Question 1

Which of the following statements is incorrect?
A)Under 'mark to market', financial instruments are revalued to their market price each reporting date
B)'Market value' usually means the net fair value of a financial asset or financial liability having the same risk profile
C)'Net present value' can be used to measure both assets and liabilities
D)'Current cash equivalent' is only applicable to current assets

Accepted Answer

Current cash equivalent can apply to both current assets and current liabilities.

Question 2

The following are quotations that concern a company's accounting policies.
I.$\quad$'I think this item will change the judgement of one or two people but not the judgement of a reasonable person.'
II.$\quad$'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users.'
III.$\quad$'When estimating the useful life of a piece of equipment one should use some caution in the estimation because of uncertainties that exist.'
IV.$\quad$'Under a contract of sale, one entity sold an asset to another entity and made a loss on sale.However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset.'
-Which one of the statements refers mainly to the comparability doctrine?
A)I
B)II
C)III
D)IV

Accepted Answer

The statement 'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users' refers to the comparability doctrine, which aims to ensure that financial information is presented in a consistent and comparable way across different companies. By disclosing their accounting policies and methods, companies provide users with the necessary information to make meaningful comparisons between different firms. The other statements do not refer specifically to the comparability doctrine.

Question 3

Which of the following are intangible assets under AASB 138?
I.$\quad$ Masthead
II.$\quad$ Deferred tax asset
III.$\quad$Goodwill arising from a business combination
IV.$\quad$Patent
A)I, II, III and IV
B)I, III and IV
C)II and III
D)I and IV

Accepted Answer

D

Question 4

A monetary asset is an asset for which its value in use is:
A)reduced by increases in the inflation rate
B)unchanged by decreases in the inflation rate
C)unchanged by changes in the inflation rate
D)unchanged by increases in the inflation rate

Accepted Answer

The answer of A monetary asset is an asset for...

Question 5

As a general rule, the directors of a large proprietary company that is a reporting entity:
A)need not prepare any financial reports for that entity
B)must ensure a financial report is prepared for that entity that gives a true and fair view only
C)must ensure that a special purpose financial report is prepared for that entity that gives a true and fair view
D)must ensure that a financial report is prepared, in accordance with AASB standards, that gives a true and fair view for that entity.

Accepted Answer

The directors of a large proprietary company that is a reporting entity must ensure that a financial report is prepared, in accordance with AASB standards, that gives a true and fair view for that entity. This is a legal requirement under the Corporations Act 2001. While a special purpose financial report may be prepared under certain circumstances, the default requirement is for a general purpose financial report prepared in accordance with AASB standards.

Question 6

The following are quotations that concern a company's accounting policies.
I.$\quad$'I think this item will change the judgement of one or two people but not the judgement of a reasonable person.'
II.$\quad$'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users.'
III.$\quad$'When estimating the useful life of a piece of equipment one should use some caution in the estimation because of uncertainties that exist.'
IV.$\quad$'Under a contract of sale, one entity sold an asset to another entity and made a loss on sale.However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset.'
-Which one of the statements refers mainly to the materiality doctrine?
A)I
B)II
C)III
D)IV

Accepted Answer

The statement "I think this item will change the judgement of one or two people but not the judgement of a reasonable person" refers mainly to the materiality doctrine. This doctrine states that immaterial information need not be disclosed in financial statements as it would not affect the judgment of a reasonable person.

Question 7

For entities that have to prepare a financial report under the Corporations Act, that report must:
Show a true and fair view?
Comply with all AASB standards?
A)$\quad$ No
$\quad$$\quad$Yes
B)$\quad$ No 
$\quad$$\quad$Maybe
C)$\quad$ Yes 
$\quad$$\quad$Maybe
D)$\quad$ Yes 
$\quad$$\quad$No

Accepted Answer

Entities that have to prepare a financial report under the Corporations Act must comply with all AASB standards and show a true and fair view of their financial position and performance. Therefore, the correct answer is Yes, as C indicates.

Question 8

Under financial capital maintenance a profit is considered earned when:
A)the financial amount of the net assets at the end of the period exceeds the financial amount of net assets at the beginning
B)the physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period
C)the net present value of future expected asset inflows exceeds the net present value of future expected liability outflows
D)the directors consider that sufficient assets are on hand to pay a dividend without affecting the ability to pay creditor commitments as and when they fall due

Accepted Answer

Under financial capital maintenance, profit is considered earned when the financial amount of the net assets at the end of the period exceeds the financial amount of net assets at the beginning. This approach focuses on maintaining the financial amount of capital, which means that the company must generate enough profit to cover the cost of capital and maintain the same level of financial worth. Therefore, option A is the correct choice. Options B, C, and D are not relevant to the concept of financial capital maintenance.

