Deck 2: Accounting Judgements

Question 1

Recognition requires the measurement of an item for inclusion in the financial statements.

Answer 1

True

Question 2

The nominal dollar capital maintenance approach implicitly recognizes that inflation is under control,and thus ignores inflation in the preparation of financial statements.

Answer 2

True

Question 3

The going concern principal does not apply if a company is expected to be liquidated in the next 24 months.

Answer 3

True

Question 4

Information is reliable when it is in agreement with the actual underlying transactions and events,the agreement is capable of independent verification and the information is reasonably free from error and bias.

Question 5

The time period concept dictates that the reporting period or fiscal period of an entity must be for 12 months.

Question 6

The constant dollar capital maintenance approach adjusts for the decline in the asset's productive capacity when reporting earnings.

Question 7

Interperiod comparability is significantly enhanced when two similar companies use the same accounting methods during a single reporting period.

Question 8

The use of historical cost,rather than liquidation value,is supported by the continuity assumption.

Question 9

Under the productive capacity capital maintenance approach,a profit is assumed to have been earned only if enough financial capital has been recovered by the end of the year to enable the business to operate at the same level as at the beginning of the year.

Question 10

Relevance is of primary importance in financial reporting,whereas comparability is of secondary importance.

Question 11

Accounting should provide information that is useful in assessing the "value" of an entity; however,accounting information does not necessarily report the actual "value" of the entity.

Question 12

The goal of maximizing shareholder wealth is consistent with the entity concept.

Question 13

Information is neutral when it is free from bias that would lead users towards making decisions that are influenced by the way the information is measured or presented.

Question 14

The unit of measure assumption holds that all aspects of a company's business operations can be readily quantified.

Question 15

The use of fair value rather than historical cost increases both the relevance and verifiability of the financial statements.

Question 16

The continuity assumption holds that a business will carry on indefinitely.

Question 17

Legally,as well as for accounting statement purposes,a corporation is treated as a separate entity apart from its stockholders,whereas a partnership is treated as one entity including the owners.

Question 18

Accounting transactions must always be realized prior to being recognized.

Question 19

The separate entity assumption has more validity for a larger corporation than it would for a sole proprietorship.

Question 20

The nominal dollar capital maintenance approach is the mostly widely used application of the stable currency assumption in North American practice.

Question 21

The nominal dollar capital maintenance approach adjusts for the replacement cost of the assets when reporting earnings.

Question 22

At times,reliability must be sacrificed in order to enhance the relevance of accounting information.

Question 23

The continuity assumption holds that the entity will continue in business for the foreseeable future but it does not mean that it will be a going concern forever.

Question 24

Under IFRS 13,a publicly quoted share price would be an example of a Level 1 Input.

Question 25

To Recording periodic depreciation on assets such as buildings or machinery is an application of the matching principle.

Question 26

An example of the full disclosure principle would be a firm signing a major contract in November to construct custom machinery for a client.Work in the current year is nil,yet the notes to the firm's financial statements discuss the nature and dollar amount of the contract.

Question 27

Warranty expense on goods sold should be recognized in the period of the sale,even though the costs to fulfill warranty claims will not be incurred until two or three years later.

Question 28

The understandability concept states that the information contained in financial statements should be understandable to persons who have a reasonable understanding of business and economic conditions and are willing to study the information with reasonable diligence.

Question 29

Relevance and representation faithfulness are the fundamental qualities under IFRS.

Question 30

Under IFRS,a change in accounting policy must result in information that is more reliable and relevant.

Question 31

The matching concept is the name applied to the process of associating expenses with revenues.

Question 32

Comparability is an enhancing quality under IFRS and ASPE.

Question 33

In order to recognize sales revenue,collection of cash from the buyer is not necessary; however,collection must be reasonably assured.

Question 34

Under IFRS 13,Level 3 inputs are deemed to be more reliable than Level 2 inputs.

Question 35

Materiality is one of the underlying constraints in the application of the IFRS conceptual framework.

Question 36

Revenue is recognized when service is rendered and collection is probable.

Question 37

The full disclosure principle asserts that the financial reports of a business enterprise should disclose all reliable information relating to its economic affairs.

Question 38

The separate entity assumption applies only to legally separate entities such as corporations; it does not apply to proprietorships or other unincorporated businesses.

Question 39

No revenue whatsoever from the performance of a service can be recognized until all of the service has been performed.

Question 40

One of the objectives of financial reporting is to help users assess the amounts,timing and uncertainty of prospective cash flows of the enterprise.

Question 41

S Corporation offered to issue 5,000 shares of its no par value common shares to another company in exchange for a building at a time when there were 1,000,000 shares already outstanding and were selling for $4.00 per share at the time.The owner of the building had the opportunity to sell it to a competing buyer for $26,000.However,because the seller wanted the S Corporation shares,S's offer was accepted.At what amount should the building be reported in S's financial statements?

A)$26,000
B)$10,000
C)$20,000
D)$16,000

Question 42

The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is relevance.

