ACCO 310 - financial reporting I MULTIPLE CHOICE—Conceptual final exam actual practice verified 2024 questions and answers Concordia University

ACCO 310 - financial reporting I MULTIPLE CHOICE—Conceptual final exam actual practice verified 2024 questions and answers Concordia University 1. The essential characteristic(s) of accounting is (are) a. communication of financial information to interested persons. b. communication of financial information about economic entities. c. identification, measurement, and communication of financial information. d. all of these. 2. Financial accounting is concerned with the process that culminates in a. the preparation of financial reports. b. specialized reports for inventory management and control. c. specialized reports for income tax calculation and recognition. d. reports on changes in stock prices and future estimates of market position. 3. Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used a by parties internal to the business enterprise only. b. by investors only. c. by parties both internal and external to the business enterprise. d. primarily by management. 4. The information provided by financial reporting pertains to a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers. c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers. d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries. 5. Whether a business is successful and thrives is determined by a. free enterprise. b. competition. c. markets. d. all of these. 6. An effective capital allocation process a. encourages innovation. b. promotes productivity. c. provides an efficient and liquid market for buying and selling securities. d. all of these. 7. In assessing management stewardship, users traditionally refer to a. non-financial measurements. b. forward-looking data. c. historical data . d. none of these. 8. Which of the following statements is not an objective of financial reporting? a. Provide information that is useful to users in making resource allocation decisions. b. Provide information about an entity’s economic resources, obligations, and equity/net assets. c. Provide information on the liquidation value of an enterprise. d. Provide information about changes in an entity’s economic resources, obligations, and equity/net assets. 9. The role of the Accounting Standards Board (AcSB) in the formulation of accounting principles in Canada can be best described as a. primary. b. secondary. c. sometimes primary and sometimes secondary. d. non-existent. 10. The body that has the responsibility to set generally accepted accounting principles in Canada is the a. FASB. b. IASB. c. AcSB. d. OSC. 11. The preparation by some companies of biased information is sometimes referred to as a. conservative financial reporting. b. aggressive financial reporting. c. full disclosure of all material facts. d. management stewardship. 12. Which of the following parties is not instrumental in the development of financial reporting standards in Canada? a. the Financial Accounting Standards Board (FASB) b. the Provincial Securities Commissions c. the International Accounting Standards Board (IASB) d. the American Institute of Certified Public Accountants 13. Which of the following is not a stakeholder in the Canadian Financial Reporting Environment? a. Investors b. Creditors c. Auditors d. All of these are stakeholders 14. In establishing financial accounting standards, “due process” refers to a. the process of giving interested parties ample opportunity to express their views. b. the practice of researching, creating a task force, issuing an exposure draft and establishing the new GAAP. c. the researching of the legal implications of proposed new accounting standards. d. the requirement that all accountants must receive a copy of financial standards. 15. The widely publicized subprime lending crisis was not caused by a. Capital market participants who acted in their own self-interest. b. A lack of transparency. c. A lack of investor understanding of the investment's true risk. d. The practice of securitizing assets. 16. Which of the following describes one of the causes of management bias? a. The need to comply with contracts, such as debt covenants. b. The desire to meet financial analyst's expectations. c. The tendency to emphasize positive events only. d. All of these 17. The adoption of International Financial Reporting Standards is an example of a. The impact of technology on user's needs. b. The impact of globalization on capital markets c. Ethical behaviour. d. None of the above 18. Which of the following statements does not describe the activities and authority of the Ontario Securities Commission (OSC)? a. The OSC reviews and monitors the financial statements of companies whose shares are listed on the Toronto Stock Exchange b. The OSC issues its own disclosure requirements for listed companies. c. The OSC has the ability to fine or delist companies. d. The OSC issues financial accounting standards for Canadian companies. 19. Generally accepted accounting principles include a. specific rules, practices and procedures. b. broad principles and conventions of general applications including underlying concepts. c. pronouncements by the Emerging Issues Committee. d. all of these. 20. Which of the following aspects is often described as one of the main issues of measuring performance in the “knowledge-based” economy? a. "Knowledge-based" assets are mostly linked to physical assets. b. The success of "knowledge-based" companies includes non-financial components. c. "Knowledge-based" companies are dominating the market. d. All of these. 21. The exercise of professional judgement does not involve which of the following: a. the use of knowledge gained through education. b. the application of knowledge gained through experience. c. the use of ethical decision making. d. none of these. 22. Which of the following are major factors in the rapidly changing financial reporting environment in Canada? a. Increased demand for accountants and the impact of technology b. Globalization and the unethical actions of accountants c. The growing number of institutional investors and the knowledge based economy d. All of these 23. Which of the following is NOT likely a drawback of the dramatic advancement of technology on financial reporting? a. Users of financial information have access to more information. b. Quality and reliability may be compromised c. Equal and fair access may be at issue. d. None of these are drawbacks 24. The business strategy model called the “Balanced Scorecard” a. ensures that all of the financial statements are accurate and balanced. b. views the company from the financial, customer, internal processes perspectives, and learning and growth perspectives. c. begins each reporting period with zero balances in all areas of measurement. d. views the financial statements as the major component of useful information for decision making within the company. 