Question 1

The application of the lower of cost or market rule in valuing inventory is an example of:
A) prudence
B) materiality
C) disclosure
D) consistency.

Accepted Answer

The lower of cost or market rule is applied to inventory to ensure prudence in valuing the inventory at the lower of its historical cost or its market value. This is an example of conservative accounting, where potential losses are recognized earlier rather than later.

Question 2

Identify the accounting concept or principle that relates to the statement in each of the following  questions:
-The financial statements need to contain information that is useful to decision-makers.
A) relevance
B) reliability
C) materiality
D) prudence.

Accepted Answer

The concept of relevance states that financial information should be capable of making a difference in the decisions made by users. In other words, it should be useful to decision-makers.

Question 3

The preparation of financial statements in a similar form to those of other companies facilitates:
A) comparability
B) materiality
C) reliability
D) understandability.

Accepted Answer

The preparation of financial statements in a similar form to those of other companies facilitates comparability. This enables users of financial statements to make meaningful comparisons between different companies and their financial performance.

Question 4

Identify the accounting concept or principle that relates to the statement in each of the following  questions:
-If a particular item is,by reason of its nature or its size,significant to a proper understanding of the situation,it should be separately stated.
A) relevance
B) reliability
C) materiality
D) prudence.

Accepted Answer

The accounting concept that relates to the statement is materiality. Materiality means that any information or item that may affect the decision of the user of the financial statements should be disclosed. Therefore, if an item is significant to a proper understanding of the situation, it should be separately stated.

Question 5

Which of the following statements about consistency is true?
A) A company has to use the same accounting methods in all parts of a company.
B) The same depreciation method should be employed for all assets of a company.
C) The same accounting methods must be used as those used by other companies in the industry.
D) The same accounting methods must be used from year to year,except where a change is made and the impact on profit is disclosed.

Accepted Answer

Consistency in accounting refers to using the same accounting methods and treatments from year to year, unless a change is made and the impact on profit is disclosed. This ensures that financial statements are comparable over time and helps users make informed decisions. While it is recommended to use industry standards and best practices, it is not a requirement for consistency. Different assets may require different depreciation methods based on their useful life and wear and tear, so it is not necessary to use the same method for all assets in a company.

Question 6

The agency empowered to prepare and issue accounting standards for the purposes of the Corporations Act 2001 is the:
A) Australian Accounting Research Foundation
B) Australian Securities Exchange
C) Australian Securities and Investments Commission
D) Australian Accounting Standards Board.

Accepted Answer

The Australian Accounting Standards Board (AASB) is the agency empowered to prepare and issue accounting standards for the purposes of the Corporations Act 2001. The AASB is a Commonwealth statutory authority operating under the Australian Securities and Investments Commission (ASIC).

Question 7

Use of the same accounting methods over time facilitates:
A) disclosure
B) prudence
C) comparability
D) reliability.

Accepted Answer

Use of the same accounting methods over time facilitates comparability, as it allows for consistent measurement and presentation of financial information that can be compared across different periods. This is important for investors, analysts, and other stakeholders who rely on financial statements to make informed decisions. While disclosure, prudence, and reliability are also important accounting principles, they are not directly related to the use of the same accounting methods over time.

Question 8

Identify the accounting concept or principle that relates to the statement in each of the following  questions:
-Information must represent faithfully the transactions or events that have occurred.
A) relevance
B) reliability
C) materiality
D) prudence.

Accepted Answer

The principle that relates to the statement is reliability. This principle requires that the accounting information is trustworthy, accurate, and unbiased, and that it represents faithfully the transactions or events that have occurred.

Question 9

In August 2011,Eggs 'R' Us was forced to destroy all its poultry as a result of an outbreak of Newcastle disease.In the annual report for the year ended 30 June 2012,published in late August,a footnote revealed the loss.This is an example of the concept or principle of:
A) disclosure
B) prudence
C) consistency
D) understandability.

Accepted Answer

The disclosure principle requires that all relevant and material information should be included in the financial statements or footnotes. In this case, the disclosure of the loss incurred due to the outbreak of Newcastle disease is a material fact that should have been disclosed to the users of the financial statements.

Question 10

In reporting on its liability for long service leave to employees,a company is obliged to trade off:
A) understandability and consistency
B) relevance and reliability
C) materiality and disclosure
D) comparability and prudence.

Accepted Answer

When reporting on long service leave liability, a company must balance the relevance (meaningful and useful to users) and reliability (accurate and complete) of the information. Both factors are important since long service leave can represent a significant financial obligation for a company and can impact its financial health. Understandability and consistency (A) are more relevant to financial statement presentation and not specific to long service leave liability reporting. Materiality and disclosure (C) are important considerations but not specific to the trade-off required for reporting long service leave liability. Comparability and prudence (D) are also important but not specific to the trade-off required for reporting long service leave liability.

Question 11

Assets are usually reported in the balance sheet at:
A) liquidation value
B) value in use
C) current or market value
D) historical cost.

Accepted Answer

Assets are usually reported in the balance sheet at historical cost, which represents the original amount paid for the asset. This accounting principle is known as the historical cost principle and it provides a reliable and objective measure of the cost of an asset. While assets may appreciate or depreciate in value over time, the balance sheet typically only reflects their historical cost. This is because the measurement of assets at current or market value may be subjective and difficult to determine accurately.

Question 12

A policy of caution when estimating uncertain amounts is an example of:
A) consistency
B) prudence
C) understandability
D) materiality.

Accepted Answer

The policy of caution when estimating uncertain amounts falls under the principle of prudence, which states that financial statements should not overestimate assets nor underestimate liabilities. Prudence encourages the use of caution when making estimates and exercising judgement in situations where there is uncertainty.

