Contemporary Accounting 8th Edition Test Bank

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Chapter 1–Introduction to accountingTRUE/FALSE1.An objective of accounting is to provide information to predict and evaluate the going concern ofan entity.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:What is accounting2.Accounting information is always quantitative and objective.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:What is accounting3.Stewardship is the term used to refer to management’s role in protecting an entity’s economicresources from theft, fraud and wastage.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting used?4.Management is an external user of accounting information.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?5.The balance sheet is an example of a management accounting report.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?6.The statement of comprehensive income is an example of a financial accounting report.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?7.The difference between management accounting and financial accounting is that managementaccounting focuses on external users whereas financial accounting focuses on internal users.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting used?8.Management has the responsibility of selecting accounting policies.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information.9.Where an Accounting Standard exists, accounting policies must comply with the AccountingStandard.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information.

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10.The economic consequences of accounting information are limited to the compensation schemespaid to managers.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information.11.Political costs create incentives for managers to select accounting policies that increase reportedprofits.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information.12.Triple bottom line reporting confirms the maximisation of profit as the major objective of listedcompanies.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting13.A triple bottom line report refers to the publication of economic, environmental andcorporategovernanceinformation in an integrated report.ANS:FPTS:1AACSB:KnowledgeTOP:Triple bottom line reporting14.Because triple bottom line reports are voluntary, the provision of an independent verification of thereports should enhance the reliability of the information provided.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting15.The GRI indicators are established by the committee without any input from stakeholders.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting16.The audit of a triple bottom line report is normally completed by the financial auditor.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reportingMULTIPLE CHOICE1.Accounting information:A.is helpful for financing decisions but not for marketing decisions.B.is useful for profit-making entities but is not needed for not-for-profit entities.C.must follow accounting principles provided by management.D.is useful for all economic organisations.ANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:What is accounting

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2.The primary purpose of accounting is to:A.help people make decisions about economic activities.B.provide information that management can use to convince shareholdersthat managementdeserves high salaries.C.provide employment to persons who have a knack for dealing with numbers.D.minimise the amount of profit that a firm has earned.ANS:APTS:1AACSB:Knowledge, AnalyticalTOP:What is accounting3.Accounting islikelyto involve:A.qualitative and financial information.B.quantitative and financial information.C.quantitative and non-financial information.D.qualitative and non-financial information.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:What is accounting4.For the individual, accounting has at least three functions. They are:A.planning, buying and selling.B.planning, decision support and spending.C.saving, controlling and buying.D.planning, controlling and decision support.ANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:What is accounting5.The difference between management accounting and financial accounting is:A.management accounting focuses on external users whereas financial accounting focuseson internal users.B.management accounting focuses only on the control function whereas financial accountingfocuses on the reporting function.C.management accounting focuses on internal users whereas financial accounting focuses onexternal users.D.management accounting focuses on the reporting function whereas financial accountingfocuses on the control function.ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting information?6.Examples of internal and external users of information are:A.creditors and investors.B.managers and unions.C.creditors and unions.D.banks and government authorities.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?7.The basic difference between managerial accounting and financial accounting is that:A.the financial accounting system relies on accounting information whereas managerialaccounting does not.B.financial accounting relies on information gathered from sources outside the businesswhereas managerial accounting relies on internally generated information.

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C.financial accounting is concerned with providing information to outsiders, whereasmanagerial accounting is concerned with providing information to managers for their usein directing the activities of the organisation.D.managerial accounting information is useful to not-for-profit organisations, but financialaccounting information is not.ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting information?8.Which of the following is an example of a stakeholder of a business?A.An ownerB.An investorC.A managerD.All of the aboveANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?9.Financial accounting is the process of:A.preparing and reporting accounting information for external decision makers.B.preparing and reporting accounting information for internal decision makers.C.enacting generally accepted accounting principles.D.preparing and reportingaccounting information to lenders.ANS:APTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting information?10.Management accounting is the process of:A.preparing and reporting accounting information for external decision makers.B.preparing and reporting accounting information for an organisation’s internal decisionmakers.C.enacting generally accepted accounting principles.D.preparing and reporting accounting information to lenders.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting information?11.Match the type of accounting information to the term that best describes it.Information prepared forInformation prepared forexternal decision makersinternal decision makersA.Financial accountingFinancial accountingB.Financial accountingManagerial accountingC.Managerial accountingFinancial accountingD.Managerial accountingManagerial accountingANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting informationused?