25. Financial statements are prepared for the user. Which of the following best describes the responsibility for the preparation of financial statements? a. They are the responsibility of management. b. They are the responsibility of external auditors. c. They are the responsibility of shareholders. d. They are the responsibility of standard setters. 26. Which of the following supports the use of "simplified GAAP" for private companies? a. Private companies usually have less complex business models. b. The financial statement users of private companies tend to have first-hand information. c. Private companies tend to have fewer users. d. All of these 27. Canada Customs and Revenue Agency does not require a corporation to use the same reporting principles for tax as for accounting. Which of the following accounting principles is most likely to be the same for accounting and tax purposes? a. Amortization expense b. Development costs c. Long-term leases d. Revenue Recognition 28. The Sarbanes-Oxley Act (SOX) was not enacted to a. Help prevent fraud and poor financial reporting practices. b. Ensure the act was applied internationally. c. Enable the SEC to increase its policing efforts. d. Introduce new independence rules for auditors 29. Which of the following does not describe a step in the AcSB’s standard setting process? a. Issue an emerging Issues Abstract b. Develop an Exposure Draft c. Write a project proposal d. Develop a Re-exposure Draft. MULTIPLE CHOICE—Conceptual 1. Generally accepted accounting principles a. are fundamental truths or axioms that can be derived from laws of nature. b. derive their authority from legal court proceedings. c. derive their credibility and authority from general recognition and acceptance by the accounting profession. d. have been specified in detail in the CICA conceptual framework. 2. A soundly developed conceptual framework of concepts and objectives should a. increase financial statement users' understanding of and confidence in financial reporting. b. enhance comparability among companies' financial statements. c. allow new and emerging practical problems to be more quickly solvable. d. all of these. 3. Which of the following is not an objective of financial reporting? a. To provide information about an entity’s economic resources, obligations and equity/net assets. b. To provide information that is helpful to investors and creditors and other users in making resource allocation decisions and/or assessing management stewardship. c. To provide information that is useful in assessing the economic performance of the entity. d. All of these are objectives of financial reporting. 4. Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link is a. relevance. b. reliability. c. understandability. d. materiality. 5. The overriding criterion by which accounting information can be judged is that of a. usefulness for decision making. b. freedom from bias. c. timeliness. d. comparability. 6. During a major renovation project of its head office, a worker was seriously injured. While the company believes that it was not at fault, it does include the incident in the notes to its financial statements. This is consistent with which of the following principles: a. Economic entity b. Control c. Full disclosure d. Periodicity 7. Accounting information is considered to be relevant when it a. can be depended on to represent the economic conditions and events that it is intended to represent. b. is capable of making a difference in a decision. c. is understandable by reasonably informed users of accounting information. d. is verifiable and neutral. 8. The adoption of international GAAP can be seen as an application of which of the following quality enhancing characteristics: a. Verifiability b. Comparability c. Understandability d. Timeliness 9. Enhancing qualitative characteristics are an essential part of the conceptual framework of accounting. These include, among others, timeliness. Which of the items below would be most indicative of timeliness? a. The preparation of quarterly financial statements b. The preparation of annual financial statements c. The large volume of data to be included. d. The choice of the best accounting principle 10. A local business man owns several different companies. His accountant prepares separate annual financial statements for each of these businesses. This is an application of which of the following principles: a. Full disclosure b. Periodicity c. Economic entity d. Matching 11. To measure the fair value of an asset, an entity should determine a. The asset's nature, condition and location b. The asset's valuation premise c. The availability of data d. All of the above 12. Under the currently proposed definition of a liability, what is the most important aspect to consider when deciding whether the item should be recognized as a liability? a. The item represents an economic obligation for which a present obligation exists b. The item is shown on the balance sheet c. The transaction underlying the obligation has occurred d. The item is measurable 13. Which of the following independent business transactions would most likely be recorded as an accounting loss? a. A decrease in a retail store's sales b. A decrease of a bank's interest income c. A decrease in net assets from a company's incidental transactions. d. All of the above 14. MAX Auto Repair has implemented a policy that requires all expenditures below $10 to be expensed. This is an application of a. The full disclosure principle b. The matching principle c. The materiality constraint d. Representational faithfulness 15. A severe cold snap may affect this year's crop of Florida's citrus growers. The potentially adverse affect is disclosed in the financial statements of the citrus growers. This practice can be best described as an application of a. The derecognition of financial statement elements b. The full disclosure principle c. The going concern assumption d. The economic entity assumption 16. Representational faithfulness is an ingredient of the primary quality of Reliability Relevance a. Yes Yes b. No Yes c. Yes No d. No No 17. Financial information does not demonstrate comparability when a. firms in the same industry use different accounting methods to account for the same type of transaction. b. a company changes its estimate of the residual value of a fixed asset. c. a company fails to adjust its financial statements for changes in the value of the measuring unit. d. none of these. 