Chapter 2 – Types of organisations and the financial reporting framework true/false



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Chapter 2 – Types of organisations and the financial reporting framework
TRUE/FALSE
1 Mutual agency refers to the fact that each member of the partnership form of business entity can bind the other(s) in contract within the scope of normal operations.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
2. There are several advantages to forming a partnership, including the ease with which it can be formed and the limited rules and regulations that apply to it. However, as for a company, one of the regulations is that a partnership must prepare financial statements in accordance with Accounting Standards if it is deemed to be a reporting entity.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
3. Although partnerships may have a tax advantage over companies in that it is the partners that are taxed and not the partnership, a disadvantage of partnerships is that they have unlimited liability.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
4. All companies can raise funds through the general public but not all companies have limited liability.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
5. If a company has sales of $8 million, assets of $4 million and 60 employees, then it may be classified as a small proprietary company.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
6. All limited-by-shares companies must have ‘Ltd’ in their names, but a private company is distinguishable from a public company because it has ‘Pty’ as well as ‘Ltd’ in its name.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
7. Two companies were formed on 1 January 20X3, with the names Pluto Pty Ltd and Neptune NL. From the names of the companies, it is clear that the former is a proprietary company and the latter is a mining company.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
8. There are several differences between the financial statements of a company and those of a partnership, not least of which is the disclosure of taxation on the balance sheet as a liability. For a company, the disclosure is a single amount as it is the company that is liable and not the owners. For a partnership, the amount of taxation is split and reported separately in accordance with each partner’s liability.
ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations


9. The reason why company shareholders may have the advantage of limited liability rests with the entity principle in accounting, not the legal status of the company.
ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations


10. The partnership form of business organisation exists where two or more carry on a business in common with a view to profit.
ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations


11. Accounting Standards set by the Australian Accounting Standards Board (AASB) apply to both the private and public sectors in Australia.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The framework for setting accounting standards

12. Due process is primarily concerned with producing Accounting Standards that meet managers’ objectives.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The standard setting process


13. The Corporations Act 2001 requires that financial statements include a directors’ report, a directors’ statement and an auditor’s report.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The Corporations Act
14. The directors’ report included with a company’s financial statements contains an opinion on whether the balance sheet and income statement present a ‘true and fair’ view.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The Corporations Act
15. Half-yearly reports contain more detailed information than annual reports.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The Corporations Act

16. A conceptual framework can be defined as a set of interrelated objectives and fundamentals that is expected to lead to consistent standards, and that prescribes the nature, function and limits of financial accounting and reporting.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: What is a conceptual framework?


17. One of the objectives of a conceptual framework is that it is considered to be a defence against politicisation.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Objectives of a conceptual framework
18. A general-purpose financial report is primarily directed toward the common information needs of a wide range of users.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
19. Users of general-purpose financial reports include investors, financial advisors, employees, lenders, suppliers and customers.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
20. A reporting entity is an entity for which there are users who rely on financial statements as their major source of information about the entity.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
21. General-purpose financial reports provide the information that is required for both internal and external user group needs.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
22. Accrual accounting refers to the method of measuring profit on the basis of cash flow, rather than when revenues and expenses occur.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
23. The going concern assumption assumes that an entity will continue to operate successfully into the foreseeable future.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework


24. An asset must have physical qualities that can be measured reliably.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework


25. A liability must always be a legal obligation that arises from past events.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
26. Equity is the residual interest in the assets of the entity after deduction of all its liabilities.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework

27. Revenue means the gross inflows arising from normal operations plus all gains during the accounting period.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework


28. The elements of financial statements are always measured using the historical cost method.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Measurement of the elements of financial statements
29. The Australian Financial Reporting Council is not able to directly influence the content of the AASB’s accounting standards, but has the capacity to do so given its control of the budget and priorities of the AASB.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The framework for setting accounting standards
30. The political nature of standard setting refers to the fact that, for example, preparers may lobby the standard setters to promote their own self-interest rather than the decision-making usefulness of general purpose reports.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The political nature of accounting standard setting
31. The fundamental element equity does not require recognition criteria, because it represents the residual interest in assets, after deducting liabilities.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
32. In accordance with the IASB Conceptual Framework, income includes both revenue and gains.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
33. The external auditor is responsible for preparing the general-purpose financial reports of a company.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
34. The responsibilities of the Australian Financial Reporting Council include advising the government on the process of setting accounting standards.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The framework for setting accounting standards
35. In Australia the overriding responsibility for the preparation and presentation of general-purpose reports resides with the directors of a company.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: The corporations act
36. An external auditor seeks to provide reasonable assurance that the financial statements of a company are true and fair, not a guarantee that every error in the financial statements of the entity has been detected.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
MULTIPLE CHOICE

1. Which of the following is not true of sole traders?



A.

They are one-owner businesses.

B.

They are not normally reporting entities.

C.

They are separate legal entities.

D.

They usually have limited funds at their disposal.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
2. Which of the following is not true for a partnership?

A.

Creditors can supply goods on credit to a partnership.

B.

Debtors can purchase goods on credit from a partnership.

C.

Partnerships have to pay their tax yearly.

D.

Partnerships can enter contracts on behalf of the partnership.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
3. Which of the following statements regarding partnerships is incorrect?

A.

There are no legal formalities required to form a partnership and it can be an oral agreement.

B.

Partnerships have unlimited liability not subject to the amount contributed by each partner.

C.

The partnership is subject to income tax, not the individual partners.

D.

Each partner has the authority to enter contracts on behalf of the partnership, provided the contracts relate to normal operations.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations

4. Which of the following would not be considered a disadvantage of forming a partnership?



A.

Limited life

B.

Unlimited liability

C.

Ease of formation

D.

Mutual agency

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
5. Jack and Jill Repairers is founded by partners Jack, Jill and Jolly. Jack, Jill and Jolly contributed $3000, $5000 and $8000 respectively. For the year ending 20X2, Jack and Jill Repairers produced a profit of $12,000. If the profits are distributed in accordance with the initial investment which of the following is true?

A.

Jack gets $2250 and Jill gets $6000.

B.

Jack gets $3750 and Jolly gets $6000.

C.

Jack gets $2250 and Jill gets $3750.

D.

Jack gets $2250 and Jolly gets $8000.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
6. Which of the following items of information would not be found in the balance sheet of a partnership?

A.

Assets

B.

Liabilities

C.

Dividends payable

D.

Distribution of profits to partners

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
7. Which of the following is true of companies? All companies:

A.

are limited liability companies.

B.

are separate legal entities.

C.

have a limited life.

D.

are bound by the contracts signed by shareholders.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
8. A large proprietary company must have its financial statements audited and lodged with the:

A.

Australian Securities Exchange.

B.

Australian Securities and Investments Commission.

C.

Financial Reporting Council.

D.

Australian Accounting Standards Board.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
9. Which of the following types of business organisation has a legal identity separate from those of the owners?

A.

Sole proprietorships

B.

Companies

C.

Partnerships

D.

All of the above.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations

10. Limited liability is a feature of what form(s) of business organisation?



A.

Company

B.

Sole proprietorship

C.

Partnership

D.

Both a company and a partnership

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
11. It can be determined that Alpha Pty Ltd is a proprietary company as its records show that:

A.

no approach has been made to the public for funds.

B.

it has fewer than 50 employees.

C.

it is a family company.

D.

it has ‘Pty Ltd’ in its name.

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
12. Gamma Pty Ltd would be a small proprietary company as its records show:

A.

assets of $15m, sales of $26m and 40 employees.

B.

assets of $6m, sales of $26m and 60 employees.

C.

assets of $15m, sales of $9m and 55 employees.

D.

assets of $4.5m, sales of $12m and 45 employees.

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
13. An advantage that a company typically has over a partnership is:

A.

mutual agency.

B.

access to greater amounts of capital.

C.

avoidance of moral hazard.

D.

smaller size.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
14. The advantages of the corporate form of business organisation do not include:

A.

ready transferability of shares.

B.

limited liability.

C.

mutual agency.

D.

continuity of existence.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
15. Which one of the following is not an advantage of a company?

A.

Separate legal entity

B.

Access to capital

C.

Continuous existence

D.

No regulation

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
16. In which section of a balance sheet would a general reserve be found?

A.

Current Assets

B.

Current Liabilities

C.

Non-current Assets

D.

Shareholders’ Equity

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
17. Equity on the balance sheet of a sole proprietorship is normally referred to as:

A.

owner’s equity.

B.

shareholders’ equity.

C.

reserves.

D.

ordinary shares.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
18. A small proprietary company is one that has:

A.

less than $25 million sales and fewer than 50 employees.

B.

less than $5 million liabilities and fewer than 50 employees.

C.

less than $5 million expenses and less than $12.5 million assets.

D.

less than $10 million equity and less than $12.5 million assets.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
19. Which of the following items does not appear on the balance sheet of a partnership?

A.

Debtors

B.

Equipment

C.

Creditors

D.

Income tax payable

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
20. The ability of a partner to enter into a contract on behalf of all partners is called:

A.

voluntary association.

B.

mutual agency.

C.

the partnership agreement.

D.

unlimited liability.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations

21. The separation of ownership and control is normally a characteristic of:



A.

companies.

B.

partnerships.

C.

sole traders.

D.

partnerships and companies.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations

22. The factors that should be considered before forming the partnership and company forms of entity would include:



A.

income taxation implications.

B.

the liability of the equity participants for the debts of the business.

C.

the scale/magnitude of the operations involved and the access to finance.

D.

all of the above.

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
23 Due process involves:

A.

the maximum opportunity to comment on proposed accounting standards.

B.

the selection and discussion of emerging issues of accounting.

C.

a process of fast-tracking the implementation of accounting standards.

D.

adequate consultation between the FRC and the AASB before an accounting standard is issued.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: The framework for setting accounting standards
24. The principle purpose of an audit is to:

A.

assure investors of the wealth of the entity.

B.

assure investors of the future profitability of the entity.

C.

express an opinion on the truth and fairness of the entity’s financial statements.

D.

detect fraud by the entity’s employees.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
25. If the conceptual framework sets out the concepts that underlie the preparation and presentation of financial statements for external users, which of the following questions is the conceptual framework not attempting to answer?

A.

Who are the users of general-purpose financial reports?

B.

Which entities should prepare special-purpose financial reports?

C.

How should the elements of the financial statements be measured and displayed?

D.

What are assets, liabilities, income, expenses and equity?

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
26. Objectives of a conceptual framework include:

A.

providing a defence against lobby groups.

B.

fewer and more consistent Accounting Standards.

C.

improved communication.

D.

all of the above.

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: Objectives of a conceptual framework
27. Which of the following statements is incorrect?

A.

Compliance with the conceptual framework is non-mandatory in general purpose financial statements.

B.

Compliance with Accounting Standards is mandatory in general purpose financial statements.

C.

Compliance with the conceptual framework is mandatory in general purpose financial statements.

D.

Accounting Standards are more specific than the conceptual framework.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The framework for setting accounting standards
28. Which of the following sets of entities are not likely to meet the definition of a reporting entity?

A.

Small proprietary companies, large proprietary companies and partnerships

B.

Small proprietary companies and sole traders

C.

Large proprietary companies, sole traders and partnerships

D.

Small proprietary companies and large professional accounting practices

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The Conceptual Framework
29. An example of a reporting entity is likely to be a:

A.

public company.

B.

partnership.

C.

family trust.

D.

small proprietary company.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: The Conceptual Framework
30. Which of the following are likely to be reporting entities?


I.

BHP Billiton

II.

The corner store

III.

An unincorporated business with 10 employees

IV.

A large proprietary company with over 500 employees and 200 creditors




A.

I only

B.

I and IV only

C.

II, III and IV only

D.

I, III and IV only

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
31. Which one of the following groups is not generally regarded as an external user of the accounting information of an enterprise?

A.

Employees

B.

Customers

C.

Management

D.

Lenders

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework

32. FeelGood Limited has been set up specifically for the building of an inner-city women’s refuge. When the building has been erected and becomes operational (estimated time four months), the company will be liquidated. Which basic assumption underlying the preparation of general-purpose financial reports will not apply in preparing the reports for FeelGood Limited?



A.

The business entity principle.

B.

The principle of duality.

C.

The going-concern principle.

D.

The period assumption.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
33. Assets are best defined as a:

A.

resource owned by the entity as a result of current event, from which future economic benefits are expected to flow.

B.

resource owned by the entity as a result of past event, from which future economic benefits are expected to flow.

C.

resource controlled by the entity as a result of past event, from which future economic benefits are expected to flow.

D.

resource controlled by the entity as a result of a future event, from which future economic benefits are expected to flow.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
34. Which of the following is not a primary characteristic of the accounting definition of an asset?

A.

The capacity to provide benefits to the entity

B.

Control but not necessarily ownership

C.

Representing past events

D.

The ability to be reliably measured

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
35. Which of the following is not an asset?

A.

Equipment

B.

Accounts receivable

C.

Accounts payable

D.

Inventory

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
36. Which of the following elements does not require recognition criteria in order to decide whether it should be recognised in the financial statements?

A.

Assets

B.

Revenues

C.

Equity

D.

Expenses

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
37. In terms of the conceptual framework, an asset is recognised on a balance sheet if it:

A.

is capable of reliable measurement and it is probable that the asset will be realised.

B.

is owned by the entity and is capable of reliable measurement.

C.

results from a past event and is owned by the entity.

D.

provides future economic benefits.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
38. Which one of the following is not an asset?

A.

Inventory

B.

Accounts receivable

C.

Revenue

D.

Cash

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
39. Which of the following is not a liability?

A.

Accounts payable

B.

Loan payable

C.

Investment by owner

D.

Unearned revenue

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
40. Which of the following is not an attribute of a liability?

A.

Present obligation to transfer resources to another entity.

B.

The transfer is unavoidable by the entity.

C.

The transfer results in reduced economic benefits to the entity making the transfer.

D.

The event creating the responsibility has not yet occurred.

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
41. Which of the following accounts is a liability?

A.

Interest Expense

B.

Interest Payable

C.

Interest Revenue

D.

Interest Receivable

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
42. Liabilities are:

A.

resources under an organisation’s legal control.

B.

obligations owed by an organisation to its creditors.

C.

the amount of investment made by owners in a business.

D.

the profits earned by a corporation.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
43. Which of the following accounts is not a liability?

A.

Wages Payable

B.

Prepaid Rent

C.

Accounts Payable

D.

Notes Payable

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework

44. Revenues result when a business:



A.

creates resources by selling goods or services.

B.

borrows money.

C.

receives money from owners of the business.

D.

pays its employees.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
45. Expenses result when a business:

A.

pays a supplier for goods purchased last month.

B.

consumes resources during the production and sale of goods or services.

C.

distributes money to owners.

D.

hires employees.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
46. Torger Associates sold business services to another organisation for cash. As a result, Torger’s assets increased. Which accounting term best describes the concept involved in the other part of this transaction?

A.

Liability

B.

Revenue

C.

Financing activity

D.

Dividends

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
47. Which of the following types of entities would not fit the category of a profit-making entity?

A.

Sole proprietorship

B.

Partnership

C.

Charitable institution

D.

Company

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: Types of organisations
48 The present obligation to make a future sacrifice that is an essential criteria of the definition of a liability under the IASB Conceptual Framework:

A.

can only arise from legal obligations.

B.

may arise out of moral or constructive obligations.

C.

meets the definition of an expense.

D.

may vary in different countries.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: The conceptual framework
49 According to the Corporations Act, an external auditor must:

A.

have appropriate tertiary qualifications.

B.

satisfy ASIC that he/she is capable of performing the duties of an auditor.

C.

satisfy ASIC that he/she is a fit and proper person to be registered as an auditor.

D.

all of the above.

ANS: D PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
50. The role of an auditor is to:

A.

review accounting systems and internal controls.

B.

detect fraud.

C.

ensure that every transaction is correct.

D.

ensure that there is no fraud and that all transactions are correct.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
51. The auditor’s report:

A.

expresses an opinion as to the truth and fairness of the financial statements.

B.

states that the reporting entity is in a sound financial position.

C.

is prepared by internal auditors.

D.

includes forecasts of future profits.

ANS: A PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
52. The relationship between the task undertaken by auditors and the understanding of the users is called:

A.

the experience gap.

B.

the auditor’s report.

C.

the expectations gap.

D.

the information gap.

ANS: C PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits
53. What is the audit expectation gap?

A.

The auditors’ ensuring that financial statements are prepared in accordance with accounting standards.

B.

The difference between what an auditor is required to do and what is expected by users.

C.

The auditors’ ensuring that they meet the requirements of an audit.

D.

The auditors’ providing a true and fair view of the financial statements.

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: External audits

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