(Test Bank) Accounting For Business

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Test Bank

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Scott: Accounting for Business , 3rd edition (All Chapters) © Peter Scott, 2019. Correct answers are marked with an asterisk (*). Topic: Qualities of financial information: relevance, faithful representation, comparability, verifiability, timeliness, understandability, materiality and cost -benefit Type: multiple choice question Title: Chapter 01 - Question 01 01)Which one of the following statements most accurately describes the fundamental qualitative characteristic of relevance? a.Information that not only represents relevant economic ph enomena but also faithfully represents the phenomena that it purports to represent. Feedback: This is a description of financial information that possesses the other fundamental qualitative characteristic, faithful representation, and is not a description of relevance. Page reference: 11-14 b.Information that is comparable over time. Feedback: This is a feature of financial information that possesses the enhancing qualitative characteristic of comparability and is not a description of the fundamental qualitative characteristic of relevance. Page reference: 11-14 *c. Information that is capable of making a difference in the decisions made by users. Feedback: Financial information is relevant if it is capable of making a difference in the decisions made by users. Page reference: 11-14 d.Informat ion that is available to u sers in time for it to be capable of influencing their decisions. Feedback: This is a feature of the enhancing qualitative characteristic of timeliness. It is true that the decision usefulness of information is enhanced if it is available to u sers in time for it to be capable of influencing their decisions, but this is not a description of the fundamental qualitative characteristic of relevance. Page reference: 11-14 Type: multiple response question Title: Chapter 01 - Questio n 02 02)Relevant information: Please select all that apply. Feedback: Relevant information can be both predictive and confirmatory and it can assist users in making predictions about the future. Information that is complete, neutral, and free from error fulfils the requirements of the second fundamental qualitative characteristic, faithful representation, and is not part of the description of relevance. Page reference: 11-14 *a. May be predictive b.Must be complete, neutral, and free from error *c. Can assist users in making predi ctions about the future *d. May be confirmatory Type: multiple choice question Title: Chapter 01 - Question 03 03)Which one of the following is not a description of the fundamental qualitative characteristic of relevance? a.Information that may assist users to a ssess the accuracy of past predictions. Feedback: This is part of the description of relevance. Financial information that assists users to assess the accuracy of past predictions is confirmatory and thus possesses the fundamental qualitative characteristic of relevance. Page reference: 11-14 b.Information that is capable of making a difference in the decisions made by users. Feedback: Financial information must be capable of making a difference in the decisions made by users if it is to be relevant. Page reference: 11-14Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. c. Information that may be predictive. Feedback: Relevant information may be predictive and assist users in making predi ctions about the future . Page reference: 11-14 *d. Information that must be verifiable. Feedback: This is a feature of the enhancing qualitative characteristic of verifiability which provides users with assurance that financial information is faithfully represented and reports the economic phenomena it purports to represent . Ther efore, this is not a feature of the fundamental qualitative characteristic of relevance. Page reference: 11-14 Type: true -false Title: Chapter 01 - Question 04 04) Financial information that is understandable must possess the characteristic of simplicit y. a. True Feedback: This statement is false. The characteristic of understandability should not be confused with simplicity. Accounting can involve very co mplex calculations, details and disclosures. Excluding complex information just because it is diff icult to understand would not result in relevant information that was faithfully represented. Reports that excluded such information would be incomplete and would thus mislead users. Readers of financial reports are assumed to have a reasonable knowledge o f business and economic activities in order to make sense of the information with which they are presented. When users are unable to understand the information presented, then the IASB recommends using an adviser. To help users understand the information p resented, information should be classified, characterized, and presented clearly. Page reference: 11-14 *b. False Feedback: The characteristic of understandability should not be confused with simplicity. Accounting can involve very co mplex calculations, de tails and disclosures. Excluding complex information just because it is difficult to understand would not result in relevant i nformation that was faithfully represented. Reports that excluded such i nformation would be incomplete and would thus mislead user s. Readers of financial reports are assumed to have a reasonable knowledge of business and economic activities in order to make sense of the information with which they are presented. When users are unable to understand the information presented, then the IASB recommends using an adviser. To help users understand the information presented, the information should be classified, characterized, and presented clearly. You are therefore correct to conclude that this statement is false. Page reference: 11-14 Type: true -false Title: Chapter 01 - Question 05 05) Information is material by size only. a. True Feedback: This statement is false as information can be material by both size and by nature. The IASB Conceptual Framework for Financial Reporting states that ‘information is material if omitting it or misstating it could influence decisions that…users …make on the basis of…financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the i nformation relates in the context of an individual entity’s financial report.’ Information is thus both material by size (magnitude) (a large transaction that is not included in the financial statemen ts or which is present ed incorrectly) and by nature. Where a key piece of information is omitted from the financial statements or present ed incorrectly, then this, too, will influence the decisions of users taken on the basis of the financial statements. Page reference: 16 *b. False Feedback: Information can be material by both size and by nature. The IASB Conceptual Framework for Financial Reporting states that ‘ information is material if omitting it or Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. misstating it could influence decisions that …users …make on the basis of …financial information about a specific reporting entity. In other words, materiality is an ent ity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.’ Information is thus both material by size (magnitude) (a large transaction that is not included in the financial statements or which is presented incorrectly) and by nature. Where a key piece of information is omitte d from the financial statements or present ed incorrectly, then this, too, will influence the decisions of users taken on the basis of the financial statements. You are therefore correct to conclude that this statement is false. Page reference: 16 Type: multiple choice question Title: Chapter 01 - Question 0 6 06) Which one of the following statements is not a description of the fundamental qualitative characteristic of faithful representation? a. Information presented must not only represent relevant eco nomic ph enomena (transactions and events), but it must also faithfully represent the phenomena that it purports to represent. Feedback: This statement is a perfectly precise description of the fundamental qualitative characteristic of faithful representat ion. Page reference: 11-14 *b. Information presented should be verifiable. Feedback: Verifiability provides users with assurance that information is faithfully presented and reports the economic phenomena it purports to represent. However, verifiability is an enhancing characteristic of financial information and is not a description of the fundamental qualitative characteristic of faithful representation. Page reference: 11-14 c. Information presented should be complete, neutral and free from error. Feedb ack: Perfectly faithful representation of economic phenomena in words and numbers requires that the information presented must have three chara cteristics: it must be complete, neutral and free from error. Therefore, this is an accurate description of the f undamental qualitative characteristic of faithful representation. Page reference: 11-14 d. Information presented does not have to be pe rfectly accurate in order to provide a faithful representation. Feedback: While faithful representation requires that i nformation presented should be free from error, this does not mean that the information has to be perfectly accurate in order to provide a faithful representation. The IASB Conceptual Framework makes it clear that ‘free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process’ ( IASB Conceptual Fram ework for Financial Reporting paragraph 2.1 8). Therefore, the IASB does not require information to be perfectly accurate in order for it to meet the requirements of faithful representation. Page reference: 11-14 Type: multiple response question Title: Chapter 01 - Question 07 07) Comparability requires that: Please select all that apply. Feedback: The enhancing qualitative characteristic of comparability does require information to be comparable over time. The usefulness of information is enhanced if it is comparable with si milar information about other entities for the same reporting period and with similar information about the same entity for other reporting periods. However, comparability does not mean consistency, even though consistency of presentation and measurement of the same items in the same way from year to year will help to achieve comparability. Similarly, comparability does not mean that information about economic phenomena must be presented uniformly. Information about the same phenomena will be presented in similar but not in the Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. same ways by differe nt entities. The differences in the presentation of such phenomena will not be so great as to prevent comparability. Page reference: 11-14 *a. Information should be comparable over time. *b. Information should be comparable with si milar information about o ther entities for the same reporting period and with similar information about the same entity for other reporting periods in order to enhance its usefulness. c. Information should be presented consistently. d. Information about economic phenomena should be presented in a uniform way. Type: multiple choice question Title: Chapter 01 - Question 0 8 08) Which one of the following statements does not describe verifiability? a. Verifiability provides users with assurance that information is faithfully pre sented and reports the economic phenomena it purports to represent. Feedback: This is a description of verifiability. Page reference: 11-14 *b. Verifiable i information is complete, neutral and free from error. Feedback: This is a feature of information th at is faithfully represented and is not a description of verifiability. Page reference: 11-14 c. The accuracy of information can be verified by observation or re -calcul ation. Feedback: This is a description of verifiability, the ways in which information can be verified to assess its accuracy. Page reference: 11-14 d. External auditors will undertake testing to prove to themselves that the information pr esented is accurate in all major respects. Feedback: External audit is one way in which to verify the f inancial information presented so this is a description of verifiability. Page reference: 11-14 Type: true -false Title: Chapter 01 - Question 09 09) Old information is not useful in making decisions. a. True Feedback: This statement is false. It is true that the decision usefulness of information is enhanced if it is available to u sers in time for it to be capable of influencing their decisions, but it is not true to say that old information cannot be useful in making decisions. Although the decision usefulness of information generally declines with time, information from the past can still be