(Test Bank) Financial and Managerial Accounting

Weygandt, Kimmel, Kieso, 3

Business

Test Bank

3rd Edition

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Test Bank for Financial and Managerial Accounting, The downloadable file consists of 389 pages, and the total size of the file is 3.98 MB. Purchase now only for highly discounted price.

Author(s): Weygandt, Kimmel, Kieso

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Test Bank for Financial and Managerial Accounting, 3e Jerry Weygandt, Paul Kimmel, Donald Kieso (All Chapters) Chapter 1: Accounting regulation and the conceptual framework © John Wi ley and Sons Australia, Ltd 2018 1.1 Chapter 1: Accounting regulation and the conceptual framework Multiple choice questions 1. With regards to the Australian accounting standards, IASB stands for : a. International Auditing Standards Board . b. International Accounting Securities Body . *c. International Accounting Standards Board . d. International Accounting Statements Body . Answer: c Learning objective 1.3: explain the structure, role and processes of the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC). 2. Which of th e following statements is false ? *a. The IFRS Advisory Council is directly accountable to the Monitoring Board . b. Australia adopted international accounting standards issued on or after 1 January 2005 . c. The IASB and IFRS Interpretations Committee are appointed and overseen by a geographically and professionally diverse group called the IFRS Foundation Trustees . d. The IASB is an independent standard -setting board that develops and approves International Financial Reporting Standards . Answer: a Learning objective 1.3: explain the structure, role an d processes of the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC). 3. Which of the following is not a chapter in the IASB’s conceptual framework ? a. the Framework . b. qualitative characteristics of useful financial reporting . c. the objective of general purpose financial reporting . *d. the issues with financial reporting . Answer: d Learning objective 1.4: explain the key components of the conceptual framework. Testbank to accompany Financial reporting 2e by Loftus et al. © John Wi ley and Sons Australia, Ltd 2018 1.2 4. Which of the following statements about the conceptual framework is true? a. The conceptual framework deals only with the objective of special purpose financial statements . b. The Conceptual Framework for Financial Reporting provides guidelines intended to meet the information needs of a range of users who are able to command that reports be prepared to their own particular needs . *c. The conceptual framework deals only with the objective of general purpose financial statements . d. the Conceptual Framework for Financial Reporting , SAC 1, and SAC 2 provides guidelines on the preparation of financial statements for a specific group of users . Answer: c Learning objective 1.4: explain the key components of the conceptual framework. 5. The two fundamental qualitative characteristics of useful information are: a. materiality and timeliness . b. understandability and verifiability . c. faithful representation and comparability . *d. relevance and faithful representation . Answer: d Learning objective 1.5: explain the qualitative characteristics that make information in financial statements useful. 6. For i nformation to be considered material: a. it must be complete . b. it must not include any bias . *c. its omission or misstatement could influence users’ decision -making . d. it has a predictive or confirmatory value. Answer: c Learning objective 1.5: explain the qualitative characteristics that make information in financial statements useful. Chapter 1: Accounting regulation and the conceptual framework © John Wi ley and Sons Australia, Ltd 2018 1.3 7. Costs of providing useful information include: a. collection and processing costs . b. dissemination costs . c. verification costs . *d. All of these options are costs of providing useful information . Answer: d Learning objective 1.5: explain the qualitative characteristics that make information in financial statements useful. 8. If different independent observers could reach the same general conclusions that the information represents then the quality of the information has achieved : a. neutrality . b. underst andability . *c. verifiability . d. comparability . Answer: c Learning objective 1.5: explain the qualitative characteristics that make information in financial statements useful. 