CHAPTER 12 M/C AND T/F PRACTICE QUESTIONS
TRUE-FALSE STATEMENTS
1.
In order to compare the financial statements of different companies, it would be
desirable to have each company develop its own set of accounting rules and practices.
2.
Pronouncements of the CICA are considered to have "substantial authoritative support."
3.
The CICA has developed a set of standards and rules that serves as a basis for
resolving accounting and reporting problems.
4.
Generally accepted accounting principles are rules and practices that provide a general
guide for financial reporting.
5.
An advantage of developing accounting principles on a problem-by-problem basis is that
it results in consistent rules and practices over time.
6.
Section 1000 of the Handbook, Financial Statements Concepts, organizes the concepts
that underlie the development and use of accounting principles by enterprises.
7.
The CICA conceptual framework consists of four major sections, the first one being the
objectives of financial accounting.
8.
The CICA conceptual framework identifies providing information useful to those making
investment and credit decisions as an objective of financial reporting.
9.
The primary objective of financial reporting is to provide useful information for decisionmaking.
10.
To be reliable, accounting information should have predictive value or feedback value,
and be reported on a timely basis.
11.
The elements of financial statements include assets, liabilities, equity, revenues, and
expenses.
12.
The CICA conceptual framework identifies future cash flows as a major element of
financial statements.
13.
In order for information to be relevant, it must be reported on a monthly basis.
14.
Consistent use of the same accounting principles and methods is necessary for
meaningful analysis of trends within a company.
15.
A company should change its accounting methods if a new method will increase
reported income for the period.
16.
Comparability results when different companies are in the same industry.
17.
To be relevant, financial information must be verifiable and be a faithful representation.
18.
Information in financial statements does not have to be understandable to the average
user.
19.
The accounting profession assumes a stable monetary unit in the preparation of a
company's primary financial statements even though inflation has occurred during the
period.
20.
Amortization policies can be justified on the basis of the going concern assumption.
21.
The percentage-of-completion method should only be used for long-term construction
projects where it is impossible to reliably estimate total construction costs.
22.
Under the instalment method, gross profit is recognized in the period in which the cash is
collected.
23.
The matching principle dictates that expenses be recognized when cash is paid or when
the work is performed.
24.
Firms often comply with the full disclosure principle by providing information in notes that
accompany the financial statements.
25.
One of the most basic accounting principles is the cost principle; however, it has come
under much criticism.
26.
Revenue should be recognized in the period in which the cash is received.
27.
Revenue should be recognized as soon as the production and/or sales effort is
substantially complete.
28.
Materiality and cost-benefit are two constraints in applying operating guidelines.
29.
Expensing the cost of small tools is an application of the materiality constraint.
30.
Conservatism in accounting means the accounting should understate assets and
income.
31.
Accounting for multinational corporations is complicated because different accounting
standards and foreign currencies are involved.
32.
International accounting standards are developed by the IASB and are followed by some
large multinational companies.
33.
Generally accepted accounting principles are uniform throughout the world.
Answers to True-False Statements
Item
1.
Ans.
F
Item
6.
Ans.
T
Item
11.
Ans.
T
Item
16.
Ans.
F
Item
21.
Ans.
F
Item
26.
Ans.
Item
Ans.
F
31.
T
2.
3.
4.
5.
T
F
T
F
7.
8.
9.
10.
T
T
T
F
12.
13.
14.
15.
F
F
T
F
17.
18.
19.
20.
F
F
T
T
22.
23.
24.
25.
T
F
T
T
27.
28.
29.
30.
T
T
T
F
32.
33.
T
F
MULTIPLE CHOICE QUESTIONS
34.
"Generally accepted" in the phrase generally accepted accounting principles means that
the principles
a. are proven theories of accounting.
b. have substantial authoritative support.
c. have been approved by The Canada Customs and Revenue Agency.
d. have been approved for use by the managements of business firms.
35.
The conceptual framework developed by the Canadian Institute of Chartered
Accountants
a. was approved by a vote of all accountants.
b. are rules that all accountants must follow.
c. is viewed as providing a constitution for setting accounting standards for financial
reporting.
d. is legally binding on all accountants.
36.
Accounting principles must be
a. proven and tested.
b. hypothesized and theorized.
c. developed or decreed.
d. universally accepted.
37.
Primary responsibility for the development of generally accepted accounting principles in
Canada rests with the
a. provincial securities commissions.
b. Board of Toronto Stock Exchange.
c. Canadian Association of Certified General Accountants.
d. Canadian Institute of Chartered Accountants.
38.
The CICA Handbook outlines
a. a list of all the Chartered Accountants practising in Canada.
b. accounting and auditing recommendations and guidelines for Canada.
c. all Canadian tax regulations.
d. none of the above.