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12.Information contained in external financial reports can be useful to a firm’s:SuppliersEmployeesA.NoNoB.NoYesC.YesNoD.YesYesANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?13.Match the type of accounting information to the term that best describes it.Information preparedInformation preparedfor suppliers’ usefor creditors’ useA.Managerial accountingFinancial accountingB.Managerial accountingManagerial accountingC.Financial accountingFinancial accountingD.Financial accountingManagerial accountingANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:For what purpose is accounting information?14.Which one of the following groups isnotgenerally regarded as an external user of the accountinginformation of an entity?A.EmployeesB.CustomersC.ManagementD.LendersANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Who uses accounting information?15.A possible limitation of accounting information is that accounting information:A.can only be used by bankers.B.is relevant depending on the needs of users.C.does not report in money terms.D.relates to past informationANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Limits on the usefulness of accounting information16.The selection of appropriate accounting policies for a company is the responsibility of:A.the body that sets Accounting Standards.B.the companysecretary.C.the internal auditors of the company.D.the management of the company.ANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information17.What is meant by the termeconomic consequences of accounting policy choice?A.The selection of accounting policies is expensive and time-consuming.B.Accounting numbers affect the financial positions of various users.

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C.Accounting policies are selected to minimise the position of creditors.D.The creation of accounting standards consumesalarge amount of resources.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information18.In a firm that offers a bonus scheme based on accounting profit, managers can, in most cases, beexpected to adopt a:A.profit-decreasing accounting policy.B.profit-increasing accounting policy.C.dividend-increasing accounting policy.D.liability-increasing accounting policy.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information19.Debt covenants primarily protect the interests of which of the following parties?A.ShareholdersB.CreditorsC.EmployeesD.CompaniesANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information20.Triple bottom line reportingA.reinforces profit as the primary objective of companies.B.recognises the legal and non-legal obligations of a company to all legitimate stakeholdersin a company.C.is mandatory in Australia.D.is where a result is produced for financial, social and environmental benefit.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting21.Arguments in favour of triple bottom line reporting include:A.enhanced all-round company credibility from greater transparency.B.that it facilitates the implementation of an environmental strategy.C.enhanced communication with stakeholders.D.all of the above.ANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting22The Global Reporting Initiative:A.refers to an institution based in Sweden.B.is the most widely cited benchmark for the determination of the content of a triple bottomline report.C.was established as a private, profit-making initiative.D.is a set of reporting obligations agreed as part of the Kyoto agreement.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting

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23.Which of the following would not form part of social reporting under the GRI 3?A.Number of female employees.B.Number of indigenous employees.C.Donations to charities.D.Greenhouse gas emissions.ANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting24.Which of the following would not be part of environmental reporting under the GRI 3?A.Greenhouse gas emissionsB.Amount of recycled paperC.Child labourD.Biodiversity managementANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting25.Which of the following reports are not reports specifically on sustainability issues?A.Sustainability reportB.Annual reportC.Triple bottom line reportD.Stakeholder impact reportANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting26.Which of the following disclosures would you expect to be included by a company in a triplebottom line report?A.Greenhouse gas emissionsB.Donations to charitiesC.Percentage of female staffin senior management positionsD.All of the aboveANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Triple bottom line reporting27.Accounting firms generally provides the following services:A.audit, assurance and taxation.B.audit, budgeting and management consulting.C.audit, budgeting and cost accounting.D.internal audit, budgeting and management consulting.ANS:APTS:1AACSB:Knowledge, AnalyticalTOP:Careers in accounting28.Managers may select accounting policies for which of the following reasons?A.To provide useful information to usersB.Toavoid violating debt contractsC.To influencecompensation plansD.All of the above are correctANS:DPTS:1AACSB:Knowledge, AnalyticalTOP:Economic consequences of accounting information

