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financial accounting theory

Questions and Answers of Financial Accounting Theory

Why have the IASB and FASB begun a project to reconsider revenue recognition and measurement? What apects of their approach in this project may cause changes to the way companies recognise and
Kalbarri Ltd began operations on 1 January 2008 by purchasing 3000 orange tree saplings at a cost of $4 per sapling. Delivery charges were $500 and it cost $1200 to plant the trees on Kalbarri Lad's
If revenue is recognised, does that mean that the revenue has been realised? Explain your answer and give an example to support your view.AppendixLO1
Lee Ltd agreed to manufacture Product A according to Smith Ltd's specifications over a 2-year period. Because special machinery is needed to produce Product A, Smith Ltd is to pay for it. Lee Lid
On 20 December, E Lid sold a portion of its inventory to W Ltd for $200 000 cash. The cost of the inventory was $80 000. In a related transaction, E Ltd agreed to repurchase the inventory from W Ltd
When should revenue be recognised for the following businesses? (a) a soft-drink manufacturer (b) a legal firm (c) a theatre that sells season tickets to musical productions (d) a magazine publisher
What are the conditions for use of the 'cash received' basis for revenue recognition?AppendixLO1
Explain how Myers' concept of 'critical event' can influence the point at which revenue is recognised.AppendixLO1
'Revenue should be recognised only where it is supported by the existence of an external transaction.' Discuss.AppendixLO1
What are the reasons proposed for recognising revenue at the end of production?AppendixLO1
What is the significance of 'title passing' in determining whether a sale has taken place?AppendixLO1
What are the reasons for selecting the point of sale as the general revenue recognition principle?AppendixLO1
Does the percentage-of-completion method meet the criterion of substantial completion of the earning process? Explain.AppendixLO1
What is meant by 'substantial completion of the earning process'? What is the significance of this criterion? How is the criterion incorporated into IAS 18/AASB 118?AppendixLO1
If the criterion of 'existence of a transaction' is relaxed so that the firms involved need not be direct participants in the transaction, what are the implications?AppendixLO1
Is it important to have an external transaction to support the amount of revenue recorded? Name a case in present accounting practice where revenue or gain is not directly based on an external
Should accountants insist that revenue be recognised by a firm only on receipt of a liquid asset in a sale transaction? Why or why not?AppendixLO1
Suppose you are a manufacturer of plastic products. A new customer, X Ltd, has purchased a large quantity and gives you a note as payment. The note requires X Ltd to make four equal instalments over
What do we mean when we suggest that applying the principles adopted in accounting standards which make use of fair value measurement, such as IAS/AASB 39/139, 40/140 and 41/141, leads to an even
Explain the concepts of realisation and recognition as they relate to the measurement and disclosure of revenues under the historical cost system and under a system of mark-to-market or fair value
What is the significance of the criterion of measurability of the consideration received?AppendixLO1
Why are revenue recognition principles needed? Does it matter which principles are adopted, as long as they are applied consistently across time? Discuss.AppendixLO1
What are the differences between general criteria for revenue recognition and revenue recognition principles contained in IAS 18/AASB 118 Revenue?AppendixLO1
Explain the 'earning process'. How does the earning process concept relate to the operational view of revenue?AppendixLO1
What is the difference between revenue and gains? How does the Framework definition of 'income' treat revenues and gains?AppendixLO1
What is revenue? Is revenue essentially an event or an object?AppendixLO1
Skipper Ltd financed the construction of its new office block by issuing securities for $50 000 000 on 30 April 2000. Buyers of the securities received a 30 per cent ownership interest in the office
How should Shannondoah Ltd account for a cash loan to the company when the contract requires that the principal will be redeemed in ordinary shares at maturity? Ten shares will be given for each
How should a mining company account for (a) a contract which stipulates that on maturity of a cash loan to the company, it must pay the principal in cash or provide a given quantity and grade of
A benefactor pays off a loan for a university. How should the university record the transaction, and why?AppendixLO1
Explain the concept of capital maintenance and how it can apply to different concepts of capital.AppendixLO1
When, if ever, should a firm recognise a pension (superannuation) liability, and why?AppendixLO1
In your opinion, when should the following be recognised as assets or liabilities? Explain whether, how and why your answer deviates from IFRS. (a) accounts payable (b) put options (c) call options
