Deck 13: Analysing and Integrating Gaap

Question 1

The purpose of full disclosure principle is to report:

A) reliable information.
B) comparable information.
C) all information in a timely manner.
D) information that could affect the decisions of users.

Answer 1

information that could affect the decisions of users.

Question 2

The CEO of Pure Water Ltd used the company's money to buy a car for his wife's personal use. The CEO has violated the:

A) cost principle.
B) monetary principle.
C) accounting entity concept.
D) accounting period concept.

Answer 2

accounting entity concept.

Question 3

Williams Washing Machines Pty Ltd purchased second-hand equipment for its operation for $25,000. The equipment was worth $35,000. Applying the cost principle, how much should the equipment be recorded at in Williams Washing Machines' statement of financial position?

A) $25,000.
B) $35,000.
C) $30,000 (which is the average of the two prices).
D) The company could choose either $25,000 or $35,000.

Answer 3

$25,000.

Question 4

The cost principle states that all assets are initially recorded in the accounts at:

A) current cost.
B) present value.
C) historical cost.
D) realisable value.

Question 5

Lazy Company is currently in its third year of operation and has yet to issue financial statements. Which accounting concept or principle has been violated by the company?

A) cost principle
B) going concern principle
C) accounting entity concept
D) accounting period concept

Question 6

The process where standard-setters invite interested parties to contribute to the development of accounting standards is known as:

A) due process.
B) standard-setting.
C) decision-making.
D) round-table discussions.

Question 7

A conceptual framework for financial reporting will not include discussion on:

A) the elements of financial reports.
B) the objective of financial reporting.
C) how to prepare financial ratio analysis.
D) the qualitative characteristics of financial reports.

Question 8

The Framework issued by the AASB is equivalent to the one issued by which accounting body?

A) AARF.
B) FASB.
C) IASB.
D) PSASB.

Question 9

The Financial Accounting Standards Board (FASB) is the accounting body of which country?

A) UK.
B) USA.
C) Australia.
D) New Zealand.

Question 10

The Conceptual Framework adopts which of the following objective of general purpose financial reporting?

A) Stewardship objective.
B) Accountability objective.
C) Decision-usefulness objective.
D) Accounting consistency objective.

Question 11

The stewardship objective of financial reporting means that:

A) the objective of general purpose financial reports is to provide information to users that is useful for making decisions about allocation of scarce resources.
B) managers use general purpose financial reports to show the shareholders that they are managing resources effectively.
C) the objective of general purpose financial reports is to provide information that is useful to capital providers.
D) general purpose financial reports support stewardship function in entities where there is no separation of ownership from control.

Question 12

Who are not the primary users of financial reports according to the Conceptual Framework?

A) lenders.
B) government.
C) other creditors.
D) equity investors.

Question 13

Shareholders are what type of users of general purpose financial reports?

A) Lenders
B) Secondary users
C) Equity investors
D) Other creditors

Question 14

Employees are considered a primary user of general purpose financial reports when they:

A) purchase goods from their employer on credit.
B) provide their services in exchange for remuneration.
C) begin their employment contract with an organisation.
D) None of the above. Employees are never classified as primary users.

Question 15

Which type of primary user provides resources to an entity by lending cash for the purpose of receiving a return in the form of interest?

A) Lenders
B) Investors
C) Employees
D) Other creditors

Question 16

Which of the following businesses is likely to be a reporting entity?

A) A listed company.
B) A local newsagency.
C) A fish & chips shop.
D) An Asian grocery shop.

Question 17

Which of the following is not an indicator of a reporting entity under SAC 1?

A) The entity receives government grants.
B) The entity is politically or economically important.
C) The entity is managed by individuals who are not owners of the entity.
D) The entity is considered large in terms of sales, assets, borrowings, employees and customers.

Question 18

According to the Conceptual Framework what are the two fundamental qualitative characteristics of information contained in financial reports?

A) reliability and relevance.
B) reliability and comparability.
C) faithful representation and timeliness.
D) relevance and faithful representation.

Question 19

Which is not a quality of faithful representation in the Conceptual Framework?

A) Prudence.
B) Neutrality.
C) Completeness.
D) Free from material error.

Question 20

In the Conceptual Framework, the qualities of faithful representation are completeness, free from material error and:

A) reliability.
B) neutrality.
C) verifiability.
D) comparability.

Question 21

Which of the following is a constraint on financial reporting?

A) cost
B) timeliness
C) allocation of scarce resources
D) financial reports are not the only source of information

Question 22

Timeliness refers to providing information in a timely manner such that it will not lose its:

A) reliability.
B) relevance.
C) comparability.
D) understandability.

