Financial Accounting, 5e (Spiceland)
Online Appendix E: International Financial Reporting Standards
1) In common-law countries (such as the U.S., the U.K., and Canada), greater emphasis is placed
on public information than in code-law countries (such as Germany, France, and Japan).
2) For countries whose tax standards are closely tied to financial reporting standards (Central
Europe and Japan), accounting earnings tend to be lower so companies can minimize tax
payments.
3) In countries where debt financing is more common (Germany and Japan) compared to equity
financing, there is greater emphasis on reporting the ability of the company to earn profits for its
investors rather than the ability to repay debt.
4) Some countries are more secretive (Brazil and Switzerland), leading to fewer financial
disclosures.
5) More economically developed economies (the U.S. and the U.K.) have a need for more complex
accounting standards.
6) Convergence of accounting practices is expected to increase the flow of resources across
borders.
7) Most countries around the world require or permit the use of IFRS.
8) The primary objective of the IASB is to develop accounting standards in the U.S.
9) The Norwalk Agreement formalized the commitment between the FASB and IASB to the
convergence of U.S. GAAP and IFRS.
10) The FIFO inventory method is not allowed under IFRS.
11) IFRS allows, but does not require, revaluation of property, plant, and equipment to fair value.
12) Under U.S. GAAP, development expenditures are capitalized, while under IFRS, these
expenditures must be expensed immediately.
13) Under IFRS, inventory write-downs due to using the lower of cost and net realizable value are
allowed to be reversed in a future year if net realizable value subsequently increases.
14) When preparing a statement of cash flows, IFRS allows companies to report cash outflows
from interest payments as either operating or financing cash flows, while U.S. GAAP requires
these outflows to be reported as only operating activities.
15) When preparing a statement of cash flows, IFRS allows companies to report cash inflows from
interest and dividends as either operating or investing cash flows, while U.S. GAAP requires these
inflows to be reported as only operating activities.
16) IFRS allows a category in the income statement for extraordinary gains and losses, while U.S.
GAAP does not allow such a category.
17) Which of the following characteristics of a country most likely results in lower reported
earnings, all else being equal?
A) Inflation.
B) Tax laws.
C) Population.
D) Culture.
18) Which of the following is not a reason why accounting differs across countries?
A) Culture.
B) Population.
C) Tax laws.
D) Sources of financing.
19) Countries that have different rules for financial accounting and tax accounting, rely more on
equity financing, and have historic political and economic ties with Great Britain are referred to as
what types of countries?
A) Code-law countries.
B) European Union countries.
C) Common-law countries.
D) Conformist countries.
20) Countries that have similar rules for financial accounting and tax accounting, rely more on
debt financing, and have historic political and economic ties with Germany are referred to as what
types of countries?
A) Code-law countries.
B) European Union countries.
C) Common-law countries.
D) Conformist countries.
21) When a country establishes financial reporting rules that closely resemble tax reporting rules,
reported accounting profits tend to be:
A) Negative.
B) Higher.
C) Lower.
D) Misreported.
22) One motivation for reducing differences in accounting practices across countries is to:
A) Decrease the flow of international capital.
B) Allow greater competition among companies.
C) Reduce companies’ tax burdens.
D) Make it easier for investors to compare companies from different countries.
23) IFRS stands for:
A) Independent Financial Reporting System.
B) International Financing Reform System.
C) International Financial Reporting Standards.
D) International Financial Regulation of Securities.
24) The body primarily responsible for establishing a single set of global accounting standards is
the:
A) IASB.
B) SEC.
C) FASB.
D) IOSCO.
25) Principles-based accounting standards:
A) Are more characteristic of U.S. GAAP than international standards.
B) Emphasize detailed implementation rules.
C) Emphasize broad concepts.
D) Offer less room for judgment.
26) The Norwalk Agreement:
A) Allowed foreign companies listed on U.S. stock exchanges to prepare financial statements in
accordance with IFRS.
B) Formalized the commitment between the FASB and IASB to converge U.S. GAAP and IFRS.
C) Eliminated the requirement that U.S. firms report under U.S. GAAP.
D) Gave authority to the IASB to set accounting standards for U.S. companies.
27) For which of the following topics is accounting under both U.S. GAAP and IFRS essentially
the same?
A) Receivables.
B) Long-term assets.
C) Inventory.
D) Research and development expenditures.
28) Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS?
A) Specific identification.
B) FIFO.
C) LIFO.
D) Average cost.
29) Which of the following statements is correct for revaluation of property, plant, and equipment
to fair value under IFRS?
A) If one asset is chosen for revaluation, then all property, plant, and equipment must be revalued.
B) Only buildings and other real estate property may be revalued.
C) If one parcel of land is revalued, then all parcels of land must be revalued.
D) All property, plant, and equipment are required to be revalued each year.
30) Which of the following statements is true regarding revaluation of property, plant, and
equipment to fair value?
A) Only IFRS allows revaluation of property, plant, and equipment to fair value.
B) Only U.S. GAAP allows revaluation of property, plant, and equipment to fair value.
C) Both U.S. GAAP and IFRS allow revaluation of property, plant, and equipment to fair value.
D) Neither U.S. GAAP nor IFRS allows revaluation of property, plant, and equipment to fair
value.
31) Compared to that in the U.S., the cost to companies in other countries of documenting effective
internal controls is:
A) Much greater.
B) Slightly greater.
C) About the same.
D) Much less.
32) Why are some U.S. companies opposed to the elimination of the LIFO inventory method?
A) Inventory amounts are more difficult to calculate under FIFO.
B) LIFO most likely matches actual flow of inventory.
C) Increased tax burden.
D) Most international companies use LIFO.
33) Assuming rising costs, the switch from LIFO to FIFO or average cost would most likely have
what effect(s)?
A) Increase reported net income in the income statement.
B) Decrease tax obligations to the Internal Revenue Service (IRS).
C) Increase reported net income and tax obligations.
D) Decrease reported net income and tax obligations.
34) Suppose a company has research costs of $100,000 and development costs of $200,000 for the
year. Under IFRS, what amount would be reported as an expense in the current year’s income
statement?
A) $100,000.
B) $150,000.
C) $200,000.
D) $300,000.
35) Suppose a company has research costs of $100,000 and development costs of $200,000 for the
year. Under U.S. GAAP, what amount would be reported as an expense in the current year’s
income statement?
A) $100,000.
B) $150,000.
C) $200,000.
D) $300,000.
36) Would a company be more likely to report a contingent liability under U.S. GAAP or IFRS?
A) U.S. GAAP.
B) IFRS.
C) Equally likely.
D) Contingent liabilities are not reported under IFRS.
37) Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two
years. Under IFRS, what is the most the company can report this year as cash outflows from
financing activities related to this item?
A) $10,000.
B) $2,000.
C) $5,000.
D) $0.
38) Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two
years. Under U.S. GAAP, what is the most the company can report this year as cash outflows from
financing activities related to this item?
A) $10,000.
B) $2,000.
C) $5,000.
D) $0.
13
Listed below are seven reasons why accounting practices differ across countries, followed by a list
of descriptions. Match each description with the best reason.
A) Legal system
B) Sources of financing
C) Political and economic ties
D) Inflation
E) Stockholders’ equity
F) Tax laws
G) Economic development
39) The extent of public disclosure depends on the secretiveness of society.
Difficulty: 2 Medium
Topic:
Learning Objective:
Differences in Accounting Practices
E-01 Explain the reasons for differences in accounting practices across countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
40) In some countries, asset values increase rapidly because of the general price level changes.
Difficulty: 2 Medium
Topic: Differences in Accounting Practices
Learning Objective: E-01 Explain the reasons for differences in accounting practices across
countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
41) Countries share business activities and have political connections.
Difficulty: 2 Medium
Topic: Differences in Accounting Practices
Learning Objective: E-01 Explain the reasons for differences in accounting practices across
countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
42) Some countries rely more heavily on debt capital than on equity capital to fund operations.
Difficulty: 2 Medium
Topic: Differences in Accounting Practices
Learning Objective: E-01 Explain the reasons for differences in accounting practices across
countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
14
43) Common-law countries rely more heavily on public information.
Difficulty: 2 Medium
Topic: Differences in Accounting Practices
Learning Objective: E-01 Explain the reasons for differences in accounting practices across
countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
44) More developed economies have more complex business transactions.
Difficulty: 2 Medium
Topic: Differences in Accounting Practices
Learning Objective: E-01 Explain the reasons for differences in accounting practices across
countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
45) Alignment between financial reporting and tax reporting rules.
Difficulty: 2 Medium
Topic: Differences in Accounting Practices
Learning Objective: E-01 Explain the reasons for differences in accounting practices across
countries.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
46) Below are seven reasons for differences in accounting practices among countries. For each
reason, at least two options are provided. For each reason, select the option that best describes the
United States.
Reason:
Options:
1. Legal system
(a) Common law
(b) Code law
2. Tax laws
(a) Different tax and financial accounting rules
(b) Similar tax and financial accounting rules
3. Sources of financing
(a) More equity financing
(b) More debt financing
4. Inflation
(a) Low inflation
(b) High inflation
5. Culture
(a) Transparent
(b) Secretive
6. Political and economic ties
(a) British ties
(b) German ties
(c) Spanish ties
7. Economic development
(a) Developed economy
(b) Developing economy
(c) Underdeveloped economy
47) Below are seven reasons for differences in accounting practices among countries. For each
reason, at least two options are provided. For each reason, select the option that best describes
Germany.
Reason:
Options:
1. Legal system
(a) Common law
(b) Code law
2. Tax laws
(a) Different tax and financial accounting rules
(b) Similar tax and financial accounting rules
3. Sources of financing
(a) More equity financing
(b) More debt financing
4. Inflation
(a) Low inflation
(b) High inflation
5. Culture
(a) Transparent
(b) Secretive
6. Political and economic ties
(a) British ties
(b) German ties
(c) Spanish ties
7. Economic development
(a) Developed economy
(b) Developing economy
(c) Underdeveloped economy
48) Describe at least five reasons why accounting practices differ across countries. Which reason
do you think is most important? Explain why.
49) What is the main objective of the International Accounting Standards Board (the IASB)?
50) Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS?
Explain why some U.S. companies will lobby strongly to keep this method as an allowable
alternative.
51) What does it mean to revalue a long-term asset? How do U.S. GAAP and IFRS differ
regarding revaluation of long-term assets?
52) How is preferred stock reported differently under U.S. GAAP and IFRS? Do you think
preferred stock is a liability or an equity item? Why?