used in identifying trends so this old information continues to be timely in the future. Page reference: 14 *b. False Feedback: It is true that the decision usefulness of information is enhanced if it is available to users in time for it to be capable of influencing their decisions, but it is not true to say that old information cannot be useful in making decisions. Although the decision usefulness of informa tion generally declines with time, information from the past can still be used in identifying trends so this old information continues to be timely in the future. You are therefore correct in concluding that this statement is false. Page reference: 14 Type: multiple choice question Title: Chapter 01 - Question 1 0 10) Which one of the following statements is not true? *a. Information should only be presented if the costs of obtaining that information exceed the benefits of providing it. Feedback: This statement is not true. To be true, this statement should read: ‘i nformation should only be presented if the benefits of providing that information ou tweigh the costs of Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. obtaining it’. Where the costs exceed the benefits, it is pointless providing information as its usefulness does not justify the expen se incurred in obtaining it. Page reference: 17 b. Information is material if omitting it or misstating it could influence decisions that…users…make on the basis of …financial information about a specific reportin g entity. Feedback: This statement is true and is an accurate representation of the IASB’s description of materiality. Remember that materiality is an entity -specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report. Page reference: 16 c. To help users understand information presented, that information should be classified, characterized and presented clearly. Feedback: This statement is a d escription of the enhancing characteristic understandability and is true. Page reference: 14 d. Where information is not comparable, similarities and differences will not be readily apparent. Feedback: This statement is true. Where information is compara ble, it is easy to determine where the similarities and differences lie. It is equally true to say that where information is not comparable it is not possible to determine where the similarities and differences lie. Page reference: 13 Type: multiple cho ice question Title: Chapter 01 - Question 11 11) Information whose omission or misstatement could influence decisions that users make on the basis of financial information about a specific reporting entity defines which characteristic of accounting informa tion? a. Comparability Feedback: The answer you were looking for is materiality. Information is material if omitting it or misstating it could influence decisions that …users …make on the basis of …financial information about a specific reporting entity. Whil e comparability will not be enhanced if information is omitted or misstated, this is not part of the definition of comparability. Page reference: 11-14, 16 b. Verifiability Feedback: The answer you were looking for is materiality. Information is materia l if omitting it or misstating it could influence decisions that …users…make on the basis of …financial information about a specific reporting entity. This is not part of the definition of verifiability. Page reference: 11-14, 16 c. Cost-benefit Feedback: The answer you were looking for is materiality. Information is material if omitting it or misstating it could influence decisions that…users …make on the basis of… financial information about a specific reporting entity. The cost -benefit principle states that information should only be presented if the benefits of providing that information ou tweigh the costs of obtaining it. The benefits of presenting material information would outweigh the costs of obtaining and providing it. Page reference: 11-14, 16 *d. Materiality Feedback: Information is material if omitting it or misstating it could influence decisions that…users…make on the basis of …financial information about a specific reporting entity. Page reference: 16 Type: multiple response question Title: Chapter 01 - Question 12 12) Perfectly faithful representation of economic phenomena in words and numbers requires that the information presented must be: Please select all that apply. Feedback: Perfectly faithful representation of economic phenomena in wo rds and numbers requires that the information presented must have three chara cteristics: it must be complete, Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. neutral and free from error. While the decision usefulness of information is enhanced if it is available to u sers in time for it to be capable of influencing their decisions, this is an enhancing characteristic of financial information, not one of the characteristics required for perfectly faithful representation of economic phenomena. Page reference: 11-14 *a. Free from error *b. Neutral c. Timely *d. Complete Type: true -false Title: Chapter 01 - Question 13 13) The characteristics of materiality and comparability are both entity -specific. a. True Feedback: This statement is false. It is true that materiality is specific to a particular en tity. The IASB states that ‘ materiality is an ent ity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the i nformation relates in the context of an individual entity’s financial report’ (IASB Conceptual Framework for Financial Reporting para 2.11). However, the IASB envisages that comparability will apply not just to the financial information presented by an entity but will also be comparable with the financial information presented by other entities: t he usefulne ss of information is enhanced if it can be compared with si milar information about other entities for the same reporting period and with similar information about the same entity for other reporting periods (IASB Conceptual Framework for Financial Reportin g para 2.24 ). Page reference: 11-14, 16 *b. False Feedback: It is true that materiality is specific to a particular entity. The IASB states that ‘materiality is an ent ity-specific aspect of relevance based on the nature or magnitude, or both, of the item s to which the i nformation relates in the context of an individual entity’s financial report’ (IASB Conceptual Framework for Financial Reporting para 2.11). However, the IASB envisages that comparability will apply not just to the financial information pre sented by an entity but will also be comparable with the financial information presented by other entities: t he usefulness of information is enhanced if it can be compared with si milar information about other entities for the same reporting period and with similar information about the same entity for other reporting periods (IASB Conceptual Framework for Financial Reporting para 2.24). You are therefore correct to conclude that this statement is false. Page reference: 11-14, 16 Topic: Financial account ing and management accounting Type: multiple choice question Title: Chapter 01 - Question 1 4 14) Which one of the following statements does not describe cost and management accounting? *a. Cost and m anagement accounting information is concerned with repo rting outcomes of past events to users external to the organisation. Feedback: This is a description of financial accounting which reports on past events to users external to the organisation whereas cost and management accounting reports mostly on the present and the future to users within the organisation. Page reference: 18-19, 21 -22 b. Cost and m anagement accounting is concerned with reporting accounting and cost information to users within an organisation. Feedback: This statement describes accurate ly what cost and management accounting does do. Page reference: 21-22 Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. c. Cost and m anagement accounting information is used to plan levels of production and activity in the future. Feedback: This statement describes accurately what cost and management ac counting does do. Page reference: 21-22 d. Cost and m anagement accounting information is mostly concerned with the present and the future. Feedback: This statement describes accurately what cost and management accounting does do. Unlike financial accoun ting which reports past results, cost and management accounting is very much concerned with current events and making projections about the future. Page reference: 21-22 Type: multiple choice question Title: Chapter 01 - Question 1 5 15) Financial accoun ting is: a. The reporting of past information to users within the organisation. Feedback: Financial accounting is certainly the reporting of past information but those reports are directed to users outside the organisation. Cost and m anagement accounting information is reported to users within the organisation. Page reference: 18-19, 21 -22 b. The reporting of present and future information to users within the organisation. Feedback: This is the function of cost and management accounting, not the functio n of financial accounting. Page reference: 21-22 c. The reporting of present and future information to users outside the organisation. Feedback: Financial accounting does report information to users outside the organisation but financial accounting report s past information not present and future information to these external parties. The reporting of present and future information to users within the business is the function of cost and management accounting. Page reference: 18-19, 21 -22 *d. The reportin g of past information to users outside the organisation. Feedback: Financial accounting is the reporting of past information to users outside the organisation. Page reference: 18-19 Type: multiple response question Title: Chapter 02 - Question 1 6 16) Financial accounting: please select all that apply. Feedback: Financial accounting is the reporting of past information to users outside the organisation. Cost and management accounting focuses on costing products and services with a view to setting a sell ing price to ensure a profit is generated. Similarly, cost and management accounting engages in planning levels of production and activity. Page reference: 18-19, 21 -22 *a. Reports on past events. b. Focuses on the costs of products and services. c. Is us ed to plan levels of production and activity. *d. Reports to users outside the organisation. Type: multiple response question Title: Chapter 02 - Question 1 7 17) Cost and management accounting: please select all that apply. Feedback: Cost and management accounting reports accounting and cost information to users within an organisation , not to users outside the organisation. Cost and m anagement accounting information is used to help managers manage the business and its activities by focusing on the costs t hat go into producing products and services to determine a selling price for those products and services that will generate a profit for the business. Cost and management accounting information is then used to plan levels of production and activity in Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. the future as well as deciding what products to produce and sell to maximize pro fits for the business. As well as planning what the business is going to do, cost and management accounting produces reports to evaluate the results of past plans to see whether th ey achieved their aims and the ways in which improvements could be made. Page reference: 18-19, 21 -22 *a. Focuses on the present and future. b. Presents information to users outside the organisation. *c. Helps managers to decide which products to produce a nd sell. *d. Uses reports on the results of past plans to improve operations in the future. Topic: Users of financial statements Type: multiple choice question Title: Chapter 01 - Question 1 8 18) A lender using a set of published financial statements would be most interested in: *a. The entity’s ability to generate cash from which to pay interest. Feedback: Lenders are banks or other entities that have lent money to businesses on which interest will be payable, so lenders will be most interested in an entity’s ability to generate cash from which to pay interest on the monies borrowed. Page reference: 19-21 b. The entity’s ability to generate cash from which to pay dividends. Feedback: Shareholders, not lenders, will be most interested in an entity’s ability to generate cash from which to pay dividends. Page reference: 19-21 c. The entity’s ability to generate cash from which to pay bonuses. Feedback: Employees, not lenders, will be most interested in an entity’s ability to generate cash from which t o pay bonuses. Page reference: 19-21 d. The entity’s ability to generate cash from which to pay taxation due on profits. Feedback: Governments, not lenders, will be most interested in an entity’s ability to generate cash from which to pay taxation. Page reference: 19-21 Type: multiple choice question Title: Chapter 01 - Question 1 9 19) Which user group of financial statements would be most interested in information relating to retirement benefit schemes? a. Shareholders Feedback: Shareholders will be m ost interested in company profits together with the dividends that will be paid from those profits. As shareholders are not generally employees of the company, they will not be entitled to participate in retirement benefit schemes offered by the entity. Page reference: 19-21 b. Lenders Feedback: Lenders are not employees of the company so they will be unable to participate in retirement benefit schemes offered by the entity. Lenders will be most interested in the ability of an entity to repay money that ha s been lent together with any interest due on that money. Page reference: 19-21 *c. Employees Feedback: Employees are the only user group entitled to participate in retirement benefit schemes offered by an organisation, so this user group will be most int erested in information relating to retirement benefit schemes presented in the entity’s financial statements. Page reference: 19-21 d. Customers Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. Feedback: Customers are not employees of an organisation so they will be unable to participate in any retire ment benefit schemes offered to employees by that organisation. Customers will be interested in an entity’s ability to continue supplying goods and services to them. Page reference: 19-21 Type: multiple choice question Title: Chapter 01 - Question 20 20) Details of the length of time it takes an organisation to pay for goods purchased on credit terms would be of most interest to which user group? a. Customers Feedback: Customers will be concerned with the continuity of supply of goods rather than how lo ng it takes an organisation to pay for goods that have been supplied on credit by that organisation’s suppliers. Page reference: 19-21 b. Employees Feedback: Employees provide services to organisations in return for which they receive a weekly or monthly salary, so employees will not be very interested in how long it takes their employer to pay for goods supplied on credit by external suppliers. Page reference: 19-21 c. Shareholders Feedback: Shareholders do not supply goods on credit to organisations but invest money in order to make financial gains in the form of dividends paid from profits and in the form of rising share prices. Therefore, shareholders’ main interest will not be the length of time it takes companies to pay for goods supplied on credit b y external suppliers. Page reference: 19-21 *d. Suppliers Feedback: Suppliers are most concerned with whether they will be paid for goods supplied so their main point of interest will be the length of time it takes an organisation to pay for goods that h ave been supplied on credit. The faster their customers pay what is owed the better. Page reference: 19-21 Topic: Limitations of accounting information Type: multiple choice question Title: Chapter 01 - Question 21 21) Which one of the following is not a limitation of accounting information? a. Accounting information does not value the external effects of operations on the environment. Feedback: This is a limitation of accounting information. Page reference: 24-25 b. Accounting information does no t value the skills and knowledge base of an entity. Feedback: This is a limitation of accounting information. Page reference: 24-25 c. Accounting information does not consider the quality of performance. Feedback: This is a limitation of accounting info rmation. Page reference: 24-25 *d. Accounting information does not include information whose costs outweigh the benefit of providing it. Feedback: Under the requirements of cost v benefit, accounting information does not provide information where the cos ts of acquiring that information outweigh the benefits of providing it. So this is a quality not a limitation of accounting information. Page reference: 17, 24 -25 Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. Type: multiple response question Title: Chapter 01 - Question 22 22) Accounting information fails to: Please select all that apply. Feedback: Accounting information does fail to present details about the pollution and social and environmental damage caused by entities. Similarly, while workforces are seen as a very valuable part of every organis ation, there is no attempt to measure the skills and knowledge base within an entity with a view to understanding the competitive advantage gained from such skills and knowledge. However, accounting most certainly does not include any subjective valuations in financial statements so it cannot be said that accounting fails to exclude subjective valuations from financial statements: this is something that accounting does do as all valuations have to be objective. On the other hand, accounting information is just a bare record of achievement with no attempt to measure the quality of organisational performance. Page reference: 24-25 *a. Present information on social damage caused by an entity. *b. Measure the skills and knowledge base of organisations. c. Exclu de subjective valuations from financial statements. *d. Provide measures of the quality of organisational performance. Topic: Chapter wide questions Type: multiple choice question Title: Chapter 01 - Question 2 3 23) Which one of the following statem ents does not describe accountability? a. Accounting information reporting on past actions is a stewardship report. Feedback: This is a description of accountability. Persons entrusted with resources are in the position of stewards, looking after those re sources for the benefit of other parties. Providing an account of their stewardship and what they have done with those resources over a given period of time helps other parties to control the actions of their stewards while rendering the stewards accountab le for their actions. Page reference: 7-8 *b. Accounting information reporting on the current cost and selling prices of products. Feedback: An accounting report on the current cost and selling prices of products is a statement of facts and not a basis o n which accountability can be assessed. Page reference: 7-8 c. Representatives reporting on their actions to those people who have placed them in positions of power. Feedback: A report on what has been done by persons placed in a position of power is a description of accountability, a report on actions to those people who entrusted their representatives with power. Page reference: 7-8 d. Accounting information provided so that individuals and organisations can render an account of what they have done with resources entrusted to them. Feedback: This is a description of accountability. Where accounting information is presented by individuals and organisations seeking to render an account of what has been done with resources entrusted to them, they are render ing an account and recognizing their accountability for their actions. Page reference: 7-8 Type: multiple choice question Title: Chapter 01 - Question 2 4 24) Which one of the following statements is not correct? Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. a. The objective of general financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Feedback: This statement is correct. The Int ernational Accounting Standards Board Conceptual Framework states that this is the objective of general purpose financial reporting . Page reference: 18 b. While financial accounting presents information about what has happened in the past, cost and manage ment accounting is very much concerned with both the present and the future and how accounting information can be used for short -term decision making and longer -term planning. Feedback: This statement is correct and describes the roles of both financial a nd cost and management accounting accurately. Page reference: 18-19, 21 -22 c. Understandability assumes that readers of financial reports have a reasonable knowledge of business and economic activities in order to make sense of what they are presented with . Feedback: This statement is correct. Understandability is one of the four qualities of financial information and it does assume that readers of financial reports have a reasonable knowledge of business and economic actitivites in order to make sense of what they are presented with. Understandability does not imply simplicity. Page reference: 14 *d. Accounting summarizes narrative data relating to past events and presents this data as information to managers and other interested parties as a basis for bo th decision making and control purposes. Feedback: This statement is not correct: accounting summarizes numerical data relating to past events and presents this data as information to managers and other interested parties as a basis for both decision maki ng and control purposes. Accounting data is presented as numbers not as narrative data. Page reference: 5-6 Type: multiple choice question Title: Chapter 01 - Question 25 25) Which one of the following statements is correct? a. The IASB states in its Conc eptual Framework for Financial Reporting that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, other creditors, regulators and members of the public in ma king decisions about providing resources to the entity. Feedback: This statement is not correct. The International Accounting Standards Board in its Conceptual Framework for Financial Reporting identifies the objective of genera l purpose financial reporting as being ‘to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in ma king decisions about providing resources to the entity.’ While the IASB Conceptual Framework for Financial Reporting does state that ‘o ther parties, such as regulators and members of the public other than investors, lenders and other creditors, may also find general purpose financial reports useful’ it does go on to say ‘Howe ver, those reports are not pr imarily directed to these other groups’. Page reference: 18 *b. Information should only be presented if the benefits of providing this information outweigh the costs of obtaining it. Feedback: This statement is correct and des cribes the cost -benefit approach to providing financial information. Page reference: 17 c. Comparability means consistency. Feedback: This statement is not correct. The IASB states that the enhancing quality of comparability does not mean consistency alt hough it concedes that consistency of presentation and measurement of the same items in the same way from year to year will help to achieve comparability. Page reference: 13 Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. d. Items in financial statements are material only by nature. Feedback: This sta tement is not correct. Items in financial statements can be material by magnitude, by nature or by both magnitude and nature. Page reference: 16 Type: multiple choice question Title: Chapter 01 - Question 2 6 26) Which one of the following statements is not correct? *a. The more accurate past predictions of profits have been, the less likely it is that users will be able to rely on current predictions of future profits. Feedback: This statement is not correct. Relevant information may be predictive and a ssist users in making predictions about the future. Therefore, t he more accurate past predictions of profits have been, the more likely it is that users will be able to rely on current predictions of future profits. Page reference: 11-14 b. All users of ac counting information will be interested in the cash generating capabilities of an entity Feedback: This statement is correct. As cash is the lifeblood of business, every user of financial statements and accounting information will want to know about the a bility of an entity to generate cash. Lenders and suppliers will want to know whether they will be paid the cash that is owed to them, shareholders will be interested in cash being available to them through dividend payments as well as the longer term surv ival of the business, employees will want to know if they will continue to be paid, the government will need to assess whether taxes owed will be paid, customers and the public will want to ensure that an entity does not run out of cash as it will close do wn and be unable to provide goods and services or employment for local people. Page reference: 21 c. Financial information must not only represent relevant economic ph enomena (transactions and events), but it must also faithfully represent the phenomena t hat it purports to represent. Feedback: This statement is correct and accurately describes the fundamental quality of faithful representation. Page reference: 11-13 d. Accounting information provides a mechanism through which to control outcomes and activities. Feedback: This statement is correct and describes exactly the function of accounting information. Page reference: 7-8 Type: multiple response question Title: Chapter 01 - Question 27 27) Which of the following statements are true? Please select all that apply. Feedback: Accounting data is presented in the form of numbers, so this statement is true. Likewise, accounting information is only relevant if it is capable of making a difference in the decisions made by users : if accounting information i s unable to influence users’ decisions, then there is no point in providing this information in the first place. Stewards are persons entrusted with resources by other parties; they then look after these resources and use them to generate benefits for thos e other parties. However, it is not true to say that accounting provides measures with which to assess the quality of an organization’s performance: such data would be qualitative and would not be capable of the objective measurement that characterises all accounting information. Page reference: 5-6, 11-12, 7-8, 24 -25 *a. Accounting data is presented in the form of numbers. *b. To be relevant, financial information must be capable of making a difference in the decisions made by users. c. Accounting provi des measures with which to assess the quality of an organization’s performance. *d. Stewards are entrusted with and look after resources for the benefit of other parties. Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. Correct answers are marked with an asterisk (*). Topic: Asset definition Type: multiple choice question Title: Chapter 02 - Question 01 01) Which one of the following statements is the IASB’s definition of an asset? a. A right that has the potential to p roduce economic benefits. Feedback: This is the IASB’s definition of an economic resource, not the IASB’s definition of an asset. Page reference: 32-35 b. A present obligation of the entity to transfer an economic resource as a result of past events . Feedback: This is the IASB’s definition of a liability not the IASB’s definition of an asset. Page reference: 32-35, 40 -43 *c. A present economic resource controlled by the entity as a result of past events. Feedback: Well done. You have correctly identified the IASB’s definition of an asset. Page reference: 32-35 d. A present economic resource that has the potential to produce economic benefits . Feedback: The IASB defines an asset as “a present economic resource controlled by the entity as a result of past events .” An economic resource is defined as “a right that has the potential to produce economic benefits ”. While the IASB definition of an asset includes the words “a present economic resource”, it does not include the words “that has the potential to produce economic benefits”. The essential asset defining elements of control and of a past event are missing from this statement. Page reference: 32-35 Type: multiple choice question Title: Chapter 02 - Question 02 02) The International Accounting Standards Board’s Conceptual Framework for Financial Reporting defines an asset as: a. A resource not purchased for resale in the normal course of business, held for long -term use in the business to produce goods or services. Feedback: This is a description of non -current assets, not the IASB Conceptual Framework definition of an asset. Page reference: 32-35, 36-38 b. A present obligation of the entity to transfer an economic resource as a result of past events . Feedback: This is the IASB Conceptual Framework definit ion of a liability, not the IASB Conceptual Framework definition of an asset. Page reference: 32-35, 40-43 c. A short term resource that is constantly changing. Feedback: This is a description of current assets, not the IASB Conceptual Framework definitio n of an asset. Page reference: 32-35, 38-39 *d. A present economic resource controlled by the entity as a result of past events. Feedback: Well done. You have correctly remembered and identified the IASB Conceptual Framework definition of an asset. Page reference: 32-35 Type: multiple choice question Title: Chapter 02 - Question 03 03) Which one of the following statements most accurately describes an asset? a. Something an entity owes, the value of which can be faithfully represented . Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. Feedback: Certain ly, the value of an asset must be capable of faithful representation before it can be recognized on the statement of financial position. However, s omething that is owed by a business is a liability, not an asset. Page reference: 32-35, 40-43 b. Something a n entity owes which will result in the transfer of cash . Feedback: Assets represent rights that ha ve the potential to produce economic benefits. : this means that cash will be received by the entity rather than being transferred from the entity . Where there is a transfer of cash, this indicates a liability not an asset. Something that is owed by a business is a liability not an asset. Page reference: 32-35, 40-43 *c. Something an entity controls which it uses to generate cash. Feedback: The IASB defines an asset as “a present economic resource controlled by the entity as a result of past events ” and goes on to define an economic resource as “a right that has the potential to produce economic benefits ”. An asset is therefore something controlle d by the organi zation ( owned or leased ) which is used to generate cash (economic benefits), so this is a good description of an asset. Page reference: 32-35 d. Something an entity owns for long term use within its business. Feedback: This statement describes only non -current (long term) assets which are used within a business. Assets can be both current (short term assets) and non -current, so this is only a partial description of the total class of asset s. Page reference: 32-35, 36 -38 Type: multiple response question Title: Chapter 02 - Question 04 04) An asset can be recognised in an entity’s statement of financial position when: Please select all that apply. Feedback: The International Accounting Standards Board’s Conceptual Framework for Financial Reporting defines an asset as “a present economic resource controlled by the entity as a result of past events .“ An economic resource is a right that has the potential to produce economic benefits .” ”. Therefore, an asset can be recognised when there is a past event giving rise to a n economic resource controlled by the entity and when profit (economic benefits) will be generated by that resource. The resource should generate economic benefits rather than resulting in a transfer of an economic resource. Where there is a trans fer of an economic resource , this represents a liability , a present obligation of the entity to transfer an economic resource as a result of past events . In addition, the IASB Conceptual Framework only allows entities to recognise assets when their bvalue can be measured in such a way that a faithful representation is achieved . Page reference: 32-35, 40-43 *a. A past event gives rise to a n economic resource controlled by the entity. *b. The value of the resource can be measured in such a way that a faithful representation is achieved . c. The resource will give rise to a transfer of economic resources . *d. Profit will be generated by the resource. Type: multiple choice question Title: Chapter 02 - Question 05 05) The International Accounting Standards Board ’s Conceptual Framework for Financial Reporting defines an asset as “a present economic resource controlled by the entity as a result of past events . An economic resource is a right that has the potential to produce economic benefits. ”. In addition, the IA SB Cocneptual Framework only allows entities to recognise assets when their value can be measured in such a way that a faithful representation is achieved . In which one of the following situations would a manufacturing company not recognise an asset on its statement of financial position? a. A new piece of plant and equipment is purchased for use in the production process. Feedback: To find the situation in which an asset cannot be recognised on the statement of financial position, use the different parts o f the asset definition to decide whether an asset can Scott: Accounting for Business , 3rd edition © Peter Scott, 2019. be recognised or not. Is there a present economic resource controlled by the company as a result of past events? Yes: the purchase of the plant and equipment gives the company control of this resource. Is there potential to produce economic benefits (profit and cash) for the company from this resource ? Yes: the new plant and equipment will be used to produce goods that can be sold at a price higher than their cost, resulting in both cash inflows and profits. Can the value of the resource be measured in such a way that a faithful representation is achieved ? Yes: the cost of the plant and equipment is the purchase price from the supplier. In this case, all the conditions for recognising an asset have been m et so this is not the correct answer. Page reference: 32-35 b. Raw materials for use in production are bought by the company. Feedback: To find the situation in which an asset cannot be recognised on the statement of financial position, use the different p arts of the asset definition to decide whether an asset can be recognised or not. Is there a present economic resource controlled by the company as a result of past events? Yes: the raw materials have been bought by the company which gives the company cont rol of those raw materials. Is there potential to produce economic benefits (profit and cash) for the company from this resource ? Yes: the raw materials will be used to produce goods which will be sold at a price higher than their cost, resulting in both c ash inflows and profits. Can the value of the resource be measured in such a way that a faithful representation is achieved ? Yes: the cost of the raw materials is the purchase price from the supplier. In this case, all the conditions for recognising an ass et have been met so this is not the correct answer. Page reference: 32-35 *c. A trade receivable that owes money to the company goes into liquidation with no likelihood that it will be able to pay what is owed. Feedback: To find the situation in which an a sset cannot be recognised on the statement of financial position, use the different parts of the asset definition to decide whether an asset can be recognised or not. Is there a present economic resource controlled by the company as a result of past events ? Yes: goods were sold to a customer giving rise to the trade receivable which the company controls. Is there potential to produce economic benefits (profit and cash) from this resurce ? No: no cash will be generated from this trade receivable and the fail ure of the trade receivable to pay what is owed will result in a loss not a profit . Can the value of the asset be measured in such a way that a faithful representation sis achieved ? Yes: the trade receivable would have been valued at the selling price of the goods. In this case no asset can be recognised as the trade receivable does not satisfy all the criteria for recognising an asset so this is the correct answer. Page reference: 32-35 d. Cash that is not required to finance day to day trading operations is invested in a bank account paying a fixed rate of interest for a fixed term of three years. Feedback: To find the situation in which an asset cannot be recognised on the statement of financial position, use the different parts of the asset definition to decide whether an asset can be recognised or not. Is there a present economic resource controlled by the company as a result of past events? Yes: the investment in the bank account is the past event and the bank will acknowledge receipt of the money pai d in so the company controls the investment. Is there potential to produce economic benefits (profit and cash) for the company from this resource ? Yes: the investment will generate interest and a repayment of the amount invested in three years’ time result ing in both cash inflows and profits. Can the value of the asset be measured in such a way that a faithful representation is achieved ? Yes: the original amount invested in the bank account. In this case, all the conditions for recognising an asset have been met so this is not the correct answer. Page reference: 32-35 Type: true -false Title: Chapter 02 - Question 06 06) The International Accounting Standards Board’s Conceptual Framework for Financial Reporting defines an asset as “a present obligation of the entity to transfer an economic resource as a result of past events.”