How does owners' equity differ from liabilities? Give examples where they are closely aligned, and examples of where they are not AppendixLO1
Does the IASB/AASB Framework adopt the principle of conservatism? Why or why not? Do you think that conservatism is desirable in the definitions of assets, liabilities and equity, or in their
Hunter Ltd is attempting to bring its accounts in line with International Financial Reporting Standards (IFRS). Advise the accountant of Hunter Ltd whether a liability exists in each of the following
Under some countries' accounting regulations, unrealised foreign exchange gains and losses are not immediately recognised in a firm's income statement. Instead, unrealised gains are put into a
If a liability is a present obligation, does that mean that a legally enforceable claim must exist before a liability exists? Explain. Conversely, if a legally enforceable claim exists, does that
Liabilities are all 'obligations' under the IASB/AASB Framework definition of liabilities. What is an obligation, and why does the Framework rely heavily on it in the definition?AppendixLO1
With respect to the entity theory, (a) what are the reasons for concentrating on the entity as a unit of accountability rather than on the proprietor? (b) what is the objective of accounting? (c) how
With respect to the proprietary theory, (a) what is the objective of the firm? (b) how important is the concept of 'stewardship'? (c) what is the relationship between assets/liabilities and the
Are the following assets? If so, whose assets, and why? (a) members of the Australian hockey team (b) a nine-month lease agreement to rent a business office (c) expenditure on research and
Under some market-based systems of accounting, asset definitions require that to be defined as an asset, an economic benefit must be both 'severable and saleable', sometimes described as
What is an agreement equally proportionately unperformed (AEPU)? According to strict interpretations of the Framework definitions of assets, liabilities and equity, should AEPUS be reported on the
According to the Framework, assets do not exist unless they result from past events. Determining whether a past event has occurred to give rise to an asset is not always straightforward. Explain the
The Framework definition of assets requires future economic benefits to be controlled by an entity before they can be regarded as an asset. How does ownership differ from control? Which criterion
The Framework defines assets, liabilities and equity by reference to economic benefits. (a) What are the economic benefits that would be assets for AlexCorp, a government business enterprise that
What attributes must something possess in order to be defined as an asset? Why?AppendixLO1
If you were the auditor of the company in question 23, what evidence would you seek to support your opinion about the fair presentation of the asset?AppendixLO1
Explain the underlying approach to intangibles under IAS 38/AASB 138. Is the approach consistent with the matching principle? Is the splitting of the research and development components of
IAS 36/AASB 136 requires the use of discounting techniques to assign a 'value in use' to assets. The discount rate used is required to take into account the risks associated with the asset for which
Has the complexity of alternative rules in the historical cost approach become a valid reason for rejecting the historical cost system?AppendixLO1
The following questions relate to the apparent divergence in view between the standard setters and the private sector, with respect to the need to shift from historical cost to current value
Explain the concept of 'fair value' as defined in IAS 16/AASB 116 and outline the benefits to financial statement users of continually revaluing assets to their current value.AppendixLO1
Explain how both exit price and current entry price accounting systems can be used to make decisions about retaining or selling assets.AppendixLO1
Evaluate the argument that a mixed or piecemeal approach to standard setting is required in order to 'better' measure profit and financial position.AppendixLO1
How can exit value accounting can be used to assess the financial risk of a balance sheet?AppendixLO1
Assume that you favour exit price accounting. Give at least three reasons for your support.AppendixLO1
What are the criticisms of the profit concept under exit price accounting?AppendixLO1
What is Chambers's argument concerning the question of 'additivity'? Is it fundamentally important to be able to add together 'like' valuations in the balance sheet?AppendixLO1
What is the basis of Sterling's conclusion that exit price should be used for the valuation of items?AppendixLO1
Why is Chambers critical of the notion of 'value in use'?AppendixLO1
Explain the concept of 'adaptive behaviour' of the firm by Chambers, and how 'financial position' relates to it.AppendixLO1
According to MacNeal, why was the 'going value' theory, which assumes the firm is a going concern, formulated?AppendixLO1
Explain Samuelson's argument for changes in current cost as a capital maintenance adjustment.AppendixLO1
Explain the difference between financial capital and physical capital.AppendixLO1
There are several explanations to justify the inclusion of holding gains as profit. Discuss them.AppendixLO1
What are the benefits of separating out the holding gains (or losses) in profit determination? What are some shortcomings of this separation?AppendixLO1
Explain the Edwards and Bell concept of 'business profit'.AppendixLO1
What are the three types of decisions managers are faced with in running a business? How does accounting enter the decision-making process?AppendixLO1
Would market value-adjusted statements be more 'decision useful' than those prepared applying historical cost measures? Would using current market values reduce the number of decisions required to
Explain the concept of 'costs attach'. What do critics say about the concept? What is meant by the terms 'unexpired cost' and 'expired cost'.AppendixLO1
According to the historical cost system, what is the objective of accounting and the role of profit? What criticisms are made of profit calculated under the historical cost system?AppendixLO1
What would be included in overhead costs assigned to inventory? How many ways can you think of assigning these costs when there are multiple products and departments? What are the audit
How will the use of fair values affect the role of auditors and the audit function? Do you think it will affect the training of accounting students? How so?AppendixLO1
Why will international financial reporting standards induce an increased demand for risk management techniques?AppendixLO1
Discuss how recent accounting standards using 'fair value' accounting such as IAS 39 and IAS 41 have moved away from fundamental measurement.AppendixLO1
Discuss whether accounting measurement is fiat or fundamental. Can accounting numbers ever be related to fundamental values? If so, what are some possible measurements that can be used?AppendixLO1
What is the difference between accuracy and reliability in measurement? How are these notions related to the testing of a theory?AppendixLO1
Explain whether the following statements are facts: (a) Canberra is 320 kilometres from Sydney. (b) Depreciation expense for Kambah Pty Ltd for 2008 was $1 294 000. (This is the amount reported on
What are the sources of error in measurement?AppendixLO1
Describe the following types of measurement: fundamental, derived, fiat. In what sense are fiat measurements 'weak'? What type of measurement is inventory costing?AppendixLO1
Determine whether the following statements are correct and state why: (a) The historical cost of inventory is $60 000 at year-end. When it is converted to constant end-of-year dollars by multiplying
Describe the following scales: nominal, ordinal, interval, and ratio. Give an example of each. Which scales are applied in accounting and where?AppendixLO1
How is a scale related to the process of measurement?AppendixLO1
Technically, what do we mean when we say 'X was measured'?AppendixLO1
What is business risk auditing? How does it differ from traditional substantive auditing? Why do critics believe it is used to justify selling more consulting services to audit clients? How could
Write a report of 1500 words or less to the chairpersons of the Financial Reporting Council and the Australian Accounting Standards Board, commenting on the following argument: 'Attempts to bring
Assume that you have been contracted by the Australian Accounting Standards Board to develop a proposal regarding whether to issue an accounting standard on accounting for the costs of environmental
Discuss whether the IASB Framework is merely a policy document based on professional values and self-interest, without scientific foundation. In your discussion, state your opinion on whether the
Why has the FASB been directed to produce more objective-based standards? Do you consider this to be a realistic standard setting objective?AppendixLO1
Explain the advantages and disadvantages of principles-based and rule-based standards.AppendixLO1
Give reasons for your answers to the following questions. (a) How important is it that standard setters agree on objectives, concepts and definitions before they develop a conceptual framework of
In Australia, the conceptual framework did not proceed to SAC 5 concerning measurement. (a) Why do you think that was the case? (b) Do you think that accounting standards have been moving towards a
The development of a SME standard by the IASB will defeat the purpose of international harmonisation.' Explain why you agree or disagree with this statement.AppendixLO1
What is the difference between art and science? Is accounting an art or a science? Does it matter? Why or why not?AppendixLO1
Some argue that the development of a conceptual framework is inappropriate because accountants constantly deal with specific issues that will not be envisaged by an overall, general conceptual
Can accounting ever provide an unbiased map of economic reality? Why or why not?AppendixLO1
Explain the role of accounting in relation to: (a) individuals (b) firms (c) the Australian economy.AppendixLO1
The expressions 'truth', 'justice' and 'fairness' have all been applied to describe desirable characteristics of accounting information. What role do you think they play in practice? Are they

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