39.
The conceptual framework does not include
a. objectives of financial reporting.
b. elements of financial statements.
c. recognition and measurement criteria.
d. quantitative characteristics of accounting information.
40.
The CICA would not view the conceptual framework as
a. a drafting of a "constitution."
b. a coherent system of interrelated objectives.
c. prescribing the functions of financial accounting.
d. providing exhaustive solutions to all accounting problems.
41.
Operating guidelines that are part of the CICA conceptual framework would best be
described as
a. laws.
b. rules.
c. regulations.
d. principles.
42.
If generally accepted accounting principles did not exist,
a. comparability between companies' financial statements would be enhanced.
b. financial statements of different companies would be presented more uniformly.
c. each company would have to develop its own set of accounting practices.
d. social welfare would have greater potential of being maximized.
43.
Which one of the following is an objective of financial reporting according to the
conceptual framework?
a. To provide information that will increase the value of the company
b. To provide information in assessing future cash flows
c. To provide information that is useful for making investment and lending decisions
d. To provide information that identifies economic resources, the claims to those
resources, and the changes in those resources and claims
44.
The CICA conceptual framework consists of four major sections. The first section details
a. elements of financial statements.
b. operating guidelines.
c. the objective of financial reporting.
d. qualitative characteristics of accounting information.
45.
Recognition and measurement criteria include all of the following sections except
a. assumptions.
b. constraints.
c. principles.
d. qualitative characteristics.
46.
Financial statements are designed to provide information about all of the following
except
a. the economic resources, obligations, and equity of the entity.
b. changes in economic resources, obligations, and equity of the entity.
c. management performance evaluations.
d. economic performance of the entity.
47.
Information that relates to a firm's solvency is used to assess the firm's ability to
a. convert assets to cash.
b. pay its debts.
c. collect its receivables on time.
d. prepare income tax information.
48.
An objective of financial reporting is to provide information that is mainly useful to
a. governmental taxing bodies.
b. employees and labour unions.
c. investors and creditors.
d. internal and external auditors.
49.
An overriding criterion in evaluating the accounting information to be presented is
a. fairness.
b. legality.
c. management's goals.
d. decision usefulness.
50.
Which one of the following is not a qualitative characteristic of useful accounting
information?
a. Relevance
b. Reliability
c. Conservatism
d. Comparability
51.
In order for accounting information to be relevant, it must
a. have very little cost.
b. have predictive or feedback value.
c. not be reported to the public.
d. be used by a lot of different firms.
52.
Accounting information should be verifiable in order to enhance
a. comparability.
b. reliability.
c. consistency.
d. feedback value.
53.
If accounting information has feedback value, it
a. has been verified by external audit.
b. is prepared on an annual basis.
c. confirms or corrects prior expectations.
d. is neutral in its representations.
54.
If accounting information has predictive value, it is useful in making predictions about
a. future Canada Customs and Revenue Agency audits.
b. new accounting principles.
c. foreign currency exchange rates.
d. the outcomes of past, present, and future events of a company.
55.
Relevant accounting information
a. is information that has been audited.
b. must be reported within the operating cycle or one year, whichever is longer.
c. has been objectively determined.
d. is information that is capable of making a difference in a decision.
56.
Which of the following is not a qualitative characteristic associated with reliability?
a. Verifiability
b. Comparability
c. Neutrality
d. Faithful representation
57.
A company can change to a new method of accounting if management can justify that
the new method results in
a. more meaningful financial information.
b. a higher net income.
c. a lower net income for tax purposes.
d. less likelihood of clerical errors.
58.
Accounting information should be neutral in order to enhance
a. reliability.
b. predictive value.
c. feedback value.
d. relevancy.
59.
Which of the following statements is not true?
a. Comparability means using the same accounting principles from year to year within a
company.
b. Reliability is the quality of information that gives assurance that it is free of error or
bias.
c. Relevant accounting information must be capable of making a difference in the
decision.
d. The CICA concluded that the overriding criterion by which accounting choices can be
judged is decision usefulness.
60.
Which of the following is the correct representation of qualitative characteristics?
Relevance
Reliability
a. Predictive Value
Feedback Value
b. Timely
Neutral
c. Feedback Value
Predictive Value
d. Verifiable
Faithful Representation
61.
Which of the following is not an element of financial statements?
a. Assets
b. Revenues
c. Expenses
d. Journals
62.
Qualitative characteristics associated with relevant accounting information are
a. consistency, faithful representation, and timeliness.
b. predictive value, feedback value, and timeliness.
c. neutrality, predictive value, and reliability.
d. going concern, cost principle, and materiality.
