Contemporary Issues in Accounting: Testbank

lOMoARcPSD|10205068
Testbank
to accompany
Contemporary issues in
accounting
nd
2 edition
by
Rankin et al.
© John Wiley & Sons Australia, Ltd 2018
Downloaded by muneera fahad ([email protected])

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Chapter 1: Contemporary issues in accounting

Multiple choice questions
1. Which of the following statements are true?
a. The role of the accountants is changing, due to changes in economic activities,

societal expectations and developments in technology.
b. Accounting is not a precise uncontested technical exercise.
c. Financial accounting is principles based and the application of appropriate
accounting and reporting requires professional judgement.
d. All of the above.
Correct answer: d
Learning objective 1.1
2. Accounting theory can be described as:
a. being based only on observations.

b. description, explanation or prediction of accounting practice based on
observations and/or logical reasoning.
c. a set of facts, specific in nature, against which accounting practice can be
evaluated.
d. being irrelevant to the development of new practice and procedures.
Correct answer: b
3. Which of the following statements is correct in relation to the purpose of theory

a. some theories explain, while others describe what is happening.
b. all theories do the same thing.
c. they make suggestions and dictate what action must be taken.
d. theories only make predictions about what will happen in the future.
Correct answer: a
An example of how theory can predict accounting practice is:
a. agency theory
b. capital market theory.
c. asset recognition theory.
d. corporate social responsibility theory.
Correct answer: a
© John Wiley and Sons Australia, Ltd 2018 1.1

lOMoARcPSD|10205068
Testbank to accompany Contemporary Issues in Accounting 2e by Rankin et al.
5. Is it possible to have different theories on the same topic?
a. yes, but there is usually only one explanation and/or solution.

b. no, it is impossible to have alternative theories on a topic.
c. yes, there are often many alternative theories on a topic because there are
usually many possible explanations and/or solutions.
d. no, there can only ever be one explanation or solution.
Correct answer: c
6. How can theories be of benefit in accounting?
a. they assist us in describing and explaining current accounting practice only.

b. they assist us to improve accounting practice and they provide principles to take
into account when taking action or making decisions.
c. they help to identify problems and deficiencies with current accounting practice
but do not assist us in improving accounting practice.
d. they assist us to predict and improve accounting practice only.
Correct answer: b
7. An example of how theory can help to identify problems and deficiencies with current
accounting practice and improve accounting practice is:
a. corporate social responsibility theory.

b. the conceptual framework for accounting.
c. agency theory and the conceptual framework for accounting.
d. corporate social responsibility theory and the conceptual framework for accounting.
Correct answer: d
8. Which of the following statements is correct?
a. a theory does not have to be correct to be useful.

b. if there is a theory about something, it must be correct.
c. it is impossible to assess the appropriateness of a particular theory.
d. a theory can only be useful if it is correct.
Correct answer: a

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9. A reason why someone may accept a theory without having ‘first hand’ or direct
knowledge of the topic are:
a. Other people choose not to accept the theory.

b. Lack of knowledge regarding the authority of the source of the theory.
c. The theory makes sense and fits with personal experiences and beliefs.
d. Evidence exists that refutes the theory.
Correct answer: c
10. Which of the following statements is incorrect, in relation to the scientific method?
a. It involves analysing observations to derive a theory.

b. It involves starting with a limited number of observations.
c. It involves starting with a large number of observations from which a reliable
conclusion can be drawn
d. It involves making predictions that are tested by further observations.
Correct answer: c
11. Deduction can best be described as:
a. The process of developing specific predictions from theories.

b. The process of moving from particular instances of something to a general
conclusion.
c. Coming to a conclusion through a process of elimination.
d. The process of developing numerous conclusions or theories.
Correct answer: a
12. Research of or about accounting would not consider the following question:
a. What role has accounting played in environmental degradation.

b. Should accountability or decision usefulness be the key goal of accounting.
c. What impact does culture have on accounting.
d. What impact do changes in specific accounting policies have on share prices.
Correct answer: d

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13. Which of the following statements is true in relation to research?
a. Often, searching or investigating a topic more than once, may detract from our
understanding of the issue.
b. By searching over and over again, each study should contribute to our
understanding of the issue.
c. Most research studies will provide definitive answers to the problem examined.
d. Some research studies will not provide definitive answers to the problem, in
which case further investigation should be postponed.
Correct answer: b
14. Research in accounting would not consider the following question:
a. What measures should be used.

b. What measurements are being used.
c. What impact do changes in specific accounting policies have on share prices.
d. Should accountability or decision usefulness be the key goal of accounting.
Correct answer: d
15. Research in accounting focuses on:
a. Issues within accounting at the more micro level.

b. Issues related to accounting at a macro level.
c. Questions such as, what role has accounting played in the rise of capitalism.
d. The bigger picture.
Correct answer: a
16. Which of the following statements is incorrect in relation to critical accounting ?
a. It aims to critically analyse inefficient accounting practices.

b. It aims to develop a critical understanding of the role of accounting processes
and practices in the functioning of society and organisations.
c. A critical understanding of the role that accounting plays can be used to engage
in change.
d. It aims to develop a critical understanding of the role of the accounting
profession in the functioning of society and organisations.
Correct answer: a

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17. Which of the following statements is correct in relation to International accounting

research?
a. It often adopts a social welfare perspective.

b. This research area declined in the second half of the twentieth century due to
harmonisation.
c. Agency or contracting theory underlies much of this research.
d. It includes research into differences in accounting practices and also considers
contextual and cultural influences on financial accounting.
Correct answer: d
18. Research that attempts to explain the motivations behind the accounting choices made by
managers is
a. Accounting policy choice research.

b. Capital market research.
c. Critical accounting research.
d. International accounting research.
Correct answer: a

