Mid Summary

Question 1

Which of the following statements about the primary purpose of financial reporting is the most correct?
a) Provides information that can help with decision making.
b) The individual needs of users can be satisfied by tailoring of financial reports.
c) Enables accountability since managers would have to account for resources used.
d) Identifies a range of existing and potential users dependent on financial statements to make decisions.

Answer 1

A is correct. The primary purpose of financial reporting is enable proper and informed decision-making by providing relevant information.

Question 2

Which of the following is not a role of The Conceptual Framework (The
Framework)?
a). It is the foundation that standard-setters use when developing accounting standards.
b) It can guide the external auditors to evaluate firms’ compliance with IFRS.
c) It enables consistency when the existing accounting standards do not provide guidance on a particular issue.
d) It is an alternative to the detailed accounting standards.

Answer 2

D is correct. Accounting standards are developed using The Framework as
guidance. It is not an alternative to the accounting standards.

Question 3

Which of the following is not an objective of The Conceptual Framework?
a Addresses the common needs of users of financial reports.
b) Enables consistency of qualitative characteristics in financial reports.
c) Enables implementation of one universal set of accounting standards.
d) Provides guidance for transactions not addressed in existing accounting
standards.

Answer 3

C is correct. A conceptual framework is not a universal set of accounting
standards. It is the framework that is essentially a theory of accounting. The
conceptual framework assists in the development of consistent accounting
standards.

Question 4

Which of the following statements about enhancing qualitative characteristics
of financial statements is not correct?
a) Fair values of assets that cannot be verified in an active market should not be
disclosed in the financial statements.
b) The financial statements of similar entities adopting different asset
measurement bases can be adequately compared.
c) The value of invoices not yet received from suppliers for services should be
estimated at financial year end for reporting purposes.
d) Financial statements should be presented with the assumption that a
reasonable and informed third person will know how to analyze financial
information.

Answer 4

A is correct. This statement is incorrect. Therefore, this is this option is the right answer.

Question 5

What effect does a framework have on an accountant’s need to exercise
professional judgement?
a) Reduces the scope for professional judgement.
b) Increases the scope for professional judgement.
c) Eliminates the scope for professional judgement.
d) Has no impact on the scope for professional judgement.

Answer 5

A is correct. The development of a framework is an attempt to discourage, among other things, a subjective approach to accounting standard setting.

Question 6

Which of the following is not a constraint on the financial statements
according to the Conceptual Framework? (hint: think about the trade offs across the desirable characteristics)
a) Understandability.
b) Benefit versus cost.
c) Balancing of qualitative characteristics.

Answer 6

A is correct. Understandability is an enhancing qualitative characteristic of
financial information-not a constraint.

Question 7

An example of an expense classification by function is .
a)… tax expense.
b)… interest expense.
c)… cost of goods sold.

Answer 7

C is correct.

Question 8

Which of the following elements of financial statements is most closely related
to measurement of performance?
a) Assets.
b) Expenses.
c) Liabilities.

Answer 8

B is correct. The elements of financial statements related to the measure of
performance are income and expenses. Assets and Liabilities are balance sheet items.

Question 9

Which of the following elements of financial statements is most closely related to measurement of financial position?
a) Equity.
b) Income.
c) Expenses.

Answer 9

A is correct. The elements of financial statements related to the measurement of financial position are assets, liabilities, and equity.

Question 10

A company is experiencing a period of strong financial performance. In order
to increase the likelihood of exceeding analysts’ earnings forecasts in the next reporting period, the company would most likely undertake accounting choices for the period under review that…
a)… inflate reported revenue.
b)… delay expense recognition.
c)… accelerate expense recognition.

Answer 10

C is correct. In a period of strong financial performance, managers may pursue accounting choices that increase the probability of exceeding earnings forecasts for the next period. By accelerating expense recognition or delaying revenue recognition, managers may inflate earnings in the next period and increase the
likelihood of exceeding targets.

Question 11

Money received from customers for products to be delivered in the future is recorded as …
a)… revenue and an asset.
b)… an asset and a liability.
c)… revenue and a liability.

Answer 11

B is correct. The cash received from customers represents an asset. The obligation to provide a product in the future is a liability called “unearned income” or “unearned revenue.” As the product is delivered, revenue will be recognized and the liability will be reduced.

Question 12

During 2009, Accent Toys PIc., which began business in October of that year, purchased 10,000 units of a toy at a cost of £10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of $11 per unit. During 2009, Accent sold 12,000 units at a price of €15 per unit. Under the first in, first out (FIFO) method, what is Accent’s cost of goods sold for 2009?
a) €120,000.
b) €122.000.
C) 124.000.

Answer 12

B is correct. Under the first in, first out (FIFO) method, the first 10,000 units sold came from the October purchases at £10, and the next 2.000 units sold came from the November purchases at £11.
COGS 09 = 10,000* £10 + 2,000 x £11 = £122,000.

Question 13

Using the same information as in the question above, what would Accent’s
cost of goods sold be under the weighted average cost method?
a) €120,000.
b) £122,000.
c) £124,000.

Answer 13

C is correct. Under the weighted average cost method:
October purchases 10,000 units £100,000
November purchases 5,000 units £55,000
Total 15,000 units £155,000
£155,000/15,000 units = £10.3333
COGS,, = £10.3333 x 12,000 units = £124,000

Question 14

Which inventory method is least likely to be used under IFRS?
a) First in, first out (FIFO).
b) Last in, first out (LIFO).
c) Weighted average cost method.

Answer 14

B is correct. The last in, first out (LIFO) method is not permitted under IFRS. The other two methods are permitted.

Question 15

In a period of declining inventory unit costs and constant or increasing
inventory quantities, which inventory method is most likely to result in a higher debt-to-equity ratio?
a) LIFO.
b) FIFO.
c) Weighted average cost method.

Answer 15

B is correct. In an environment of declining inventory unit costs and constant or increasing inventory quantities, FIFO (in comparison with weighted average cost or LIFO) will have higher cost of goods sold (and net income) and lower inventory. Because both inventory and net income are lower, total equity is lower, resulting in
a higher debt- to- equity ratio.

Question 16

A company wishing to increase earnings in the reporting period may choose to
a)…. decrease the useful life of depreciable assets.
b)… lower estimates of uncollectible accounts receivables.
c)… classify a purchase as an expense rather than a capital expenditure.

Answer 16

B is correct. If a company wants to increase reported earnings, the company’s managers may reduce the allowance for uncollected accounts and the related expense reported for the period. Decreasing the useful life of depreciable assets would increase depreciation expense and decrease earnings in the reporting period. Classifying a purchase as an expense, rather than capital expenditure, would decrease earnings in the reporting period. The use of accrual accounting may result in estimates in financial reports, because all facts associated with events may not be known at the time of recognition. These estimates can be
grounded in reality or managed by the company to present a desired financial
picture.

Question 17

Lurvey Company is authorized to issue 50,000 shares of $25 par ordinary share.
On May 30, 20X6, Lurvey issued 20,000 shares at $45 per share. Lurvey’s journal
entry to record these facts should include a …
A)… credit to common stock for $500.000.
B)… debit to common stock for $900,000.
C)… credit to capital surplus for $900,000.
D)… both a) and c).

Answer 17

A is correct. 20,000 shares x $25 = $500,000.

Question 18

Debt due within one year is considered …
A… current.
B… preferred.
C… convertible.
D… non-current.

Answer 18

A is correct. Current liabilities are those liabilities, including debt, due within one year. Preferred refers to a class of stock. Convertible refers to a feature of bonds (or preferred stock) allowing the holder to convert the instrument into common stock.

Question 19

When a company pays its rent in advance, its balance sheet will reflect a reduction in …
A)… assets and liabilities.
b)… assets and shareholders’ equity.
C)… one category of assets and an increase in another.

Answer 19

C is correct. Paying rent in advance will reduce cash and increase prepaid
expenses, both of which are assets.

Question 20

Accrued expenses (accrued liabilities) are ..
A)expenses that have been paid.
B)… created when another liability is reduced.
C)… expenses that have been reported on the income statement but not yet paid.

Answer 20

C is correct. Accrued liabilities (accruals) are expenses that have been reported on a company s income statement but have not yet been paid.