18. Financial information exhibits the characteristic of comparability when a. expenses are reported as charges against revenue in the period in which they are paid. b. accounting entities give accountable events the same accounting treatment from period to period. c. extraordinary gains and losses are not included on the income statement. d. accounting procedures are adopted which give a consistent rate of net income. 19. A principles based approach to financial reporting standards generally does not exhibit ` the following: a. Specific rules b. Flexibility c. General guidance d. Room for a large degree of professional judgement 20. Which of the following items below does not meet the definition of an asset? a. A building owned and used by a company b. Equipment that is owned and used by a company c. Publicly available water used by a farm to water its crops d. None of the above 21. The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners' a. transfers of assets to the entity. b. rendering services to the entity. c. satisfaction of liabilities of the entity. d. all of these. 22. In classifying the elements of financial statements, the primary distinction between revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions involved. 23. A decrease in net assets arising from peripheral or incidental transactions is called a(n) a. capital expenditure. b. cost. c. loss. d. expense. 24. Principles-based GAAP is sometimes criticized for being a. Too inflexible. b. Too flexible c. Too inconsistent d. None of these 25. Which of the following elements of financial statements is not a component of comprehensive income? a. Revenues b. Distributions to owners c. Losses d. Expenses 26. The economic entity assumption a. is inapplicable to unincorporated businesses. b. recognizes the legal aspects of business organizations. c. requires periodic income measurement. d. is applicable to all forms of business organizations. 27. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d. neutrality characteristic. 28. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? a. Cost/benefit relationship b. Periodicity assumption c. Conservatism constraint d. Matching principle 29. What accounting concept justifies the usage of accruals and deferrals? a. Going concern assumption b. Materiality constraint c. Consistency characteristic d. Monetary unit assumption 30. The assumption that a business enterprise will not be sold or liquidated in the near future is known as the a. economic entity assumption. b. monetary unit assumption. c. conservatism assumption. d. none of these. 31. Which of the following is an implication of the going concern assumption? a. The historical cost principle is credible. b. Amortization and amortization policies are justifiable and appropriate. c. The current-noncurrent classification of assets and liabilities is justifiable and significant. d. All of these. 32. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more: a. reliable. b. relevant. c. indicative of the entity's purchasing power. d. conservative. 33. Valuing assets at their liquidation values rather than their cost is inconsistent with the a. periodicity assumption. b. matching principle. c. materiality constraint. d. historical cost principle. 34. The current mixed valuation model primarily ties the basis of valuation to a. the level of uncertainty. b. measurement reliability. c. the age of the asset. d. management intent with respect to the asset. 35. Revenue is generally recognized when performance is achieved and it is measurable and collectible. This statement describes the a. consistency characteristic. b. matching principle. c. revenue recognition principle. d. relevance characteristic. 36. Generally, revenue from sales should be recognized at a point when a. management decides it is appropriate to do so. b. the product is available for sale to the ultimate consumer. c. the entire amount receivable has been collected from the customer and there remains no further warranty liability. d. none of these. 37. Revenue generally should be recognized a. at the end of production. b. at the time of cash collection. c. when performance is achieved. d. when performance is achieved and the amount earned is measurable and collectible. 38. Which of the following is not a time when revenue may be recognized? a. At time of sale b. At receipt of cash c. During production d. All of these are possible times of revenue recognition. 39. Under the currently proposed definition of an asset, what is the most important aspect to consider when deciding whether the item should be recognized as an asset? a. The item represents a present economic resource to which the entity has a right b. The item is shown on the balance sheet c. The transaction underlying the resource has occurred d. The item is measurable 40. One of the principles of the conceptual framework is the matching principle. Which of the following is not a good example of that principle? a. A machine that produces certain goods is amortized over its useful life. The resulting amortization expense is matched with the proceeds from the sale of those goods. b. The entire two-year insurance premium is expensed in the first year. c. The write-off an uncollectible receivable in the year that the sale was made. d. The recognition of revenue for which associated expenses can not yet be determined is delayed until such determination can be made. 41. The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the a. consistency characteristic. b. matching principle. c. materiality constraint. d. revenue recognition principle. 42. The accounting principle of matching is best demonstrated by a. not recognizing any expense unless some revenue is realized. b. associating effort (expense) with accomplishment (revenue). c. recognizing prepaid rent received as revenue. d. establishing an Appropriation for Contingencies account. 43. Which of the following serves as the justification for the periodic recording of amortization expense? a. Association of efforts (expense) with accomplishments (revenue) b. Systematic and rational allocation of cost over the periods benefited c. Immediate recognition of an expense d. Minimization of income tax liability 44. Application of the full disclosure principle a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits. b. is violated when important financial information is buried in the notes to the financial statements. c. is demonstrated by the inclusion of information such as information about contingencies. d. requires that the financial statements be consistent and comparable. 