Deck 17: The Framework of Accounting

Question 1

Due process in standard setting involves public consultation with all interested parties.

Answer 1

True

Question 2

The authority responsible for enforcing accounting and other corporate rules for companies in Australia is:

A)ASIC.
B)FRC.
C)AASB.
D)both A and C

Answer 2

A

Question 3

Which of the following parties is NOT a frequent contributor in the consultation phase of the standard setting process?

A)The professional accounting bodies,CPAA and ICAA
B)Academics
C)ASIC
D)Industry groups

Answer 3

C

Question 4

According to the IASB and adopted by the AASB,the primary objective of financial reporting is to provide information:

A)about the profitability of the business.
B)that is useful for decision making,particularly for investors and lenders.
C)to the federal government.
D)regarding the cash flows of the business.

Question 5

A conceptual framework of accounting is intended to eliminate the need for detailed accounting standards.

Question 6

Inventory has a cost of $475 000 and a current selling price of $435 000.What amount should be reported on the financial statements and what concept or principle applies?

A)$435 000,conservatism
B)$435 000,going concern
C)$475 000,going concern
D)$475 000,cost

Question 7

The basic accounting concepts and principles:

A)explain the difference between managerial and financial accounting.
B)provide financial information about the reporting entity that is useful to existing and potential investors,lenders and other creditors in making decisions about providing resources to the entity.
C)are an important way in which management discharges its accountability to investors and other outside users.
D)provide a structure for helping us to judge whether specific rules and methods for calculating and reporting accounting information are consistent with each other.

Question 8

According to the IASB Framework,accounting information should meet all of the following qualitative characteristics,except:

A)comparability.
B)relevance.
C)reliability.
D)reasonableness.

Question 9

SAC 2 is titled:

A)Objective of General Purpose Financial Reporting.
B)Qualitative Characteristics of Financial Information.
C)Definition and Recognition of the Elements of Financial Statements.
D)Definition of the Reporting Entity.

Question 10

Management relies much more on special purpose reports rather than the general-purpose information needed by external users.

Question 11

The objective of financial reporting is to provide useful information to investors,creditors and others to aid in making and evaluating decisions about the allocation of scarce resources.

Question 12

The Financial Reporting Council (FRC)was established by the federal government to oversee the Australian standard-setting process.

Question 13

Accounting principles initially drew their authority from acceptance by the business community.

Question 14

Accounting standards in the USA are issued by:

A)Congress.
B)the Financial Accounting Standards Board.
C)the Securities and Exchange Commission.
D)the Accounting Principles Board.

Question 15

Which of the following is not a characteristic used to judge whether an entity is a reporting entity that should prepare general purpose financial reports?

A)The structure of the entity,e.g.whether it is a sole trader or a company
B)Whether ownership and management are separate
C)Whether the entity has economic or political importance
D)The size or indebtedness of the entity

Question 16

Which of the following are NOT potential users of financial reports as identified in SAC 2?

A)Resource providers,including investors,lenders,creditors,suppliers and employees
B)Recipients of goods and services,such as customers
C)Parties performing a review or oversight function,which may include governments,regulatory agencies (such as ATO),labour unions,financial analysts,employer groups and the media
D)Managers,accountants and standard setters

Question 17

Since 2005,the main influence on Australian accounting standards is:

A)U.S.accounting standards.
B)British accounting standards.
C)International accounting standards.
D)All of the above

Question 18

Accounting principles:

A)should be accepted by people and organisations who need financial information to make decisions.
B)explain financial phenomena.
C)are similar to natural laws,like the law of gravity.
D)apply only to large business organisations.

Question 19

The body that is responsible for the issue of accounting standards in Australia is:

A)The Australian Securities and Investments Commission.
B)The Australian Accounting Standards Board.
C)The Institute of Chartered Accountants in Australia.
D)CPA Australia.

Question 20

AASB stands for Australian Accounting Standards Board.

Question 21

Information that is free from error and bias has the quality of:

A)comparability.
B)reliability.
C)usefulness.
D)relevance.

Question 22

All entities using the same terms to describe the elements of financial statements is an example of the:

A)timeliness principle.
B)comparability principle.
C)materiality principle.
D)reliability principle.

Question 23

Under the AASB Framework,which of the following is NOT a primary qualitative characteristic of financial reporting?