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 5: Theories in accounting

1. Accounting theory helps us understand accounting better as:
a. A random process.
b. A fundamental part of the natural universe.
c. A human endeavour.
d. A representation of truth.
Correct answer: c
2. A normative theory:
a. Is based on what should be the case given a certain objective.

b. Is completely divorced from reality.
c. Describes, explains or predicts activities.
d. Only focuses on normal activities.
Correct answer: a
3. A positive theory:
a. Is based on what should be the case given a certain objective.

b. Is completely divorced from reality.
c. Describes, explains or predicts activities.
d. Only focuses on rewarding activities.
Correct answer: c
4. Theories in accounting can help us to understand the decisions of:
a. Financial information regulators.

b. Financial information preparers.
c. Financial information users.
Correct answer: d
© John Wiley & Sons Australia, Ltd 2018 5.1

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5. Agency theory concentrates on:
a. two agency relationships.

b. multiple agency relationships.
c. one agency relationship.
d. three agency relationships.
Correct answer: a
6. Positive accounting theory is based on:
a. stakeholder theory.
b. contracting theory.
c. agency theory.
d. both a and b.
Correct answer: d
7. Key problems for owner-manager agency relationships are:
a. dividend retention.
b. horizon problem.
c. risk aversion.
d. all of the above.
Correct answer: d
8. According to institutional theory which of the following statements is NOT true about
corporate social and environmental disclosure:
a. Within industries the nature of the disclosure is likely to diverge over time.
b. It will be heavily influenced by regulation.
c. Well organised external stakeholders will lead to increased disclosure.
d. None of the above, i.e. they are all true.
Correct answer: a

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9. A key underlying assumption of Institutional Theory is that people are:
a. Risk-adverse.
b. Self-interested.
c. Likely to conform to external norms.
Correct answer: c
10. Which of the following is NOT one of the four ways an organisation can obtain or
maintain organisational legitimacy according to Lindblom?
a. Change its behaviour.

b. Change perceptions of society, without changing its own behaviour.
c. Manipulate perceptions by deflecting attention from societal concerns.
d. None of the above, i.e. they are all ways an organisation can obtain or maintain
legitimacy.
Correct answer: d
11. Legitimacy theory argues that disclosure practice.
a. The business of business is business.

b. Organisations can only continue to exist if they demonstrate values consistent
with society at large.
c. Organisations should focus on wealth maximisation for their owners.
d. Consumers are only interested in minimising costs to themselves.
Correct answer: b
12. Which of the following is NOT considered a stakeholder according to the managerial
branch of stakeholder theory?
a. Customers.
b. Communities.
c. Competitors.
d. None of the above, i.e. they are all considered stakeholders.
Correct answer: c

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13. Stakeholder theory:
a. Has both a normative and positive version.

b. Is completely different to legitimacy theory.
c. Focuses on government power.
Correct answer: a
14. According to stakeholder theory accounting information:
a. is usually misleading.
b. is seen as largely advertising.
c. is unimportant to most stakeholders.
d. is an important way to communicate with stakeholders.
Correct answer: d
15. Contingency theory proposes that:
a. Shareholder needs drive accounting system choices.

b. Accounting policies are likely to be consistent within industries.
c. Size is not an important factor when considering management accounting
systems.
d. No universally consistent accounting system can apply to all organisations.
Correct answer: d
16. The central proposition of contingency theory is:
a. Organisational performance depends on the fit between organisational context and

structure.
b. Institutional norms drive organisational structure.
c. Organisational performance is largely random and poorly understood.
d. Organisations are simply a nexus of contractual agreements.
Correct answer: a

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17. Which of the following theories have been used to explain voluntary disclosure in the
annual report?
a. Institutional Theory.
b. Stakeholder Theory.
c. Legitimacy Theory.
Correct answer: d
18. Agency theory would hold that managers on compensation contracts which have bonuses
tied to a current measure of performance would prefer to:
a. Smooth income using either expensing or capitalising.

b. Be indifferent to expensing or capitalising transactions.
c. Expense transactions rather than capitalise them.
d. Capitalise transactions rather than expense them.
Correct answer: d

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 6: Products of the financial reporting process

1. What is NOT one of the key elements of control?
a. Influence over returns.

b. Ownership.
c. Variable returns.
d. None of the above, i.e. they are all elements of control.
Correct answer: b
2. What is the key element of the IASB definition of the reporting entity?
a. The existence of investors and creditors who cannot directly obtain information.
b. The existence of a broad range of users who want information.
c. The legal requirements of the country in which the entity resides.
d. The existence of scarce resources.
Correct answer: a
3. Which of the following is an argument for more flexible reporting periods?
a. It makes dividend calculation easier.

b. It makes it less attractive for entities to manipulate profits.
c. It enhances comparability.
d. It is widely supported.
Correct answer: b
4. Which of the following is NOT an argument for a standardised annual reporting period?
a. Most businesses operate on a natural 12 month cycle.

b. It allows investors to compare entities more easily.
c. It is necessary to calculate an annual dividend.
d. Various laws require regular information be produced by the entity.
Correct answer: a

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5. Manipulation of reported earnings:
a. Affects wealth transfers between the company and others.

b. Can be both legal and illegal.
c. Includes income smoothing.
Correct answer: d
6. AASB 134 Interim Reporting mandates:
a. That interim financial reports should be prepared at least once per year.
b. The minimum contents of interim financial reports.
c. Who must prepare interim financial reports.
Correct answer: b
7. Pro forma reports:
a. Usually show a lower profit figure than those prepares in accordance with
accounting standards.
b. Are simply IFRS compliant reports.
c. Are GAAP compliant reports.
d. Usually show a higher profit figure than those prepares in accordance with
accounting standards.
Correct answer: d
8. Income smoothing:
a. Is only possible when sufficient profits are regularly made.

b. Aims to produce a steady growth in the profit stream.
c. Transfers wealth from new shareholders to management.
Correct answer: d

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9. Earnings Management:
a. is always bad for shareholders.

b. is always illegal.
c. depends on timing difference between cash and accrual accounting.
d. None of the above.
Correct answer: c
10. Intangible assets are defined as:
a. Identifiable non-monetary assets without physical substance.

b. One-sided financial assets.
c. Unidentifiable assets without physical.
Correct answer: a
11. Approximately what percentage of the real value of companies is thought to be the result
of intangible assets?
a. 50%.
b. 10%.
c. 30%.
d. 70%.
Correct answer: d
12. Which of the following intellectual capital could be included in the Statement of
Financial Position?
a. Development of software by the company for external use.

b. Training of programmers employed by a company.
c. Development of software by the company for internal use.
Correct answer: a

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13. Which of the following is specifically prohibited from recognition as an intangible asset
according to AASB138?
a. Training.
b. Internally generated brands.
c. Research.
Correct answer: d
14. The kinds of information likely to be included in the annual report includes:
a. Occupational health and safety disclosures.

b. Corporate governance.
c. Environmental performance.
Correct answer: d
15. The annual report:
a. Is thought to have little influence on stakeholder perceptions.

b. May have significant additional voluntary disclosure in the financial statements.
c. Is used for impression management.
d. Is not thought to be an important information avenue for organisations.
Correct answer: c
16. Extensible business reporting language (XBRL) is expected to:
a. Facilitate better corporate analysis.

b. Benefit all businesses, large to small.
c. Ease the burden of reporting to governments.
Correct answer: d

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17. Annual reports contain many financial graphics, it has been noted that:
a. They are frequently distorted to improve perceptions of performance.

b. They are mostly unhelpful in summarising data.
c. They are irrelevant to most users.
Correct answer: a
18. Corporate social responsibility:
a. Still means organisations should pursue profit.

b. Is concerned about the environmental impact of organisations.
c. Suggests that companies can build shareholder value by engaging other
stakeholders.
Correct answer: d
19. Which of the following has NOT been identified as a reason that management might
voluntarily disclose information in annual reports?
a. To win reporting awards.

b. To mislead competitors.
c. To manage powerful stakeholders.
d. To forestall regulation.
Correct answer: b
20. Legitimacy theory suggests that corporate social disclosure will be used to:
a. Disclose all firm activities, good or bad.

b. Signal deeply held ethical values of the entity.
c. Manage the concerns of key stakeholders.
d. The minimal degree possible.
Correct answer: c

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 7: Corporate governance
1. Which of the following examples is NOT advantage of good corporate governance?
a. Increasing the cost of capital.

b. Expanding the company’s shareholder base.
c. Reducing perceived risks to investors.
d. Increased market confidence.
Correct answer: a
2. Which of the following problems has contributed to the growth in corporate governance
over the past decades?
a. Corporations misleading shareholders to avoid consequences.

b. Managers using the resources of the company to benefit themselves.
c. Corporations taking actions shareholders consider undesirable.
Correct answer: d
3. According to the ‘Anglo-Saxon’ model whose interest should be the focus of corporate
governance?
a. Community.
b. Employees.
c. Shareholders.
d. Environment.
Correct answer: c

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4. Corporate governance is:
a. The system by which corporations are directed and controlled.

b. A coherent system of concepts that underlie financial reporting.
c. A term referring to management’s choosing to voluntarily disclose
non-compulsory information in annual reports.
d. A set of broad principles that provide the basis for guiding actions or decisions.
Correct answer: a
5. The OECD Principles of Corporate Governance link manages’ remuneration to

shareholder interest to address which agency problem?
a. Horizon problem.
b. Risk aversion.
c. Dividend retention.
Correct answer: d
6. Which of these costs is NOT associated with an agency relationship between managers
and shareholders?
a. Bonding Cost.
b. Monitoring Cost.
c. Taxation Loss.
d. Residual Loss.
Correct answer: c
7. Which of the following is NOT one of the ASX’s Principles of Corporate Governance?
a. Establish an audit committee.

b. The majority of directors should be executive.
c. Promote ethical and responsible decision making.
d. Ensure level and composition of remuneration is sufficient and reasonable.
Correct answer: b

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8. Which of the following is NOT an example of corporate governance practice?
a. Formation of a nominating committee to identify potential new directors.

b. Codes of conduct for directors.
c. Requirements that most board directors be independent.
d. None of the above, i.e. they are all examples of corporate governance.
Correct answer: d
9. To ensure shareholders are sufficiently informed good governance practices include:
a. Detail related party transactions.

b. Prepare regular reports.
c. Have annual reports audited.
Correct answer: d
10. Which of the following is NOT an example of good corporate governance in relation to
shareholders?
a. Provide shareholders with all information made available to directors.

b. Treat all shareholders equally.
c. Have rules that allow shareholders to call extraordinary meetings.
Correct answer: a
11. An advantage of a principles-based approach to corporate governance is that:
a. It bans loans to directors.

b. It places a higher level of duty on directors to determine which corporate
governance practices are required.
c. It requires a corporation to prepare an annual report and provide them to
shareholders.
d. All of the options are correct.
Correct answer: b

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12. Which of the following is NOT a requirement of the Sarbanes-Oxley Act:
a. Audit partner rotation every 5 years.

b. No loans by company to directors.
c. The use of checklists.
d. The disclosure of whether there is a code of ethics for senior financial officers.
Correct answer: c
13. Which of the following is NOT a significant influence on actual corporate governance
practice?
a. The commitment of management.

b. The nature of the requirements.
c. The environment in which the entity operates.
d. None of the above, they are all significant.
Correct answer: d
14. What element of executive remuneration has been argued to have contributed to the
global financial crisis?
a. Bonuses on non-financial key performance indicators.

b. Share options.
c. Bonuses on the basis of short-term profits.
d. High fixed salary components.
Correct answer: c