Question 23

The following statements are associated with the qualitative characteristics of relevance, except:

A) confirms or corrects previous expectations.
B) relevance is affected by materiality.
C) provides a basis for predictions.
D) free from material error.

Question 24

The purpose of full disclosure principle is to report all:

A) timely information.
B) reliable information.
C) relevant information.
D) comparable information.

Question 25

Timeliness refers to reporting information in a timely manner so that it still retains its:

A) reliability.
B) relevance.
C) materiality.
D) comparability.

Question 26

Under AASB 15 Revenue from Contracts with Customers, a service entity will recognise revenue:

A) at the time the service is performed.
B) when the entity collects cash from the customer for services provided.
C) if both parties agree the services will be performed over a period of time, at the completion of the service contract.
D) if both parties agree the services will be performed over a period of time, at the commencement of the service contract.

Question 27

Under the Conceptual Framework, decreases in economic benefits that arise outside the ordinary course of business are known as:

A) gains.
B) losses.
C) revenues.
D) expenses.

Question 28

On 1 April 2019, Waratah Ltd paid for a yearly insurance for $48,000. How much of insurance expense should be recognised in the income statement on 31 December 2019?

A) $24,000.
B) $36,000.
C) $40,000.
D) $48,000.

Question 29

Which of the elements of financial reports cannot be defined independently from other elements?

A) asset
B) equity
C) income
D) liability

Question 30

For a resource to be defined as an asset:

A) the entity must own the resource.
B) the resource must be physically tangible.
C) the entity must have control over the resource.
D) the entity must be able to sell the resource for profits.

Question 31

The following item will not be recognised as a liability in the statement of financial position?

A) a bank loan.
B) a mortgage.
C) a warranty provision.
D) a contingent liability.

Question 32

Which is the correct order for preparers of financial reports in applying various aspects of GAAP?

A) conceptual framework, accounting standards, concepts and principles
B) accounting standards, concepts and principles, conceptual framework
C) accounting standards, conceptual framework, concepts and principles
D) there is no particular order

Question 33

Which of the following statements about generally accepted accounting principles (GAAP) and conceptual framework is correct?

A) Conceptual framework is part of GAAP.
B) GAAP is part of the conceptual framework.
C) Australian GAAP only consists of the developed accounting standards.
D) Since 2005, SAC 1 is no longer a part of Australian conceptual framework.

Question 34

Which of the following best describes the relationships among the various aspects of GAAP?

A) They operate in isolation.
B) There is no relationship at all.
C) They are interrelated with no particular order of application.
D) They are interrelated and need to be applied in a particular order.

Question 35

There are eight Content Elements in the International Integrated Reporting Framework (IIRF). The element that covers the basis of presentation refers to:

A) the organisation's business model.
B) challenges and uncertainties the organisation is likely to encounter in preparing its financial statements.
C) how the organisation's governance structure supports its ability to create value in the short, medium and long term.
D) how the organisation determines what matters to include in the integrated report and how such matters are quantified or evaluated.

Question 36

Which of the following is not one of guiding principles of the International Integrated Reporting Framework (IIRF)?

A) Governance
B) Materiality
C) Reliability and completeness
D) Strategic focus and future orientation

Question 37

Sustainability is concerned with the following areas except for:

A) social.
B) financial.
C) economic.
D) environmental.

Question 38

Please complete the following statementS :
-Under the _________________ theory, the reporting entity is viewed as being separate from its owners and having its own substance.

Question 39

Please complete the following statementS :
-__________________________ are reports intended to meet the information needs of users who are unable to command reports to suit their specific needs.

Question 40

Please complete the following statementS :
-_____________ serves so as not to overstate amounts when reporting the assets and income or not to understate the liabilities and expenses of a business.

Question 41

Please complete the following statementS :
-A consultation process where standard-setters invite interested parties to contribute to the development of accounting standards is known as ________________ .

Question 42

Please complete the following statementS :
-A liability is recognised in the statement of financial position when it is _____________ that an outflow of resources embodying economic benefits will result from the settlement of a present obligation.

Question 43

Please complete the following statementS :
-Increases in economic benefits that do not arise in the ordinary course of business are labelled as ______________.

Question 44

Please complete the following statementS :
-If the ____________________ is not assumed, then plant and equipment should be stated at their liquidation value (selling price less costs of disposal), not at their cost.

Question 45

Please complete the following statementS :
-The Conceptual Framework classifies relevance and faithful representation as _______________ qualitative characteristics.

Question 46

a. Briefly explain the essential characteristics in the definition of a liability.
b. What are the criteria that must be satisfied for liabilities to be recognised in the statement of financial position?
c. Using the definition and recognition criteria, explain why the following items are liabilities:
• bank loan
• revenue earned in advance (unearned revenue)
• provision for employees' annual leave

Question 47

Hello Hello Limited is a company that manufactures telephones under its own brand, as well as distributing and selling other telephone brands. Recently Hello Hello has been conducting a research project to develop a mobile phone with various functions that could be used under water. The company is hiring experts from around the world and is spending a considerable amount of money to fund this project.
Required:Provide a justified opinion of whether the amount spent for the research project should be considered as an asset and recognised in the statement of financial position.

Question 48

Match the descriptions with their terms :

-All circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements.

A) Resource providers
B) Materiality
C) Assets
D) SAC 2
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 49

Match the descriptions with their terms :

-Liabilities that do not satisfy the recognition criteria.

A) Resource providers
B) Materiality
C) Assets
D) SAC 3
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 50

Match the descriptions with their terms :

-A set of concepts defining the nature, purpose, and content of general purpose financial reporting to be followed by financial report preparers and standard-setters.

A) Resource providers
B) Materiality
C) Assets
D) SAC 4
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 51

Match the descriptions with their terms :

-Outlines the objective of general purpose financial reporting.

A) Resource providers
B) Materiality
C) Assets
D) SAC 5
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 52

Match the descriptions with their terms :

-Following consultation with the FASB, the IASB reissued this document in 2010.

A) Resource providers
B) Materiality
C) Assets
D) SAC 6
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 53

Match the descriptions with their terms :

-The primary users of general purpose financial reports.

A) Resource providers
B) Materiality
C) Assets
D) SAC 7
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 54

Match the descriptions with their terms :

-The extent that information presented represents the economic phenomena without bias or material error and has been prepared with appropriate recognition and measurement methods.

A) Resource providers
B) Materiality
C) Assets
D) SAC 8
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 55

Match the descriptions with their terms :

-A resource controlled by the entity as a result of past events and from which the future economic benefits are expected to flow to the entity.

A) Resource providers
B) Materiality
C) Assets
D) SAC 9
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 56

Match the descriptions with their terms :

-Decreases in economic benefits that do not arise in the ordinary course of business.

A) Resource providers
B) Materiality
C) Assets
D) SAC 10
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 57

Match the descriptions with their terms :

-Under this principle, assets are recorded in the accounts at their purchase price.

A) Resource providers
B) Materiality
C) Assets
D) SAC 11
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 58

Match the descriptions with their terms :

-A conceptual framework issued by the IASB and adopted by the AASB in 2005.

A) Resource providers
B) Materiality
C) Assets
D) SAC 12
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 59

Match the descriptions with their terms :

-The extent that omissions or misstatements of information could affect users' decisions.

A) Resource providers
B) Materiality
C) Assets
D) SAC 13
E) Full disclosure principle
F) Cost
G) A conceptual framework
H) Verifiability
I) The Conceptual Framework
J) The Framework
K) Losses
L) Contingent liabilities

Question 60

Explain why it is necessary to develop a conceptual framework.

Question 61

Give a brief explanation of how organisations or businesses determine if they are required to prepare general purpose financial reports.

Question 62

Distinguish between stewardship/accountability objectives and decision-usefulness objective of general purpose financial reporting.

Question 63

The generally accepted accounting principles (GAAP) consist of accounting standards, underlying accounting concepts and principles, and the Conceptual Framework. Explain the relationships among various components of GAAP. How do preparers of general purpose financial reports determine which component to be apply first?

Question 64

Distinguish how the Conceptual Framework classifies users of financial reports.

Question 65

Ethics: Socks R Us Limited is a manufacturer of socks for various ranges of customers. Recently the company obtained a business loan from a bank with a condition that the company maintains a certain level of profitability. At the end of financial year, Socks R Us made a $15 million profit. Bob, the company's accountant, decided to report a $20 million profit to comply with the bank's loan requirement. In addition, Bob has changed the depreciation method of some machinery from straight-line to reducing-balance method without disclosing the changes in the notes to the financial statement because the results are similar to the previous method.
Which qualitative characteristics of financial reports in the Conceptual Framework have been violated by Bob's unethical decisions?

Question 66

Communication: Amy is a fresh accounting & finance graduate who just started working in an investment company. One of the company's clients asked Amy to help him to decide whether he should invest in a mining company. Amy read the mining company's financial reports and then straight away told the client that based on the financial reports, the mining company should be a good investment.
As Amy's supervisor, you decide to write her a memo to remind her not to rely solely on financial reports when making economic decisions. In your memo you should include alternative sources of information and reasons as to why the financial statements should not be the sole resource used for decision making.