9. Which of the following statements about the going concern assumption is not true? a. it can justif y the use of historical cost s when measur ing non-current assets. b. it supports the use of assets such as Prepaid Expenses . c. it supports the systematic allocation of depreciation over an asset’s useful life . *d. it is used when an entity goes into liquidation . Answer: d Learning objective 1.6: discuss the going concern assumption underlying the preparation of financial statements. Testbank to accompany Financial reporting 2e by Loftus et al. © John Wi ley and Sons Australia, Ltd 2018 1.4 10. Which of the following are the three essential criteri a in the definition of an asset: I. Future sacrifices of economic benefits IV. Past event . II. Future economic benefits. V. Ownership . III. Present obligation . VI. Control. a. I, III, V I. *b. II, IV, VI. c. II, III, VI. d. I, III, V. Answer: b Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. 11. The only financial statement element which cannot be defin ed independently of the other elements under the conceptual framework is: *a. equity . b. assets . c. income . d. expenses. Answer: a Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. 12. Which of the following statements is correct? a. Equity is defined as ‘the residual interest in the assets of the entity after deducting all its expenses ’. *b. Equity is increased by profit and owner contributions . c. Equity is decreased by an entity’s income . d. Equity cannot be sub -classified in the statement of financial position . Answer: b Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. Chapter 1: Accounting regulation and the conceptual framework © John Wi ley and Sons Australia, Ltd 2018 1.5 13. An example of an expense , as defined in the conceptual framework, is : a. Payment to a supplier for purchases made on credit . b. Dividends paid to shareholders. c. Cash p urchase of office equipment . *d. Wages paid on a weekly -basis to employees. Answer: d Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. 14. Which of the following statements about income is not true? *a. Income includes capital contributed by owners of the entity . b. Income can be in the form of decreases of liabilities . c. Income arises when there is control over the increase in economic benefits . d. Income results in increases in economic benefits . Answer: a Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. 15. The two recognition criteria for the elements of financial statements are: a. Measured reliably and Existence of economic benefits . b. Existence of economic benefits and Control . *c. Probability of occurrence and Measured reliably . d. Probability of occurrence and Control . Answer: c Learning objective 1.8: explain the principles for recognising the elements of financial statements. Testbank to accompany Financial reporting 2e by Loftus et al. © John Wi ley and Sons Australia, Ltd 2018 1.6 16. Georgetown Ltd purchased a block of land on 31 March and paid $ 400 000 cash to the land owner. An independent evaluation reve als that the land is worth $5 00 000. Using historical cost as a measurement base, how should Georgetown Ltd recognise this purchase of land in its financial statements? a. $400 000 recognised as an asset (land) and $100 000 as a liability . *b. $400 000 recognised as an asset (land) . c. $500 000 recognised as an asset (land) . d. The land should not be recognised as an asset as it cannot be reliably measured. Answer: b Learning objective 1.9: distinguish between alternative bases for measuring the elements of financial statements. 17. In order to comply with the Australian Accounting Standards, which of the following asset s cannot be recorded at its historical cost ? *a. inventories . b. buildings . c. motor vehicles . d. land. Answer: a Learning objective 1.9: distinguish between alternative bases for measuring the elements of financial statements. 18. In measuring the value of a liability, w hich measurement base uses the discounted future net cash outflows that are expected to settle the obligation in the normal course of business? a. Realisable value . b. Current cost. c. Historical cost . *d. Present value . Answer: d Learning objective 1.9: distinguish between alternative bases for measuring the elements of financial statements. Chapter 1: Accounting regulation and the conceptual framework © John Wi ley and Sons Australia, Ltd 2018 1.7 19. Which of the following is not an example of a settlement of a liability? a. cash payment . b. provision of services . *c. owner contribution . d. creditor waiving their rights to the obligation . Answer: c Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. 20. Bruce’s Bouquets rents a small shop located in the outskirts of Melbourne. In accordance with the Conceptual Framework , Bruce’s Bouquets should recognise the monthly payment for the shop rental as: a. an increase in income and a decrease in liabilities . b. a decrease in assets and an increase in equity . c. a decrease in assets and a decrease in income. *d. a decrease in assets and an increase in expense. Answer: d Learning objective 1.7: define the basic elements in financial statements — assets, liabilities, equity, income and expenses. 