Question 43

C Corporation exchanged 20,000 shares of its nonconvertible preferred shares for land owned by B Corporation.A competing buyer previously had offered $150,000 cash for the land.Because of tax consequences,the cash offer was not accepted and the lot was exchanged for the shares.C Corporation previously had sold only 100 shares of its preferred shares at $9 per share several months ago.Based on the cost principle,at what amount should the land be reported on C's financial statements?

A)$180,000
B)$165,000
C)$150,000
D)$160,000

Question 44

Which of the following accounting concepts best justifies the use of accruals and deferrals?

A)Cost/benefit constraint
B)Unit-of-measure assumption
C)Continuity assumption
D)Materiality constraint

Question 45

The sales manager of a firm has the use of a blue company-owned automobile to use to visit potential customers.The sales manager also owns her own identical car except that it is red.The manager paid for the red car with funds earned from her employment as sales manager.The firm will report the cost of the blue auto in its balance sheet,but not the red auto.This is an example of:

A)Reliability
B)Matching
C)Separate entity
D)Going concern
E)None of these answers are correct.

Question 46

Verifiability focuses on the correct application of a basis of measurement rather than its appropriateness.

Question 47

The objective of financial reporting is:

A)To provide the market value of a firm at a point in time.
B)To provide the total market value of its common stock.
C)To provide information useful for decision making by investors and creditors.
D)To require all companies to comply with GAAP.

Question 48

The list price of a new van was $30,000 at a local car dealership.However,a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier).The van would cost the dealer $24,000 today.Inflation is 5% per year.The amount of profit that would be recognized by the dealer as a result of the sale using the nominal dollar approach is:

A)$10,000
B)$2,500
C)$5,000
D)$6,000

Question 49

Materiality is a component of representational faithfulness under IFRS.

Question 50

Comparability is sometimes sacrificed for consistency.

Question 51

Accounting traditionally has been influenced by conservatism because of the:

A)probability of undetected errors in the financial statements.
B)difficulty in measuring net income on the accrual basis.
C)inherent uncertainties of many accounting measurements.
D)difficulty in making certain calculations.
E)large number of transactions recorded in any one period.

Question 52

The cost-benefit trade-off is a persuasive constraint under both IFRS and ASPE.

Question 53

Preparation of financial statements with adequate notes is primarily based on the:

A)separate entity assumption.
B)full-disclosure principle.
C)cost principle.
D)cost/benefit constraint.
E)reliability quality.

Question 54

The going concern or continuity assumption is critical to financial accounting.The assumption

A)Is always maintained for all firms for all years.
B)Supports the use of historical cost valuation for assets rather than market values.
C)Means that a corporation has a definite ending date.
D)Requires that we immediately expense prepaid accounts because they do not represent a future cash inflow.

Question 55

Interperiod tax allocation is the process of spreading the income tax expense across periods benefited.

Question 56

In classifying the elements of financial statements,the primary distinction between revenues and gains is the materiality of the amounts involved.

Question 57

A furniture builder accepts a purchase order from a client to build a customized dresser.The acceptance of this contract on that date is executory in nature and the builder must thus record a liability on that date.

Question 58

Under IFRS and ASPE,both assets and liabilities are mostly arises from past events.

Question 59

A firm's accounting policy is to immediately expense the cost of metal wastebaskets it purchases for use by its employees at their desks.The total cost of wastebaskets in any year is $1,000 and the firm has $6 billion in total assets.The firm expects the wastebaskets to last indefinitely.The firm

A)Is violating GAAP
B)Is invoking the materiality constraint
C)Is invoking the conservatism constraint
D)Is violating the relevance principle
E)None of these answers are correct.

Question 60

The continuity assumption is the basis for the rule that:

A)the income statement should not include material gains and losses that are both unusual and infrequent.
B)treasury stock should not be reported in the balance sheet as an asset.
C)the cost of installing a machine should not be included in the recorded cost of the machine, but rather expensed immediately.
D)the cost of operational assets should be allocated to expense systematically and rationally over their useful lives.

Question 61

A corporation needed a new warehouse; a contractor quoted a $250,000 price to construct it.The corporation believed that it could build the warehouse for $215,000 and decided to use company employees to construct the warehouse.The final construction cost incurred by the corporation was $240,000 but the asset was recorded at $250,000.This is in violation of the:

A)cost principle.
B)time period assumption.
C)matching principle.
D)revenue recognition principle.
E)None of these answers are correct.

Question 62

Neutrality is an ingredient of the qualitative criteria of $$\begin{array} { | l | l | l | } \hline & \text { Relevance } & \text { Reliability } \\\hline 1 & \text { Yes } & \text { Yes } \\\hline 2 & \text { No } & \text { Yes } \\\hline 3 & \text { Yes } & \text { No } \\\hline 4 & \text { No } & \text { No } \\\hline\end{array}$$

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 63

Timeliness is an ingredient of the qualitative criteria of $$\begin{array} { | l | l | l | } \hline & \text { Relevance } & \text { Reliability } \\\hline 1 & \text { Yes } & \text { Yes } \\\hline 2 & \text { No } & \text { Yes } \\\hline 3 & \text { Yes } & \text { No } \\\hline 4 & \text { No } & \text { No } \\\hline\end{array}$$

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 64

The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is

A)relevance.
B)reliability.
C)verifiability.
D)neutrality.
E)None of these answers are correct.

Question 65

Representational faithfulness is an ingredient of the qualitative criteria of $$\begin{array} { | l | l | l | } \hline & \text { Reliability } & \text { Relevance } \\\hline 1 & \text { Yes } & \text { Yes } \\\hline 2 & \text { No } & \text { Yes } \\\hline 3 & \text { Yes } & \text { No } \\\hline 4 & \text { No } & \text { No } \\\hline\end{array}$$

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 66

If,in year 1,a company used LIFO; year 2,FIFO; and in year 3,moving average cost for inventory valuation,which of the following assumptions,constraints,or principles would be violated:

A)cost.
B)time period.
C)matching.
D)consistency.
E)materiality.

Question 67

Which of the following qualities does the cost principle primarily support?

A)Predictive value
B)Conservatism
C)Verifiability
D)Timeliness

Question 68

A primary objective of financial reporting is to:

A)assist investors in predicting prospective cash flows.
B)assist investors in analyzing the economy.
C)assist suppliers in determining an appropriate discount to offer a particular company.
D)enable banks to determine an appropriate interest rate for their commercial loans.

Question 69

The inclusion of notes and supporting schedules in the financial statements reflect application of the:

A)time period assumption.
B)industry peculiarities constraint.
C)relevance quality.
D)full-disclosure principle.
E)comparability characteristic.

Question 70

The list price of a new van was $30,000 at a local car dealership.However,a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier).The van would cost the dealer $24,000 today.Inflation is 5% per year.The amount of profit that would be recognized by the dealer as a result of the sale using the physical capital maintenance approach is:

A)$1,000
B)$2,500
C)$5,000
D)$6,000

Question 71

Accounting information is considered to be relevant when it

A)can be depended on to represent the economic conditions and events that it is intended to represent.
B)is capable of making a difference to a decision-maker.
C)is understandable by reasonably informed users of accounting information.
D)is verifiable and neutral.

Question 72

Verifiability is an ingredient of the qualitative criteria of $$\begin{array} { | l | l | l | } \hline & \text { Relevance } & \text { Reliability } \\\hline 1 & \text { Yes } & \text { No } \\\hline 2 & \text { Yes } & \text { Yes } \\\hline 3 & \text { No } & \text { No } \\\hline 4 & \text { No } & \text { Yes } \\\hline\end{array}$$

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 73

Which of the following distinguishes the personal transactions of business owners from business transactions?

A)Unit-of-measure assumption
B)Full-disclosure principle
C)Materiality constraint
D)Separate entity assumption

Question 74

Certain costs of doing business are capitalized when incurred and then amortized over subsequent accounting periods to:

A)aid management in decision-making.
B)match the costs incurred with revenues earned.
C)conform to the conservatism constraint.
D)conform to the comparability characteristic.
E)reduce the income tax.

Question 75

A large international corporation immediately expenses the $50 cost of a small item of office equipment.This is an example of:

A)reliability.
B)conservatism.
C)materiality.
D)an accounting error.
E)None of these answers are correct.

Question 76

Adjusting entries are needed because an entity:

A)has earned revenue during the period by selling products from its central operations.
B)has expenses.
C)uses the accrual basis of accounting.
D)uses the cash basis of accounting rather than the accrual basis.

Question 77

Predictive value is an ingredient of the qualitative criteria of $$\begin{array} { | l | l | l | } \hline & \text { Relevance } & \text { Reliability } \\\hline 1 & \text { Yes } & \text { No } \\\hline 2 & \text { Yes } & \text { Yes } \\\hline 3 & \text { No } & \text { No } \\\hline 4 & \text { No } & \text { Yes } \\\hline\end{array}$$

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 78

When an $30 asset with a six-year estimated useful life is recorded as an expense at the date of purchase,this is an application of the:

A)matching principle.
B)cost principle.
C)unit-of-measure assumption.
D)materiality constraint.
E)None of these answers are correct.

Question 79

Which of the following is the incorrect basis for recognizing the expense indicated?

A)Sales commissions expense on the basis of relationship with sales.
B)Administrative salaries expense recognized as incurred.
C)Amortization expense on the basis of time.
D)Cost of goods sold expense on a subjective or arbitrary basis.

Question 80

The list price of a new van was $30,000 at a local car dealership.However,a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier).The van would cost the dealer $24,000 today.Inflation is 5% per year.The amount of profit that would be recognized by the dealer as a result of the sale using the constant dollar financial capital maintenance approach is:

A)$10,000
B)$4,000
C)$5,000
D)$9,000