Question 9

Can an entity be a reporting entity and not be caught by the Corporations Act?
A)No, because the reporting entity concept is in the Corporations Act
B)Yes, because the reporting entity concept can be applicable to any type of entity
C)No, because the reporting entity concept is only relevant to companies
D)Yes, because the reporting entity concept is applicable only to companies and to unincorporated businesses

Accepted Answer

The reporting entity concept can be applicable to any type of entity, not just companies that are caught by the Corporations Act. There may be other legislative or regulatory requirements that apply to certain types of entities, but the concept of reporting entity is not limited to a specific legislation.

Question 10

The following are quotations that concern a company's accounting policies.
I.$\quad$'I think this item will change the judgement of one or two people but not the judgement of a reasonable person.'
II.$\quad$'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users.'
III.$\quad$'When estimating the useful life of a piece of equipment one should use some caution in the estimation because of uncertainties that exist.'
IV.$\quad$'Under a contract of sale, one entity sold an asset to another entity and made a loss on sale.However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset.'
-Which one of the statements refers mainly to the notion of substance over form?
A)I
B)II
C)III
D)IV

Accepted Answer

The statement "Under a contract of sale, one entity sold an asset to another entity and made a loss on sale. However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset" refers to the concept of substance over form, where the substance of the transaction (i.e., retaining use of the asset) may override the legal form of the transaction (i.e., a sale).

Question 11

During 20X4, a large shareholder of Seremban Ltd donated some inventory to Seremban Ltd with a fair value of $1 million.This $1 million is an asset and:
A)a liability to Seremban Ltd
B)a revenue to Seremban Ltd
C)a part of equity of Seremban Ltd
D)a contingent liability of Seremban Ltd

Accepted Answer

When inventory is donated to a company, the fair value of the inventory is recognized as revenue, as it increases the assets of the company without a corresponding increase in liabilities or a direct investment by the owners.

Question 12

Winston, a young accountant has determined that the definition of an asset as been satisfied for an item.He states that the item can now be recognised in the financial statements of the relevant entity.Winston's statement is:
A)Incorrect, because the recognition criteria also have to be satisfied
B)Incorrect, because control over the future benefits of the asset has to be determined beyond reasonable doubt first
C)Correct, because once the definition is satisfied the legal enforceability of the asset is satisfied an this automatically satisfies the recognition criteria
D)Correct, because once the definition is satisfied the legal enforceability and tangibility of the asset are established, which automatically satisfies the recognition criteria

Accepted Answer

Winston's statement is incorrect because satisfying the definition of an asset does not automatically lead to recognition in the financial statements. The recognition criteria, which include the probability of future economic benefits flowing to or from the entity and the measurement reliability of the asset, must also be satisfied.

Question 13

The Australian conceptual framework of accounting is presently composed of which documents?
A)SAC 1, SAC 2 and the Framework
B)SAC 1, SAC 2, SAC 3, SAC 4 and the Framework
C)SAC 1, SAC 2, SAC 3 and SAC 4
D)The Framework

Accepted Answer

The Australian conceptual framework of accounting currently includes SAC 1, SAC 2, and the Framework. SAC 3 and SAC 4 have been withdrawn.

Question 14

Which of the following statements about AASB 1031 Materiality is/are correct?
I.$\quad$Qualitative factors may be the primary reason that an item is classified as material.
II.$\quad$Materiality means that accounting standards only have to be applied to an item if the amount of the item is greater than or equal to 10 per cent of the relevant base amount.
III.$\quad$An accounting standard's provisions may have to be applied to an item even when that item is less than 1 per cent of the relevant base amount.
IV.$\quad$Materiality applies to accounting measurement and policies but not to disclosure.
A)III only
B)I and II only
C)I and III only
D)I, III and IV only

Accepted Answer

I. This statement is correct. Qualitative factors can have a significant impact on whether an item is classified as material or not.

II. This statement is incorrect. AASB 1031 Materiality does not specify any specific percentage or amount for determining materiality. Instead, it advises entities to use professional judgement.

III. This statement is correct. Materiality is not just limited to quantitative factors, and even small items may be material based on their qualitative impact.

IV. This statement is incorrect. Materiality applies to both accounting measurement and disclosure, as both can have an impact on the financial statements' users' decision-making processes.

Question 15

Sumo Pty Ltd makes submarines for coastal holiday resorts.The small submarines hold around ten passengers and one driver and are used for diving up to ten metres to examine reefs and sea life.Sumo Pty Ltd exports the submarines around the world and last years total revenue was $45 million.This year, revenue is expected to be $80 million with about 70% export revenue.Sumo Pty Ltd is owned jointly by two brothers Harry and Barry Jones.They employ 85 full time staff from their single factory outside Noosa on the Sunshine Coast of Queensland.Sumo Pty Ltd is likely to be a:
A)non-reporting entity because there is little separation of ownership from management
B)reporting entity because of its financial and economic importance
C)non-reporting entity because of its lack of political importance
D)reporting entity because of its large percentage of export revenue to total revenue

Accepted Answer

Sumo Pty Ltd is a reporting entity because of its significant financial and economic importance, with total revenue expected to be $80 million this year, and with 70% of that revenue coming from exports. The fact that it is owned by two brothers does not necessarily mean that it is a non-reporting entity.