21. Which of the following statements is incorrect about the physical capital concept? *a. The general price level accounting system follows the physical capital concept. b. Capital is seen as the operating capability of the entity’s assets. c. Profit is earn ed after an entity has set aside enough capital to maintain the operating capability of the entity’s assets. d. Physical capital may be measured under a current value system. Answer: d Learning objective 1.10: outline concepts of capital maintenance. Chapter 2: Application of accounting theory © John Wi ley and Sons Australia, Ltd 2018 2.1 Chapter 2: Application of accounting theor y Multiple c hoice questions 1. In which of the following contexts would accountants be required to exercise professional judgement ? a. Deciding whether property, plant and equipment should be measured at fair value after its initial recognition . b. Determining the most appropriate depreciation method to be used for non -current assets . c. Measuring the net realisable value of inventories . *d. All of the options are correct. Answer: d Learning objective 2.1: describe the role of professional judgement in the preparation of financial reports. 2. Considering whether a past event has arisen relates to which of the following components in accounting policy decisions : *a. Definition. b. Recognition. c. Measurement. d. Disclosure. Answer: a Learning objective 2.2: identify the major decision areas in considering policies to account for transactions and other events. 3. Positive theories: a. explain why managers choose a particular accounting method . b. might be descriptive of accounting practice . *c. All of these options are correct . d. rely on real -world observations . Answer: c Learning objective 2.3: explain how normative and positive theories are used in accounting. Testbank to accompany Financial reporting 2e by Loftus et al. © John Wi ley and Sons Australia, Ltd 2018 2.2 4. Normative theories are developed using the following process : a. Principles → Assumptions → Objectives → Definitions/Actions. b. Objectives → Definitions/Actions → Assumptions → Principles. c. Definitions/Actions → Principles → Assumptions → Objectives. *d. Objectives → Assumptions → Principles → Definitions/Actions. Answer: d Learning objective 2.3: explain how normative and positive theories are used in accounting. 5. Marcus observes that the bank overdraft account is a liability account and has a credit balance. He also notices that the accounts payable account is a liability account and has a credit balance. Therefore, Marcus comes to the conclusion that all liability accounts have a credit balance. Which approach is Marcus using in developing h is theory that all liability accounts having credit balance s? a. Conceptual reasoning . b. Conclusive reasoning . *c. Inductive reasoning . d. Deductive reasoning . Answer: c Learning objective 2.3: explain how normative and positive theories are used in accounting. 6. A limitation of the use of inductive reasoning in the development of an accounting theory is that it : *a. does not question the appropriateness of the observed actions . b. attempts to improve a particular process . c. is based on identifying a set of objectives. d. is only useful for developing normative theories . Answer: a Learning objective 2.3: explain how normative and positive theories are used in accounting. Chapter 2: Application of accounting theory © John Wi ley and Sons Australia, Ltd 2018 2.3 7. Which of the following statements is correct ? a. Accounting is only concerned with recording transactions and does not require professional judgement . b. Normative theories tend to maintain the status quo . *c. The process of deductive reasoning starts with objective setting. d. The conceptual framework is developed through a n inductive approach. Answer: c Learning objective 2.3: explain how normative and positive theories are used in accounting. 8. Positive accounting theory is based on a n economic assumption that all individuals act in their own self-interest and are wealth maximisers . This economic assumption is referred to as the : a. responsible economic person assumption . b. logical economic person assumption . *c. rational economic person assumption . d. reasonable economic person assumption . Answer: c Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 9. Which of the following is not a relationship focused on by positive accounting theory? a. debt contracts . b. political contracts . c. managerial contracts . *d. creditor contract s. Answer: d Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. Testbank to accompany Financial reporting 2e by Loftus et al. © John Wi ley and Sons Australia, Ltd 2018 2.4 10. Which of the following statements is not consistent with agency theory ? a. Managers are employed to conduct business on behalf of the shareholders . b. Managers have a legal and fiduciary duty to act in the best interests of the shareholders . *c. Managers are more likely to favour the interests of lenders in managing debt contracts . d. Costs are incurred in monitoring