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15. Which of the following were examples of risk management deficiencies that lead to the
GFC:
i. risk being monitored at the individual level rather than the entity level.
ii. information about risks not reaching the board.
iii. the organisational culture of ‘pursuing growth in profits’
iv. remuneration packages for high risk activities
v. alerting shareholders to a potential investment with a high return
a. i, ii, iii, iv.

b. i, ii, iii, v.
c. ii, iii, iv, v.
d. i, ii, iii, iv, v.
Correct answer: a
16. The Dodd-Frank Wall Street Reform and Consumer Protection act includes provisions
that require:
a. That compensation can be rescinded if it was paid based on inaccurate financial

statements.
b. Executive compensation to be submitted for shareholder approval via a non-
binding vote.
c. Increased disclosure about the nature of compensation packages and payments
related to financial performance.
Correct answer: d

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17. In what ways can accounting cause financial reporting problems?
i. disclosure can lead to constraining of the behaviour of a manager

ii. accounting information may lead a manager to making a different approach to a
company’s original financial approach
iii. there is a drive or desire to meet share market expectations based on these accounting
results
iv. the manipulation of earnings to meet market expectations
a. i, ii, iii.
b. i, ii.
c. iii, iv.
d. iv, iii, ii, i.
Correct answer: c
18. What is one of the ways that accounting is used to direct and control the manager of a
corporation?
a. Threatening to tell shareholders a mangers income if a manager makes a ‘poor

financial’ decision.
b. Linking of a mangers performance to a bonus that depends on accounting profit.
c. Making decisions based on the accounting information regardless of managerial
input.
d. Using income smoothing to assure a manager that they can invest in a low risk
investment.
Correct answer: b
19. Implementation of good corporate governance practices and principles will:
a. completely prevent corporate failure.

b. guarantee corporate failure.
c. minimise the chance of corporate failure.
d. not impact the change of corporate failure.
Correct answer: c

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20. When it comes to corporate governance many commentators have argued the most
important factor is:
a. Personal ethics.
b. Strong accounting systems.
c. Harsh legal penalties.
d. Codes of practice.
Correct answer: a
21. Which of the following statements is most correct?
a. Corporate governance not relevant to family entities.

b. Corporate governance is only relevant to listed entities.
c. Corporate governance is only relevant to developed economies.
d. Corporate governance is relevant to most companies globally.
Correct answer: d

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 8: Capital markets research and accounting

1. One of the criticisms of capital markets research is:
a. It is only normative research.

b. It focuses too much on social preferences.
*c. It is mainly focussed on US data.
d. It is mainly qualitative.
Correct answer: c
2. Capital markets research focuses on the relationship between:
a. Accounting information and standards setting.

*b. Accounting information and capital markets.
c. Capital markets and the economy.
d. Standards setting and accounting information.
Correct answer: b
3. Which of the following factors are commonly considered by capital markets

research?
i. Accounting earnings
ii. Unexpected earnings
iii. Asset pricing
iv. Market efficiency
a. i., ii. and iv. only.

b. None of them.
c. i. and iv. only.
*d. All of them.
Correct answer: d
4. Which of the following is NOT one of the three key assumptions underlying capital
markets research:
a. Expectations about dividends determine market price for shares.

b. Accounting information can be used to form expectations about profitability.
c. Expectations about profitability inform expectations about dividends.
*d. None of the above, i.e. they are ALL assumptions underlying capital markets
research.
Correct answer: d

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5. The kind of study used to examine how quickly accounting measures capture changes
in the information that is reflected in share prices over a given period is:
a. A qualitative study.
b. An events study.
*c. An association study.
d. A normative study.
Correct answer: c
6. To test whether accounting information and capital markets researchers examine:
a. The relationship between expected earnings and share returns.

b. The statements of shareholders about their decisions to sell shares.
*c. The relationship between unexpected earnings and share returns.
d. The relationship between shareholder expectations and share price.
Correct answer: c
7. Information perspective studies have shown us that when compared to sophisticated

investors, unsophisticated investors:
a. Underreact to good new and overreact to bad news.

*b. Overreact to good news and underreact to bad news.
c. Overreact to news, both good and bad.
d. Are little different to their reactions.
Correct answer: b
8. What phenomenon has been suggested as one of the most puzzling anomalies in
accounting research and calls into question the efficient markets hypothesis?
a. Signalling theory.
b. Income smoothing.
*c. Post-earnings announcement drift.
d. Big bath write-offs.
Correct answer: c

lOMoARcPSD|10205068
9. It has been found that prices often lead earnings. Why is this thought to be the case:
a. Accounting recognition criteria are less stringent for losses than for gains.
b. Accounting conservatism 'garbles' earning signals about firm value.
c. Accounting statements are poor at incorporating information about human
capital and other intangibles.
*d. All of the above.
Correct answer: d
10. Which of the following has been found to suggest that the users of financial
statements are either unwilling or unable to unravel the effects of earnings
management?
a. Management engaging in 'big bath' accounting.

b. Managers using discretionary accounting to increase their compensation.
c. Managers using income smoothing to increase share price.
Correct answer: d
11. Which of the following is NOT a conclusion of capital markets research?

@Feedback - Learning Objective 8.3 Outline the relationship between accounting
measures of financial performance and share prices.
*a. Accounting information is not used by investors.

b. Accounting earnings are poor measures of relevant events that are
incorporated into share price.
c. Investors react more quickly to bad news than to good.
d. Forecasts of future performance are core to valuation.
Correct answer: a
12. Voluntary disclosure theory predicts:
a. Shareholders will always want increased and more accurate information.

b. Increased disclosure lowers information asymmetry, thus increasing the cost
of capital.
*c. Disclosure will be biased but on average credible.
Correct answer: c

lOMoARcPSD|10205068
13. Which of the following is NOT a finding or assumption of capital markets research?
a. The work of financial intermediaries impacts on share prices.

b. Capital providers consider auditors increase accounting information
credibility.
*c. The qualification of a financial report will have a significant impact on share
price.
d. Analysts' earnings forecasts are more accurate than time-series models of
earnings.
Correct answer: c
14. Which of the following is NOT one of the three assumptions underlying value
relevance literature?
a. Share prices adequately represent investors' use of information in valuing

equity securities.
*b. Accounting earnings are not highly associated with equity market value
changes.
c. Equity users are the dominant users of financial reports.
d. Share-price-based tests can measure relevance and reliability as defined by
accounting bodies.
Correct answer: b
15. Value relevance studies attempt to assess the role of which qualitative characteristic
of the Conceptual Framework?
*a. Relevance and faithful representation.

b. Relevance.
c. Faithful representation.
Correct answer: a
16. Value relevance research suggests which measurement model best links share price
and accounting information?
a. Historic cost accounting.

b. Accrual accounting.
*c. Fair value accounting.
d. Cash accounting.
Correct answer: c

lOMoARcPSD|10205068
17. Value relevance studies have shown that:
a. Losses are strongly associated with a firms ability to generate future cash
flows.
b. Reported earnings are good measures of value-relevant events.
*c. Any relationship between accounting earnings and share returns is weak.
Correct answer: c
18. Which of the following is not an anomaly that has been noted to the efficient markets
hypothesis?
a. Investor interest varies according to the market the share is traded in.
*b. Market prices appear to react to more than just accounting information.
c. Returns of firms followed by analysts are superior to those that are not.
d. The returns of small listed firms appear to be smaller than those of larger
firms.
Correct answer: b
19. Which of the following is NOT an assumption behavioural finance?
a. People are over confident.

b. People make systematic errors in their thinking.
*c. People anchor on long term experience and under appreciate recent
experience.
d. People avoid realising paper losses but seek to realise paper gains.
Correct answer: c
20. Accounting studies testing market efficiency have conclusively found that:
a. Markets are efficient in the long term.

b. Markets are highly efficient.
c. Markets are more efficient in the short term.
*d. There is not conclusive evidence about market efficiency.
Correct answer: d

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 9: Earnings management

1. Which of the following is NOT likely to be interested in earnings information?
a. Customers.
b. Shareholders.
c. Lenders.
*d. None of the above, i.e. they are all interested in earnings information.
Correct answer: d
2. Earnings are important because:
a. Earnings assist in predicting future cash flows.

b. Increased earnings signal an increase in equity value.
c. Earnings are used to assess management performance.
Correct answer: d
3. With regards to inventory which of the following would be classed as conservative

accounting?
*a. Consistently and quickly applying the lower of cost and net realisable value
rule.
b. Being slow to write down slow-moving inventory.
c. Still recording obsolete inventory as an asset.
d. Overstating inventory by including non-existent inventory in accounts.
Correct answer: a
4. Which of the following would be considered fraudulent accounting?
a. Liberal credit terms and estimation of provision for doubtful debts.

b. Recognising revenue when services are prepaid but only partially performed.
*c. Capitalising advertising costs.
d. Restating useful life and residual value of non-current assets upwards.
Correct answer: c

lOMoARcPSD|10205068
5. Earnings management:
*a. Has a range of meanings.

b. Is illegal.
c. Is considered to always be harmful to shareholders.
Correct answer: a
6. An entity can change its accounting policy:
a. Never once the decision is made.

*b. Provided it can argue that the new method provides better information for
users.
c. Only with the approval of its auditors.
d. As often as it likes.
Correct answer: b
7. Which of the following methods is NOT commonly used to manipulate earnings:
*a. Incorrect classification of current liabilities as non-current.

b. Accounting policy choice.
c. Accelerating expenses.
d. Aggressive accounting for accruals.
Correct answer: a
8. Which of the following techniques is NOT generally useful to smooth income?
*a. Using fair value accounting.

b. Varying the provision for warranties.
c. Hedging of financial instruments.
d. None of the above, they could all be used to smooth income.
Correct answer: a
9. Which of the following is NOT an accrual accounting technique that could be used to
manage earnings?
a. Adjusting closing inventory valuations.

b. Under-provisioning for bad debts.
c. Delaying asset impairments.
*d. None of the above, they could all be used to manage earnings.
Correct answer: d

lOMoARcPSD|10205068
10. Big bath accounting is generally used to drop earnings when:
a. When the economy is poor.

b. There is a change in management team.
c. When operations are restructured.
Correct answer: d
11. Which of the following is NOT an example of real activities management that could
be used to manage earnings?
a. Accelerating sales.
b. Reducing discretionary spending.
*c. Adjusting loan loss provisions.
d. Delaying research and development.
Correct answer: c
12. Why does income smoothing generally lead to a higher share value?
a. It is perceived as increasing the chance of insolvency.

*b. It reduces the perceived risk of the company.
c. It leads to higher perceived income.
Correct answer: b
13. Which of the following earning management reasons would NOT be viewed as a
positive for shareholders?
a. To meet analysts' expectations.

b. To accurately convey private information.
*c. To increase short term profits.
d. To avoid violating debt covenants.
Correct answer: c
14. Research into income smoothing has concluded that:
*a. The findings are mixed with regards to earnings quality.

b. Smoothed income indicates high earnings quality.
c. Smoothed income indicates low earnings quality.
d. There is no relationship between income smoothing and earnings quality.
Correct answer: a

lOMoARcPSD|10205068
15. Which of the following is NOT thought to reflect earnings quality?
a. Operating/non-operating mix.
b. Trend in profit results.
*c. Total income tax expense for the period.
d. Earnings base.
Correct answer: c
16. Which of the following is most likely to be true?
*a. An incoming CEO would prefer to manage earnings downward in their first
year.
b. An existing CEO facing removal is likely to manage earnings downwards.
c. An incoming CEO following a forced departure will find it easier to manage
earnings upwards.
Correct answer: a
17. Which of the following components of managerial compensation are thought to most
encourage earnings management?
a. Shares or share options.

b. Their base salary.
*c. Their cash bonuses.
d. Various perquisites.
Correct answer: c
18. Research into IPOs and earnings management have indicated:
a. The market does discover upwards earning management.

*b. Investors expect upwards earning management.
c. Firms do not engage in upwards earnings management.
Correct answer: b

lOMoARcPSD|10205068
19. Researchers examining share price reactions to evidence of fraudulent reporting have
concluded that:
*a. Markets are generally surprised by the information.

b. Markets are highly efficient.
c. Markets interpret the discovery as good news.
d. Share prices are generally unaffected.
Correct answer: a
20. Which of the following board characteristics are likely to reduce earnings
management?
a. The existence of an audit committee.

b. A mix of monitoring and expertise skills.
c. More independent directors.
Correct answer: d

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 10: Fair value accounting

1. AASB 13 Fair Value Accounting has an effective date of:
*a. January 2013.

b. July 2005.
c. July 2011.
d. January 2015.
Correct answer: a
2. Fair value accounting:
*a. Appears in many accounting standards.

b. Is a new concept.
c. Is currently rare in accounting standards.
d. Is simply a refinement to the definition of historic cost.
Correct answer: a
3. Which part of the asset definition supports the use of fair value accounting?
*a. Future economic benefit.

b. Control.
c. Relevance and reliability.
d. Past transaction.
Correct answer: a
4. Traditionally what measurement technique has been most commonly used:
a. Replacement cost.
*b. Modified historical cost.
c. Fair value.
d. Sales value.
Correct answer: b

lOMoARcPSD|10205068
5. Which of the following has NOT been identified as a problem with the old definition
of fair value?
a. The word willing is not always ideal.

b. The word exchange is unclear.
c. The word settle is potentially misleading.
*d. None of the above, i.e. they are all criticisms.
Correct answer: d
6. Which of the following is NOT part of the old definition of fair value?
a. An arms-length transaction.
b. The amount an asset could be exchanged for.
c. The amount a liability could be settled for.
*d. At measurement date.
Correct answer: d
7. IFRS 13 is considered:
*a. To be an evolutionary standard.

b. To clarify our current use of fair value.
c. To be a revolutionary standard.
d. To be a regression from previous practice.
Correct answer: a
8. Which of the following is NOT one of the reasons given for issuing IFRS 13?
a. To clarify the definition of fair value.

*b. To replace the use of historical cost.
c. To enhance disclosure.
d. To provide a single source of guidance on the use of fair value.
Correct answer: b
9. Why does the new definition focus on an exit price when valuing and asset or
liability?
a. It introduces the concept of an external party into the transaction.

b. It focuses on the current value.
c. It is specific to the item being considered.
Correct answer: d

lOMoARcPSD|10205068
10. Which of the following is not part of the definition of fair value under AAASB 13?
*a. Knowledgeable and willing parties.

b. Price received to sell an asset.
c. Price paid to sell a liability.
d. At measurement date.
Correct answer: a
11. Which of the following would NOT indicate that market is inactive?
*a. The bid-ask spread is narrow.

b. Little information is publicly available.
c. Price quotations don't reflect current information.
d. Indices are demonstrably uncorrelated with recent indications of fair
valuation.
Correct answer: a
12. Which two economic concepts are fundamental to the relevance of fair values to
accounting?
i. The Efficient Markets Hypothesis
ii. Supply and Demand
iii. Economic Rationalism
iv. Marginal Utility
*a. i. & iii.

b. i. & ii.
c. ii. & iv.
d. iii. & iv.
Correct answer: a
13. When valuing non-financial assets which use for the asset should be considered?
a. The asset's expected use.

*b. The asset's highest and best use.
c. The asset's current use.
Correct answer: b

lOMoARcPSD|10205068
14. When fair valuing a liability which factor should NOT be considered?
a. Expectations of the market about fulfilling the obligation.

b. Non-performance risk.
c. The fair value of the corresponding asset.
*d. None of the above, i.e. they are all factors to consider.
Correct answer: d
15. When fair valuing a motor vehicle which of the following is least likely to be
important?
*a. Colour.
b. Age.
c. Make and model.
d. Kilometres travelled.
Correct answer: a
16. Which of the following would most likely be valued using a level 2 valuation?
a. Shares.
b. Gold.
*c. A building.
d. A business unit.
Correct answer: c
17. Which of the following is not an acceptable valuation technique?
*a. The expert evaluation approach.

b. The income approach.
c. The cost approach.
d. None of the above, i.e. they are all acceptable valuation techniques.
Correct answer: a
Learning Objective 10.5
18. Which of the following is NOT a transaction cost that should be considered in the
calculation of fair value?
a. Costs associated with marketing the item.

*b. Transport costs.
c. Agent's selling fees.
d. None of the above, i.e. they are all transaction costs.
Correct answer: b

lOMoARcPSD|10205068
19. Where there is a difference between fair value at initial recognition and cost,
assuming no other standard prohibits it, the entity should?
*a. Immediately adjust the value and recognise profit or loss.

b. Ignore the difference as there should be no day one gain or loss.
c. Amortise the difference over the useful life of the item.
d. Pay more or less for the item to make the figures equal.
Correct answer: a
20. Which of the following information must be provided in the financial report about
level 3 fair valuations?
a. Quantitative information on the inputs used in the model.

b. A description of the valuation technique used.
c. If the asset is not being used for its highest and best use why this is the case.
Correct answer: d

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 11: Sustainability and environmental accounting
1. Which of the following statements about Intragenerational Equity is NOT true:
a. It is concerned with poverty and access to food, water and shelter.

b. It is an important component of eco-justice.
*c. It means that future generations should not have a lower quality of life.
d. None of the above, i.e. they are all true.
Correct answer: c
2. The Brundtland report defined sustainable development as “development that…”:
a. meets the needs of the future without compromising the ability of current
generations to meet their own needs.
*b. meets the needs of the present without compromising the ability of future
generations to meet their own needs.
c. allows all people to meet their needs to an equal degree.
d. continues at the current pace, neither increasing nor decreasing into the
foreseeable future.
Correct answer: b
3. Which of the following terms is commonly used to mean Sustainability Reporting?
a. Environmental, Social and Governance Reporting.

b. Triple Bottom Line Reporting.
c. Corporate Social Reporting.
Correct answer: d
4. According to the research undertaken to date, what is the relationship between

environmental performance and disclosure of corporations?
a. Good performers have good disclosure, but no relationship has been found
for poor performers.
b. Poor performers have good disclosure, but no relationship has been found for
good performers.
c. Poor performers have poor disclosure, but no relationship has been found for
good performers.
*d. Research has not drawn any clear conclusions.
Correct answer: d

lOMoARcPSD|10205068
5. The International Integrated Reporting Committee was formed by which two bodies?
a. UNHCR and IASB.

*b. GRI and A4S.
c. NGO and GRI.
d. IASB and FASB.
Correct answer: b
6. The three parts of the triple bottom line are:
*a. Economic, Environmental and Social.

b. Economic, Stakeholder and Employee.
c. Financial, Economic and Government.
d. Financial, Customer and Government.
Correct answer: a
7. In regards to the Global Reporting Initiative (GRI), Which of the following is true:
a. it was launched in 1997 as an initiative to develop a globally accepted

reporting framework.
b. it includes 55 core indicators and 29 additional indicators across
environmental, economic and social performance areas.
c. it is the most widely recognised and commonly used guidelines for
sustainability reporting.
*d. all of the above.
Correct answer: d
8. The UN’s Principles of Responsible Investment have main been adopted by which
types of organisations?
*a. Institutional Investors.

b. Governments.
c. Mining Companies.
d. Builders.
Correct answer: a

lOMoARcPSD|10205068
9. Stakeholder power is general considered to relate to which of the following factors?
a. How vocal they are prepared to be.

*b. The degree of control they have over resources required by the organisation.
c. The amount of impact the organisation has on them.
Correct answer: b
10. Ethical investment funds might be concerned about how individual companies
address climate change because:
*a. They believe companies that address environmental risks will perform better
in the long run.
b. They believe carbon emissions proxy for economic performance.
c. They don’t want to invest money on companies that waste money.
Correct answer: a
11. Which of the following is NOT considered a stakeholder with potential interests in
corporate sustainability?
a. Government.
b. Media.
c. Banks.
*d. None of the above i.e. They are all potential interested in corporate
sustainability.
Correct answer: d
12. ISO 14001 Environmental Management requires certifying companies to assess

environmental performance against:
a. Industry benchmarks.
b. Government set standards.
*c. Internally developed policies, objectives and targets.
d. Internationally established values.
Correct answer: c

lOMoARcPSD|10205068
13. An EMS is a:
a. Ecological Maintained Source.

*b. Environmental Management System.
c. Emissions Measurement Scheme.
d. Ethical Mission Statement.
Correct answer: b
14. Climate change has the ability to impact on traditional financial accounting in what
way?
a. Asset Impairment.
b. Risk disclosure.
c. Liability valuation.
Correct answer: d
15. The Kyoto Protocol:
*a. Commits countries to achieving specific greenhouse gas emissions

reductions.
b. Forbids trading in greenhouse gases.
c. Sets standards on corporate reporting of carbon emissions.
Correct answer: a
16. The IASB project on Accounting for Carbon Emissions:
a. Is currently an Exposure Draft (ED133/A).

*b. Part of the IASB research program.
c. Is complete with the release of IFRS 4.
d. Does not exist.
Correct answer: b

lOMoARcPSD|10205068
17. An emissions trading scheme:
a. Allows the trade of excess emissions permits.

b. Usually involves substantial fines for excessive polluters.
c. Can also be referred to as a ‘cap and trade’ scheme.
Correct answer: d

lOMoARcPSD|10205068
Testbank
to accompany
accounting
nd
2 edition
by
Rankin et al.

lOMoARcPSD|10205068
Chapter 12: International accounting
Chapter 12: International Accounting
1. Which of the following is NOT a level that can be used to define international
accounting?
a. Company.
b. Comparative.
c. Supranational.
*d. None of the above, i.e. they are all levels of international accounting.
Correct answer: d
2. To what does International Accounting refer?
a. Comparison of accounting practices between countries.

b. Accounting for international transactions.
c. Descriptions of accounting practices in different countries.
Correct answer: d
3. With harmonisation of accounting practices globally:
*a. Environmental and cultural factors still lead to diversity in practice.

b. Financial reporting is becoming simpler.
c. International accounting differences have all but disappeared.
Correct answer: a
4. In countries where finance is mainly provided by banks we would expect:
*a. Greater emphasis on the balance sheet.

b. More public disclosure.
c. More lenient bankruptcy laws.
Correct answer: a

lOMoARcPSD|10205068
Testbank to accompany Contemporary Issues in Accounting2e by Rankin et al.
5. Which of the following is likely to influence accounting systems at a national level?
a. Political system.
b. Capital market structures.
c. Tax system.
Correct answer: d
6. The work of Hofstede has been very important to the study of international
accounting, which of the following was NOT one of his cultural characteristics used
to describe cultures around the world?
*a. Organised versus laid-back.

b. Individualism versus Collectivism.
c. Masculinity versus Femininity.
d. None of the above, i.e. they are all cultural characteristics.
Correct answer: a
7. The accounting regulation is heavily influenced by the legal system in which it

operates. In Australia laws are based on which legal system?
*a. Common Law.