63.
Qualitative characteristics associated with reliable accounting information are
a. verifiability, predictive value, and timeliness.
b. faithful representation, materiality, and neutrality.
c. neutrality, verifiability, faithful representation, and conservatism.
d. relevance, faithful representation, verifiability, and conservatism.
64.
The time period assumption states that
a. the economic life of a business can be divided into artificial time periods.
b. economic events can be identified with a particular unit of accountability.
c. the accounting period should not exceed one year.
d. it is assumed that the business will operate indefinitely.
65.
The going concern assumption assumes that the business
a. will be liquidated in the near future.
b. will be purchased by another business.
c. is in a growth industry.
d. will continue in operation long enough to carry out its existing objectives and
66.
commitments.
The time period assumption states that the economic life of a business can be divided
into
a. equal time periods.
b. cyclical time periods.
c. artificial time periods.
d. perpetual time periods.
67.
Acceptance of the going concern assumption gives credibility to the
a. cost principle.
b. revenue recognition principle.
c. matching principle.
d. full disclosure principle.
68.
The going concern principle may be inapplicable when
a. the business is just starting-up.
b. liquidation is assumed.
c. fair market values are higher than costs.
d. net realizable values cannot be obtained.
69.
Which accounting guideline assumes that an enterprise will remain in business long
enough to carry out its existing objectives and commitments?
a. Cost principle
b. Economic entity assumption
c. Periodicity assumption
d. Going concern assumption
70.
It is assumed that the activities of Ford of Canada can be distinguished from those of
General Motors because of the
a. going concern assumption.
b. economic entity assumption.
c. monetary unit assumption.
d. time period assumption.
71.
The percentage-of-completion method
a. is used in valuing inventories.
b. is an exception to the sales basis for revenue recognition.
c. must be used by all companies.
d. should only be used if reliable estimates of total costs are not available.
72.
The monetary unit assumption
a. assumes that the business will continue to operate in the foreseeable future.
b. is the means by which the consistency principle is implemented.
c. assumes that the unit of measure remains stable over time.
d. restates financial statement items so that they reflect fair market values.
73.
Alton Construction signed a long-term construction contract to build a sports stadium for
$50,000,000. During the current year, $10,000,000 in costs were incurred of an
estimated total cost of $40,000,000 to build the stadium. The amount of gross profit to be
recognized in the current year if the percentage-of-completion method is employed is
a. $10,000,000.
74.
b. $8,000,000.
c. $2,500,000.
d. $12,500,000.
Dinaldo Builders signed a long-term construction contract to build a shopping mall for
$75,000,000. The total construction cost is estimated to be $60,000,000 and the firm
plans to use the percentage-of-completion method during the construction period. During
2001, the total construction costs actually incurred amounted to $12,000,000. The
amount of revenue to be recognized on the project in 2001 is
a. $3,000,000.
b. $9,600,000.
c. $12,000,000.
d. $15,000,000.
75.
Catlet Tractor Company sold a tractor which cost $28,000 for $40,000 on account. Since
the risk of collecting the receivable was high, it was decided to use the instalment
method for revenue recognition. During the first year, the down payment and instalment
payments on the tractor amounted to $8,000. The amount of gross profit to be
recognized during the current year should be
a. $0.
b. $12,000.
c. $8,000.
d. $2,400.
76.
An example of an expired cost is
a. inventory.
b. sales salaries.
c. prepaid expenses.
d. capital assets.
77.
The revenue recognition principle dictates that revenue should be recognized in the
accounting period in which it is
a. collected.
b. earned.
c. most likely to be collected.
d. earned and collected.
Use the following information for questions 78–79.
Carter Construction signed a long-term construction contract to build a new business school for
Ontario College for $80 million. During the current year, $10 million in costs were incurred of an
estimated total cost of $50 million.
78.
The amount of revenue that Carter Construction recognized in the current year if the
percentage-of-completion method is employed is
a. $80 million.
b. $10 million.
c. $70 million.
d. $16 million.
79.
The amount of gross profit recognized by Carter Construction in the current year if the
percentage-of-completion method is employed is
80.
a. $16 million.
b. $10 million.
c. $6 million.
d. $70 million.
If dependable estimates of costs and progress are not available in a long-term contract
situation, then the
a. instalment method should be used.
b. revenue should be recognized at the completion date.
c. percentage-of-completion method should be used.
d. contract should not be accepted.
81.
A construction company is calculating revenue using the percentage-of-completion
method. The costs incurred in the current period on the project are $3,000,000. Half of
these costs represent materials that have been stockpiled that won't be used on the
project in the current account year. As the accountant, you recommend that the costs
incurred to date toward completion of the project are
a. $3,000,000.
b. $1,500,000.
c. not determinable.
d. irrelevant since the instalment method applies.
82.
Another approach to revenue recognition using the receipt of cash as a basis for
recognition is the
a. accrual method.
b. instalment method.
c. percentage-of-completion method.
d. point-of-sale method.
83.
Under the instalment method of accounting, gross profit is recognized in the period
a. that the most payments are made.
b. that the sale is made.
c. that cash is collected.
d. after the sale is made.
84.
The practice of "letting the expense follow the revenue" is referred to as the
a. full disclosure principle.
b. instalment method.
c. matching principle.
d. revenue recognition principle.
85.
Costs that will generate revenues only in the current accounting period represent
a. accrued costs.
b. expired costs.
c. unexpired costs.
d. operating costs.
86.
One criterion for recognition of revenue is to recognize revenue when
a. the selling price is not known.
b. collection is not assured.
c. material expenses can be determined and matched.
d. the sales effort is not complete.
87.
88.
Costs that will generate revenues in current and future accounting periods represent
a. unexpired costs.
b. operating costs.
c. expired costs.
d. accrued costs.
The summary of significant accounting policies footnoted in the financial statements
would not normally discuss
a. amortization methods.
b. board of directors salaries.
c. method of inventory costing.
d. revenue recognition policies.
89.
Notes to the financial statements are required because the most important objective of
financial reporting is to
a. provide information to the CICA.
b. obtain uniformity with foreign countries.
c. provide information useful for decision-making.
d. provide information about the board of directors.
90.
The information provided in the notes that accompany financial statements is required
because of the
a. cost principle.
b. full disclosure principle.
c. matching principle.
d. revenue recognition principle.
91.
A cost that is not expected to provide future benefits is an
a. expired cost.
b. accrued cost.
c. operating cost.
d. unexpired cost.
92.
The cost principle is the basis for preparing financial statements because it is
a. a conservative value.
b. relevant and objectively measured, and verifiable.
c. an international accounting standard.
d. the most accurate measure of purchasing power.
93.
Under the instalment method, each cash collection from a customer consists of
a. a recovery of the cost of the goods sold.
b. gross profit.
c. interest.
d. a recovery of the cost of the goods sold and gross profit.
94.
Expenses are recognized when
a. cash is paid.
b. the work is performed.
c. the product is produced.
d. the product makes its contribution to revenue.
95.
Which of the following is a constraint in applying generally accepted accounting
principles?
a. Materiality
b. Percentage-of-completion method
c. Consistency
d. Time period
96.
In applying accounting constraints within the conceptual framework, an item is
considered material if
a. it costs a lot of money.
b. it is of a tangible nature.
c. it is likely to influence the decision of a reasonably prudent investor or creditor.
d. the cost of reporting the item is greater than its benefits.
97.
To determine the materiality of an account, an accountant would compare it with any of
the following except
a. total assets.
b. total liabilities.
c. total employees.
d. net income.
98.
A common application of the cost-benefit constraint is
1. recording assets at cost.
2. not disclosing information that is not material and not required in the notes.
3. use of the FIFO method for inventory valuation.
a.
b.
c.
d.
1
2
3
1 and 2
99.
Firms that conduct their operations in more than one country through subsidiaries or
branches are referred to as
a. global corporations.
b. international corporations.
c. multinational corporations.
d. foreign corporations.
100.
The organization that is working toward uniformity in accounting practices throughout the
world is the
a. World Bank.
b. United Nations.
c. International Accounting Standards Board.
d. National Commission on Fraudulent Financial Reporting.
Answers to Multiple Choice Questions
Item
34.
35.
36.
Ans.
b
c
c
Item
44.
45.
46.
Ans.
c
d
c
Item
54.
55.
56.
Ans.
d
d
b
Item
64.
65.
66.
Ans.
a
d
c
Item
74.
75.
76.
Ans.
d
d
b
Item
84.
85.
86.
Ans.
c
b
c
Item
94.
95.
96.
Ans.
d
a
c
37.
38.
39.
40.
41.
42.
43.
d
b
d
d
d
c
c
47.
48.
49.
50.
51.
52.
53.
b
c
d
c
b
b
c
57.
58.
59.
60.
61.
62.
63.
a
a
a
b
d
b
c
67.
68.
69.
70.
71.
72.
73.
a
b
d
b
b
c
c
77.
78.
79.
80.
81.
82.
83.
b
d
c
b
b
b
c
87.
88.
89.
90.
91.
92.
93.
a
b
c
b
a
b
d
97.
98.
99.
100.
c
b
c
c