45. Where there is a significant uncertainty with respect to the measurement of an item a. do not record anything in the financial statements. b. recognize the item in the financial statements and disclose the measurement uncertainty in the notes to the financial statements. c. do not record anything in the financial statements and disclose the measurement uncertainty in the notes to the financial statements. d. record the maximum amount in the financial statements. 46. Management Discussion and Analysis (MD&A) is a. notes on meetings between management and auditors. b. internal documents not released to shareholders. c. supplementary information included in the annual report. d. supplementary information included in the notes to the financial statements. 47. The operations of a resource company's oil sands operations results in environmental damage. While the extent of the damage can not yet be determined, the situation is disclosed in its financial statements. This best demonstrates a. The application of professional judgement b. The full disclosure principle c. Representational faithfulness d. Good management stewardship 48. Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the a. consistency characteristic. b. matching principle. c. materiality constraint. d. historical cost principle. 49. Which of the following statements about materiality is not correct? a. An item must make a difference or it need not be disclosed. b. Materiality is a matter of relative size or importance. c. An item is material if its inclusion or omission would influence or change the judgement of a reasonable person. d. All of these are correct statements about materiality. 50. Fraudulent financial reporting is a business reality. While it cannot be eliminated, the risk of fraudulent reporting can be decreased. Which of the following considerations is least likely to lessen that risk? a. An independent audit committee b. An internal audit function c. An increased focus on tying bonuses to short-term company performance d. Vigilant management 51. Information that is representationally faithful is a. Complete b. Neutral c. Free from material error or bias d. All of these 52. Which of the following best describes the importance of qualitative characteristics as part of the conceptual framework of financial reporting? a. Relevance and representational faithfulness must always be present. b. Representational faithfulness may be traded off. c. Timeliness is a fundamental qualitative characteristic. d. All of these 53. Schmidt Ltd. aims to improve the qualitative characteristics of its financial statements. Your assistant has presented you with options shown below. Which of those options would most likely improve the comparability of your company's financial statements? a. The restatement of its financial statements from Canadian GAAP to US GAAP for its American investors b. The preparation of monthly financial statements c. The introduction of a policy that specifies how Schmidt's capital assets should be amortized d. The use of foreign-trained accountants 54. You want to improve the qualitative characteristics of your firm's financial statements. Which of the following options would most likely improve the timeliness of your company's financial statements? a. To increase the frequency of issue from annually to quarterly b. To increase the number of disclosures c. To increase the amortization period for capital assets from 5 to years. d. To change the timing of when revenues are recognized 55. Gains and losses are based on whether they are related to an entity’s major ongoing or central operations. These gains or losses may be related to Peripheral Activities Use by Others of Resources b. Yes Yes c. No Yes d. No No Factors that shape an accounting information system include the a. nature of the business. b. size of the firm. c. volume of data to be handled. d. all of these. 2. Which of the following criteria must be met before an event or item should be recorded for accounting purposes? a. The event or item can be measured objectively in financial terms. b. The event or item is relevant and reliable. c. The event or item is an element. d. All of these must be met. 3. A trial balance a. is a list of accounts at a specific point in time. b. can be used for the preparation of financial statements. c. is best described by (a.) and (b.) d. is none of the above. 4. A post-closing trial balance. a. includes temporary accounts only. b. includes permanent accounts only. c. includes both temporary and permanent accounts. d. may include expenses. 5. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the a. ledger. b. account. c. trial balance. d. none of these. 6. The debit and credit analysis of a transaction normally takes place a. before an entry is recorded in a journal. b. when the entry is posted to the ledger. c. when the trial balance is prepared. d. at some other point in the accounting cycle. 7. An example of a transaction is a. the receipt of cash from a customer prior to performing the service. b. the recording of depreciation. c. the accrual of salaries owed. d. all of these. 8. Some events are not recorded in the accounting information system because a. the amounts are not material. b. the service has not been provided yet although the cash has been received. c. the problems measuring them are too complex. d. all of these. 9. The income summary account a. is used only at year-end. b. is used to record dividends. c. is used to bring temporary accounts to zero. d. is best described by (a) and (c). 10. Which of the following best describes adjustments: a. adjustments ensure proper matching. b. they are used to record external events. c. (a) and (d). d. they are usually prepared at the end of the accounting period. 11. A trial balance may prove that debits and credits are equal, but a. an amount could be entered in the wrong account. b. a transaction could have been entered twice. c. a transaction could have been omitted. d. all of these. 12. Adjusting entries are necessary to a. obtain a proper matching of revenue and expense. b. achieve an accurate statement of assets and equities. c. adjust assets and liabilities to their fair market value. d. both a and b. 13. Why are certain costs of doing business capitalized when incurred and then amortized over subsequent accounting cycles? a. To reduce the income tax liability b. To aid management in cash-flow analysis c. To match the costs of production with revenues as earned d. To adhere to the accounting constraint of conservatism 14. A payment that is received would most likely be recorded directly in that company's: a. general ledger. b. cash disbursements journal. c. cash receipts journal. d. trial balance. 15. A cheque that is issued would most likely be recorded directly in that company's: a. expense journal. b. cash disbursements journal. c. cash receipts journal. d. none of the above. 16. Consider a cheque received in payment for revenues that have not yet been earned. Assuming that company uses the cash-basis of accounting, how would that payment be recorded? a. it would be recorded as unearned revenue until it is actually earned. b. the entire amount would be recognized as revenue in the current period. c. it would be recorded as a prepaid expense. d. none of the above. 17. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 18. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve a. a liability account and an asset account. b. an asset or contra-asset and an expense account. c. a liability account and an expense account. d. a receivable account and a revenue account. 19. Which of the following must be considered in estimating depreciation on an asset for an accounting period? a. The original cost of the asset b. Its useful life c. The decline of its fair market value d. Both the original cost of the asset and its useful life. 20. Which of the following statements best describes the frequency of when financial statements are issued? a. financial statements should only be issued at the end of the year. b. financial statements should only be issued quarterly. c. financial can be issued anytime during the year. d. none of the above. 21. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries? a. Expiration of prepaid insurance b. Depreciation of long-lived assets c. Accrued wages payable d. All of these 22. A prepaid expense can best be described as an amount a. paid and currently matched with revenues. b. paid and not currently matched with revenues. c. not paid and currently matched with revenues. d. not paid and not currently matched with revenues. 23. An accrued revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses. 24. An unearned revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses. 25. Which of the following is a real (permanent) account? a. Goodwill b. Sales c. Accounts Receivable d. Both Goodwill and Accounts Receivable 26. Which of the following is a nominal (temporary) account? a. Unearned Revenue b. Salary Expense c. Inventory d. Retained Earnings 27. If the inventory account at the end of the year is understated, the effect will be to a. overstate the gross profit on sales. b. understate the net purchases. c. overstate the cost of goods sold. d. overstate the goods available for sale. 28. Which of the following items should be journalized? a. a letter advising an employee of a pay raise. b. a customer's pending bankruptcy (assuming an adequate allowance for doubtful accounts has already been set up). c. a customer's pending bankruptcy (assuming an adequate allowance for doubtful accounts has not already been set up). d. (a) and (b). 29. Below are several statements about the trial balance. Which of these statements is not correct? a. debits and credits must balance. b. the equality of credits and debits ensures that no errors were made. c. the post-closing trial balance includes temporary accounts only. d. (b) and (c). *30. Adjusting entries that should be reversed include those for prepaid or unearned items that a. create an asset or a liability account. b. were originally entered in a revenue or expense account. c. were originally entered in an asset or liability account. d. create an asset or a liability account and were originally entered in a revenue or expense account. *31. Adjusting entries that should be reversed include a. all accrued revenues. b. all accrued expenses. c. those that debit an asset or credit a liability. d. all of these. The business model may be broken up into three activities: a. investing, operating, allocating. b. balance sheet, income statement, cash flow statement. c. investing, operating, financing. d. balance sheet, income statement, retained earnings statement. 2. The income statement strives to capture the a. financing activities. b. investing activities. c. interrelationship between the activities. d. operating activities. 3. The concept of transparency mandates that the financial statements a. reflect the economic reality of running a business. b. reflect everything no matter how small. c. reflect the biases of the managers. d. all of the above. 4. The concept of ‘soft numbers’ reflects that a. financial statement numbers may be manipulated. b. sometimes significant measurement uncertainty exists. c. sometimes significant errors exist. c. earnings numbers may not be sustainable. 5. Earnings management is a. the process of managing a business. b. the process of profit maximization. c. always fraudulent. d. manipulating income to meet a targeted earnings level. 6. The major elements of the income statement are a. revenue, cost of goods sold, selling expenses, and general expense. b. operating section, non-operating section and discontinued operations. c. revenues, expenses, gains, and losses. d. all of these. 7. Information in the income statement helps users to a. evaluate the past performance of the enterprise. b. provide a basis for predicting future performance. c. help assess the risk or uncertainty of achieving future cash flows. d. all of these. 8. Which of the following is an acceptable method of presenting the income statement? a. A single-step income statement b. A multiple-step income statement c. A consolidated statement of income d. All of these 9. The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement. d. the various components of income from continuing operations. 10. Limitations of the income statement include all of the following except a. items that cannot be measured reliably are not reported. b. only actual amounts are reported in determining net income. c. income measurement involves judgement. d. income numbers are affected by the accounting methods employed. 11. Which of the following is not a generally practiced method of presenting the income statement? a. Including corrections of errors made in a prior period b. The single-step income statement c. The consolidated statement of income d. Including gains and losses from discontinued operations of a segment of a business in determining net income 12. The occurrence which most likely would have no effect on 2011 net income (assuming that all amounts involved are material) is the a. sale in 2011 of an office building contributed by a stockholder in 1987. b. collection in 2011 of a receivable from a customer whose account was written off in 2010 by a charge to the allowance account. c. settlement based on litigation in 2011 of previously unrecognized damages from a serious accident which occurred in 2008. d. worthlessness determined in 2011 of stock purchased on a speculative basis in 2007. 13. Irregular or unusual gains or losses that don’t relate to discontinued operations a. may be reported separately if they are material in amount. b. are generally combined with other gains and losses if they are immaterial. c. must be shown above “income before discontinued operations” and before the provision for income tax. d. All of these 14. The concept of intraperiod tax allocation is used for a. income from continuing operations b. income from discontinued operations c. other comprehensive income d. All of these 15. Expenses may be presented in the income statement a. by nature or by function b. by amount or in alphabetical order c. by geographical area or by the single-step method d. by current or non-current 16. When expenses are presented by function in the income statement a. Their breakdown should be disclosed. b. They should be reported as part of other comprehensive income. c. Their cash flow predictive value is decreased d. (a) and (c) 17. The concept of comprehensive income a. Is not relevant under IFRS b. Is not relevant under private entity GAAP c. Can be replaced with the concept of discontinued operations under private entity GAAP d. None of these 18. A company's balance sheet a. Would never include accumulated other comprehensive income (because it is an income statement item). b. May include accumulated other comprehensive income if the company follows IFRS c. May include accumulated other comprehensive income if the company follows private entity GAAP d. None of these 19. Which of the following is a change in accounting principle? a. A change in the estimated service life of machinery b. A change estimated allowance for bad debts c. A change in the estimated future warranty expense d. A change from FIFO to weighted average for inventory 20. Which of the following is a required disclosure in the income statement when reporting a change in accounting principle? a. A per share amount for the cumulative effect of the change. b. The cumulative effect on prior years net of tax. c. The cumulative effect should be disclosed immediately after discontinued operations. d. None of these. 21. Which of the following is a required disclosure in the income statement when reporting the disposal of a segment of the business? a. The gain or loss on disposal should be reported as an extraordinary item. b. Results of operations of a discontinued segment should be disclosed immediately below other irregular items. c. Earnings per share from both continuing operations and net income should be disclosed on the face of the statement or in the notes. d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations. 22. When a company disposes of a discontinued operation (segment), the transaction should be included in the income statement as a gain or loss on disposal reported as a. a prior period adjustment. b. other comprehensive income. c. an amount after continuing operations. d. a bulk sale of plant assets included in income from continuing operations. 23. For purposes of discontinued operations, the key elements in determining that a separate segment exists are a. the component is a separate business and a separate legal entity. b. the component is a separate legal entity and generates its own net cash flows. c. the component is in a separate geographic region and can be sold. d. the component is a separate business and generates its own cash flow. 24. Income taxes are allocated to a. correction of errors reported in prior periods. b. discontinued operations. c. irregular items. d. all of these. 25. Which of the following is true about intraperiod tax allocation? a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. b. It is required for the cumulative effect of changes in accounting principles but not for discontinued operations. c. Its purpose is to allocate income tax expense evenly over a number of accounting periods. d. Its purpose is to relate the income tax expense to the items which affect the amount of tax. 26. Which of the following items will not appear in the retained earnings statement? a. Net loss b. Correction of an error c. Change in accounting estimates d. Stock dividends 27. Which one of the following types of losses is excluded from the determination of net income in income statements? a. Material losses resulting from transactions in the company's investments account. b. Material losses resulting from unusual sales of assets not acquired for resale. c. Material losses resulting from the write-off of intangibles. d. Material losses resulting from correction of errors related to prior periods. Which of the following is a limitation of the balance sheet? a. Many items that are of financial value are omitted. b. Judgements and estimates are used. c. Current fair value is not reported. d. All of these 2. The balance sheet is useful for analysing all of the following except a. liquidity. b. solvency. c. profitability. d. financial flexibility. 3. Monetary assets are defined as assets that are convertible to a. known amounts of cash. b. cash within one operating cycle. c. cash within twelve months. d. cash within three months 4. A company that follows private entity GAAP a. must not disclose the cash flow per share b. can disclose the cash flow per share c. can disclose the cash flow per share if it makes a special election to do so d. None of these 5. A company that follows IFRS a. can disclose the cash flow per share if it makes a special election to do so b. must not disclose the cash flow per share c. is generally allowed to disclose the cash flow per share d. None of these 6. The basis for classifying assets as current or noncurrent is conversion to cash within a. the accounting cycle or one year, whichever is shorter. b. the operating cycle or one year, whichever is longer. c. the accounting cycle or one year, whichever is longer. d. the operating cycle or one year, whichever is shorter. 7. The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in a. inventory back into cash, or twelve months, whichever is shorter. b. receivables back into cash, or twelve months, whichever is longer. c. tangible fixed assets back into cash, or twelve months, whichever is longer. d. inventory back into cash, or twelve months, whichever is longer. 8. When current debt is refinanced by the issue date of financial statements, it may generally be presented as non-current a. if the company follows IFRS b. under either private entity GAAP or IFRS c. if the company follows private entity GAAP d. None of these 9. Which of the following is a current asset? a. Cash surrender value of a life insurance policy of which the company is the beneficiary. b. Investment in equity securities for the purpose of controlling the issuing company. c. Cash designated for the purchase of tangible fixed assets. d. Trade instalment receivables normally collectible in eighteen months. 