Testbank: Financial Accounting: Reporting, Analysis and Decision Making 6e
Testbank: Financial Accounting: Reporting, Analysis and Decision Making 6e
Testbank: Financial Accounting: Reporting, Analysis and Decision Making 6e
Testbank
to accompany
Financial accounting:
Reporting, analysis and
decision making 6e
by
Carlon et al.
Chapter 1: An introduction to accounting
Multiple-choice questions
1. The provision of accounting information within the business entity is referred to as:
a. financial accounting.
*b. management accounting.
c. commercial accounting.
d. public accounting.
Answer: b
Learning objective 1.1 – Explain the business context and the need for decision
making.
Feedback: The provision of information within the business entity is referred to as
management accounting.
Answer: a
Learning objective 1.2 – Define accounting, describe the accounting process and
define the diverse role of accountants.
Feedback: The four steps of the accounting process are identifying, measuring,
recording and communicating relevant transactions and events.
Answer: c
Learning objective 1.3 – Explain the characteristics of the main forms of business
organisation.
Feedback: Under the sole trader business structure the owner of the business has no
separate legal existence from the business. The owner of the business is therefore
personally liable for the debts of the business.
a. sole traders.
b. partnerships.
c. government units.
*d. companies.
Answer: d
Learning objective 1.3 – Explain the characteristics of the main forms of business
organisation.
Feedback: The majority of business in Australia is transacted by companies.
Answer: c
Learning objective 1.3 – Explain the characteristics of the main forms of business
organisation.
Feedback: A company is a separate legal entity and has an indefinite life that is
independent of the shareholders. Shareholders of most companies have limited liability
for the debts of the company and if there is more than one director, the decision
making is usually a shared responsibility.
Answer: c
Learning objective 1.3 – Explain the characteristics of the main forms of business
organisation.
Feedback: There are initial costs associated with incorporation for a company and
then ongoing fees and regulations to comply with. If there is more than one director,
then the decision making is usually a shared responsibility. Shareholders of most
companies have limited liability for the debts of the company.
*a. The definition of reporting entity forms the foundation of the Conceptual
Framework as all other elements flow from it.
b. A reporting entity must prepare general purpose financial reports that comply with
accounting standards.
c. Political or economic importance is a factor in determining whether an entity is a
reporting entity.
d. The objective of general purpose financial reports is to provide information that is
useful to existing and potential investors, creditors and other external users.
Answer: a
Learning objective 1.4 – Understand the Conceptual Framework and the purpose of
financial reporting.
Feedback: The objective of general purpose reporting forms the foundation of the
Conceptual Framework. If we know why we need to report then who needs to report
can be determined and then what and how the information is to be reported follow. All
the other statements are correct.
Answer: a
Learning objective 1.4 – Understand the Conceptual Framework and the purpose of
financial reporting.
Feedback: The purpose of financial reports is to provide information for decision
making.
9. Who of the following would not be considered an internal user of accounting data
for the XYZ Company Ltd?
Answer: d
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Internal users of accounting information are managers who plan, organise
and control the business.
10. Which of the following user groups would use accounting information to determine
whether an advertising proposal will be cost effective?
a. investors in shares.
*b. marketing managers.
c. creditors.
d. chief financial officer.
Answer: b
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Evaluating an advertising proposal would occur internally and would
typically be undertaken in the marketing department.
11. Which of the following user groups is an internal user of accounting information
for the XYZ Company Ltd?
Answer: b
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Managers are internal users of accounting information.
12. Which of the following users would not be considered an internal user of
accounting data for a company?
Answer: c
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Creditors are an external resource provider.
a. operating.
b. investing.
c. financing.
*d. delivering.
Answer: d
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: The three main types of business activities are operating, investing and
financing. Delivery is a function of operating activities.
a. marketing activity.
*b. financing activity.
c. investing activity.
d. operating activity.
Answer: b
Learning objective 1.5 – Identify users of financial reports and describe users'
information needs.
Feedback: Borrowing money is one of the two main sources of outside funds for
companies. The other is the issue of shares to investors.
a. advertising activity.
b. financing activity.
*c. investing activity.
d. operating activity.
Answer: c
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Investing activities involve purchasing resources an entity needs in order to
operate.
16. The activity involved with employing the resources of the business to generate
revenues is:
a. accounting.
b. financing.
c. investing.
*d. operating.
Answer: d
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Once a business has acquired resources it needs to employ those resources
to generate revenues from operating activities.
Answer: a
Learning objective 1.5 – Identify the users of financial reports and describe users'
information needs.
Feedback: Buying and selling products are examples of operating activities.
a. long life.
b. great monetary value.
c. tangible nature.
*d. future economic benefit.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: An asset is defined in the Conceptual Framework as a resource controlled
by the entity as a result of past events from which future economic benefits are
expected.
a. increase assets.
b. increase expenses.
c. decrease revenues.
*d. decrease retained earnings.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Retained earnings refers to company profits that have been accumulated
and not distributed as dividends to shareholders.
a. equity.
b. liabilities.
*c. assets.
d. revenues.
Answer: c
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Assets are defined in the Conceptual Framework as a resource controlled
by the entity as a result of past events from which future economic benefits are
expected.
21. The financial statement that summarises the changes in retained earnings for a
specific period of time is the:
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The statement of changes in equity reports profit for the period and
transactions with owners of the company such as share capital movements and
dividends. The statement of changes in equity explains the link between the income
statement and the statement of financial position.
a. retained earnings at the beginning of the period plus profit minus liabilities.
*b. retained earnings at the beginning of the period plus profit minus dividends paid.
c. profit plus total assets.
d. assets plus liabilities.
Answer: b
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Retained earnings refers to company profits that have been accumulated
and not distributed as dividends to shareholders.
23. A company's policy toward dividend distributions and growth could best be
determined by examining the:
Answer: c
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Shareholders and other external users can see how much profit has been
distributed as dividends by reading the statement of changes in equity.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The purpose of the income statement is to report the success or failure of
the entity's operations for a period of time.
25. If retained earnings increases from the beginning of the year to the end of the year,
then:
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Profits increase equity and are accumulated into retained earnings.
Dividends reduce retained earnings.
Answer: b
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Total revenue is shown in the Income Statement.
27. Johnny's Car Repairs had total assets of $60,000 and total liabilities of $40,000 at
the beginning of the year. During the year the business recorded $100,000 in revenues,
$55,000 in expenses, and dividends of $10,000 were distributed. Equity at the end of
the year is:
*a. $55,000.
b. $35,000.
c. $65,000.
d. $45,000.
Answer: a
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Beginning equity was $20,000 ($60,000 - $40,000), profit for the year is
$45,000 ($100,000 - $55,000) therefore $20,000 + $45,000 - $10,000 = $55,000.
28. Johnny's Car Repairs had total assets of $60,000 and total liabilities of $40,000 at
the beginning of the year. During the year the business recorded $100,000 in revenues,
$55,000 in expenses, and dividends of $10,000 were distributed. Profit reported by
Johnny's Car Repairs for the year was:
a. $35,000
*b. $45,000
c. $20,000
d. $90,000
Answer: b
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Profit is $45,000 ($100,000 - $55,000).
29. If total liabilities increased by $25,000 and equity increased by $5,000 during a
period of time, then total assets:
a. decrease by $20,000.
b. increase by $20,000.
c. increase by $25,000.
*d. increase by $30,000.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Assets = Liabilities + Equity therefore assets = $25,000 + $5,000.
30. If total liabilities decreased by $14,000 during a period of time and equity
increased by $6,000 during the same period, then the change in total assets is:
a. an increase of $14,000.
b. an increase of $20,000.
*c. a decrease of $8,000.
d. an increase of $8,000.
Answer: c
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Assets = Liabilities + Equity therefore assets = - $14,000 + $6,000 = -
$8,000.
Answer: c
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The statement of financial position reports assets and claims to those assets
at a specific point in time.
32. Which of the following financial statements is concerned with a business at a point
in time?
Answer: a
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The statement of financial position reports assets and claims to those assets
at a specific point in time.
a. investors.
b. owners.
*c. creditors.
d. shareholders.
Answer: c
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Claims of creditors are called liabilities.
Answer: b
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Claims of owners are called equity or shareholders' equity.
35. Equity:
Answer: c
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Equity of a company comprises two parts - share capital and retained
earnings.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Retained earnings are the accumulated profits of the company that have not
been distributed as dividends to shareholders and is available for future expansion.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: An annual report would not contain detailed information regarding the
salaries or clerical staff. This type of information is for internal decision making only
and is not available for external users.
a. auditor's report.
b. statement of financial position.
c. directors' report.
*d. notes to the financial statements.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The notes to the financial statements include descriptions of the accounting
policies and methods used in preparing the statements.
39. In the annual report, where would a financial statement reader find out if the
company's financial statements give a true and fair view of its financial position and
operating results?
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: It is the auditor's responsibility to state whether or not the financial
statements provide a true and fair view of the company's financial position and
operating results.
a. auditor's report.
*b. directors' report.
c. notes to the financial statements.
d. income statement.
Answer: b
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Operational review and information relating to dividends, and post balance
day events is included in the directors' report.
41. Categories usually found on the face of a classified statement of financial position
include:
Answer: a
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The main sections in the statement of financial position are assets,
liabilities and equity.
a. revenue.
b. an expense.
c. retained earnings.
*d. a current asset.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Cash is usually classified as a current asset.
a. cash.
b. property, plant and equipment.
c. deferred tax assets.
*d. short-term borrowings.
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: Short term borrowings are debts that are due to be settled within 12 months
and are included as current liabilities in a classified statement of financial position.
44. Which financial statement would indicate whether the company relies on debt or
equity to finance its assets?
Answer: d
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Feedback: The statement of financial position reports assets and claims to those assets
at a specific point in time. The claims to the assets are of two types: creditors (debts)
and equity (claims by the owner/s).
45. The Financial Reporting Council (FRC) is responsible to the government for:
Answer: a
Learning objective 1.7 – Describe the financial reporting environment.
Feedback: The FRC is the body that advises the Commonwealth Government on the
accounting standard-setting and auditing standard-setting processes.
Answer: d
Learning objective 1.7 – Describe the financial reporting environment.
Feedback: The accounting standards issued by the Australian Accounting Standards
Board (AASB) are substantially consistent with those issued by the International
Accounting Standards Board.
Answer: c
Learning objective 1.7 – Describe the financial reporting environment.
Feedback: Members of the FRC appoint members of the AASB. Members of the FRC
are appointed by the Commonwealth Treasurer and include key stakeholders from the
business community, the professional accounting bodies, governments and regulatory
agencies. All other statements are correct.
Answer: b
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: The going concern principle states that the business will remain in
operation for the foreseeable future.
49. The accounting principle which assumes that a business will remain in operation
for the foreseeable future is the:
a. monetary principle.
b. accounting entity concept.
c. full disclosure principle.
*d. going concern principle.
Answer: d
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: The going concern principle states that the business will remain in
operation for the foreseeable future.
Answer: d
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: The going concern principle assumes the business will remain in operation
for the foreseeable future.
Answer: a
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: The accounting entity concept states that every entity can be separately
identified and accounted for.
52. What are the qualitative characteristics that enhance the decision usefulness of
relevant information faithfully represented in financial statements?
Answer: d
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: Information is more relevant and reliability when it is comparable,
verifiable and understandable. Information must also be available to users before it
ceases to be relevant.
Answer: b
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: The accounting period concept states the life of a business can be divided
into artificial periods and that useful reports covering those periods can be prepared.
a. market value.
*b. the amount paid for them.
c. selling price.
d. liquidation value.
Answer: b
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: The cost principle states that all assets are initially recorded in the
accounts at their purchase price or cost.
Answer: a
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: Accounting information is considered to be relevant if it is capable of
making a difference in a business decision.
Answer: b
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
Feedback: In accounting, comparability is achieved when an entity uses the same or
consistent accounting principles each year and different entities use the same
accounting principles.
*a. the ability of a company to pay its obligations that are due within the next year or
operating cycle.
b. the operating success of a company for a period of time.
c. the ability of a company to survive over a long time.
d. the extent to which a company's assets are financed by debt.
Answer: a
Learning objective 1.9 – Calculate and interpret ratios for analysing an entity's
profitability, liquidity and solvency.
Feedback: Liquidity ratios measure the short-term ability of the entity to pay its
obligations that are due within the next year or operating cycle.
Answer: a
Learning objective 1.9 – Calculate and interpret ratios for analysing an entity's
profitability, liquidity and solvency.
Feedback: Return on assets is calculated by dividing profit by average assets.
*a. repay its long-term debts at maturity and interest as it becomes due.
b. meet its short-term obligations.
c. pay its obligations that will fall due within the operating cycle.
d. turn its inventory into cash.
Answer: a
Learning objective 1.9 – Calculate and interpret ratios for analysing an entity's
profitability, liquidity and solvency.
Feedback: Solvency is an entity's ability to pay interest as it becomes due and to repay
the debt at maturity.
Answer: b
Learning objective 1.9 – Calculate and interpret ratios for analysing an entity's
profitability, liquidity and solvency.
Feedback: A high debt to total asset ratio is undesirable to creditors as there is less
chance of them receiving debt repayment from shareholders' funds if the company goes
into liquidation. Generally, companies with stable profits can support high levels of
debt.
Exercises
61. Indicate in the spaces provided whether each item would appear on the statement of
cash flows as an: (O) operating activity, (I) investing activity, or (F) financing activity.
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
O a. I d.
F b. O e.
F c. I f.
Revenues $
Expenses $
Total expenses
Profit $
Equity, 1 October $
Add:
Less:
Equity, 31 October $
JERRY COLE
Statement of Financial Position
at 31 October 2018
______________________________________________________________________
Assets
Current assets
Non-current assets $
Total assets
Liabilities
$
Equity
$
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Assets
Current assets
Cash ..............................................................................................................
11,000
Accounts receivable ..........................................................................................
14,000
*Note: Jerry Cole, Dental Practice, is structured as a Sole Trader. Unlike a company the
liability for the debts of the business is unlimited for the sole trader. Therefore the equity of the
owner is reported as a single item – Owner’s equity and distributions to the owner are called
“drawings” not dividends.
63. Use the following information to calculate for the year ended 31 December 2018
(a) profit, (b) ending retained earnings and (c) total assets.
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
64. Use the following accounts and information to prepare an income statement, a
statement of changes in equity, and a statement of financial position for Lazares Services
Ltd for the month ended 31 July 2018.
Expenses
$
Total expenses
Profit $
Less:
Current assets
Non-current assets
Total assets
Equity
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Assets
Current assets
Cash .............................................................................................................. $ 15,600
Accounts receivable .......................................................................................... 1,400
Supplies ............................................................................................................ 400
17,400
Non-current assets
Building .............................................................................................................
60,000
Total assets ......................................................................................................
$77,400
Current liabilities
Accounts payable .............................................................................................. $ 3,100
Accrued expenses payable ................................................................................ 3,300
Total liabilities .................................................................................................
$ 6,400
Equity
Share capital ................................................................................................ $52,000
Retained earnings ........................................................................................ 19,000
71,000
Total liabilities and Equity .........................................................................
$77,400
65. Listed below in alphabetical order are statement of financial position items of Rowen
Ltd at 31 December 2018. Prepare a classified statement of financial position.
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
ROWEN LTD
Statement of Financial Position
at 31 December 2018
ASSETS
Current assets
Cash $ 11,000
Accounts receivable 16,000
27,000
Non-current assets
Office equipment 5,000
Building 66,000
Land 31,000
102,000
Total assets $129,000
LIABILITIES
Current liabilities
Accounts payable $ 8,000
EQUITY
Share capital $80,000
Retained earnings 41,000
121,000
Total equity and liabilities $129 000
66. Indicate in the spaces provided whether each item would appear on the Income
Statement (IS), Statement of Financial Position (SFP), or Statement of Changes in Equity
(SCE):
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
a. IS g. SFP
b. IS h. SFP
c. SFP i. SFP
d. SFP j. IS
e. SFP k. SCE
f. IS l. SFP
67. The directors of Tomas Sanchez Ltd were reviewing the company business
activities at the end of the year (2018) and decided to prepare a Statement of Changes
in Equity. At the beginning of the year company assets were $500,000, liabilities were
$150,000, and share capital was $100,000. Profit for the year was $420,000. Dividends
paid of $220,000 were paid during the year. Prepare a Statement of Changes in Equity
for Tomas Sanchez Ltd.
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
68. At 1 September 2018, the Statement of Financial Position for Arnold's Restaurant
Ltd contained the following items:
The following transactions occurred during the next two days: shareholders invested an
additional $22,000 cash in the business and accounts payable were paid in full. Prepare
a statement of financial position for Arnold's Restaurant Ltd at 3 September 2018.
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
ASSETS
Current Assets
Cash (a) $ 23,200
Accounts receivable 1,600
Supplies 4,600
29,400
Non-current assets
Furniture 18,700
Building 68,000
Land 33,000
119,700
Total assets $149,100
LIABILITIES
Non-current liability (b)
Loan payable $ 46,000
EQUITY
Share capital(c) $59,900
Retained earnings 43,200
103,100
Total liabilities and Equity $149,100
69. From the following list of selected items taken from the records of Downing Clinic
Ltd, identify those that would appear on the Statement of Financial Position.
Answer: a, c, e, f, g, i.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
70. One item is omitted in each of the following summaries of Statement of Financial
Positions and Income Statements for three different companies, X Ltd, Y Ltd, and Z
Ltd. Determine the amounts of the missing items, identifying each company by letter.
Company
X Ltd Y Ltd
Z Ltd
Beginning of the Year:
Assets $400,000 $150,000 $199,000
Liabilities 250,000 105,000 168,000
End of the Year:
Assets 450,000 195,000 195,000
Liabilities 280,000 95,000 169,000
During the Year:
Additional Investment by Shareholders ? 79,000 78,000
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
72. Identify which of the following items appear in a statement of financial position.
a) Service revenue
b) Cash
c) Share capital
d) Accounts payable
e) Rent expense
f) Supplies
g) Land
Answer: b, c, d, f, g.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
73. For the items listed below, fill in the appropriate code letter to indicate whether the
item is an asset, liability, or equity item.
Code
Asset A
Liability L
Equity E
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
1. E 6. A
2. A 7. A
3. L 8. E
4. E 9. E
5. E 10. L
74. Classify each of these items as an asset (A), liability (L), or Equity (E).
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
1. A
2. L
3. E
4. A
5. E
6. A
7. L
8. A
75. At the beginning of the year, Wise Company Ltd had total assets of $700,000 and
total liabilities of $300,000. Answer the following questions viewing each situation as
being independent of the others.
1. If total assets increased $225,000 during the year, and total liabilities decreased
$100,000, what is the amount of equity at the end of the year?
2. During the year, total liabilities increased $315,000 and Equity decreased $130,000.
What is the amount of total assets at the end of the year?
3. If total assets decreased $60,000 and Equity increased $180,000 during the year,
what is the amount of total liabilities at the end of the year?
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
76. Reinhart’s Carpet Cleaning Ltd has the following statement of financial position
items:
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
77. On 1 June 2018, Lewis Company Ltd prepared a Statement of Financial Position
that shows the following:
Shortly thereafter, all of the assets were sold for cash. How would the statement of
financial position appear immediately after the sale of the assets for cash for each of
the following cases?
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
78. Compute the missing amount in each category of the accounting equation.
Answer below.
Learning objective 1.6 – Identify the elements of each of the four main financial
statements.
Completion statements
a. relevance
b. reliability
c. comparability
d. understandability
Answer below.
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
1. d understandable
2. c comparable
3. a relevant
4. b reliable
10. If different entities use the same accounting principle, the financial reports of those
entities are _________________. LO8
Answer below.
Learning objective 1.3, 1.5, 1.6, 1.8.
Matching
81. Match the items below by entering the appropriate code letter in the space
provided.
____ 1. Financial information is collected quickly so that it does not lose its
relevance.
____ 2. Consumed assets or services.
____ 3. Ownership is limited to one person.
____ 4. Officers and others who manage the business.
____ 5. Creditor claims against the assets of the business.
____ 6. An organisation that produces listing rules that companies must comply with.
____ 7. A report prepared by directors that presents audited financial information.
____ 8. A section of the annual report that presents management’s views.
____ 9. Future economic benefits.
____ 10. Accumulated profit that has not been distributed as dividends to owners.
Answer below.
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
1. E 6. F
2. I 7. C
3. D 8. B
4. A 9. G
5. H 10. J
82. Presented below are the basic assumptions and principles underlying financial
statements.
____ 1. The economic life of a business can be divided into artificial time periods.
____ 2. The business will continue in operation long enough to carry out its existing
objectives.
____ 5. Circumstances and events that make a difference to financial statement users
should be disclosed.
____ 6. Only transaction data that can be accurately expressed in terms of money
should be included in the accounting records.
Answer below.
Learning objective 1.8 – Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial statements.
1. f 4. b
2. d 5. c
3. a 6. e
Short-answer/essay questions
Answer below.
Learning objective 1.2
Define accounting, describe the accounting process and define the diverse role of
accountants. The accounting cycle consists of four steps. First, all relevant economic
events (or transactions) must be identified. Relevant economic benefits are those that
affect the assets and or liabilities of the business. Second, all transactions that have
been identified in the first step have to be quantified in monetary terms. The third step
is recording the transactions. This step must include analysing, recording, classifying
and summarising transactions. Finally once these three steps have been performed the
results can be communicated to users by preparing accounting reports, including an
income statement, statement of financial position, statement of cash flows and
statement of changes in equity.