Question 16

The qualitative characteristics of comparability refers to being able to compare:
A)The financial report of an entity with its reports for previous periods - Yes The financial report of an entity with the report of another entity - No
B)The financial report of an entity with its reports for previous periods - No The financial report of an entity with the report of another entity - No
C)The financial report of an entity with its reports for previous periods - Yes The financial report of an entity with the report of another entity - Yes
D)The financial report of an entity with its reports for previous periods - No The financial report of an entity with the report of another entity - Yes

Accepted Answer

Comparability in accounting refers to the ability to compare financial reports both over time within the same entity (to observe trends and changes) and across different entities (to evaluate relative financial position, performance, and changes in financial position). This is essential for users of financial statements to make informed decisions.

Question 17

Which of the following is not a possible characteristic of current assets as defined by AASB 101?
A)a current asset is expected to be realised in, or is intended for sale or consumption in, the entity's normal operating cycle
B)a current asset is held primarily for the purpose of being traded
C)a current asset is expected to be realised within 12 months after the reporting date
D)a current asset is cash, excluding long term cash equivalents

Accepted Answer

Current assets include cash and cash equivalents, where cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Therefore, excluding long-term cash equivalents does not align with the definition of current assets as they inherently include short-term cash equivalents.

Question 18

Which entities covered by the Corporations Act must apply the provisions in all AASB accounting standards when preparing the annual financial reports (assuming materiality)?
A)only reporting entities
B)only disclosing entities
C)only public companies that are reporting entities
D)only disclosing entities and reporting entities

Accepted Answer

Both reporting entities and disclosing entities are required to apply the provisions in all AASB accounting standards when preparing their annual financial reports, assuming materiality. Public companies are often reporting entities, but not all reporting entities are public companies. Disclosing entities are those that have issued securities to the public or have specific obligations to disclose information to the market.

Question 19

Sara and Clara form a proprietary company called Slara Pty Ltd, to incorporate their small haberdashery business.Sara and Clara hold 51% of the shares and issue the remaining 49% to 30 different friends and acquaintances.Slara Pty Ltd is most likely to be classified as a reporting entity based on:
A)Economic importance or significance
B)Political importance or significance
C)Financial characteristics
D)Separation of management from economic interest

Accepted Answer

The answer of Sara and Clara form a proprietary company...

Question 20

In the Framework, recognition means including the financial effect of an item:
A)in one of the financial statements
B)in the notes only
C)in one of the financial statements or in the notes
D)only in either the income statement or the balance sheet

Accepted Answer

Recognition in the context of the framework refers to the process of including an item within the main body of the financial statements (either the income statement or the balance sheet), rather than merely mentioning it in the notes.

Quiz 2: Objectives of Company Reporting, Conceptual Elements and Terminology

Which of the following statements is incorrect?

Which of the following are intangible assets under AASB 138? I. $\quad$ Masthead II. $\quad$ Deferred tax asset III. $\quad$ Goodwill arising from a business combination IV. $\quad$ Patent

A monetary asset is an asset for which its value in use is:

As a general rule, the directors of a large proprietary company that is a reporting entity:

For entities that have to prepare a financial report under the Corporations Act, that report must: Show a true and fair view? Comply with all AASB standards?

Under financial capital maintenance a profit is considered earned when:

Can an entity be a reporting entity and not be caught by the Corporations Act?

During 20X4, a large shareholder of Seremban Ltd donated some inventory to Seremban Ltd with a fair value of $1 million.This $1 million is an asset and:

Winston, a young accountant has determined that the definition of an asset as been satisfied for an item.He states that the item can now be recognised in the financial statements of the relevant entity.Winston's statement is:

The Australian conceptual framework of accounting is presently composed of which documents?

The qualitative characteristics of comparability refers to being able to compare:

Which of the following is not a possible characteristic of current assets as defined by AASB 101?

Which entities covered by the Corporations Act must apply the provisions in all AASB accounting standards when preparing the annual financial reports (assuming materiality) ?

Sara and Clara form a proprietary company called Slara Pty Ltd, to incorporate their small haberdashery business.Sara and Clara hold 51% of the shares and issue the remaining 49% to 30 different friends and acquaintances.Slara Pty Ltd is most likely to be classified as a reporting entity based on:

In the Framework, recognition means including the financial effect of an item: