Test Bank for Intermediate Accounting, Volume 1, 6th Edition by Kin Lo
Chap 01 - 6ce Answers Included ✅
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which statement is NOT correct? 1)
A) Accounting is about the communication of financial information.
B) Financial accounting is the process of providing information to internal parties.
C) Accounting is the production of information about an enterprise and the transmission of
that information to those who need the information.
D) Financial accounting is the process of providing information to external parties.
2) How does an accountant decide on the appropriate method of accounting for a business 2)
transaction?
A) Evaluating whether the selected method differs from the underlying economics.
B) Evaluating if the particular method is consistent with the conceptual framework.
C) Ensuring that the accounting method agrees with that selected by other companies.
D) Testing the selected method for numerical accuracy and consistency.
3) Which statement is correct? 3)
A) Financial reporting is only based on rules issued by CPA Canada or the IASB.
B) Financial reporting is the process of preparing information for internal parties.
C) Financial reporting involves issuing financial statements to external parties.
D) Financial reporting provides the same information as management accounting.
4) Which is NOT a question that financial accounting theory can answer? 4)
A) Why do companies provide financial information to external parties?
B) Why is certain disclosure mandatory in financial reporting?
C) Why do all companies use the same accounting policies?
D) What is the role of financial accounting and reporting?
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
5) Why is financial information required?
6) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these
accounting activities related to each other?
7) Discuss three reasons why it is important to understand accounting theory.
8) Explain the meaning of generally accepted accounting principles (GAAP).
9) Explain the process an accountant uses to determine the appropriate accounting method for a business
transaction.
10) Explain what accounting is and why financial reporting exists.
1
,MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
11) Which statement BEST explains "information asymmetry"? 11)
A) Information asymmetry means information is material to a decision maker.
B) Information asymmetry means that some people have more information than others.
C) Information asymmetry means that external parties need financial information.
D) Information asymmetry means that there is uncertainty about the future.
12) Which statement BEST explains "moral hazard"? 12)
A) The term refers to the fact that some people have more information than others.
B) The term refers to a situation where one party has an information advantage over another.
C) The term refers to the need external parties have for financial information.
D) The term refers to a situation where one party cannot observe the actions of another party.
13) Which statement BEST explains "adverse selection"? 13)
A) The term refers to a situation where one party cannot observe the actions of another party.
B) The term refers to the fact that some people have more information than others.
C) The term refers to a situation where one party has an information advantage over another.
D) The term refers to the need external parties have for financial information.
14) Having an audit performed on the company's financial statements BEST illustrates which of the 14)
following?
A) Moral hazard. B) Cheap talk.
C) Information asymmetry. D) Signalling.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
15) Explain the meaning of information and information asymmetry. Give an example of each.
16) Explain the meaning of adverse selection and moral hazard. Give an example of each.
17) Explain the difference between moral hazard and adverse selection.
18) Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a
company.
19) Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a
company.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
20) Which of the following statements is correct about financial information? 20)
A) Forward looking information is useful for evaluating management stewardship.
B) Trade-offs are necessary in accounting.
C) All users require the same kind of information.
D) Historical cost information is useful for pricing the value of a company's shares.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
21) How does accounting information help alleviate adverse selection and moral hazard?
2
, 22) Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting
information.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
23) Management motivation to increase the likelihood that the company will receive a $50,000 23)
government rebate BEST illustrates which of the following?
A) Information asymmetry. B) Positive accounting theory.
C) Earnings management. D) Efficient securities market.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
24) For the situations described below, explain whether managers would be motivated to manage earnings, assets,
and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings,
assets, and equity downward and liabilities upward.
Management motivation
Situation (Upward / Downward)
To influence investors to pay more for the
firm's shares.
To reduce the likelihood of additional taxes or
regulations.
To take a "big bath" in a bad year by recording
more expenses than usual so that future years
are more likely to show higher and rising
profitability, resulting in higher future
compensation or stock price.
To reduce riskiness of its cash flows and obtain
funds from the bank at a lower interest rate.
To obtain a stronger bargaining position in
merger negotiations.
25) For the situations described below, explain whether managers would be motivated to manage earnings, assets,
and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings,
assets, and equity downward and liabilities upward.
Management motivation
Situation (Upward / Downward)
To obtain higher bonuses.
To increase the likelihood of receiving
government subsidies and trade protection.
To improve bargaining position relative to
employee unions.
To meet covenants based on net income.
To meet regulatory requirements.
26) Explain how earnings management may arise.
3
, MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
27) Which statement appropriately explains the meaning of "publicly accountable enterprise"? 27)
A) Firms with equity, debt or other securities traded in public markets.
B) New firms entering the public markets to provide goods and services.
C) Firms without equity, debt or other securities traded in public markets.
D) Firms with assets and liabilities that provide goods and services in public markets.
28) Which statement BEST explains the semi-strong form of the efficient securities market 28)
hypothesis?
A) A market in which the prices of securities traded in that market at all times properly
reflect all information that is publicly known about those securities.
B) A market in which the prices of debt securities traded in that market reflect all
information that is privately known about those securities.
C) A market in which the prices of securities traded in that market reflect all information,
whether publicly or privately known.
D) A market in which the prices of equity securities traded in that market reflect all
information that is privately known about those securities.
29) Which statement BEST explains the relationship between the efficient securities market 29)
hypothesis and accounting?
A) Security prices adjust slowly when accounting reports are publicly released.
B) The timeliness of accounting information is irrelevant to securities markets.
C) Security prices are unaffected when accounting reports are publicly released.
D) Accounting information competes with other sources of information.
30) Why is the efficient securities market hypothesis important for accounting? 30)
A) When providing financial information, management need only consider the specifically
identifiable users who they know will rely on the information.
B) Accounting information is the only source of financial information that markets use.
C) Individuals with information that is not publicly available cannot make significant profits.
D) Accounting standards can assume that the majority of market participants have a
reasonable level of sophistication.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
31) Explain the meaning of publicly accountable enterprises, efficient securities market (semi-strong form), and
efficient securities market (strong form).
32) Explain how accounting information helps security markets.
33) Explain the accounting implications of the following concepts about efficient securities markets:
a) Accounting information competes with other sources of information.
b) Accounting reports and standards can assume that users have a reasonable level of sophistication.
4
Chap 01 - 6ce Answers Included ✅
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which statement is NOT correct? 1)
A) Accounting is about the communication of financial information.
B) Financial accounting is the process of providing information to internal parties.
C) Accounting is the production of information about an enterprise and the transmission of
that information to those who need the information.
D) Financial accounting is the process of providing information to external parties.
2) How does an accountant decide on the appropriate method of accounting for a business 2)
transaction?
A) Evaluating whether the selected method differs from the underlying economics.
B) Evaluating if the particular method is consistent with the conceptual framework.
C) Ensuring that the accounting method agrees with that selected by other companies.
D) Testing the selected method for numerical accuracy and consistency.
3) Which statement is correct? 3)
A) Financial reporting is only based on rules issued by CPA Canada or the IASB.
B) Financial reporting is the process of preparing information for internal parties.
C) Financial reporting involves issuing financial statements to external parties.
D) Financial reporting provides the same information as management accounting.
4) Which is NOT a question that financial accounting theory can answer? 4)
A) Why do companies provide financial information to external parties?
B) Why is certain disclosure mandatory in financial reporting?
C) Why do all companies use the same accounting policies?
D) What is the role of financial accounting and reporting?
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
5) Why is financial information required?
6) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these
accounting activities related to each other?
7) Discuss three reasons why it is important to understand accounting theory.
8) Explain the meaning of generally accepted accounting principles (GAAP).
9) Explain the process an accountant uses to determine the appropriate accounting method for a business
transaction.
10) Explain what accounting is and why financial reporting exists.
1
,MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
11) Which statement BEST explains "information asymmetry"? 11)
A) Information asymmetry means information is material to a decision maker.
B) Information asymmetry means that some people have more information than others.
C) Information asymmetry means that external parties need financial information.
D) Information asymmetry means that there is uncertainty about the future.
12) Which statement BEST explains "moral hazard"? 12)
A) The term refers to the fact that some people have more information than others.
B) The term refers to a situation where one party has an information advantage over another.
C) The term refers to the need external parties have for financial information.
