Question 1

Which of the following is NOT a reason that preparers of financial reports are obliged to make choices?

Accepted Answer

Directors have a responsibility to choose accounting methods that are reliable, relevant, comparable, and understandable—not those that show the highest profit. This duty is part of their broader fiduciary responsibility to manage their business prudently, transparently, and with accountability to their stakeholders. Therefore, option B is not a valid reason why preparers of financial reports are obliged to make choices.

Question 2

Which of the following is NOT normally a significant accounting estimate involved in financial measurement?

Accepted Answer

The amount of product warranty claims, the portion of credit sales that will be uncollectable, and the period a fixed asset is depreciated over are all common accounting estimates. However, the number of financial periods that will benefit from advertising is not an accounting estimate.

Question 3

Which of the following is NOT an area in which large companies typically make policy choices?

Accepted Answer

Cash versus accrual accounting is a basic accounting decision that is typically made by small businesses, not large companies. Large companies are more likely to make policy choices regarding financial reporting, such as how to value receivables in the balance sheet, over what period to amortize intangible assets, and which product development expenditures should be expenses.

Question 4

Select the income statement account(s)that would be affected by a policy choice at the same time as the allowance for doubtful debts balance sheet account.

Accepted Answer

A policy choice related to the allowance for doubtful debts will directly impact the bad debts expense account on the income statement. As the allowance for doubtful debts increases, bad debts expense will increase correspondingly, and vice versa. The other options (B, C, and D) are not typically linked to the allowance for doubtful debts account.

Question 5

Select the income statement account(s)that would be affected by a policy choice at the same time as the inventory balance sheet account.

Accepted Answer

The inventory balance sheet account is directly related to the cost of goods sold expense, as the cost of goods sold is calculated by subtracting the ending inventory from the beginning inventory and adding the purchases during the period. Therefore, any policy choice that affects the inventory level (such as changes in ordering or production processes) will also impact the cost of goods sold. The other options listed may be affected by different policy choices, but not necessarily in conjunction with the inventory balance sheet account.

Question 6

Select the balance sheet account(s)that would be affected by a policy choice at the same time as the cost of goods sold income statement account.

Accepted Answer

The cost of goods sold (COGS) is directly related to the balance of inventory, which means that any policy choice related to COGS will affect the inventory account as well. For instance, reducing the production of goods could lead to a decrease in COGS and therefore an increase in the inventory balance, and vice versa. The other options (A, C, D) are not directly related to COGS and may be affected by other policy choices.

Question 7

Which of the following would be increased by an accounting policy change involving the declaration of a final dividend?

Accepted Answer

A change in accounting policy involving the declaration of a final dividend would not affect expenses or assets. It also would not affect revenue as a dividend is not a revenue-generating item. Therefore, the correct answer is D, there would be no effect on net profit.

Question 8

Which of the following is NOT an accounting method that could be chosen by a company to help the current ratio look as high as possible?

Accepted Answer

Optimistic estimation of the useful life of plant and equipment affects depreciation expense and net income, but it does not directly impact the current ratio, which measures a company's ability to pay short-term obligations with its short-term assets. The other options directly affect either current assets or current liabilities, thereby impacting the current ratio.

Question 9

Which of the following is NOT an area in which companies typically make policy accounting choices?

Accepted Answer

The purchase of equipment is classified in the cash flow statement according to the nature of the transaction, which is investing, not a policy choice between investing or financing.

Question 10

In which of the following areas has choice largely been made by a standard-setting body,legislators or by accepted practice,so that companies are NOT free to make their own decisions?

Accepted Answer

Goodwill inclusion on the balance sheet is largely governed by accounting standards and regulations, such as IFRS (International Financial Reporting Standards) or GAAP (Generally Accepted Accounting Principles), which dictate when and how goodwill should be recognized, measured, and reported. This leaves companies with little to no discretion in deciding whether to include goodwill in their financial statements.

Question 11

Select the balance sheet account(s)that would be affected by a policy choice at the same time as the wages expense income statement account.

Accepted Answer

Accrued expenses, such as salaries and wages payable, are recorded as a liability on the balance sheet and are directly related to the wages expense recorded on the income statement. Any policy choice that impacts the amount or timing of wages paid would affect both the income statement wage expense and the balance sheet accrued wages liability. The other options listed are not directly related to wages and would not be affected by a policy choice related to wages.

Question 12

Which of the following would be increased by an accounting policy change involving the recognition of accounts receivable sooner?