10. Which of the following should not be considered as a current asset in the balance sheet? a. Instalment notes receivable due over eighteen months in accordance with normal trade practice. b. Prepaid taxes which cover assessments of the following operating cycle of the business. c. Equity or debt securities purchased with cash available for current operations. d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president. 11. Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as a. current assets. b. property, plant, and equipment. c. intangible assets. d. long-term investments. 12. Disclosure of the date that financial statements are authorized for issue is a. mandatory if the company follows private entity GAAP b. mandatory if the company follows IFRS c. mandatory under either private entity GAAP or IFRS d. None of these 13. Which of the following items would require special disclosure under IFRS? a. Investment property b. Biological assets c. Provisions d. All of these 14. Significant changes to the presentation of financial statements are currently being developed by the IASB and FASB. Which of the following statements best describes the focus of these changes? a. To better highlight the company's assets, liabilities and equity b. To segregate the company’s operating, financing and investing activities c. To highlight the company's major business and financing activities. d. To increase the number of notes to be attached to the company's financial statements. 15. Which item below is not a current liability? a. Unearned revenue b. Stock dividends distributable c. The currently maturing portion of long-term debt d. Trade accounts payable 16. Working capital is a. capital which has been reinvested in the business. b. unappropriated retained earnings. c. cash and receivables less current liabilities. d. none of these. 17. An example of an item which is not an element of working capital is a. accrued interest on notes receivable. b. goodwill. c. goods in process. d. short-term investments. 18. Long-term liabilities include a. obligations not expected to be liquidated within the operating cycle. b. obligations payable at some date beyond the operating cycle. c. future income taxes and most lease obligations. d. all of these. 19. Which of the following should be excluded from long-term liabilities? a. Obligations payable at some date beyond the operating cycle b. Most pension obligations c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund d. None of these 20. Treasury stock should be reported as a(n) a. current asset. b. investment. c. other asset. d. reduction of shareholders’ equity. 21. Which of the following should be reported for capital shares? a. The shares authorized b. The shares issued c. The shares outstanding d. All of these 22. Which of the following would be classified in a different major section of a balance sheet from the others? a. Capital stock b. Common stock subscribed c. Stock dividend distributable d. Stock investment in affiliate 23. The shareholders' equity section is usually divided into what four parts? a. Preferred stock, common stock, treasury stock, contributed surplus b. Preferred stock, common stock, retained earnings, other comprehensive income c. Capital shares, contributed surplus, retained earnings, accumulated other comprehensive income d. Capital stock, appropriated retained earnings, unappropriated retained earnings, contributed surplus 24. Which of the following best describes a liability? a. Any obligation, whether enforceable or not, is a liability b. A liability is an enforceable economic burden or obligation c. A liability is a legal economic benefit d. None of these 25. Which of the following is not a method of disclosing pertinent information? a. Supporting schedules b. Parenthetical explanations c. Cross reference and contra items d. All of these are methods of disclosing pertinent information. 26. A cash flow statement that is prepared under the direct method starts with: a. Net income b. Gross Profit c. None of these d. Income from operations 27. The standards for private entity GAAP and IFRS include numerous differences. Which of the following statements best describes the requirements for the preparation and presentation of the cash flow statement? a. Both standards allow the use of the indirect or direct method b. Private entity GAAP permits the use of the direct method only c. IFRS permits the use of the single-step method only d. (b) and (c) 28. A cash flow statement that is prepared under the indirect method adds and subtracts certain items to the base number. How would decreases in unearned revenues be shown? They would be shown as a. a deduction from net income b. an addition to net income c. a deduction from sales d. an addition to sales 29. A company's petty cash fund of $450 would generally be a. included as part of cash b. would not qualify as a current asset because the amount is below $1,000 c. a current asset d. (a) and (c) 30. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the a. retained earnings statement. b. income statement. c. statement of cash flows. d. statement of financial position. 31. Making and collecting loans and disposing of property, plant, and equipment are a. operating activities. b. investing activities. c. financing activities. d. liquidity activities. 32. In preparing a statement of cash flows, repurchase of a company’s own shares at an amount greater than cost would be classified as a(n) a. operating activity. b. financing activity. c. extraordinary activity. d. investing activity. 33. In preparing a statement of cash flows, cash flows from operating activities a. are always equal to accrual accounting income. b. are calculated as the difference between revenues and expenses. c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash. 34. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discount 35. Preparing the statement of cash flows involves all of the following except determining the a. cash provided by operations. b. cash provided by or used in investing and financing activities. c. change in cash during the period. d. cash collections from customers during the period. 36. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by a. average long-term liabilities. b. average total liabilities. c. ending long-term liabilities. d. ending total liabilities. 