Sample Questions and Answers
Which of the following is the purpose of the ‘conceptual framework’ for financial reporting?
A) To set specific standards for every type of accounting transaction.
B) To provide a theoretical foundation for developing new accounting standards and resolving financial reporting issues.
C) To ensure that companies comply with tax regulations.
D) To create a system for auditing financial statements.
Answer: B
- Under the ‘substance over form’ principle, a lease where the lessee assumes most of the risks and rewards associated with ownership would be classified as:
A) An operating lease.
B) A financial lease.
C) A contingent liability.
D) A capital lease.
Answer: B - Which of the following accounting treatments is recommended under IFRS for ‘property, plant, and equipment’ (PPE)?
A) PPE should always be valued at historical cost and not adjusted for inflation.
B) PPE can be carried at fair value or historical cost, depending on the company’s policy.
C) PPE should be revalued annually to reflect its current market value.
D) PPE should be expensed immediately upon purchase.
Answer: B - Which of the following is an example of a non-operating activity that would appear in the income statement?
A) Revenue from selling inventory
B) Interest expense on a loan
C) Income from normal sales operations
D) Depreciation of machinery used in production
Answer: B - Which of the following is true about ‘fair value accounting’?
A) It reports assets and liabilities at their original cost.
B) It measures assets and liabilities based on current market prices or expected cash flows.
C) It is applicable only for non-financial assets.
D) It eliminates the need for revaluation of assets.
Answer: B - Which of the following would be considered an asset under IFRS?
A) A debt owed to a company
B) A legal claim against a company
C) A customer’s promise to pay for a product or service in the future
D) A company’s estimated future liabilities
Answer: C - Which of the following is an example of an ‘investing activity’ in the statement of cash flows?
A) Purchase of inventory
B) Payment of dividends
C) Issuance of stock
D) Purchase of land and equipment
Answer: D - Which of the following is NOT an example of a financing activity on the statement of cash flows?
A) Issuance of common stock
B) Repayment of long-term debt
C) Borrowing from a bank
D) Sale of inventory
Answer: D - In accounting, the term ‘materiality’ refers to:
A) The ability of financial information to accurately predict future cash flows.
B) The size or importance of an item, based on whether its omission or misstatement could influence decisions.
C) The requirement to disclose all financial transactions in detail.
D) The process of simplifying financial reports for user comprehension.
Answer: B - Which of the following would be classified as an intangible asset under IFRS?
A) Real estate owned by the company
B) A patent for a new invention
C) Inventory held for resale
D) A piece of machinery used in manufacturing
Answer: B - Which of the following is true about the ‘cost model’ for property, plant, and equipment under IFRS?
A) Assets are carried at fair value, less depreciation and impairment losses.
B) Assets are carried at historical cost, less depreciation and impairment losses.
C) Assets are revalued every year to reflect their market value.
D) The cost model is not allowed under IFRS.
Answer: B - Which of the following would be classified as a liability?
A) A note payable to a creditor due in 5 years
B) Revenue from sales transactions
C) A patent owned by the company
D) The company’s investment in stock
Answer: A - Which of the following statements best describes the relationship between IFRS and local GAAP in a multinational company?
A) IFRS takes precedence over local GAAP in all countries.
B) Companies are required to follow local GAAP, but may also use IFRS as a guideline.
C) Multinational companies must follow IFRS, regardless of local GAAP.
D) IFRS and local GAAP may be used interchangeably depending on the company’s location.
Answer: C - Which of the following is NOT a typical element of the ‘conceptual framework’ for financial reporting under IFRS?
A) Recognition criteria for assets, liabilities, and equity.
B) A complete list of detailed accounting rules for every transaction.
C) A definition of the objective of financial reporting.
D) A set of qualitative characteristics for useful financial information.
Answer: B - Under IFRS, the ‘impairment of assets’ is determined by comparing:
A) The asset’s carrying amount with its fair value.
B) The asset’s fair value with its recoverable amount.
C) The asset’s depreciation cost with its initial cost.
D) The asset’s current market value with its original purchase price.
Answer: B - Which of the following is an example of an external user of financial information?
