Deck 1: Setting the Stage

Question 1

A company has chosen accounting policies that result in minimizing its net income.Which of the following is not a reason for doing this?

A)Income tax deferral
B)Performance evaluation
C)Discourage new competitors
D)For negotiations with unions

Answer 1

B

Question 2

How does a company usually take a "big bath" in a loss year?

A)Reduces its long-term liabilities
B)Expenses as many of its costs as possible
C)Recognizes revenue as soon as possible
D)Writes-down its assets

Answer 2

D

Question 3

Which of the following Canadian accounting standards are not included in the CICA Handbook?

A)Publicly accountable enterprises
B)Private enterprises
C)Not-for-profit organizations
D)Government

Answer 3

D

Question 4

Which of the following user groups has the most influence on reporting objectives?

A)Canada Revenue Agency
B)The company's audit committee
C)The company's major lenders
D)Industry security analysts

Question 5

In the U.S. ,accounting standards are set by the Financial Accounting Standards Board (FASB).From which body does FASB derive its authority?

A)US government
B)American Institute of Certified Public Accountants (AICPA)
C)Securities and Exchange Commission (SEC)
D)International Accounting Standards Board (IASB)

Question 6

Which of the following statements about income smoothing is true?

A)Incoming smoothing can only be accomplished through revenue recognition policies.
B)Income smoothing can only be accomplished through the use of estimates.
C)IFRS provides more opportunities for income smoothing than under pre-IFRS GAAP.
D)Income smoothing through expense recognition policies is effective if there is a strong relationship between expenses and revenues.

Question 7

Which of the following statements on professional judgment is not true?

A)The exercise of professional judgment requires the availability of benchmarks or explicit criteria by which to evaluate alternatives.
B)The use of professional judgment represents arbitrary behaviour.
C)An auditor must use his or her professional judgment to determine whether management's choices are suitable within the context of the company.
D)Applying the mandatory disclosure requirements of the CICA Handbook often involves professional judgment.

Question 8

Professional judgement is based on criteria that include certain characteristics of accounting.Which of the following is not one of these characteristics?

A)Timeliness
B)Relevance
C)Efficiency
D)Verifiability

Question 9

Which financial reporting objective is common to both users and preparers of financial statements?

A)Cash flow prediction
B)Contract compliance
C)Income tax deferral
D)Net income maximization

Question 10

What effect does income smoothing have on risk analysis?

A)Reduces the business risk of a company
B)Increases the financial risk of a company
C)Reduces the audit risk of a company
D)Has no effect on risk analysis

Question 11

What is often the main motivation behind the practice of taking a "big bath" in a loss year?

A)To minimize income taxes
B)To smooth income
C)To maximize asset book values
D)To increase future years' earnings

Question 12

Which of the following financial statements would likely be the most effective in conveying information to users that will help them to predict the long-term future cash flows of the company?

A)A classified balance sheet prepared under the accrual basis of accounting
B)A proforma cash flow statement showing expected cash flows for the next year
C)A multi-step income statement prepared under the accrual basis of accounting
D)A cash flow statement showing actual cash flows for the past two year

Question 13

Which of the following is not one of the major reporting objectives of financial statement preparers?

A)Prediction of future cash flows
B)Compliance monitoring
C)Fraud detection
D)Performance evaluation

Question 14

What does accounting harmonization refer to?

A)The smoothing of income between periods by a company
B)Achieving a high level of consistency among accounting standards of different countries
C)All companies using the same accounting standards
D)Reconciling financial statements prepared under pre-IFRS GAAP to financial statements prepared under IFRS

Question 15

Which of the following financial reporting objectives is a user objective?

A)Income tax deferral
B)Net income maximization
C)Cash flow prediction
D)Income smoothing

Question 16

How do financial analysts refer to earnings that correspond closely to cash flows?

A)Cash flow per share
B)High quality earnings
C)Earnings determined on a cash basis
D)Low quality earnings

Question 17

A company has chosen accounting policies that result in maximizing its net income.Which of the following is not a reason for doing this?

A)To comply with loan agreement maintenance tests
B)For favourable performance evaluation
C)For cash flow prediction
D)To attract new investors

Question 18

Choco Chocolate is the wholly-owned Canadian subsidiary of the Yummy Candy Company,a publicly-traded US company.Which accounting standards must Choco Chocolate comply with?

A)IFRS
B)Canadian Accounting Standards for Private Enterprises
C)US GAAP
D)Whatever standards are prescribed by any loan agreements that Choco has with its lending institutions

Question 19

In preparing financial statements with cash flow prediction as a major objective,a company should choose an accounting policy that ________.

A)allows a cost to be capitalized
B)allows a cost to be expensed
C)results in income-smoothing
D)maximizes net income

Question 20

Which of the following covenants would not appear in a loan agreement?

A)Limits on additional debt
B)Dividend payout limitations
C)Valuation
D)Minimum times-interest-earned ratio

Question 21

Sam Stone is a financial analyst currently looking at a set of financial statements.After his review of the company's statements,he concludes that the statements report "high quality earnings".
Required:
Explain what is meant by "high quality earnings".In preparing financial statements that result in high quality earnings,what types of accounting policy choices will preparers normally adopt.

Question 22

Sheng Ltd. ,a private company,is seeking financing.Why might it be advantageous for Sheng to use IFRS rather than Accounting Standards for Private Enterprises (ASPE)?

A)It is less costly for Sheng to prepare IFRS financial statements.
B)It will give Sheng the appearance of an international company.
C)It will lower Sheng's audit fees.
D)It might enable Sheng to negotiate a lower cost of financing.

Question 23

Which of the following private companies is required to use IFRS?

A)Investment company
B)Import/export company
C)Manufacturing company
D)Accounting firm

Question 24

Private companies in Canada may follow either IFRS or accounting standards for private companies.
Required:
Why did Canada adopt accounting standards for private companies? What is different about private companies and public companies that require a different set of accounting standards? How did the AcSB design these private company accounting standards and why did it choose this option?

Question 25

Which of the following statements about IFRS is true?

A)IFRS is more rule-based than pre-IFRS GAAP.
B)IFRS reduces the number of management estimates that can be used.
C)IFRS requires more judgement in selecting appropriate accounting policies than under pre-IFRS GAAP.
D)IFRS does not require as strong an accounting infrastructure as under pre-IFRS GAAP.

Question 26

France,Germany,Japan and Canada are four countries that have adopted International Financial Reporting Standards.As a result,auto companies from these nations will have similar statements,statement components,disclosures and measurement methods.
Required:
Discuss the "invisible differences" that may cause statements from the different countries to be less comparable and give examples.

Question 27

When the International Accounting Standards Board amends a standard,what must a code-law country do to adopt the amendment?

A)The country's securities regulators must approve the amendment.
B)The country's professional accounting body must approve the amendment.
C)The country must pass new legislation to adopt the amendment.
D)The country's financial institution regulators must approve the amendment.

Question 28

Sharon Peters is a controller is a New Start Co.She has just been informed by her CEO to "make sure that she chooses accounting policies that will have the effect of smoothing income".
Required:
What is meant by "income smoothing"? Why would a company be concerned about smoothing its income? How would income smoothing affect a user's perception of the company's results? Explain how income smoothing can be accomplished.

Question 29

XY Co.is a Canadian company listed on a US stock exchange.In the past,the company prepared a set of financial statements under pre-changeover Canadian GAAP and another set under US GAAP.XY Co.converted to IFRS in 2010 for Canadian purposes,but is still considering preparing a second set of statements under US GAAP.
Required:
What are the current reporting requirements required by the SEC? Should the company be producing two sets of financial statements? Why is there pressure on FASB and the IASB to cooperate in preparing new accounting policy proposals? What do you think FASB will do in the future?

Question 30

Companies that find themselves with poor earnings in a certain year will often decide to take a "big bath".
Required:
Explain what a "big bath" is and the motivation behind it.Why does this type of earnings management "tread very close to the line of ethical reporting"?

Question 31

Both Canada and Japan have adopted IFRS even though the two countries differ in many ways.What is one areas in which the two countries differ?

A)Corporate structure
B)Issuance of consolidated financial statements
C)Use of common law
D)Ability to select accounting policies

Question 32

For international standards to be applied effectively,a country does not require ________.

A)professional financial preparers
B)quality auditors
C)an independent enforcement agency
D)companies with ethical managers

Question 33

Which of the following statements about the use of GAAP for private companies is true?

A)Private companies must use IFRS.
B)Private companies must use Accounting Standards for Private Enterprises.
C)Private companies may use either full IFRS or Accounting Standards for Private Enterprises.
D)Private companies may use either modified IFRS or Accounting Standards for Private Enterprises.

Question 34

What was the main reason for adopting international standards?

A)Internationalization of securities markets
B)Internationalization of financial markets
C)Globalization of business
D)Increasing complexity of GAAP

Question 35

High Traders Inc.is a private Canadian company.The company adopted accounting standards for private enterprises early in 2009 since there were few changes required on changeover.However,a new CFO has just been hired and now is suggesting that the company consider adopting IFRS in the near future.
Required:
Outline four possible reasons that a private company in Canada might choose to adopt IFRS.What would be the costs related to changing to IFRS?

Question 36

Which financial reporting approach has Canada decided to take with respect to private enterprises?

A)IFRS
B)Special adaptation of IFRS for small and medium enterprises
C)Canadian GAAP for private enterprises
D)Disclosed basis of accounting

Question 37

Many countries around the world have adopted International Financial Reporting Standards as their accounting standards.As a result,companies competing in the same industry,but operating in different countries should use the same accounting policies.This,in turn,makes interpretation and analysis of peers' statements listed on different exchanges far easier than in the past.
Required:
Is the above statement true? Explain

Question 38

John Smith is the controller of Excel Co. ,a private company owned by Rita Cooler.John receives a bonus equal to 10 percent of net income,before the bonus,as calculated in accordance with GAAP.
Required:
Explain how John Smith is both the preparer and a user of the financial statements of Excel Co.and whether or not he will likely try to defer income taxes.

Question 39

Management prepares the company's financial statements.Consequently,management's objectives will dominate the selection of accounting policies.
Required:
Give examples of users that might have the power to influence the accounting policy choices made by preparers.

Question 40

What is one of the main reasons why securities commissions are often ineffective enforcement agencies for accounting standards?

A)Lack of knowledge
B)Lack of financing
C)Lack of independence
D)Lack of support from professional accounting bodies