Question 13

A decision by an accountant to disregard errors involving less than 1% of profits is an application of the concept of:
A) relevance
B) consistency
C) disclosure
D) materiality.

Accepted Answer

This is an application of the concept of materiality, which states that financial information should only be disclosed if it would impact a user's decision-making process. In this case, an error that involves less than 1% of profits would not be considered material and therefore can be disregarded.

Question 14

The decision by a motor repair company to expense small tools immediately on acquisition rather than depreciate them over their useful lives is an application of the concept of:
A) timeliness
B) materiality
C) disclosure
D) understandability.

Accepted Answer

The concept of materiality relates to the significance of an item or event to a company's financial statements. Small tools may be considered immaterial in the grand scheme of the company's financials, therefore they can be expensed immediately rather than being depreciated over their useful lives.

Question 15

The agency charged with the administration and enforcement of the Corporations Act 2001 is the:
A) Australian Accounting Standards Board
B) Australian Securities Exchange
C) Australian Securities and Investments Commission
D) Australian Accounting Research Foundation.

Accepted Answer

The Australian Securities and Investments Commission (ASIC) is the regulatory agency responsible for administering and enforcing the Corporations Act 2001. The other options listed - the Australian Accounting Standards Board, Australian Securities Exchange, and Australian Accounting Research Foundation - do not have the same responsibilities and powers under the Corporations Act.

Question 16

The practice by Woolworths Ltd of presenting their financial statements in millions of dollars is an application of the concept of:
A) relevance
B) materiality
C) understandability
D) prudence.

Accepted Answer

The practice of presenting financial statements in millions of dollars is an application of the materiality concept, which requires that financial information is reported if it could influence the economic decisions of users. Presenting financial statements in millions of dollars condenses the information and makes it easier for users to understand.

Question 17

Which accounting concept is involved in the requirement that financial statements contain information that is useful to those who are making decisions?
A) prudence
B) comparability
C) reliability
D) relevance.

Accepted Answer

The concept of relevance requires that the information presented in financial statements must be useful for decision-making. This means that information should be timely, meaningful, and understandable for users of the financial statements. Prudence refers to the need for caution in accounting estimates, while comparability and reliability are also important accounting concepts but are not directly related to the requirement for useful information in financial statements.

Question 18

The letters GAAP stand for:
A) government approved accounting principles
B) generally accepted audit procedures
C) generally accepted audit principles
D) generally accepted accounting principles.

Accepted Answer

GAAP stands for Generally Accepted Accounting Principles, which are a set of guidelines and standards used in the accounting industry to ensure consistency and accuracy in financial reporting. These principles include things like the matching principle, which requires expenses to be matched with the revenues they helped to generate, and the principle of conservatism, which requires accountants to be cautious in their estimates and to err on the side of understating rather than overstating financial results.

Question 19

Identify the accounting concept or principle that relates to the statement in each of the following  questions:
-Information should have predictive value and/or feedback value.
A) relevance
B) reliability
C) materiality
D) prudence.

Accepted Answer

The concept of relevance in accounting ensures that information is useful and pertinent to decision making. Information with predictive value (i.e. helps predict future outcomes) and feedback value (i.e. provides feedback on past performance) is considered relevant.

Question 20

Which of the following is not a key point of the Framework?
A) Relevance and reliability are the primary qualitative characteristics that financial information should possess.
B) Consistency should not be an end in itself.
C) The concept of prudence should always take precedence over reliability.
D) Financial information may lose its relevance if there is undue delay in reporting it.

Accepted Answer

The Framework specifies that prudence (or conservatism) should be used in preparing financial statements, but it should not take precedence over the other qualitative characteristics such as relevance and reliability. Therefore, option C is not a key point of the Framework.

Quiz 6: Financial Reporting Principles, accounting Standards and Auditing

The application of the lower of cost or market rule in valuing inventory is an example of:

Identify the accounting concept or principle that relates to the statement in each of the following questions: -The financial statements need to contain information that is useful to decision-makers.

The preparation of financial statements in a similar form to those of other companies facilitates:

Identify the accounting concept or principle that relates to the statement in each of the following questions: -If a particular item is,by reason of its nature or its size,significant to a proper understanding of the situation,it should be separately stated.

Which of the following statements about consistency is true?

The agency empowered to prepare and issue accounting standards for the purposes of the Corporations Act 2001 is the:

Use of the same accounting methods over time facilitates:

Identify the accounting concept or principle that relates to the statement in each of the following questions: -Information must represent faithfully the transactions or events that have occurred.

In August 2011,Eggs 'R' Us was forced to destroy all its poultry as a result of an outbreak of Newcastle disease.In the annual report for the year ended 30 June 2012,published in late August,a footnote revealed the loss.This is an example of the concept or principle of:

In reporting on its liability for long service leave to employees,a company is obliged to trade off:

Assets are usually reported in the balance sheet at:

A policy of caution when estimating uncertain amounts is an example of:

A decision by an accountant to disregard errors involving less than 1% of profits is an application of the concept of:

The decision by a motor repair company to expense small tools immediately on acquisition rather than depreciate them over their useful lives is an application of the concept of:

The agency charged with the administration and enforcement of the Corporations Act 2001 is the:

The practice by Woolworths Ltd of presenting their financial statements in millions of dollars is an application of the concept of:

Which accounting concept is involved in the requirement that financial statements contain information that is useful to those who are making decisions?

The letters GAAP stand for:

Identify the accounting concept or principle that relates to the statement in each of the following questions: -Information should have predictive value and/or feedback value.

Which of the following is not a key point of the Framework?