A)Relevance
B)Conservatism
C)Understandability
D)Reliability

Question 24

Which of the following statements is incorrect? Timeliness in reporting:

A)improves usefulness.
B)often requires a trade-off with relevance.
C)means reporting without undue delay.
D)often requires a trade-off with reliability.

Question 25

The interest in the assets of an entity that remains after subtracting its liabilities is referred to as:

A)a gain.
B)equity.
C)a debt.
D)income.

Question 26

The presumption is that a material item is one that is ________ of an appropriate base amount.

A)greater than 20%
B)greater than 10%
C)equal to or less than 5%
D)greater than 5%

Question 27

Resources controlled by an entity as a result of past events that are expected to provide future economic benefits is the AASB's definition of:

A)assets.
B)gains.
C)owners' equity.
D)revenue.

Question 28

Three of the qualitative characteristics listed in the AASB Framework are:

A)reliability,comparability,relevance.
B)readability,timeliness,reasonability.
C)conservatism,availability,relevance.
D)optimism,availability,relevance.

Question 29

The materiality principle requires that financial statements should tend to understate rather than overstate net assets in the face of uncertainty.

Question 30

The Global Reporting Initiative (GRI)is a worldwide,network-based organisation that produces a comprehensive sustainability reporting framework that is widely used globally.

Question 31

Information is regarded as material if its omission or misstatement could influence the economic decisions made by users of financial reports.

Question 32

The principle that accountants do not have to account for every last item in strict accordance with the accounting rules is known as the:

A)relevance principle.
B)cost principle.
C)materiality principle.
D)going-concern principle.

Question 33

The pair of general principles of reporting that often result in a trade-off are:

A)understandability and reliability.
B)timeliness and reliability.
C)materiality and relevance.
D)comparability and materiality.

Question 34

Which of the following statements is false?

A)Reliable data are usually supported by objective evidence.
B)An independent valuation is usually considered reliable.
C)Reliable data are verifiable.
D)Owner opinions are one source of objective evidence.

Question 35

A business decides to expense the cost of minor repair tools rather than capitalise them.This is an example of which principle?

A)materiality
B)understandability
C)relevance
D)matching

Question 36

All of the following accounting practices are examples of conservatism,except:

A)completed contract method.
B)lower-of-cost-and-net-realisable-value inventory method.
C)accelerated depreciation.
D)FIFO method when prices are increasing.

Question 37

Under the comparability principle,financial statements should,as far as possible,be:

A)comparable from one period to the next.
B)comparable with foreign businesses.
C)comparable from business to business.
D)both A and C

Question 38

Since Freda's Alterations has very few transactions each year,financial statements are only prepared for the bank every alternate year.This violates the reliability principle.

Question 39

When a $100 000 sale of a yacht is made by accepting a $10 000 down payment and nine future yearly payments of $10 000 each,profit will most likely be recognised using the:

A)percentage of completion method.
B)instalment method.
C)completed contract method.
D)none of the above

Question 40

Professionals such as solicitors may use the ________ to record income if the receipt of fees is regarded as very uncertain.

A)collection method
B)percentage of completion method
C)instalment method
D)sales method

Question 41

Which type of business would be most likely to use the instalment method to record revenue?

A)medical practitioner
B)real estate developer
C)pharmacy
D)construction firm

Question 42

Which of the following is not a condition that must be met under AASB 118 'Revenue' before revenue from the sale of goods is recorded?

A)The seller has effectively transferred ownership to the buyer.
B)The cash for the sale has been received.
C)The amount of revenue and related costs can be measured reliably.
D)All of the above are conditions that must be met.

Question 43

Table 17-1
In 2016, a developer sells land for $\$ 800,000$ . The cost of the land was $\$ 500,000$ . He receives a $\$ 200000$ down payment plus three instalments of $\$ 300,000$ , $\$ 200000$ and $\$ 100,000$ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $10 \%$ is the appropriate rate of interest.

-Refer to Table 17-1.What is the developer's gross profit?

A)$500 000
B)$300 000
C)$200 000
D)$800 000

Question 44

Which business would be most likely to use the percentage of completion method to record income?

A)Accountant
B)Grocery store
C)Plumber
D)Construction firm

Question 45

Table 17-1
In 2016, a developer sells land for $\$ 800,000$ . The cost of the land was $\$ 500,000$ . He receives a $\$ 200000$ down payment plus three instalments of $\$ 300,000$ , $\$ 200000$ and $\$ 100,000$ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $10 \%$ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the 2019 payment is received?

A)$0
B)$26 091
C)$100 000
D)$9 091

Question 46

A construction firm was contracted to build a bridge for $100 000 000.It is estimated that the total cost will be roughly $95 000 000 spread over five years,but it is unable to estimate reliably the yearly percentage of completion.Under the completed contract method,what amount of profit will be recorded in Year 2?

A)$5 000 000
B)$0
C)$1 000 000
D)none of the above

Question 47

The total contract price to build an office building is $4 200 000,with estimated costs of $2 800 000.The construction firm's costs for Year 1 were $800 000.Under the percentage of completion method,gross profit reported in Year 1 is:

A)$2 200 000.
B)$1 200 000.
C)$400 000.
D)none of the above

Question 48

Alpha Hardware sells on the instalment plan.Sales-related figures for Alpha hardware for 2017 were as follows: sales,$700 000;down payments on the sales,$70 000;collections on instalments $300 000;beginning inventory,$50 000;ending inventory,$40 000;and purchases,$410 000.What is Alpha Hardware's gross profit for 2017 using the instalment method?

A)$370 000
B)$280 000
C)($50 000)
D)$148 000

Question 49

In 2017,Amana sold 10 refrigerators that cost $825 each for a price of $1 285 each.Payments are made in 10 equal instalments with no down payment.During 2018,Amana collected $10 285 on the 2017 sales.Using the instalment method and assuming an interest rate of 10%,how much gross profit will Amana recognise in 2018?

A)$790
B)$129
C)$460
D)None;it is all recognised in 2017.

Question 50

Which profit recognition method is the most conservative?

A)sales method
B)percentage of completion method
C)collection (receipt of cash)method
D)instalment method

Question 51

Table 17-1
In 2016, a developer sells land for $\$ 800,000$ . The cost of the land was $\$ 500,000$ . He receives a $\$ 200000$ down payment plus three instalments of $\$ 300,000$ , $\$ 200000$ and $\$ 100,000$ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $10 \%$ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the 2017 payment is received?

A)$300 000
B)$51 315
C)$71 315
D)$0

Question 52

On 1 April 2017,Babies Unlimited sold a crib with accessories,which cost $1 000,for $1 500.It was sold for 10% deposit,with the balance to be paid in six equal payments beginning on 1 May 2017.How much sales revenue is recognised in the calendar year 2017 under the instalment method?

A)$300
B)$1 500
C)$150
D)$1 350

Question 53

Table 17-1
In 2016, a developer sells land for $\$ 800,000$ . The cost of the land was $\$ 500,000$ . He receives a $\$ 200000$ down payment plus three instalments of $\$ 300,000$ , $\$ 200000$ and $\$ 100,000$ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $10 \%$ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the developer makes the sale and receives the down payment?

A)$100 000
B)$513 148
C)$713 148
D)$213 148

Question 54

Helen Hines,Solicitor,performed bankruptcy services for a client and billed the full fee of $6 000 on 20 September 2017.Hines is uncertain if she will collect the fee.At 31 December 2017,she had collected $900 and in 2018 has collected an additional $2 000.How much service revenue should Hines report in 2017 and 2018,respectively?

A)$3 000,$3 000
B)$900,$2 000
C)$6 000,$0
D)$0,$6 000

Question 55

Saunders Hardware sells on the instalment plan.Sales-related figures for Saunders Hardware for 2017 were as follows: sales,$600 000;down payments on the sales,$60 000;collections on instalments,$250 000;beginning inventory,$90 000;ending inventory $60 000;and purchases,$400 000.What is Saunders Hardware's gross profit using the sales method of income recognition?

A)$200 000
B)$170 000
C)$260 000
D)$190 000

Question 56

Build-it-Better Constructions received a contract to build a convention centre for $23 000 000.It estimated total costs to be $16 000 000 over a three-year construction period: $5 000 000 in Year 1,$7 000 000 in Year 2,and $4 000 000 in Year 3.What is the total project revenue from the convention centre?

A)$16 000 000
B)$23 000 000
C)$18 000 000
D)$7 000 000

Question 57

When both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated,a construction firm should record income on a long-term construction project using the:

A)percentage of completion method.
B)sales method.
C)instalment method.
D)collection method.

Question 58

Luke's Construction receives a contract to build a bridge for $6 000 000,with an estimated cost of $4 000 000.Over the three-year construction period,the costs are estimated to be $500 000 in Year 1,$3 200 000 in Year 2 and $300 000 in Year 3.How much construction revenue would be reported in Year 2 using the percentage of completion method?