37. The current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency. 38. A measure of a company’s financial flexibility is the a. cash debt coverage ratio. b. current cash debt coverage ratio. c. free cash flow. d. cash debt coverage ratio and free cash flow. 39. Free cash flow is calculated as net cash provided by operating activities less a. capital expenditures. b. dividends. c. capital expenditures and dividends. d. capital expenditures and amortization. The primary purpose of the statement of cash flows is to provide information a. about an entity’s operating, investing, and financing activities during a period. b. that is useful in assessing cash flow prospects. c. about an entity’s cash receipts and cash payments during a period. d. about an entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing. 2. The information in a statement of cash flows enables stakeholders to assess the a. amounts, timing and certainty of future cash flows. b. liquidity and solvency of an entity. c. change in working capital during the period. d. reason(s) for the difference between net income and cash flows from financing activities. 3. Cash equivalents include a. treasury bills, equity investments and long term bonds. b. non-equity investments with short maturities and bank overdrafts repayable on demand. c. treasury bills, commercial paper and all equity investments. d. treasury bills, commercial paper, and money market funds purchased with excess cash. 4. The statement of cash flows is required to be included a. only for financial statements prepared under IFRS. b. only for financial statements prepared under ASPE (PE GAAP). c. for both financial statements prepared under IFRS and under ASPE (PE GAAP). d. for financial statements prepared under IFRS, but is optional under ASPE (PE GAAP). 5. Which of the following is not a significant non-cash transaction? a. Capital (finance) lease obligations. b. Conversion of preferred shares to common shares. c. Exchange of non-monetary assets. d. Purchasing a building with a 10% cash down payment and mortgaging the balance. 6. A successful company’s major source of cash should be a. operating activities. b. investing activities. c. financing activities. d. both operating activities and investing activities. 7. Using the indirect method, an increase in inventory would be reported in a statement of cash flows as a(n) a. addition to net income in calculating cash flows from operating activities. b. deduction from net income in calculating cash flows from operating activities. c. cash flow from investing activities. d. cash flow from financing activities. 8. A statement of cash flows generally would not include the effects of a. common shares issued at an amount greater than par value. b. the purchase of treasury shares. c. cash dividends paid. d. stock dividends declared and issued. 9. In a statement of cash flows, which of the following would be reported in the cash flows from investing activities section? a. Issuance of common shares in exchange for a factory building. b. Stock dividends received. c. Development costs incurred (intangible asset). d. Declaration of cash dividends. 10. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to cash flows from operating activities? a. An increase in prepaid expenses. b. An increase in bonds payable. c. A decrease in income taxes payable. d. Depreciation expense. 11. When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to net income because a. cash was increased while cost of goods sold was decreased. b. acquisition of inventory is an investment activity. c. inventory purchased during the period was less than inventory sold, resulting in a net cash increase. d. cost of goods sold on an accrual basis is lower than on a cash basis. 12. When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause which one of the following adjustments in calculating cash flows from operating activities? Direct Method Indirect Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease 13. In calculating cash flows from operating activities, a decrease in accounts payable during a period a. means that accrual basis income is less than cash basis income. b. requires an addition to net income under the indirect method. c. requires an increase to cost of goods sold under the direct method. d. requires a decrease to cost of goods sold under the direct method. 14. Oyster Corp reports its income from investments by the equity method and recognized income of $25,000 from its investment in Pearl Ltd during the current year, even though no dividends were declared or paid by Pearl during the year. On Oyster's statement of cash flows (indirect method), the $25,000 should a. not be shown. b. be shown as cash inflow from investing activities. c. be shown as cash outflow from financing activities. d. be shown as a deduction from net income in the cash flows from operating activities section. 15. When preparing a statement of cash flows, an increase in accounts payable during a period would require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease 16. When preparing a statement of cash flows, a decrease in prepaid insurance during a period would require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease 17. On a statement of cash flows, additional cash invested by a sole proprietor would be disclosed in a. operating activities. b. investing activities. c. financing activities. d. both operating and financing activities. 18. When preparing a statement of cash flows using the direct method, a net loss reported on the income statement will a. automatically result in a cash outflow from operating activities. b. be included in financing activities. c. be disclosed as a note to the statement of cash flows. d. not be included on the statement at all 19. Free cash flow is a. the cash flows from operating activities reported on the statement of cash flows. b. the discretionary cash that an entity has available for increasing capacity, acquiring new investments, paying dividends, and retiring debt. c. the discretionary cash that an entity has available for increasing capacity, selling off investments, paying dividends, and incurring new debt. d. the cash flows from operating activities reported on the statement of cash flows increased by the capital expenditures that are needed to sustain the current level of operations. 20. With regard to disclosures required under IFRS and ASPE, which of the following statements is incorrect? a. IFRS requires separate disclosure of taxes on income. b. IFRS requires separate disclosure of interest received and paid and dividends received and paid. c. ASPE does not require reporting and explanation of the amount of cash and cash equivalents that have restrictions on their use. d. ASPE does not require separate disclosure of taxes on income.