Chapter 1Introduction to financial accounting

Chapter 1—Introduction to financial accounting

MULTIPLE CHOICE

• Which of the following use accounting information?
• Shareholders
• Banks
• Trade unions
• 1 and 2 only
• 2 and 3 only
• 1 and 3 only
• 1, 2 and 3

ANS: D PTS: 1 TOP: Who uses financial accounting information?

• Which of the following organisations may use financial statements?
• Australian Taxation Office
• A church congregation
• A university
• 1 and 2 only
• 2 and 3 only
• 1 and 3 only
• 1, 2 and 3

ANS: D PTS: 1 TOP: Who uses financial accounting information?

3. Financial statements provide useful information for shareholders to:

• understand day-to-day activities.
• decide whether to buy, sell or hold shares of companies.
• decide whether to lend money to the business entity.
• create business planning strategies.

ANS: B PTS: 1 TOP: Who uses financial accounting information?

4. Financial performance means:

• providing information about the cash position of an entity.
• setting out the enterprise’s set of financial resources and obligations at a point in time.
• identifying, measuring and communicating economic information to allow informed

decisions.

• generating new resources from day-to-day operations over a period of time.

ANS: D PTS: 1 TOP: Financial accounting

• Which of the following statements is NOT true?
• Judgements need to be made in determining profit.
• Attempts are made to measure incomplete transactions.
• The impact of transactions is recognised when cash is received or paid.
• Estimates are made of certain balance sheet items.

ANS: C PTS: 1 TOP: Accrual accounting

• A user’s main demand is for credible periodic reporting of an enterprise’s financial position and

performance. Credible means:

• 100 per cent accurate.
• easily understandable by users of financial statements.
• sufficiently trustworthy and competently prepared for it to be used to make decisions.

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• relevant to the needs of decision-makers.

ANS: C PTS: 1 TOP: The people involved in financial accounting

• Which type of information would be of most interest to trade creditors?
• Dividends declared
• Ability to pay debts
• Pollution of waterways adjacent to the firm’s factory
• Continuity of orders for the firm’s products

ANS: B PTS: 1 TOP: The people involved in financial accounting

• Which type of information would be of most interest to shareholders?
• Profitability
• Long-term financial stability
• Pollution of waterways adjacent to the firm’s factory
• Continuity of orders for the firm’s products

ANS: A PTS: 1 TOP: The people involved in financial accounting

• Which type of information would be of least interest to employees?
• Proposed expansion of the business
• Long-term financial stability
• Dividends declared
• Profitability

ANS: C PTS: 1 TOP: The people involved in financial accounting

• Which of the following statements about external company auditors is NOT true?
• External company auditors provide assurance that the financial statements audited by them

contain no mistakes.

• External company auditors cannot credibly audit statements they have prepared.
• External company auditors must be independent.
• Auditing arose because users demanded some assurance that managers’ reports on their

performance were reliable.ANS: A PTS: 1 TOP: The people involved in financial accounting

• Which of the following statements about accrual accounting is NOT true?
• The impact of transactions on the financial statements is recognised when the cash is

received or paid.

• The financial statements include estimates.
• Judgements made by accountants affect profit.
• Transactions are recognised at the time when revenue and expenses occur.

ANS: A PTS: 1 TOP: Accrual accounting

• Does measuring economic performance involve: (i) estimates; (ii) adjustments; and/or (iii)

judgements?

• (i) and (ii) only
• (i) and (iii) only
• (ii) and (iii) only
• (i), (ii) and (iii)

ANS: D PTS: 1 TOP: Accrual accounting

• During 2016, a company makes credit sales of $500 000, of which $375 000 is collected at year-end.

It pays $200 000 in expenses and owes $25 000 for electricity used during 2016. Accrual profit is:

A. $150 000.

B. $175 000.

C. $275 000.

D. $300 000.

ANS: C PTS: 1 TOP: Accrual accounting

• During 2016, a company makes credit sales of $500 000, of which $375 000 is collected at year-end.

It pays $200 000 in expenses and owes $25 000 for electricity used during 2016. What would the profit be if cash accounting rather than accrual accounting was used?

A. $150 000

B. $175 000

C. $275 000

D. $300 000

ANS: B PTS: 1 TOP: Accrual accounting

• What is the net profit for 2016 given the following information?

$ Cash sales 10 000 Credit sales 30 000 Cash received from accounts receivable 22 000 Wages paid 8000 Wages owing at year-end 5000

A. $22 000

B. $27 000

C. $32 000

• None of the answers provided

ANS: B PTS: 1 TOP: Accrual accounting

• During 2016, a company makes credit sales of $600 000, of which $350 000 is collected at year-end.

It pays $220 000 in expenses and owes $20 000 for electricity used during 2016. Profit according to

accrual accounting is:

A. $130 000.

B. $380 000.

C. $360 000.

D. $710 000.

ANS: C PTS: 1 TOP: Accrual accounting

• During 2016, a company makes credit sales of $600 000, of which $350 000 is collected at year-end.

It pays $220 000 in expenses and owes $20 000 for electricity used during 2016. What would the profit be if cash accounting rather than accrual accounting were used?

A. $130 000.

B. $110 000.

C. $380 000.

D. $730 000.

ANS: A PTS: 1 TOP: Accrual accounting

• Use the information given below to answer the following question.

$ Cash sales 20 000 Credit sales 60 000 Cash received from accounts receivable 42 000 Wages paid 10 000 Wages owing at year-end 8000 What is the net profit for 2016?

A. $70 000

B. $62 000

C. $104 000

D. $112 000

.ANS: B PTS: 1 TOP: The The key financial statements

• Use the information given below to answer the following question.

$ Cash sales 20 000 Credit sales 60 000 Cash received from accounts receivable 42 000 Wages paid 10 000 Wages owing at year-end 8000 What is the cash flow from operations for 2016?

A. $52 000

B. $62 000

C. $70 000

D. $104 000

ANS: A PTS: 1 TOP: The key financial statements

• ABC is a company that commenced business on 1 January 2016. Below are the balances in the 30

June 2016 financial statements.$ Cash 1000 Share capital 6000 Accounts receivable 3000 Accounts payable 2000 Loan owed 7000 Land 10 000 Inventory 2000 Cost of goods sold 1500 Wages expense 2500 Sales 5000 What is the balance of assets?

A. $8000

B. $10 000

C. $16 000

• None of the answers provided

ANS: C PTS: 1 TOP: The key financial statements

• ABC is a company that commenced business on 1 January 2016. Below are the balances in the 30

June 2016 financial statements.$ Cash 1000 Share capital 6000 Accounts receivable 3000 Accounts payable 2000 Loan owed 7000 Land 10 000 Inventory 2000 Cost of goods sold 1500 Wages expense 2500 Sales 5000 What is the balance of liabilities?

A. $7000

B. $9000