A)$2 300 000
B)$2 800 000
C)$4 800 000
D)$3 200 000

Question 59

Table 17-1
In 2016, a developer sells land for $\$ 800,000$ . The cost of the land was $\$ 500,000$ . He receives a $\$ 200000$ down payment plus three instalments of $\$ 300,000$ , $\$ 200000$ and $\$ 100,000$ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $10 \%$ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the 2018 payment is received?

A)$0
B)$26 446
C)$200 000
D)$31 446

Question 60

In 2017,Amana sold 10 washing machines,which cost $700 each,for a price of $1 300 each.All sales are made on credit and $7 000 was collected in 2017.Using the sales method,how much gross profit will Amana recognise in 2017?

A)$6 000
B)$7 000
C)$13 000
D)$6 800

Question 61

In most businesses,profit is recognised at the point of sale.

Question 62

AASB 101 requires a summary of significant accounting policies to be included in the director's report that accompanies the financial statements.

Question 63

Which of the following is not a type of 'value'?

A)Current cost
B)Historical cost
C)Selling price
D)None of the above,i.e.all are types of 'value'

Question 64

The term 'revenue recognition' means the recording of revenue in the accounting records and its reporting in the income statement.

Question 65

A specific exception to the use of historical cost to value assets is if the net realisable value of inventories falls below cost.In this case,the justification for the use of market value rather than cost relies on the:

A)comparability principle.
B)cost versus benefit principle.
C)materiality principle.
D)conservatism principle.

Question 66

Under AASB 108,a change in the useful life of a fixed asset which affects the depreciation charge is regarded as a change in accounting policy,not a change in an accounting estimate.

Question 67

The Australian Accounting Standard dealing with hyperinflation is:

A)AASB 101.
B)AASB 129.
C)AASB 2000.
D)There is no Australian accounting standard dealing with hyperinflation.

Question 68

AASB 110 refers to subsequent events that relate to conditions that have arisen after the reporting date.Such events,if they could influence decision making:

A)must be referred to in a special mail-out to shareholders.
B)need not be accounted for.
C)must be disclosed in a footnote to the financial statements.
D)require adjustments to the figures in the financial statements.

Question 69

Accounting standard AASB 101 requires that a summary of accounting policies should be included:

A)in a schedule attached to the annual report.
B)in the initial section of the notes to the financial statements.
C)on the first page of the annual report.
D)as a footnote to the balance sheet.

Question 70

Under the percentage of completion method,which is used to record profit on assets that take several years to construct,profit is reported as the instalments of contract income that are received.

Question 71

The underlying basis for the use of historical cost is the:

A)relevance principle.
B)matching principle.
C)comparability principle.
D)reliability principle.

Question 72

Accountants generally make no adjustments for changes in the value of the dollar.

Question 73

AASB 110 refers to subsequent events that provide evidence about conditions that existed at reporting date.Such events:

A)must be disclosed in a footnote to the financial statements.
B)must be referred to in the auditor's report.
C)do not have any effect on the accounts until the next financial period.
D)require adjustments to the figures in the financial statements.

Question 74

AASB 101 requires that accounting policy changes be disclosed in a note to the financial statements.A business bought new equipment and thought it would have a six-year useful life.After two years,the business decided that the equipment would be useful for only three more years.This would be considered a:

A)change in accounting estimate.
B)change in accounting policy.
C)recording error.
D)contingency.

Question 75

AASB 110 refers to subsequent events that relate to new matters that have arisen after balance date.Which of the following occurrences after balance date is not an example of a new event?

A)substantial borrowings or share issues
B)specific information on the size of a bad debt that had previously been considered doubtful
C)a major fire or flood loss
D)becoming a party to a legal action

Question 76

Under AASB 101,which of the following is not required to be disclosed in the annual reports of ASX-listed companies?

A)Provision for doubtful debts deducted from debtors
B)Comparative figures for the previous financial year
C)Information on executives' remuneration
D)None of the above,i.e.all are required to be disclosed

Question 77

Which of these items must be disclosed in general purpose financial reports under AASB 101?

A)interest on borrowings
B)different categories of receivables
C)comparative figures
D)all of the above

Question 78

In Australia,in recent years,there has been a move to show some assets at current cost rather than at historical cost.This is because the need for relevancy sometimes outweighs the requirement for reliability.