A) Company management
B) Company employees
C) Government regulators
D) Internal auditors
Answer: C - Which of the following best describes the purpose of segment reporting under IFRS?
A) To provide financial information about different parts of a company to help investors make decisions.
B) To report the company’s consolidated financial results only.
C) To highlight the company’s cash flows for tax purposes.
D) To separate operational costs from capital expenditures.
Answer: A - Which of the following is a major objective of the IASB (International Accounting Standards Board)?
A) To regulate the tax policies of different countries.
B) To issue IFRS that improve the quality of financial reporting.
C) To set specific tax rates for multinational companies.
D) To ensure compliance with the laws of individual countries.
Answer: B - Which of the following is true regarding the ‘going concern assumption’?
A) It assumes that the company will be liquidated in the near future.
B) It assumes that the company will continue to operate indefinitely unless there is evidence to the contrary.
C) It assumes that the company’s assets are only valued at their liquidation price.
D) It requires companies to immediately disclose their plans for closing operations.
Answer: B - Which of the following financial statements is primarily concerned with reporting the cash inflows and outflows during a specific period?
A) Balance sheet
B) Income statement
C) Cash flow statement
D) Statement of changes in equity
Answer: C
- Which of the following best describes the ‘full disclosure principle’ in financial reporting?
A) Only essential financial information is disclosed in financial statements.
B) Financial statements must include all information necessary for users to understand the company’s financial position.
C) Companies should only disclose information that is required by tax authorities.
D) Companies should not disclose any forward-looking statements.
Answer: B - Which of the following is a fundamental characteristic of useful financial information according to the conceptual framework?
A) Verifiability
B) Predictability
C) Comparability
D) Simplicity
Answer: A - Under the historical cost principle, assets are recorded at:
A) Fair value
B) Replacement cost
C) Acquisition cost
D) Net realizable value
Answer: C - Which of the following is an example of an ‘operating activity’ in the statement of cash flows?
A) Payment for equipment purchase
B) Payment of dividends to shareholders
C) Revenue from sale of goods
D) Issuance of long-term debt
Answer: C - Which of the following is true regarding the ‘materiality’ principle in accounting?
A) Material items should not be included in financial statements to avoid clutter.
B) An item is material if its omission or misstatement would influence the decisions of a user relying on the financial statements.
C) Materiality applies only to external transactions, not internal adjustments.
D) Immaterial items should always be reported separately.
Answer: B - Which of the following is an objective of financial reporting under IFRS?
A) To provide financial information that is useful for tax reporting.
B) To provide information that helps users make economic decisions.
C) To ensure that all companies report their financial performance in the same manner.
D) To reduce the complexity of financial transactions.
Answer: B - Which of the following is a key difference between the accrual basis of accounting and the cash basis of accounting?
A) Under the accrual basis, revenues and expenses are recognized when cash is exchanged.
B) Under the cash basis, revenues and expenses are recognized when they are earned or incurred, regardless of when cash is exchanged.
C) Under the accrual basis, revenues and expenses are recognized when they are realized in cash.
D) Under the cash basis, revenues and expenses are recognized when they are received or paid in cash.
Answer: D - Which of the following is true about the going concern assumption in accounting?
A) It assumes that the company will cease operations soon and prepare for liquidation.
B) It assumes that the company will continue its operations for the foreseeable future.
C) It assumes that all company assets will be revalued annually.
D) It assumes that the company is facing bankruptcy within a short period.
Answer: B - Which of the following is a limitation of the historical cost accounting method?
A) It provides a current market value for all assets.
B) It does not account for changes in the fair value of assets over time.
C) It is highly subjective and depends on management’s judgment.
D) It is not applicable under IFRS.
Answer: B - Which of the following is true regarding the ‘economic entity assumption’?
A) A business is considered separate from its owners and other entities.
B) A company’s financial statements should include both business and personal assets of its owners.
C) A business entity can include only financial transactions involving its owners.
D) A company’s financial performance should reflect the personal finances of its managers.
Answer: A - Which of the following is true about the ‘impaired asset’ accounting under IFRS?
A) An asset is impaired when its carrying amount exceeds its recoverable amount.
