Chapter 1 – Introduction to accounting
TRUE/FALSE
1. An objective of accounting is to provide information to predict and evaluate the going concern of
an entity.
2. Accounting information is always quantitative and objective.
3. Stewardship is the term used to refer to management’s role in protecting an entity’s economic
resources from theft, fraud and wastage.
4. Management is an external user of accounting information.
5. The balance sheet is an example of a management accounting report.
6. The statement of comprehensive income is an example of a financial accounting report.
7. The difference between management accounting and financial accounting is that management
accounting focuses on external users whereas financial accounting focuses on internal users.
8. Management has the responsibility of selecting accounting policies.
9. Where an Accounting Standard exists, accounting policies must comply with the Accounting
Standard.
10. The economic consequences of accounting information are limited to the compensation schemes
paid to managers.
11. Political costs create incentives for managers to select accounting policies that increase reported
profits.
12. Triple bottom line reporting confirms the maximisation of profit as the major objective of listed
companies.
13. A triple bottom line report refers to the publication of economic, environmental and corporate
governance information in an integrated report.
14. Because triple bottom line reports are voluntary, the provision of an independent verification of the
reports should enhance the reliability of the information provided.
15. The GRI indicators are established by the committee without any input from stakeholders.
16. The audit of a triple bottom line report is normally completed by the financial auditor.
MULTIPLE CHOICE
1. Accounting information:
A.
is helpful for financing decisions but not for marketing decisions.
B.
is useful for profit-making entities but is not needed for not-for-profit entities.
C.
must follow accounting principles provided by management.
D.
is useful for all economic organisations.
2. The primary purpose of accounting is to:
A.
help people make decisions about economic activities.
B.
provide information that management can use to convince shareholders that management
deserves high salaries.
C.
provide employment to persons who have a knack for dealing with numbers.
D.
minimise the amount of profit that a firm has earned.
3. Accounting is likely to involve:
A.
qualitative and financial information.
B.
quantitative and financial information.
C.
quantitative and non-financial information.
D.
qualitative and non-financial information.
4. For the individual, accounting has at least three functions. They are:
A.
planning, buying and selling.
B.
planning, decision support and spending.
C.
saving, controlling and buying.
D.
planning, controlling and decision support.
5. The difference between management accounting and financial accounting is:
A.
management accounting focuses on external users whereas financial accounting focuses
on internal users.
B.
management accounting focuses only on the control function whereas financial accounting
focuses on the reporting function.
C.
management accounting focuses on internal users whereas financial accounting focuses on
external users.
D.
management accounting focuses on the reporting function whereas financial accounting
focuses on the control function.
6. Examples of internal and external users of information are:
A.
creditors and investors.
B.
managers and unions.
C.
creditors and unions.
D.
banks and government authorities.
7. The basic difference between managerial accounting and financial accounting is that:
A.
the financial accounting system relies on accounting information whereas managerial
accounting does not.
B.
financial accounting relies on information gathered from sources outside the business
whereas managerial accounting relies on internally generated information.
C.
financial accounting is concerned with providing information to outsiders, whereas
managerial accounting is concerned with providing information to managers for their use
in directing the activities of the organisation.
D.
managerial accounting information is useful to not-for-profit organisations, but financial
accounting information is not.
8. Which of the following is an example of a stakeholder of a business?
A.
An owner
B.
An investor
C.
A manager
D.
All of the above
9. Financial accounting is the process of:
A.
preparing and reporting accounting information for external decision makers.
B.
preparing and reporting accounting information for internal decision makers.
C.
enacting generally accepted accounting principles.
D.
preparing and reporting accounting information to lenders.
10. Management accounting is the process of:
A.
preparing and reporting accounting information for external decision makers.
B.
preparing and reporting accounting information for an organisation’s internal decision
makers.
C.
enacting generally accepted accounting principles.
D.
preparing and reporting accounting information to lenders.
11. Match the type of accounting information to the term that best describes it.
Information prepared for Information prepared for
external decision makers internal decision makers
A.
Financial accounting Financial accounting
B.
Financial accounting Managerial accounting
C.
Managerial accounting Financial accounting
D.
Managerial accounting Managerial accounting
12. Information contained in external financial reports can be useful to a firm’s:
Suppliers Employees
A.
No No
B.
No Yes
C.
Yes No
D.
Yes Yes
13. Match the type of accounting information to the term that best describes it.
Information prepared Information prepared
for suppliers’ use for creditors’ use
A.
Managerial accounting Financial accounting
B.
Managerial accounting Managerial accounting
C.
Financial accounting Financial accounting
D.
Financial accounting Managerial accounting
14. Which one of the following groups is not generally regarded as an external user of the accounting
information of an entity?
A.
Employees
B.
Customers
C.
Management
D.
Lenders
15. A possible limitation of accounting information is that accounting information:
A.
can only be used by bankers.
B.
is relevant depending on the needs of users.
C.
does not report in money terms.
D.
relates to past information
16. The selection of appropriate accounting policies for a company is the responsibility of:
A.
the body that sets Accounting Standards.
B.
the company secretary.
C.
the internal auditors of the company.
D.
the management of the company.
17. What is meant by the term economic consequences of accounting policy choice?
A.
The selection of accounting policies is expensive and time-consuming.
B.
Accounting numbers affect the financial positions of various users.
C.
Accounting policies are selected to minimise the position of creditors.
D.
The creation of accounting standards consumes a large amount of resources.
18. In a firm that offers a bonus scheme based on accounting profit, managers can, in most cases, be
expected to adopt a:
A.
profit-decreasing accounting policy.
B.
profit-increasing accounting policy.
C.
dividend-increasing accounting policy.
D.
liability-increasing accounting policy.
19. Debt covenants primarily protect the interests of which of the following parties?
A.
Shareholders
B.
Creditors
C.
Employees
D.
Companies
20. Triple bottom line reporting
A.
reinforces profit as the primary objective of companies.
B.
recognises the legal and non-legal obligations of a company to all legitimate stakeholders
in a company.
C.
is mandatory in Australia.
D.
is where a result is produced for financial, social and environmental benefit.
21. Arguments in favour of triple bottom line reporting include:
A.
enhanced all-round company credibility from greater transparency.
B.
that it facilitates the implementation of an environmental strategy.
C.
enhanced communication with stakeholders.
D.
all of the above.
22 The Global Reporting Initiative:
A.
refers to an institution based in Sweden.
B.
is the most widely cited benchmark for the determination of the content of a triple bottom
line report.
C.
was established as a private, profit-making initiative.
D.
is a set of reporting obligations agreed as part of the Kyoto agreement.
23 . Which of the following would not form part of social reporting under the GRI 3?
A.
Number of female employees.
B.
Number of indigenous employees.
C.
Donations to charities.
D.
Greenhouse gas emissions.
24. Which of the following would not be part of environmental reporting under the GRI 3?
A.
Greenhouse gas emissions
B.
Amount of recycled paper
C.
Child labour
D.
Biodiversity management
25. Which of the following reports are not reports specifically on sustainability issues?
A.
Sustainability report
B.
Annual report
C.
Triple bottom line report
D.
Stakeholder impact report
26. Which of the following disclosures would you expect to be included by a company in a triple
bottom line report?
A.
Greenhouse gas emissions
B.
Donations to charities
C.
Percentage of female staff in senior management positions
D.
All of the above
27. Accounting firms generally provides the following services:
A.
audit, assurance and taxation.
B.
audit, budgeting and management consulting.
C.
audit, budgeting and cost accounting.
D.
internal audit, budgeting and management consulting.
28. Managers may select accounting policies for which of the following reasons?
A.
To provide useful information to users
B.
To avoid violating debt contracts
C.
To influence compensation plans
D.
All of the above are correct
SHORT ANSWER
1. What is the role of accounting information in business?
2. Distinguish managerial accounting from financial accounting. Your answer should include a brief
discussion of differences in the types of information provided to users as well as differences in the
identity of users of financial and managerial accounting information.
PROBLEM
1. Doug Murphy, a newly hired accountant, wanted to impress his boss, so he stayed late one night to
analyse the office supplies expense. He determined the cost by month, for the past 12 months, of
each of the following: computer paper, copy paper, fax paper, pencils and pens, note pads, postage,
corrections supplies, stationery, and miscellaneous items. Why do entities, such as companies, not
include information of this nature in published (general purpose) financial statements?
CASE
1. In October 2002, Duke Power, the regulated electricity utility of the United States (US)
corporation Duke Energy, agreed to pay $25 million to its customers to settle allegations by
regulators in North and South Carolina that it had underreported net earnings by about $123
million between 1998 and 2002. The under reporting of net earnings by Duke Energy was
allegedly undertaken in order to avoid having to cut its electricity rates.
Required:
Explain what is meant by the term ‘economic consequences’ and relate this to the underreporting
of net earnings by Duke Energy.