Chapter 4 Multiple Choice Questions

Question 1

What is the primary purpose of the income statement?
A) To show the company’s financial position at a specific point in time.
B) To show the company’s operational success over a period of time.
C) To report the company’s equity changes.
D) To report the company’s assets and liabilities.

Answer 1

B) To show the company’s operational success over a period of time.

Question 2

Which of the following is a component of Other Comprehensive Income (OCI) under IFRS?
A) Sales revenue.
B) Unrealized gains/losses on securities.
C) Income tax expense.
D) Preferred dividends.

Answer 2

B) Unrealized gains/losses on securities.

Question 3

Under IFRS, which two statements are used to present financial performance?
A) Statement of profit or loss and statement of financial position.
B) Statement of financial performance and statement of retained earnings.
C) Statement of profit or loss and statement of comprehensive income.
D) Income statement and balance sheet.

Answer 3

C) Statement of profit or loss and statement of comprehensive income.

Question 4

What must companies disclose when presenting EPS (Earnings per Share)?
A) The total amount of dividends paid.
B) Only basic EPS for the current year.
C) Both basic and diluted EPS for public companies.
D) The total revenue generated during the year.

Answer 4

C) Both basic and diluted EPS for public companies.

Question 5

Which of the following describes the nature of expenses under IFRS?
A) Allocation of administrative costs between activities.
B) Cost of sales and selling expenses.
C) Depreciation, employee benefits, and transportation costs.
D) Income tax expense and gains from non-operating activities.

Answer 5

C) Depreciation, employee benefits, and transportation costs.

Question 6

Under IFRS, what must be presented separately when reporting discontinued operations?
A) Sales revenue and operating costs.
B) The gain or loss from disposal and the loss from operations (net of tax).
C) Regular operational activities and irregular items.
D) Only the operating income.

Answer 6

B) The gain or loss from disposal and the loss from operations (net of tax).

Question 7

What is the Statement of Retained Earnings used for under ASPE?
A) To show the amount of dividends paid out to shareholders.
B) To present the accumulated income or deficit of a company and changes due to dividends.
C) To display the total shareholders’ equity.
D) To present the company’s sales and administrative expenses.

Answer 7

B) To present the accumulated income or deficit of a company and changes due to dividends.

Question 8

. Which of the following is NOT recognized under ASPE?
A) Statement of Retained Earnings.
B) Other Comprehensive Income (OCI).
C) Basic EPS for private companies.
D) Income tax expense

Answer 8

B) Other Comprehensive Income (OCI).

Question 9

Which of the following statements is true about discontinued operations?
A) They are always presented as part of continuing operations.
B) Discontinued operations must be shown separately, net of tax.
C) Discontinued operations are not relevant for financial statements.
D) Only the assets are shown separately, not the income.

Answer 9

B) Discontinued operations must be shown separately, net of tax.

Question 10

How are assets “held for sale” measured under IFRS?
A) At their original cost, with no further adjustments.
B) At lower of carrying amount and fair value, less costs to sell.
C) At market value, with depreciation recognized.
D) At net book value, with no consideration of selling costs.

Answer 10

B) At lower of carrying amount and fair value, less costs to sell.

Question 11

What is the purpose of the Statement of Changes in Equity under IFRS?
A) To show the total income and expenses for the period.
B) To show the changes in equity components, such as profit or loss and OCI.
C) To present only the company’s liabilities and assets.
D) To disclose the company’s operating income and non-operating revenue.

Answer 11

B) To show the changes in equity components, such as profit or loss and OCI.

Question 12

In a multi-step income statement, where would you find gross profit?
A) Operating section.
B) Non-operating section.
C) Comprehensive income section.
D) Statement of retained earnings.

Answer 12

A) Operating section.

Question 13

Which accounting change does NOT require retrospective application under IFRS?
A) Change in accounting estimate.
B) Change in accounting policy.
C) Correction of an error.
D) Change in business model.

Answer 13

A) Change in accounting estimate.

Question 14

Under ASPE, which of the following is NOT included in the Statement of Income?
A) Income tax expense.
B) Results of discontinued operations.
C) Share of profit/loss from investments using the equity method.
D) Regular operating expenses.

Answer 14

C) Share of profit/loss from investments using the equity method.

Question 15

What is the basic formula for calculating Earnings per Share (EPS)?
A) Net Income ÷ Total assets.
B) Net Income ÷ Weighted Average Common Shares Outstanding.
C) Net Income ÷ Total liabilities.
D) Gross Profit ÷ Total equity.

Answer 15

B) Net Income ÷ Weighted Average Common Shares Outstanding.

Question 16

What does the Full Disclosure Principle require in financial statements?
A) Only the most recent accounting policies.
B) Disclosure of material and relevant information for users to make informed decisions.
C) Financial statements must be simplified and brief.
D) Only the major operational items must be disclosed.

Answer 16

B) Disclosure of material and relevant information for users to make informed decisions.

Question 17

Which of the following best describes the purpose of a Statement of Comprehensive Income under IFRS?
A) To display the company’s net income and changes in equity from shareholder transactions only.
B) To show the company’s revenue, expenses, and other income/loss items that are not part of net income.
C) To report the income generated from discontinued operations separately.
D) To show the company’s overall profitability, including only operating income.

Answer 17

B) To show the company’s revenue, expenses, and other income/loss items that are not part of net income.

Question 18

Under IFRS, when presenting the Statement of Financial Performance, which section includes information about gains and losses that are not part of ongoing operations?
A) Income from continuing operations.
B) Other comprehensive income (OCI).
C) Operating income.
D) Discontinued operations.

Answer 18

B) Other comprehensive income (OCI).

Question 19

According to IFRS, which of the following must be disclosed if a company presents expenses by function (e.g., cost of sales or administrative costs)?
A) The nature of each expense presented in the functional categories.
B) The total cost of administrative expenses in each function.
C) The breakdown of expenses into operating and non-operating items.
D) A reconciliation of operating expenses to net income.

Answer 19

A) The nature of each expense presented in the functional categories.

Question 20

Under IFRS, what is required when presenting earnings per share (EPS)?
A) Only basic EPS is required for public companies.
B) Public companies must present both basic and diluted EPS on the face of the income statement.
C) EPS must be calculated only for net income, excluding OCI.
D) EPS is not required for companies with negative net income.

Answer 20

B) Public companies must present both basic and diluted EPS on the face of the income statement.

Question 21

In which section of the income statement should a company report the results of discontinued operations under IFRS?
A) As a part of the non-operating income section.
B) In a separate section below the results from continuing operations, net of tax.
C) Within the operating income section, separately identified.
D) As part of comprehensive income, without any separate identification.

Answer 21

B) In a separate section below the results from continuing operations, net of tax.

Question 22

When determining the quality of earnings, which characteristic would most strongly indicate high-quality earnings?
A) The earnings are based on aggressive accounting policies.
B) The earnings are closely correlated with cash flows from operations.
C) The earnings are highly influenced by non-recurring gains and losses.
D) The earnings are consistently below industry averages.

Answer 22

B) The earnings are closely correlated with cash flows from operations

Question 23

Under ASPE, which of the following is true regarding the Statement of Retained Earnings?
A) It includes changes in each equity component, such as the effects of retrospective accounting changes.
B) It only includes changes in equity arising from non-operating income.
C) It presents all the income earned by the company, including comprehensive income.
D) It shows the cumulative total of dividends paid and the net income or loss for the period.

Answer 23

D) It shows the cumulative total of dividends paid and the net income or loss for the period.

Question 24

Which of the following best describes the accounting treatment for “Assets Held for Sale” under IFRS?
A) Assets held for sale are reclassified as current, regardless of their original classification.
B) They are measured at the original cost, with depreciation continuing until the asset is sold.
C) They are reclassified as current only if the company has a plan to dispose of them within one year.
D) They are reclassified as non-current if the company has not yet found a buyer.

Answer 24

A) Assets held for sale are reclassified as current, regardless of their original classification.

Question 25

When a company disposes of a part of its business, such as a subsidiary, and it meets the criteria for discontinued operations under IFRS, which of the following is true?
A) The assets and liabilities of the discontinued operation must be reclassified as non-current on the balance sheet.
B) The income and loss from the discontinued operation, including the gain or loss on disposal, must be presented separately in the income statement.
C) The gain or loss on the disposal is not included in the statement of income but is reported in the statement of changes in equity.
D) The discontinued operation’s income and expenses should be included with continuing operations to maintain consistency.

Answer 25

B) The income and loss from the discontinued operation, including the gain or loss on disposal, must be presented separately in the income statement.

Question 26

What is the primary difference between the income statement formats under IFRS and ASPE when reporting operating and non-operating income?
A) IFRS requires a combined statement of income and comprehensive income, while ASPE does not.
B) ASPE requires separate reporting of operating and non-operating income, while IFRS does not.
C) Under IFRS, operating income is always presented as a single line item, while ASPE requires separate disclosures for each type of income.
D) ASPE mandates reporting income from continuing operations and discontinued operations in a combined format, while IFRS requires them to be separated.

Answer 26

A) IFRS requires a combined statement of income and comprehensive income, while ASPE does not.

Question 27

How are discontinued operations reported in the statement of income or comprehensive income?
A) As part of net income from continuing operations.
B) As a single-line item, net of tax, in a separate section.
C) As part of Other Comprehensive Income (OCI).
D) As part of the statement of changes in equity.

Answer 27

B) As a single-line item, net of tax, in a separate section.

Question 28

What is the role of representational faithfulness in the financial reporting process?
A) To ensure that financial statements reflect economic reality, providing a true and fair view of the company’s financial position and performance.
B) To present financial statements in a simple, summarized format.
C) To comply with all local tax regulations.
D) To provide detailed explanations of each item in the financial statements.

Answer 28

A) To ensure that financial statements reflect economic reality, providing a true and fair view of the company’s financial position and performance.

Question 29

How are the results from discontinued operations presented under ASPE?
A) As part of continuing operations in the income statement.
B) Discontinued operations are not required to be presented separately under ASPE.
C) As a part of comprehensive income, without any separate identification.
D) As a single line item, net of tax, in a separate section of the income statement.

Answer 29

B) Discontinued operations are not required to be presented separately under ASPE.

Question 30

Which of the following is an example of an item that would be classified as “Other Comprehensive Income” (OCI) under IFRS?
A) Loss from sale of assets.
B) Unrealized gains or losses on certain securities.
C) Income tax expense.
D) Revenue from the sale of goods.

Answer 30

B) Unrealized gains or losses on certain securities.

Question 31

What is a primary disadvantage of non-GAAP measures in financial reporting?
A) They are not required by law, so companies may choose not to report them.
B) They are calculated consistently across all companies, ensuring comparability.
C) They are not standardized, making it difficult to compare them across companies.
D) They add little to the decision-making process for users of financial statements.

Answer 31

C) They are not standardized, making it difficult to compare them across companies.