Question 1

Holding monetary assets during a period of inflation results in:
A)purchasing power gains.
B)purchasing power losses.
C)transaction gains.
D)translation losses.

Accepted Answer

Inflation erodes the purchasing power of money, resulting in a decline in the value of monetary assets over time. Therefore, holding monetary assets during a period of inflation leads to purchasing power losses. Option A is incorrect as it mentions purchasing power gains, which is the opposite of what happens during inflation. Option C and D are not relevant as they refer to different aspects of currency management.

Question 2

What is a "holding gain?"
A)The increase in owners' equity resulting from maintaining monetary assets during a period of inflation
B)The increase in income resulting from general purchasing power accounting during a period of inflation
C)The increase in owners' equity resulting from holding nonmonetary assets during a period of inflation
D)The increase in income caused by paying liabilities with cheaper dollars

Accepted Answer

Holding gain is the increase in owners' equity resulting from holding nonmonetary assets during a period of inflation. Nonmonetary assets are assets that do not have a fixed monetary value, such as land, property, equipment, and securities. When the value of these assets increases due to inflation, the company can report a holding gain on its financial statements. Holding gains are not realized gains, as the assets have not been sold or disposed of, but they can contribute to higher reported earnings and shareholder equity.

Question 3

Which method of accounting for changing prices (inflation) reflects current replacement cost of specific assets?
A)Current replacement cost method
B)General purchasing power method
C)Temporal method
D)Current rate method

Accepted Answer

The Current replacement cost method reflects the current replacement cost of specific assets, which means that it takes into account the current market value of assets that might have increased in price due to inflation. This method is suitable for companies that have significant amounts of inventory or fixed assets. The other methods listed do not specifically reflect the current replacement cost of specific assets.

Question 4

Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29?
A)The cumulative inflation rate over a three-year period is 75% or higher.
B)Interest rates, wages, and prices are linked to a price index.
C)The price of credit sales includes a "buffer" to compensate for the expected loss in purchasing power over the credit period.
D)The general population thinks about prices in terms of a stable foreign currency, and prices may actually be quoted in that currency.

Accepted Answer

IAS 29 considers a cumulative inflation rate of 100% over three years as indicative of hyperinflation, not 75%.

Question 5

Under general purchasing power accounting, how is the gain or loss in purchasing power reported?
A)As a prior period adjustment to Retained Earnings
B)As an element of accumulated comprehensive income on the Balance Sheet
C)As an element of income in the current year
D)All of the above methods are acceptable

Accepted Answer

Under general purchasing power accounting, the gain or loss in purchasing power is reported as an element of income in the current year. This approach reflects the impact of inflation or deflation on the purchasing power of money, affecting the company's financial performance.

Question 6

Since 2003, what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards?
A)No rule is currently in place that generally requires inflation-adjusted financial statements.
B)General purchasing power method must be used.
C)Current replacement cost method must be used.
D)Companies have the option of using current cost or historical cost.

Accepted Answer

No rule is currently in place that generally requires inflation-adjusted financial statements.

Question 7

What does it mean to say that the inflation rate last year was 5%?
A)All prices are 5% less at the end of the year than they were at the beginning of the year.
B)The price of specific products increased 5% between the beginning and the end of the year.
C)On average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year.
D)The general purchasing power of the dollar has increased 5% between the beginning of the year and the end of the year.

Accepted Answer

Inflation rate refers to the percentage increase in the general price level of goods and services in an economy over a period of time. Therefore, if the inflation rate last year was 5%, it means that, on average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year. Option A is incorrect because prices did not decrease, but rather increased. Option B is inaccurate because it refers to specific products, whereas inflation rate measures the overall price level of the economy. Option D is also incorrect because an increase in inflation means the opposite - the general purchasing power of the dollar has decreased.

Question 8

How do multinational corporations combine operations?
A)The acquired firm is dissolved and is merged into the acquiring company.
B)One company acquires a majority of shares of another company, but both entities continue to exist.
C)Two or more entities dissolve their legal status and merge to create a new corporation.
D)All of the above.

Accepted Answer

Multinational corporations can combine operations through a variety of methods, including acquiring a firm and dissolving it into the acquiring company (A), acquiring a majority of shares in another company while both entities continue to exist (B), or merging two or more entities together to create a new corporation (C). Therefore, the best answer is D, as all of these options are valid ways for multinational corporations to combine operations.

Question 9

Prior to 2007, which method of accounting for inflation most closely represented the supplemental reporting required in Mexico?
A)Current replacement cost
B)Current cost
C)General purchasing power
D)Historical cost

Accepted Answer

The most closely represented method of accounting for inflation required in Mexico prior to 2007 was the general purchasing power method. This method adjusts the financial statements to reflect changes in purchasing power caused by inflation, therefore providing a more accurate representation of the real economic performance of a company.

Question 10

According to IAS 27, how can effective control be achieved without owning more than 50% of another company's voting shares?
A)Representation on the company's board of directors
B)Being the primary entity exercising voting rights
C)Through a contract between the entities
D)All of the above may result in control by one corporation over another.

Accepted Answer

According to IAS 27, effective control can be achieved without owning more than 50% of another company's voting shares through representation on the company's board of directors, being the primary entity exercising voting rights, or through a contract between the entities. All of these options may result in control by one corporation over another. Therefore, option D is the best choice.

