quad \quad \quad \quad £ 35,000$
C) $£ 160,000 \quad \quad £ 65,000 \quad \quad \quad \quad\quad £ 30,000$
D) $£ 80,000 \quad \quad £ 65,000 \quad \quad \quad \quad \quad £ 35,000$

Question 8

The payment of dividends to shareholders would normally be shown in the:

A) Income Statement
B) Statement of Comprehensive Income
C) Statement of Changes in Equity
D) Statement of Financial Position

Question 9

Receivables would be classified in a Statement of Financial Position as:

A) Non-current asset
B) Current asset
C) Non-current liability
D) Current liability

Question 10

In a Statement of Financial Position, amounts showing as non-current liabilities might include:

A) Inventory
B) Payables
C) Goodwill
D) Mortgage debt

Question 11

Which of the following expresses the accounting equation correctly?:

A) Net assets = non-current assets less non-current liabilities
B) Equity = assets plus liabilities
C) Net assets = total assets less total liabilities
D) Total assets = liabilities less equity

Question 12

The following items appear in a Statement of Financial Position: Receivables €200,000; Payables €350,000; Inventory €100,000; Non-current assets €750,000; Long-term loan €400,000. Shareholders' funds would be shown in the same Statement of Financial Position as:

A) €1,050,000
B) €750,000
C) €650,000
D) €300,000

Question 13

A business is completing its financial records for this financial year and realises that it has not yet paid its energy bill for the last two months, which is yet to be received. The energy bill for the last three months of the previous financial year was $600,000. If the appropriate adjustment was made, it would appear in the Statement of Financial Position as a:

A) $200,000 accrual
B) $200,000 prepayment
C) $400,000 accrual
D) $400,000 prepayment

Question 14

An adjustment to the financial statements to reflect customers who are unlikely to pay the amounts they owe would be shown in the financial statements as:

A) Expense and provision
B) Expense and accrual
C) Income and prepayment
D) Income and provision

Question 15

A company buys a major piece of computer equipment for £100,000 and expects this to last for 4 years, after which it will most likely be scrapped with no value. At the end of the first year, the financial statements will show:

A) A depreciation expense of £20,000 and a net asset value of £100,000
B) A depreciation expense of £25,000 and a net asset value of £100,000
C) A depreciation expense of £20,000 and a net asset value of £75,000
D) A depreciation expense of £25,000 and a net asset value of £75,000

Question 16

ABC buys a smaller company XYZ for a negotiated price of £1 million. XYZs assets are valued at £750,000. Assuming goodwill is amortized over 5 years, the value of goodwill in ABC's Statement of Financial Position at the end of the third year after acquisition will be:

A) £400,000
B) £300,000
C) £150,000
D) £100,000

Question 17

The Statement of Cash Flows has three types of cash flow, those from each of:

A) Profit, financing and cash retained
B) Operations, investing and financing
C) Investing, financing and cash equivalents
D) Operations, profit and depreciation

Question 18

Depreciation is added back to net profit in a Statement of Cash Flows because it is:

A) A non-cash expense
B) An investing activity
C) A non-current asset
D) Not included in net profit

Question 19

Profit is not the same as cash flow because of:

A) Depreciation and changes in working capital
B) Purchase and sale of non-current assets
C) New borrowings or repayments of debt
D) All of the above

Question 20

The Statement of Cash Flows reflects the movement between the:

A) Statement of Financial Position at the beginning and end of the financial year
B) Revenue and expenses in the Income Statement for the financial year
C) Income Statement and Statement of Financial Position
D) Income Statement and Statement of Changes in Equity

Question 21

Agency theory is predominantly concerned with:

A) Shareholders appointing agents to manage the business
B) Directors preparing contracts for various business functions
C) Managers appointing agents to carry out various business functions
D) Contractual relationships between shareholders and directors and managers

Question 22

Shareholders and directors and managers have access to different kinds of information. In agency theory, this is termed:

A) Sharing rule
B) Information asymmetry
C) Adverse selection
D) Moral hazard