D) The term refers to a situation where one party cannot observe the actions of another party.
13) Which statement BEST explains "adverse selection"? 13)
A) The term refers to a situation where one party cannot observe the actions of another party.
B) The term refers to the fact that some people have more information than others.
C) The term refers to a situation where one party has an information advantage over another.
D) The term refers to the need external parties have for financial information.
14) Having an audit performed on the company's financial statements BEST illustrates which of the 14)
following?
A) Moral hazard. B) Cheap talk.
C) Information asymmetry. D) Signalling.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
15) Explain the meaning of information and information asymmetry. Give an example of each.
16) Explain the meaning of adverse selection and moral hazard. Give an example of each.
17) Explain the difference between moral hazard and adverse selection.
18) Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a
company.
19) Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a
company.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
20) Which of the following statements is correct about financial information? 20)
A) Forward looking information is useful for evaluating management stewardship.
B) Trade-offs are necessary in accounting.
C) All users require the same kind of information.
D) Historical cost information is useful for pricing the value of a company's shares.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
21) How does accounting information help alleviate adverse selection and moral hazard?
2
, 22) Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting
information.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
23) Management motivation to increase the likelihood that the company will receive a $50,000 23)
government rebate BEST illustrates which of the following?
A) Information asymmetry. B) Positive accounting theory.
C) Earnings management. D) Efficient securities market.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
24) For the situations described below, explain whether managers would be motivated to manage earnings, assets,
and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings,
assets, and equity downward and liabilities upward.
Management motivation
Situation (Upward / Downward)
To influence investors to pay more for the
firm's shares.
To reduce the likelihood of additional taxes or
regulations.
To take a "big bath" in a bad year by recording
more expenses than usual so that future years
are more likely to show higher and rising
profitability, resulting in higher future
compensation or stock price.
To reduce riskiness of its cash flows and obtain
funds from the bank at a lower interest rate.
To obtain a stronger bargaining position in
merger negotiations.
25) For the situations described below, explain whether managers would be motivated to manage earnings, assets,
and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings,
assets, and equity downward and liabilities upward.
Management motivation
Situation (Upward / Downward)
To obtain higher bonuses.
To increase the likelihood of receiving
government subsidies and trade protection.
To improve bargaining position relative to
employee unions.
To meet covenants based on net income.
To meet regulatory requirements.
26) Explain how earnings management may arise.
3
, MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
27) Which statement appropriately explains the meaning of "publicly accountable enterprise"? 27)
A) Firms with equity, debt or other securities traded in public markets.
B) New firms entering the public markets to provide goods and services.
C) Firms without equity, debt or other securities traded in public markets.
D) Firms with assets and liabilities that provide goods and services in public markets.
28) Which statement BEST explains the semi-strong form of the efficient securities market 28)
hypothesis?
A) A market in which the prices of securities traded in that market at all times properly
reflect all information that is publicly known about those securities.
B) A market in which the prices of debt securities traded in that market reflect all
information that is privately known about those securities.
C) A market in which the prices of securities traded in that market reflect all information,
whether publicly or privately known.
D) A market in which the prices of equity securities traded in that market reflect all
information that is privately known about those securities.
29) Which statement BEST explains the relationship between the efficient securities market 29)
hypothesis and accounting?
A) Security prices adjust slowly when accounting reports are publicly released.
B) The timeliness of accounting information is irrelevant to securities markets.
C) Security prices are unaffected when accounting reports are publicly released.
D) Accounting information competes with other sources of information.
30) Why is the efficient securities market hypothesis important for accounting? 30)
A) When providing financial information, management need only consider the specifically
identifiable users who they know will rely on the information.
B) Accounting information is the only source of financial information that markets use.
C) Individuals with information that is not publicly available cannot make significant profits.
D) Accounting standards can assume that the majority of market participants have a
reasonable level of sophistication.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
31) Explain the meaning of publicly accountable enterprises, efficient securities market (semi-strong form), and
efficient securities market (strong form).
32) Explain how accounting information helps security markets.
33) Explain the accounting implications of the following concepts about efficient securities markets:
a) Accounting information competes with other sources of information.
b) Accounting reports and standards can assume that users have a reasonable level of sophistication.
4
