Question 1

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

Accepted Answer

Cash versus accrual accounting is a fundamental accounting choice that all companies must make, regardless of size. Therefore, it is not an area in which large companies typically have exclusive policy choices.

Question 2

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

Accepted Answer

Directors do not have a responsibility to choose the accounting method that shows the highest profit. Rather, they have a responsibility to choose the accounting method that accurately reflects the financial position and performance of the company. This may involve making choices about accounting figures, notes, and methods, as well as deciding whether to adjust the figures or disclose them in footnotes. Governments and professional accounting standard setters may not specify all solutions, leaving preparers to make choices based on their judgement and professional ethics.

Question 3

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

Accepted Answer

Policy choices related to inventory will directly impact the cost of goods sold expense account on the income statement, as well as the inventory asset account on the balance sheet. The other options listed may affect the income statement, but not necessarily at the same time as the inventory balance sheet account.

Question 4

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

Accepted Answer

A change in accounting policy regarding the declaration of a final dividend would not affect net profit, as dividends are distributions of profit, not expenses or revenues.

Question 5

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

Accepted Answer

The policy choice related to accounts receivable will likely impact revenue and bad debts expense on the income statement. When a company extends credit to customers and records them as accounts receivable, they are essentially recognizing revenue for those sales, but there is also a risk that some customers may not pay their bills. As a result, the company may need to estimate and record bad debts expense, which is an expense account that reduces the reported revenue on the income statement. Therefore, policy choices related to accounts receivable will affect both revenue and bad debts expense. The other options listed may be impacted by other accounting policy choices, but not necessarily ones related to accounts receivable.

Question 6

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

Accepted Answer

Dividend policy is not an accounting policy, but rather a financial policy decision. Accounting policy choices involve how to record and report financial transactions and events in financial statements. The other options listed involve accounting policy choices in revenue recognition, depreciation, and inventory valuation.

Question 7

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

Accepted Answer

Accrued expenses are expenses that have been recognized on the income statement but have not yet been paid for, resulting in a balance on the balance sheet. By choosing a different accounting policy for these expenses, various expense accounts on the income statement could be affected. Therefore, the best choice is D.

Question 8

Which of the following would be decreased by an accounting policy change involving writing off spoiled inventories?

Accepted Answer

Writing off spoiled inventories would result in a decrease in the value of inventory, which in turn would decrease the cost of goods sold and increase net profit. Therefore, option D (net profit) would be decreased.

Question 9

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

Accepted Answer

Policy choices that affect cost of goods sold on the income statement typically involve inventory valuations or methods of cost allocation. These choices also impact the balance sheet account of inventories, as the value of the inventory on hand will change based on the policy choice. Choice A (accounts receivable) and choice C (prepaid expenses, accrued expenses, and liabilities) are not directly related to cost of goods sold. Choice D (property, plant and equipment; intangible and leased assets) may be affected by other policy choices related to depreciation, but not specifically related to cost of goods sold.

Question 10

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

Accepted Answer

By recognizing accounts receivable sooner, revenue would increase because sales would be recorded earlier.

Question 11

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

Accepted Answer

The inclusion of goodwill in the balance sheet is governed by accounting standards and regulations, leaving companies with little discretion in this matter.

Question 12

Which of the following would be increased by an accounting policy change involving the capitalisation of some repairs expenses?

Accepted Answer

Capitalization of repair expenses would result in an increase in the value of assets and a decrease in expenses, which will increase the net profit of the company.

Question 13

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

Accepted Answer

The allowance for doubtful debts is a contra asset account on the balance sheet that reduces the accounts receivable asset account. A policy choice that affects the allowance for doubtful debts will also affect the bad debts expense account on the income statement. The other options listed do not have a direct connection to the allowance for doubtful debts account.

Question 14

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

Accepted Answer

Classifying longer-term receivables as current assets is not an accounting method that could be chosen by a company to increase reported profits. In fact, it would have the opposite effect of decreasing reported profits since long-term receivables are typically less liquid and more difficult to collect than current assets. The other options listed could potentially be used by a company to increase reported profits in different ways.

Question 15

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

Accepted Answer

The other options listed are all common accounting estimates involved in financial measurement. However, the number of financial periods that will benefit from research and development expenditure is not typically considered as a significant estimate. This is because the period over which research and development costs will provide benefits is typically identified and determined based on industry standards and the specific circumstances of the company, rather than being estimated.

Question 16

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

Accepted Answer

Accruing greater employee benefits expense would increase the amount of liabilities reported on the balance sheet. This is because benefits owed to employees are considered a liability until they are paid out.

Question 17

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

Accepted Answer

Wages expense affects accrued expenses and liabilities on the balance sheet, as wages that are incurred but not yet paid are recorded as liabilities.

Question 18

Most accounting policy choices affect both the income statement and the balance sheet.Select the income statement account(s)that would be affected by a policy choice at the same time as the prepaid expenses balance sheet account.

Accepted Answer

Prepaid expenses are initially recorded as assets on the balance sheet and are expensed over time as they are used. This affects various expense accounts on the income statement as the prepaid amounts are recognized as expenses.

Question 19

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

Accepted Answer

Optimistic estimation of the useful life of plant and equipment affects depreciation expense and non-current assets, not current liabilities or current assets, and thus does not directly impact the current ratio.

Question 20

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

Accepted Answer

Goodwill is an intangible asset that is subject to amortization over time. Therefore, the choice of amortization policy will affect both the goodwill balance sheet account and the amortization expense on the income statement.

Quiz 16: Accounting Policy Choices

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

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

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

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

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

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

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

Which of the following would be decreased by an accounting policy change involving writing off spoiled inventories?

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

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

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

Which of the following would be increased by an accounting policy change involving the capitalisation of some repairs expenses?

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

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

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

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

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

Most accounting policy choices affect both the income statement and the balance sheet.Select the income statement account(s) that would be affected by a policy choice at the same time as the prepaid expenses balance sheet account.

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

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