and controlling agent’s behaviour. Answer: c Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 11. An example of monitoring costs is: *a. implementing a management remuneration plan . b. preparing quarterly financial statements for le nders . c. linking management incentives to entity performance . d. measuring the residual loss of the manager purchasing office supplies for his/her own personal use . Answer: a Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 12. The majority of monitoring and bon ding costs will be borne by: a. shareholders . b. creditors . *c. agents . d. principals . Answer: c Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. Chapter 2: Application of accounting theory © John Wi ley and Sons Australia, Ltd 2018 2.5 13. Residual loss, as an agency cost, refers to : a. the costs incurred by the agent when implementing assurances that they are acting in the principal’s best interests . b. the costs incurred by the principal in observing, evaluating and controlling the agent’s behaviour . c. the amount by which the marginal cost is less than the expected benefit of additional monitoring and bonding. *d. the amount by which the marginal cost exceeds the expected benefit of additional monitoring and bonding . Answer: d Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 14. Positive accounting theory suggests that the separation of ownership and control within an entity means managers, as agents, are likely to act: *a. in their own interests . b. in the interests of the debtholders . c. in the interests of the shareholders . d. in the interests of the directors . Answer: a Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 15. Which of the following is not identified as one of the major problems that can arise in owner -manager agency relationships? a. Risk aversion. b. Dividend retention. *c. Reduced incentives. d. Horizon problems. Answer: c Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. Testbank to accompany Financial reporting 2e by Loftus et al. © John Wi ley and Sons Australia, Ltd 2018 2.6 16. In an owner –manager agency relationship the problem of risk aversion arises because: a. shareholders prefer the managers to take fewer risks in order to maximise the returns on their investment . *b. managers prefer to make decisions that are less risky for the entity as they have more to lose than the shareholders . c. managers have less capit al invested in the entity than shareholders. d. shareholders generally have no other sources of income . Answer: b Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 17. An agreement between managers and lenders to maintain a minimum ratio of working capital can assist which of the following problem s in relation to increased lender’s risk? a. claim dilution . b. asset substitution . c. underinvestment . *d. excessive dividend payments . Answer: d Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 18. Claim dilution arises when : a. the entity is unable to repay a loan . b. a lender restricts an entity from obtaining debt of a lower priority . *c. the entity takes out a secured loan after obtaining an unsecured loan from another lender . d. a lender restricts an entity from obtaining debt with an earlier maturity date . Answer : c Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. Chapter 2: Application of accounting theory © John Wi ley and Sons Australia, Ltd 2018 2.7 19. The problem of ‘underinvestment’ occurs when managers are reluctant to undertake projects with positive net present value because: a. shareholders prefer less risk than do lenders and managers . *b. the increased funds obtained from the projects will rank higher in priority of payments to creditors over shareholders in the event of the entity being liquidated . c. the projects would result in a reduction of managers’ incentives . d. managers prefer to maintain a high level of funds within the entity. Answer: b Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 20. The following statements about asset substitution are true except for : a. Managers have incentives to use debt finance to invest in higher -risk assets with the expectation of obtaining higher returns for shareholders . *b. Lenders are willing to share higher returns earned when managers invest in higher -risk projects. c. A debt covenant that restricts investment opportunities of the entity can reduce the entity’s borrowing costs . d. Asset substitution arises when an entity uses borrowed funds to invest in higher risk assets than those agreed upon in the debt contract . Answer: b Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 21. An example of political costs is: a. lower taxes on mining companies. *b. economic sanctions imposed on retai lers who purchase their supplie s from overseas businesses that use child labour . c. excessive consumption of perquisites . d. having a debt covenant . Answer: b Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice.