Testbank

to accompany

Contemporary Issues in Accounting

Michaela Rankin, Patricia Stanton, Susan

McGowan, Matthew Tilling, Kimberly
Ferlauto & Carol Tilt

Prepared by
Matt Tilling

John Wiley & Sons Australia, Ltd 2012

 Chapter 6 Products of the financial reporting process

Chapter 6 Products of the financial reporting process

Multiple Choice Questions

1. What is the key element of the IASB definition of the reporting entity?

a. The existence of a broad range of users who want information

b. The legal requirements of the country in which the entity resides
*c. The existence of investors and creditors who cannot directly obtain information
d. The existence of scarce resources

Correct answer: c
Learning Objective 6.1 ~ Evaluate the importance of the identification of the reporting entity.

2. What is NOT one of the key elements of control?

*a. Ownership
b. Variable returns
c. Influence over returns
d. None of the above, i.e. they are all elements of control

Correct answer: a
Learning Objective 6.1 ~ Evaluate the importance of the identification of the reporting entity.

3. Which of the following is NOT an argument for a standardised annual reporting period?

a. It allows investors to compare entities more easily

b. It is necessary to calculate an annual dividend
*c. Most businesses operate on a natural 12 month cycle
d. Various laws require regular information be produced by the entity

Correct answer: c
Learning Objective 6.2 ~ Outline the debate surrounding the length and frequency of reporting
periods.

John Wiley & Sons Australia, Ltd 2012 6.1

Testbank to accompany Contemporary Issues in Accounting

4. Which of the following is an argument for more flexible reporting periods?

*a. It makes it less attractive for entities to manipulate profits

b. It enhances comparability
c. It makes dividend calculation easier
d. It is widely supported

Correct answer: a
Learning Objective 6.2 ~ Outline the debate surrounding the length and frequency of reporting
periods.

5. AASB 134 Interim Reporting mandates:

*a. The minimum contents of interim financial reports

b. Who must prepare interim financial reports
c. That interim financial reports should be prepared at least once per year
d. All of the above

Correct answer: a
Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the
production of financial information.

6. Manipulation of reported earnings:

a. Can be both legal and illegal

b. Includes income smoothing
c. Affects wealth transfers between the company and others
*d. All of the above

Correct answer: d
Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the
production of financial information.

7. Earnings Management:

a. is always illegal
*b. depends on timing difference between cash and accrual accounting
c. is always bad for shareholders
d. None of the above

Correct answer: b
Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the
production of financial information.

John Wiley & Sons Australia, Ltd 2012 6.2

 Chapter 6 Products of the financial reporting process

8. Income smoothing

a. Aims to produce a steady growth in the profit stream

b. Transfers wealth from new shareholders to management
c. Is only possible when sufficient profits are regularly made
*d. All of the above

Correct answer: d
Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the
production of financial information.

9. Pro forma reports

a. Are simply IFRS compliant reports

b. Are GAAP compliant reports
c. Usually show a lower profit figure than those prepares in accordance with
accounting standards
*d. Usually show a higher profit figure than those prepares in accordance with
accounting standards

Correct answer: d
Learning Objective 6.3 ~ Discuss the practice of manipulating reported earnings in the
production of financial information.

10. Approximately what percentage of the real value of companies is thought to be the result
of intangible assets?

a. 10%
b. 30%
c. 50%
*d. 70%

Correct answer: d
Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and
intellectual capital from the financial reporting process.

John Wiley & Sons Australia, Ltd 2012 6.3

Testbank to accompany Contemporary Issues in Accounting

11. Intangible assets are defined as

a. One-sided financial assets

b. Unidentifiable assets without physical
*c. Identifiable non-monetary assets without physical substance
d. All of the above

Correct answer: c
Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and
intellectual capital from the financial reporting process.

12. Which of the following is specifically prohibited from recognition as an intangible asset
according to AASB138?

a. Internally generated brands

b. Research
c. Training
*d. All of the above

Correct answer: d
Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and
intellectual capital from the financial reporting process.

13. Which of the following intellectual capital could be included in the Statement of
Financial Position?

a. Training of programmers employed by a company

b. Development of software by the company for internal use
*c. Development of software by the company for external use
d. None of the above

Correct answer: c
Learning Objective 6.4 ~ Outline the debate surrounding the exclusion of intangibles and
intellectual capital from the financial reporting process.

John Wiley & Sons Australia, Ltd 2012 6.4

 Chapter 6 Products of the financial reporting process

14. The annual report

a. May have significant additional voluntary disclosure in the financial statements

*b. Is used for impression management
c. Is thought to have little influence on stakeholder perceptions
d. Is not thought to be an important information avenue for organisations

Correct answer: b
Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary
disclosures.

15. The kinds of information likely to be included in the annual report includes

a. Corporate governance
b. Environmental performance
c. Occupational health and safety disclosures
*d. All of the above

Correct answer: d
Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary
disclosures.

16. Annual reports contain many financial graphics, it has been noted that

a. They are mostly unhelpful in summarising data

b. They are irrelevant to most users
*c. They are frequently distorted to improve perceptions of performance
d. All of the above

Correct answer: c
Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary
disclosures.

17. Extensible business reporting language (XBRL) is expected to

a. Benefit all businesses, large to small

b. Ease the burden of reporting to governments
c. Facilitate better corporate analysis
*d. All of the above

Correct answer: d
Learning Objective 6.5 ~ Explain the options available to companies reporting voluntary
disclosures.

John Wiley & Sons Australia, Ltd 2012 6.5

Testbank to accompany Contemporary Issues in Accounting

18. Which of the following has NOT been identified as a reason that management might
voluntarily disclose information in annual reports

*a. To mislead competitors

b. To manage powerful stakeholders
c. To win reporting awards
d. To forestall regulation

Correct answer: a
Learning Objective 6.6 ~ Identify three theories that explain the motivation for voluntary
disclosures in annual reports.

19. Corporate social responsibility

a. Is concerned about the environmental impact of organisations

b. Suggests that companies can build shareholder value by engaging other
stakeholders
c. Still means organisations should pursue profit
*d. All of the above.

Correct answer: d
Learning Objective 6.6 ~ Identify three theories that explain the motivation for voluntary
disclosures in annual reports.

20. Legitimacy theory suggests that corporate social disclosure will be used to

a. Signal deeply held ethical values of the entity

*b. Manage the concerns of key stakeholders
c. Disclose all firm activities, good or bad
d. The minimal degree possible

Correct answer: b
Learning Objective 6.6 ~ Identify three theories that explain the motivation for voluntary
disclosures in annual reports.

John Wiley & Sons Australia, Ltd 2012 6.6