Question 11

Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation?
A)Asset understatement
B)Overpayment of income taxes
C)Overstated income
D)All of the above are potential problems

Accepted Answer

In periods of inflation, the historical cost-based financial statements may not reflect the current value of assets, resulting in asset understatement. This could also lead to overstated income due to the failure to adjust for inflation, which might result in overpayment of income taxes. Hence, all of the above are potential problems associated with historical cost-based financial statements in periods of inflation.

Question 12

Which method of accounting for inflation is used under U.S.GAAP?
A)Current Replacement Cost method
B)General Purchasing Power method
C)Both Current Replacement Cost and General Purchasing Power methods must be used
D)Inflation accounting is not required under U.S.GAAP.

Accepted Answer

Inflation accounting is not required under U.S. GAAP. U.S. GAAP assumes that the dollar is a stable currency and does not require any adjustments for inflation in financial statements.

Question 13

Why inflation accounting is NOT required in the United States and the United Kingdom since late 1980s?
A)Accounting regulators in the U.S.and U.K.have not addressed the issue of inflation accounting in their pronouncements.
B)Inflation is insignificant in the U.S.and the U.K.since late 1980's.
C)Accounting regulators could not agree on a method for adjusting financial statements for the effect of inflation.
D)Corporations in the U.S and U.K.voluntarily report inflation-adjusted financial statements, making the regulations unnecessary.

Accepted Answer

Inflation became insignificant in the U.S. and the U.K. since the late 1980s, therefore, inflation accounting was no longer required.

Question 14

A representative market basket of products cost $250 at the beginning of the year, and the same collection of products costs $280 at the end of the year.What is the annual rate of inflation?
A)10.7%
B)12%
C)112%
D)-10.7%

Accepted Answer

The annual rate of inflation is calculated by the formula [(New Price - Old Price) / Old Price] * 100. So, [(280 - 250) / 250] * 100 = 12%.

Question 15

Which method of accounting for changing prices (inflation) updates assets by applying inflation rates to historical costs?
A)Current replacement cost method
B)Current rate method
C)Temporal method
D)General purchasing power method

Accepted Answer

The General purchasing power method updates assets by applying inflation rates to historical costs to reflect changes in the general purchasing power of the currency. This method is designed to maintain the purchasing power of the reported amounts and is therefore the best choice for accounting for changing prices (inflation).

Question 16

Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements?
A)The Netherlands
B)Mexico
C)Brazil
D)None of the above

Accepted Answer

None of the listed countries require companies to use current replacement cost accounting for primary financial statements.

Question 17

Holding monetary liabilities during a period of inflation results in:
A)purchasing power gains.
B)purchasing power losses.
C)transaction gains.
D)translation losses.

Accepted Answer

The answer of Holding monetary liabilities during a period of...

Question 18

What issue of reporting effects of changing prices is addressed by IAS 29, issued by the International Accounting Standards Board in 1989?
A)Choice between current replacement cost and general purchasing power method
B)Making inflation-adjusted reporting optional or required
C)Specifying the European Central Bank as the official source of inflation rates in the European Union
D)Mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies

Accepted Answer

IAS 29, issued by the International Accounting Standards Board in 1989, mandates inflation adjustment for primary financial statements of companies in hyperinflationary economies. This standard provides guidance on how to report financial information in economies with hyperinflation, where changes in the general price level are so significant that they distort the comparability of financial statements.

Question 19

Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies?
A)Current replacement cost.
B)General purchasing power.
C)Historical cost for non-monetary assets and current replacement cost for monetary assets.
D)Companies have a choice between current replacement cost and general purchasing power methods.

Accepted Answer

IAS 29 requires financial statements to be adjusted for changes in the general purchasing power of the currency in hyperinflationary economies, which is represented by the general purchasing power method.

Question 20

For the purpose of financial reporting under IASB standards, what is a "group?"
A)A parent corporation and all of its subsidiary corporations
B)Any multinational corporation under the jurisdiction of the IASB
C)All countries that have adopted IASB standards
D)A company that is comprised of foreign corporations dissolved into one entity

Accepted Answer

A "group" in the context of financial reporting under IASB standards refers to a parent corporation and all of its subsidiary corporations. These entities are required to prepare consolidated financial statements to present a true and fair view of the group's financial position and performance. Option B is incorrect as not all multinational corporations fall under the jurisdiction of the IASB. Option C is also incorrect as countries that have adopted IASB standards are not considered a group. Finally, option D is incorrect as a group is not necessarily comprised of foreign corporations dissolved into one entity.

Quiz 9: Additional Financial Reporting Issues

Holding monetary assets during a period of inflation results in:

What is a "holding gain?"

Which method of accounting for changing prices (inflation) reflects current replacement cost of specific assets?

Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29?

Under general purchasing power accounting, how is the gain or loss in purchasing power reported?

Since 2003, what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards?

What does it mean to say that the inflation rate last year was 5%?

How do multinational corporations combine operations?

Prior to 2007, which method of accounting for inflation most closely represented the supplemental reporting required in Mexico?

According to IAS 27, how can effective control be achieved without owning more than 50% of another company's voting shares?

Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation?

Which method of accounting for inflation is used under U.S.GAAP?

Why inflation accounting is NOT required in the United States and the United Kingdom since late 1980s?

A representative market basket of products cost $250 at the beginning of the year, and the same collection of products costs $280 at the end of the year.What is the annual rate of inflation?

Which method of accounting for changing prices (inflation) updates assets by applying inflation rates to historical costs?

Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements?

Holding monetary liabilities during a period of inflation results in:

What issue of reporting effects of changing prices is addressed by IAS 29, issued by the International Accounting Standards Board in 1989?

Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies?

For the purpose of financial reporting under IASB standards, what is a "group?"