B) An asset is always impaired when its fair value is lower than its historical cost.
C) Impairment losses are not required to be recognized under IFRS.
D) Impairment losses are only recognized when the asset is sold.
Answer: A - Which of the following is an example of a financing activity in the statement of cash flows?
A) Payment of operating expenses
B) Sale of long-term investments
C) Borrowing from a bank
D) Purchase of raw materials
Answer: C - Which of the following is the primary purpose of segment reporting?
A) To provide information about a company’s different divisions or business segments for better decision-making.
B) To provide detailed financial statements for external users.
C) To comply with tax reporting requirements in different jurisdictions.
D) To simplify financial statements for internal use.
Answer: A - Which of the following financial statements is primarily concerned with the company’s profitability over a specific period of time?
A) Balance sheet
B) Income statement
C) Statement of cash flows
D) Statement of shareholders’ equity
Answer: B - Which of the following is an example of a ‘current liability’?
A) Bonds payable due in 10 years
B) Accounts payable for goods purchased on credit
C) Long-term lease obligations
D) Deferred tax liabilities
Answer: B - Which of the following is true about the ‘revenue recognition principle’?
A) Revenue should only be recognized when cash is received.
B) Revenue should be recognized when goods are sold or services are rendered, regardless of when cash is received.
C) Revenue should be recognized based on the company’s historical cost of production.
D) Revenue should always be recognized immediately upon invoice issuance.
Answer: B - Which of the following is the purpose of the ‘matching principle’ in accounting?
A) To match income with related expenses within the same period in order to determine net income.
B) To match the historical cost of assets with their current market value.
C) To match cash inflows with cash outflows in the same period.
D) To match the company’s revenues with the exact timing of tax payments.
Answer: A - Which of the following is an example of an intangible asset under IFRS?
A) Copyright
B) Land
C) Equipment
D) Inventory
Answer: A - Which of the following would NOT be considered an event that requires an adjustment to financial statements after the balance sheet date but before the financial statements are issued?
A) A customer declares bankruptcy after the reporting period ends.
B) The company acquires a subsidiary after the reporting period ends.
C) A company receives a lawsuit settlement after the balance sheet date.
D) The company issues bonds after the balance sheet date.
Answer: D - Which of the following is an example of an operating lease?
A) A lease where the company assumes most of the risks and rewards of ownership.
B) A lease with a transfer of ownership at the end of the lease term.
C) A lease where the lessee has no option to purchase the asset at the end of the lease.
D) A lease with a bargain purchase option at the end of the lease term.
Answer: C - Which of the following is true about the ‘matching principle’?
A) It requires companies to recognize revenues and expenses in the period when cash is received.
B) It matches revenues with expenses incurred to earn that revenue, regardless of cash flow timing.
C) It ensures that expenses are always recognized before revenues.
D) It allows companies to defer revenue recognition until expenses are paid.
Answer: B - Which of the following is true regarding a ‘contingent liability’?
A) A contingent liability is always recognized in the financial statements.
B) A contingent liability is disclosed only if it is probable and can be reasonably estimated.
C) A contingent liability is not disclosed unless it is certain to occur.
D) A contingent liability must be recorded as an expense immediately.
Answer: B - Which of the following is NOT an example of a cash flow from investing activities?
A) Purchase of shares in another company
B) Sale of long-term investments
C) Receipt of dividends from an investment
D) Payment of interest on bonds
Answer: D - Which of the following is true about ‘fair value accounting’?
A) Fair value accounting reflects the market value of assets and liabilities at the balance sheet date.
B) Fair value accounting is applicable only for short-term liabilities.
C) Fair value accounting only applies to non-financial assets.
D) Fair value accounting does not allow for the use of market-based data.
Answer: A - Which of the following statements is true regarding the classification of liabilities?
A) Liabilities are always classified as current liabilities unless they are due in more than one year.
B) Liabilities are always classified as long-term liabilities unless they are due within 30 days.
C) Liabilities are classified as current if they are expected to be settled within one year or within the normal operating cycle.
D) Liabilities must always be classified as current, regardless of maturity date.
Answer: C
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