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SHORT ANSWER1.What is the role of accounting information in business?ANS:Accounting information helps decisionmakers. It aids managers by providing quantitativeinformation about the entity to help them in planning, operating and evaluating the entity’sactivities. Accounting information helps external decisionmakers by providing them with financialstatements containing economic information about the performance and financial position of theentity.PTS:1AACSB:Knowledge, CommunicationTOP:For what purpose isaccounting information used?2.Distinguish managerial accounting from financial accounting. Your answer should include a briefdiscussion of differences in the types of information provided to users as well as differences in theidentity of users of financial and managerial accounting information.ANS:Financial accountingis used primarily by external users such as shareholders and creditors and bysenior management as a means of evaluating performance. Financial accounting is presented insummaryform and must follow generally accepted accounting principles (GAAP). GAAP ensuresthat information is consistent from period to period and comparable across entities.Managerial accountingis used internally by senior management, functional and division managersand middle managers. Managerial accounting information is frequently presented with detailedinformation for day-to-day decisions. The information provided does not have to conform toGAAP or need not be consistent between periods or comparable across entities. Rather, it focuseson the information needs of managers. It is critical that managerial accounting information beprovided in a timely manner.PTS:1AACSB:Knowledge, CommunicationTOP:For what purpose isaccounting information used?PROBLEM1.Doug Murphy, a newly hired accountant, wanted to impress his boss, so he stayed late one night toanalyse the office supplies expense. He determined the cost by month, for the past 12 months, ofeach of the following: computer paper, copy paper, fax paper, pencils and pens, note pads, postage,corrections supplies, stationery, and miscellaneous items. Why do entities, such as companies, notinclude information of this nature in published (general purpose) financial statements?ANS:Entities provide information to external users to make decisions. The primary decision makersexternal to the business are creditors, bankers, analysts, shareholders, and potential shareholders.These users need to know that the company can repay its debts, earn a profit, and pay dividends.The cost by month for each item of office supplies does not provide any additional information thatwould be helpful for any external users. In addition, the time and expense necessary to create theadditional detail would outweigh the benefits of the final product.PTS:1AACSB:Knowledge, Communication, AnalyticalTOP:For whatpurpose is accounting information used?

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CASE1.In October 2002, Duke Power, the regulated electricity utility of the United States (US)corporation Duke Energy, agreed to pay $25 million to its customers to settle allegations byregulators in North and South Carolina that it had underreported net earnings by about $123million between 1998 and 2002. The under reporting of net earnings by Duke Energy wasallegedly undertaken in order to avoid having to cut its electricity rates.Required:Explain what is meant by the term ‘economic consequences’ and relate this to the underreportingof net earnings by Duke Energy.ANS:Economic consequences: wealth effects, resulting from accounting policy choices, impacting, forexample, managers, the firm, shareholders and/or debtholders.Given Duke Energy’s status as a regulated electricity utility, and the explanation for theunderreporting, from an economic consequences perspective the entity’s choice of accountingpolicies lies with political costs ( p 17).Further, ultimately if large companies attract lower political costs its managers will be rewarded(p 17).PTS:1AACSB:Knowledge, Communication, AnalyticalTOP:Economic consequences of accounting information

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Chapter 2–Types of organisations and the financial reporting frameworkTRUE/FALSE1Mutual agency refers to the fact that each member of the partnership form of business entity canbind the other(s) in contract within the scope of normal operations.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations2.There are several advantages to forming a partnership, including the ease with which it can beformed and the limited rules and regulations that apply to it. However, as for a company, one ofthe regulations is that a partnership must prepare financial statements in accordance withAccounting Standards if it is deemed to be a reporting entity.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations3.Although partnerships may have a tax advantage over companies in that it is the partners that aretaxed and not the partnership, a disadvantage of partnerships is that they have unlimited liability.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations4.All companies can raise funds through the general public but not all companies have limitedliability.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations5.If a company has sales of $8 million, assets of $4 million and 60 employees, then it may beclassified as a small proprietary company.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations6.All limited-by-shares companies must have ‘Ltd’ in their names, but a private company isdistinguishable from a public company because it has ‘Pty’ as well as ‘Ltd’ in its name.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations7.Two companies were formed on 1 January 20X3, with the names Pluto Pty Ltd and Neptune NL.From the names of the companies, it is clear that the former is a proprietary company and the latteris a mining company.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations

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8.There are several differences between the financial statements of a company and those of apartnership, not least of which is the disclosure of taxation on the balance sheet as a liability. For acompany, the disclosure is a single amount as it is the company that is liable and not the owners.For a partnership, the amount of taxation is split and reported separately in accordance with eachpartner’s liability.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations9.The reason why company shareholders may have the advantage of limited liability rests with theentity principle in accounting, not the legal status of the company.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations10.The partnership form of business organisation exists where two or more carry on a business incommon with a view to profit.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations11.Accounting Standards set by the Australian Accounting Standards Board (AASB) apply to both theprivate and public sectors in Australia.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The framework for setting accounting standards12.Due process is primarily concerned with producing Accounting Standards that meet managers’objectives.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The standard setting process13.TheCorporations Act 2001requires that financial statements include a directors’ report, adirectors’ statement and an auditor’s report.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The Corporations Act14.The directors’report included with a company’s financial statements contains an opinion onwhether the balance sheet and income statement present a ‘true and fair’ view.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The Corporations Act15.Half-yearly reports contain more detailed information than annual reports.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The Corporations Act

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16.A conceptual framework canbe defined as a set of interrelated objectives and fundamentals that isexpected to lead to consistent standards, and that prescribes the nature, function and limits offinancial accounting and reporting.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:What is aconceptual framework?17.One of the objectives of a conceptual framework is that it is considered to be a defence againstpoliticisation.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:Objectives of aconceptual framework18.A general-purpose financial report is primarily directed toward the common information needs of awide range of users.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework19.Users of general-purpose financial reports include investors, financial advisors, employees,lenders, suppliers and customers.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework20.A reporting entity is an entity for which there are users who rely on financial statements as theirmajor source of information about the entity.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework21.General-purpose financial reports provide the information that is required for both internal andexternal user group needs.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework22.Accrual accounting refers to the method of measuring profit on the basis of cash flow, rather thanwhen revenues and expenses occur.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework23.The going concern assumption assumes thatan entity will continue to operate successfully into theforeseeable future.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework24.An asset must have physical qualities that can be measured reliably.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework

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25.A liability must always be a legal obligation that arises from past events.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework26.Equity is the residual interest in the assets of the entity after deduction of all its liabilities.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework27.Revenue means the gross inflows arising from normal operations plus all gains during theaccounting period.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework28.The elements of financial statements are always measured using the historical cost method.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:Measurement of the elements of financial statements29.The Australian Financial Reporting Council is not able to directly influence the content of theAASB’s accounting standards, but has the capacity to do so given its control of the budget andpriorities of the AASB.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The framework for setting accounting standards30.The political nature of standard setting refers to the fact that, for example, preparers may lobby thestandard setters to promote their own self-interest rather than the decision-makingusefulness ofgeneral purpose reports.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The political nature of accounting standard setting31.The fundamental elementequitydoes not require recognition criteria, because it represents theresidual interest in assets, after deducting liabilities.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework32.In accordance with theIASBConceptualFramework, income includes both revenue and gains.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The conceptual framework33.The external auditor is responsible for preparing the general-purpose financial reports of acompany.ANS:FPTS:1AACSB:Knowledge, AnalyticalTOP:External audits

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34.The responsibilities of the Australian Financial Reporting Council include advising thegovernment on the process of setting accounting standards.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The framework for setting accounting standards35.In Australia the overriding responsibility for the preparation and presentation of general-purposereports resides with the directors of a company.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:The corporations act36.An external auditor seeks to provide reasonable assurance that the financial statements of acompany are true and fair, not a guarantee that every error in the financial statements of the entityhas been detected.ANS:TPTS:1AACSB:Knowledge, AnalyticalTOP:External auditsMULTIPLE CHOICE1.Which of the following is not true of sole traders?A.They are one-owner businesses.B.They are not normally reporting entities.C.They are separate legal entities.D.They usually have limited funds at their disposal.ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations2.Which of the following is not true for a partnership?A.Creditors can supply goods on credit to a partnership.B.Debtors can purchase goods on credit from a partnership.C.Partnerships have to pay their tax yearly.D.Partnerships can enter contracts on behalf of the partnership.ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations3.Which of the following statements regarding partnerships is incorrect?A.There are no legal formalities required to form a partnership and it can be an oralagreement.B.Partnerships have unlimited liability not subject to the amount contributed by each partner.C.The partnership is subject to income tax, not the individual partners.D.Each partner has the authority to enter contracts on behalf of the partnership, provided thecontracts relate to normal operations.ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations4.Which of the following would not be considered a disadvantage of forming a partnership?A.Limited lifeB.Unlimited liabilityC.Ease of formationD.Mutual agency

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ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations5.Jackand Jill Repairers is founded by partners Jack, Jill and Jolly. Jack, Jill and Jolly contributed$3000, $5000 and $8000 respectively. For the year ending 20X2, Jack and Jill Repairers produceda profit of $12,000. If the profits are distributed in accordance with the initial investment which ofthe following is true?A.Jack gets $2250 and Jill gets $6000.B.Jack gets $3750 and Jolly gets $6000.C.Jack gets $2250 and Jill gets $3750.D.Jack gets $2250 and Jolly gets $8000.ANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations6.Which of the following items of information would not be found in the balance sheet of apartnership?A.AssetsB.LiabilitiesC.Dividends payableD.Distribution of profits to partnersANS:CPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations7.Which of the following is true of companies? All companies:A.are limited liability companies.B.are separate legal entities.C.have a limited life.D.are bound by the contracts signed by shareholders.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations8.A large proprietary company must have its financial statements audited and lodged with the:A.AustralianSecuritiesExchange.B.Australian Securities and Investments Commission.C.Financial Reporting Council.D.Australian Accounting Standards Board.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations9.Which of the following types of business organisation has a legal identity separate from those ofthe owners?A.Sole proprietorshipsB.CompaniesC.PartnershipsD.All of the above.ANS:BPTS:1AACSB:Knowledge, AnalyticalTOP:Types of organisations

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