The Development of Financial Reporting

33. If a company buys goods for £50, and then sells half of these for £100. How much profit would be recognised? A. £25 B. £50 C. £75 D. £100   Answer : C The amount of goods that were sold is half, therefore the other half is still in stock with a value of £25. So £25 of goods were sold, for £100, meaning a gross profit of £75.

32. Which of the following is NOT generally recognised as being an asset in the financial statements of a company? A. Goodwill following the sale of a business B. Plant & Machinery used in the business bought on a hire purchase contract C. Stock held for resale D. Skills and qualifications of Staff   Answer : D Although there are strong arguments to recognise “human capital” and there are very small areas where it may be recognised, generally the “value” of human capital is not...

31. The four main objectives of the “Statement of Principles for Financial Reporting” are: A. Going Concern, Accruals, Consistency and Prudence B. Relevance, Reliability, Comparability and Understandability C. Going Concern, Relevance, Consistency and Comparability D. Accruals, Prudence, Reliability and Understandability   Answer : B Relevance: to the needs of the user in predicting the future of confirming the past.Reliability: faithful representation of the underlying...

30. The four main accounting principles for Financial Reporting established in SSAP 2 “Accounting Concepts” (1971) are: A. Going Concern, Accruals, Consistency and Prudence B. Relevance, Reliability, Comparability and Understandability C. Going Concern, Relevance, Consistency and Comparability D. Accruals, Prudence, Reliability and Understandability   Answer : A Going Concern: The business will continue to trade for the foreseeable future> Accruals: Also known as “matching”. Income and...

29. If a business starts the year with equity of £1.5m, ends the year with £1.8m and inflation is at 10%, how much can it pay out in profit if an Historic Cost approach is taken? A. 0.15m B. 0.3m C. 0.18m D. 0.03m   Answer : B

28. If a business starts the year with equity of £1.5m, ends the year with £1.8m and inflation is at 10%, how much can it pay out in profit if a Current Purchasing Power (CPP) approach is taken? A. 0.15m B. 0.3m C. 0.18m D. 0.03m   Answer : A

27. The measurement of profit is useful: A. As a guide to dividend decisions B. As a basis for taxation C. Statements A and B are both correct D. None of the above   Answer : C

26. Which of the following statements is correct? A. In a period of rising prices, cost of sales is overstated B. In a period of rising prices, return on capital employed (ROCE) is understated C. In a period of rising prices, asset values are understated D. In a period of rising prices, depreciation is overstated   Answer : D

25. During the year, the total amount for equity can change because: A. Additional shares are issued B. Property has been revalued C. Dividends are paid D. All of the above   Answer : D

24. Which of the following statements is false? A. For an "intangible" asset to be recognized, there must be a probability of it generating future economic benefit and be capable of being measured B. Research expenditure may be treated as capital expenditure C. Development expenditure may be treated as capital expenditure D. Internally generated intangibles, such as brands, should not be capitalized   Answer : B

23. Which of the following statements is false? A. Goodwill is an intangible asset B. Goodwill is the excess of the price paid for the business, acquired over the net fair value of identifiable assets C. According to IFRS 3, internally generated goodwill must be shown as an asset on the statement of financial position D. Goodwill is recognized only where it is the result of a transaction   Answer : C

22. Which of the following statements is correct? A. Inventories should be shown at the lower of cost and net realizable value B. Inventories should be shown at net realizable value C. Inventories should be shown at cost D. Inventories should be shown at the higher of cost and net realizable value   Answer : A

21. Which of the following concepts suggests that minor items will not affect the true and fair view of a set of financial statements? A. Duality B. Materiality C. Objectivity D. Consistency   Answer : B

20. Which accounting concept is associated with recording items at original cost? A. Current cost B. Historic cost C. Current market value D. Relevant cost   Answer : B

19. Which of the following statements is correct? A. Retained earnings are usually available as a cash reserve B. Retained earnings equal the total amount of equity in a company C. Retained earnings are defined as operating profit plus proposed dividend D. Retained earnings are not usually available as cash   Answer : D

18. Which of the following statements is false? A. Lenders are often provided with more information than is included on the financial statements of a company B. It would be impractical to expand financial statements to include all the information that different user groups want C. It is a legal requirement for companies to provide relevant financial accounting information to each of the user groups defined by the IASB D. Shareholders and lenders want to know about the future prospects of a...

17. Public financial statements are produced specifically in order to satisfy the requirements of HM Revenue and Customs FALSE

16. Published financial statements are aimed at a variety of users, including customers, the public and employees TRUE

15. Unincorporated businesses, such as sole traders and most partnerships, are required by law to produce a statement of financial position and income statement FALSE

14. Which of the following is false? A. A company's statement of financial position should only include the assets that it owns B. An asset is a resource controlled by the enterprise as the result of past events from which economic benefits are expected to flow C. A company's statement of financial position should include all the assets that it controls D. A company's statement of financial position may include financial assets, including shares it owns in another company   Answer : D

13. The objective of "reliability" in the ASB's Statement of Principles overrides which fundamental accounting concept? A. Comparability B. Going concern C. Accruals D. Prudence   Answer : D

12. According to ASB's Statement of Principles for Financial Reporting, what 4 objectives should financial accounting statements meet? A. Accruals, capital maintenance, understandability and relevance B. Relevance, reliability, comparability and understandability C. Prudence, relevance, accruals and comparability D. True and fair view, capital maintenance, reliability and prudence    

11. Shareholders wealth consists of two sources: A. Dividends and share price B. Profit and share price C. ROCE and dividends D. Growth and dividends   Answer : A

10. Which of the following statements is true? A. The amount of profit a company makes is more important than return on capital employed (ROCE) B. The amount of profit a company makes is less important than return on capital employed (ROCE) C. The amount of profit a company makes is not related to return on capital employed (ROCE) D. Shareholders are only concerned with the amount of profit a company makes   Answer : B

9. Which of the following statements is false? A. The auditors prepare the financial statements B. Auditors are responsible for finding fraud C. The financial statements show what a company is worth D. All of the above   Answer : D

8. Which accounting principle stipulates that dividends should only be paid out of profit, not by issuing new share capital? A. Revenue recognition B. Matching C. Capital maintenance D. Prudence   Answer : C

7. Which fundamental accounting concept stipulates that revenues and profits are not anticipated, but recognized only when realized as cash? A. Consistency B. Prudence C. Comparability D. Accruals    Answer : B

6. Which fundamental accounting concept stipulates that revenue and costs are recognized as they are earned or incurred? A. Consistency B. Comparability C. Accruals D. Prudence   Answer : C

5. Companies are allowed to pay dividends out of capital FALSE

4. The going concern concept assumes that the business will continue in operational existence for only a limited period of time FALSE

3. Auditors are not responsible for finding fraud TRUE

2. The establishment of the limited liability company made the position of creditors less secure TRUE

1. Financial accounting can measure the "true value" of a company FALSE