Accepted Answer

Recognizing accounts receivable sooner would result in revenue being recognized earlier, increasing the overall revenue of the company.

Question 13

Which of the following is NOT an accounting method that would increase the current ratio (currently 1.5:1)?

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Options A, B, and C all involve either increasing current assets or decreasing current liabilities, which would increase the current ratio. Changing the method of depreciation (D) affects non-current assets and expenses, not current assets or liabilities, and thus would not directly impact the current ratio.

Question 14

Select the income statement account(s)that would be affected by a policy choice at the same time as the accrued expenses balance sheet account.

Accepted Answer

Accrued expenses reflect expenses that have been incurred but not yet paid, and therefore would impact various expense accounts on the income statement. Depending on the nature of the policy choice, it could result in changes to the timing or recognition of certain expenses, which would in turn impact the income statement accounts. Options A, B, and C are not necessarily directly related to the timing of accrued expenses.

Question 15

Which of the following would NOT be affected by an accounting policy change involving the capitalisation of some repairs expenses?

Accepted Answer

Liabilities would not be directly affected by a change in accounting policy regarding the capitalisation of repairs expenses, as this change primarily impacts the classification between expenses and assets, and subsequently net profit.

Question 16

Select the income statement account(s)that would be affected by a policy choice at the same time as the goodwill balance sheet account.

Accepted Answer

Goodwill is subjected to annual impairment testing, and the amortization expense account is used to amortize the goodwill's cost over its useful life. Therefore, if a policy choice affects the goodwill balance sheet account, it may also affect the amortization expense account.

Question 17

Select the income statement account(s)that would be affected by a policy choice at the same time as the accounts receivable balance sheet account.

Accepted Answer

Revenue is directly affected by accounts receivable, as it represents sales made on credit that have not yet been collected in cash.

Question 18

Which of the following is NOT an accounting method that could be chosen by a company to increase reported profits?

Accepted Answer

The answer of Which of the following is NOT an...

Question 19

Which of the following would be increased by an accounting policy change involving the accrual of greater employee benefits expense?

Accepted Answer

An increase in the accrual of employee benefits expense would increase the company's liabilities, as it represents an obligation to pay those benefits in the future. This change would not affect assets, net profit, or shareholders' equity directly.

Question 20

Which of the following is NOT an area in which companies typically make policy accounting choices?

Accepted Answer

Dividend policy is not an area in which companies typically make policy accounting choices. Dividend policy concerns how much of a company's earnings will be distributed to shareholders in the form of dividends, which is a financial decision rather than an accounting policy. The other choices listed involve accounting policies, such as revenue recognition, depreciation methods, and inventory valuation.

Quiz 16: Accounting Policy Choices

Which of the following is NOT a reason that preparers of financial reports are obliged to make choices?

Which of the following is NOT normally a significant accounting estimate involved in financial measurement?

Which of the following is NOT an area in which large companies typically make policy choices?

Select the income statement account(s) that would be affected by a policy choice at the same time as the allowance for doubtful debts balance sheet account.

Select the income statement account(s) that would be affected by a policy choice at the same time as the inventory balance sheet account.

Select the balance sheet account(s) that would be affected by a policy choice at the same time as the cost of goods sold income statement account.

Which of the following would be increased by an accounting policy change involving the declaration of a final dividend?

Which of the following is NOT an accounting method that could be chosen by a company to help the current ratio look as high as possible?

Which of the following is NOT an area in which companies typically make policy accounting choices?

In which of the following areas has choice largely been made by a standard-setting body,legislators or by accepted practice,so that companies are NOT free to make their own decisions?

Select the balance sheet account(s) that would be affected by a policy choice at the same time as the wages expense income statement account.

Which of the following would be increased by an accounting policy change involving the recognition of accounts receivable sooner?

Which of the following is NOT an accounting method that would increase the current ratio (currently 1.5:1) ?

Select the income statement account(s) that would be affected by a policy choice at the same time as the accrued expenses balance sheet account.

Which of the following would NOT be affected by an accounting policy change involving the capitalisation of some repairs expenses?

Select the income statement account(s) that would be affected by a policy choice at the same time as the goodwill balance sheet account.

Select the income statement account(s) that would be affected by a policy choice at the same time as the accounts receivable balance sheet account.

Which of the following is NOT an accounting method that could be chosen by a company to increase reported profits?

Which of the following would be increased by an accounting policy change involving the accrual of greater employee benefits expense?

Which of the following is NOT an area in which companies typically make policy accounting choices?