b. Codified Roman Law.
c. Civil Law.
d. Case Law.
Correct answer: a
8. One of Gray’s accounting values is Professionalism versus Statutory Control. Which

country would you expect to be closest to the Statutory Control end of the spectrum?
*a. France.
b. UK.
c. Australia.
d. USA.
Correct answer: a

lOMoARcPSD|10205068
9. Gray adapted Hofstede’s categories for accounting, which of the following is not one
of his four accounting values?
a. Secrecy versus Transparency.

b. Conservatism versus Optimism.
c. Uniformity versus Flexibility.
*d. Short-term versus Long-term Orientation.
Correct answer: d
10. One significant barrier to the adoption of international accounting standards in

Islamic countries has been:
a. Refusal to compartmentalise religious and secular life.

b. The requirement to pay zakat (a religious levy).
*c. The prohibition on charging interest.
Correct answer: c
11. The international Accounting Standards Board’s objective for International

Accounting Standards would be best described as:
a. Harmonisation.
b. Convergence.
*c. Adoption.
d. Adaption.
Correct answer: c
12. Which of the following is NOT considered a challenge for international business
operations when faced with accounting diversity?
a. It reduces access to international investments.

*b. National accounting regimes are inferior to international accounting.
c. It is costly to restate financial statements.
d. None of the above, i.e. they are all a challenge.
Correct answer: b

lOMoARcPSD|10205068
Testbank to accompany Contemporary Issues in Accounting2e by Rankin et al.
13. Which of the following elements or standards has been raised as a significant problem
with the adoption of IFRS in certain countries?
a. Fair value accounting.

b. Profit focus.
c. Consolidation requirements.
Correct answer: d
14. Which of the following is NOT an advantage to IFRS adoption?
a. It makes financial statements more comparable.

*b. It makes accounting standard development more flexible.
c. It is a cost effective way to have a comprehensive set of standards.
d. None of the above, i.e. they are all advantages.
Correct answer: b
15. China’s acceptance of international accounting standards would be best described as:
a. Harmonisation.
*b. Convergence.
c. Adoption.
d. Indifference.
Correct answer: b
16. In Australia IFRSs are required to be used by:
a. All listed entities.

b. Consolidated entities only.
*c. All reporting entities.
d. Multinational Entities.
Correct answer: c
17. Multinational entities
a. Operate independently of any national legal framework.

b. Use IFRS exclusively.
c. Are largely unaffected by the culture of individual countries.
*d. None of the above.
Correct answer: d

lOMoARcPSD|10205068
18. The SEC allows non-US companies listed on a US stock exchange to report using:
a. International Accounting Standards, with reconciliation to US-GAAP.

*b. International Accounting Standards.
c. Their home country’s standards.
d. None of the above, they must use US-GAAP only.
Correct answer: b
19. Transfer pricing has been identified as a major problem for multi-national entities.
This refers to:
*a. The pricing of goods and services exchanged within a corporate group.
b. Paying local workers less than expatriate employees.
c. Setting up parent entities in tax havens.
d. Manufacturing cheaply in the third world to sell at high profit in the first
world.
Correct answer: a

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Chapter 1: Contemporary issues in accounting

Chapter 1: Contemporary issues in accounting

1. Which of the following statements are true?

a. The role of the accountants is changing, due to changes in economic activities,

2. Accounting theory can be described as:

a. being based only on observations.

3. Which of the following statements is correct in relation to the purpose of theory

An example of how theory can predict accounting practice is:

© John Wiley and Sons Australia, Ltd 2018 1.1

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Testbank to accompany Contemporary Issues in Accounting 2e by Rankin et al.

5. Is it possible to have different theories on the same topic?

a. yes, but there is usually only one explanation and/or solution.

6. How can theories be of benefit in accounting?

a. they assist us in describing and explaining current accounting practice only.

a. corporate social responsibility theory.

8. Which of the following statements is correct?

a. a theory does not have to be correct to be useful.

© John Wiley and Sons Australia, Ltd 2018 1.2

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Chapter 1: Contemporary issues in accounting

a. Other people choose not to accept the theory.

a. It involves analysing observations to derive a theory.

11. Deduction can best be described as:

a. The process of developing specific predictions from theories.

a. What role has accounting played in environmental degradation.

© John Wiley and Sons Australia, Ltd 2018 1.3

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Testbank to accompany Contemporary Issues in Accounting 2e by Rankin et al.

13. Which of the following statements is true in relation to research?

14. Research in accounting would not consider the following question:

a. What measures should be used.

15. Research in accounting focuses on:

a. Issues within accounting at the more micro level.

16. Which of the following statements is incorrect in relation to critical accounting ?

a. It aims to critically analyse inefficient accounting practices.

© John Wiley and Sons Australia, Ltd 2018 1.4

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Chapter 1: Contemporary issues in accounting

17. Which of the following statements is correct in relation to International accounting

a. It often adopts a social welfare perspective.

a. Accounting policy choice research.

© John Wiley and Sons Australia, Ltd 2018 1.5

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© John Wiley & Sons Australia, Ltd 2018

Downloaded by muneera fahad ([email protected])

Chapter 5: Theories in accounting

Chapter 5: Theories in accounting

1. Accounting theory helps us understand accounting better as:

a. Is based on what should be the case given a certain objective.

a. Is based on what should be the case given a certain objective.

4. Theories in accounting can help us to understand the decisions of:

a. Financial information regulators.

© John Wiley & Sons Australia, Ltd 2018 5.1

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Testbank to accompany Contemporary Issues in Accounting 2e by Rankin et al.

5. Agency theory concentrates on:

a. two agency relationships.

6. Positive accounting theory is based on:

7. Key problems for owner-manager agency relationships are: