accounting exam 2
Because differences in business traditions and practices could make cross-country ratio analysis difficult, what should an analyst do to overcome this problem? A) Learn more about the business environment in relevant countries. B) Make all decisions using nominal monetary differences rather than ratios. C) Translate all ratios to a common currency. D) Avoid recommending investments in foreign companies.
Learn more about the business environment in relevant countries.
Under U.S. GAAP and IASB standards, the threshold for determining "significant influence" in an associate enterprise is: A) 50% ownership of voting shares B) 5% ownership of voting shares C) 20% ownership of voting shares D) 10% ownership of voting shares
20% ownership of voting shares
For the purpose of financial reporting under IASB standards, what is a "group?" A) A parent corporation and all of its subsidiary corporations B) Any multinational corporation under the jurisdiction of the IASB C) All countries that have adopted IASB standards D) A company that is comprised of foreign corporations dissolved into one entity
A parent corporation and all of its subsidiary corporations
Footnote disclosures in foreign financial statements are particularly helpful in: A) overcoming differences in statement format among countries. B) reconciling statements from one country's GAAP to another country's GAAP. C) learning relevant information not required to be presented in the accounts. D) All of the above
All of the above
Which of the following is likely to affect an analyst's ability to make meaningful comparisons of financial statement ratios for companies in different countries? A) Accounting diversity B) Varying business traditions C) Unique terminology D) All of the above
All of the above
Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation? A) Asset understatement B) Overpayment of income taxes C) Overstated income D) All of the above are potential problems.
All of the above are potential problems.
Which of the following are reasons to report segmented accounting information for multinational enterprises? A) There are different risks in different parts of the world that a reader may need to know about. B) Different lines of business have different levels of risk that may affect business success. C) Growth opportunities differ from one nation to another which could affect share value. D) All of the above are reasons for segmented reporting.
All of the above are reasons for segmented reporting.
According to IAS 27, how can effective control be achieved without owning more than 50% of another companies' voting shares? A) Representation on the company's board of directors B) Being the primary entity exercising voting rights C) Through a contract between the entities D) All of the above may result in control by one corporation over another
All of the above may result in control by one corporation over another
How can foreign corporations alleviate the accounting diversity problem related to comparing foreign financial statements? A) Presenting multiple sets of financial statements under various GAAP B) Selecting a widely used set of accounting standards for their financial reporting C) Providing adequate disclosure in notes to the financial statements to allow analysts to make conversions to another country's GAAP D) All of the above.
All of the above.
How do multinational corporations combine operations? A) The acquired firm is dissolved and is merged into the acquiring company. B) One company acquires a majority of shares of another company, but both entities continue to exist. C) Two or more entities dissolve their legal status and merge to create a new corporation. D) All of the above.
All of the above.
What is the best short-term solution to alleviate problems of financial statement analysis arising from international differences in accounting terminology? A) Require all countries to conform to IASB standards. B) Create standard financial statement terminology for all companies around the world. C) Analysts should carefully read the notes to financial statements and learn about the business environments of countries they analyze. D) Convert all financial statements into English.
Analysts should carefully read the notes to financial statements and learn about the business environments of countries they analyze.
Some European companies do not report cost of goods sold as a separate expense item. What affect does this have on financial statement analysis? A) It would not be possible to determine the company's total expenses. B) Any measure that relies on knowing gross profit cannot be calculated. C) Income cannot be accurately calculated. D) There is inadequate aggregation of financial information.
Any measure that relies on knowing gross profit cannot be calculated.
How is accounting for a pooling of interests different from a purchase when business entities combine? A) Assets and liabilities are not revalued when the pooling of interests is used. B) Goodwill arises only when the pooling of interests method is used for business combinations. C) Pooling of interests is used for international consolidations but never for domestic consolidations. D) The purchase method is used only when less than 100% of an entity's voting shares are acquired.
Assets and liabilities are not revalued when the pooling of interests is used.
How would a company decide which foreign languages will be used to present its financial statements? A) Determine which language is closest to the local language so that translation is less costly. B) Choose the language based on which countries provide the greatest potential source of funds. C) Follow the language requirements of its local accounting regulatory agency. D) Select the language of the most populous country in its region of the world.
Choose the language based on which countries provide the greatest potential source of funds.
Why do financial analysts and other readers of financial statements want segmented information? A) Consolidation obscures facts that may be important for evaluating financial statements. B) More information is always preferred to less information. C) To ensure that illegal business combinations are not taking place D) Models for economic forecasting have not been developed using consolidated financial statement information
Consolidation obscures facts that may be important for evaluating financial statements.
In order to appropriately analyze the trends in foreign financial statement data, which exchange rates should be used? A) Historical exchange rates B) Beginning of year exchange rates C) Current exchange rates D) Average exchange rates
Current exchange rates
Which of the following statements is true relative to accounting for leases internationally? A) Operating lease disclosure for IFRS and U.S. GAAP is identical. B) Some analysts believe that all leases must be restated as if they were operating leases. C) Current rules under IFRS, U.S. GAAP and other national accounting standards require leases to be capitalized under certain circumstances. D) U.S. GAAP requires that future minimum lease payment disclosures be made for each of the next ten years and for all years thereafter.
Current rules under IFRS, U.S. GAAP and other national accounting standards require leases to be capitalized under certain circumstances.
Translating foreign financial statements into a convenience language: A) eliminates all readability problems for a financial analyst. B) does not always clarify accounting terminology unique to a particular country. C) is easily and inexpensively done when the convenience language is English. D) is required for all multinational corporations.
Does not always clarify accounting terminology unique to a particular country.
Prior to 2007, which method of accounting for inflation most closely represented the supplemental reporting required in Mexico? A) Current replacement cost B) Current cost C) General purchasing power D) Historical cost
General purchasing power
Why has inflation accounting NOT been required in the United States and the United Kingdom since the 1980s? A) Accounting regulators in the U.S. and U.K. have not addressed the issue of inflation accounting in their pronouncements. B) Inflation has not been a significant problem in the U.S. and the U.K. since the 1980's. C) Accounting regulators could not agree on a method for adjusting financial statements for the effect of inflation. D) Corporations in the U.S and U.K. voluntarily report inflation-adjusted financial statements, making the regulations unnecessary.
Inflation has not been a significant problem in the U.S. and the U.K. since the 1980's.
According to IFRS 3, how should companies account for Goodwill arising from business combinations? A) It is capitalized and amortized over a period of no more than 40 years. B) It is expensed in the year the subsidiary is acquired. C) It is capitalized and written down when its fair value become less than its carrying value. D) It is amortized over between 5 and 40 years.
It is capitalized and written down when its fair value become less than its carrying value.
How is Goodwill resulting from business combinations treated under Japanese GAAP? A) It is capitalized and amortized over a period of no more than 40 years. B) It may be expensed in the year the subsidiary is acquired. C) It is capitalized and written down when its fair value becomes less than its carrying value. D) It is amortized over between 5 and 40 years.
It may be expensed in the year the subsidiary is acquired.
How must Goodwill resulting from business combinations be treated under U.S. GAAP? A) It must be amortized over a period of no more than 40 years. B) It must be expensed when it is acquired. C) It must be written down when its fair value is less than its carrying value. D) It must be written down in no less than 5 years and no more than 40 years.
It must be written down when its fair value is less than its carrying value.
According to IFRS 3, how should companies account for negative goodwill arising from business combinations? A) It should be capitalized and amortized over a period of no more than 40 years. B) It should be treated as a loss on the consolidated income statement. C) It should be treated as a gain on the consolidated income statement. D) There is no rule for negative goodwill, because there is no such thing.
It should be treated as a gain on the consolidated income statement.
How is negative goodwill accounted for under U.S. GAAP? A) There is no rule for negative goodwill, because there is no such thing. B) It should be capitalized and amortized over a period of no more than 40 years. C) It should be treated as an extraordinary loss on the consolidated income statement. D) It should be treated as an extraordinary gain on the consolidated income statement.
It should be treated as an extraordinary gain on the consolidated income statement.
What issue of reporting effects of changing prices is addressed by IAS 29, issued by the International Accounting Standards Board in 1989? A) Choice between current replacement cost and general purchasing power method B) Making inflation-adjusted reporting optional or required C) Specifying the European Central Bank as the official source of inflation rates in the European Union D) Mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies
Mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies
Which method of accounting for inflation must be used under U.S. GAAP? A) Current Replacement Cost method B) General Purchasing Power method C) Both Current Replacement Cost and General Purchasing Power methods must be used D) Neither method must be used since inflation accounting is not required under U.S. GAAP.
Neither method must be used since inflation accounting is not required under U.S. GAAP.
Since 2003, what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards? A) No rule is currently in place that generally requires inflation-adjusted financial statements. B) General purchasing power method must be used. C) Current replacement cost method must be used. D) Companies have the option of using current cost or historical cost.
No rule is currently in place that generally requires inflation-adjusted financial statements.
Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements? A) the Netherlands B) Mexico C) Brazil D) None of the above
None of the above
Which of the following statements is true about convenience translations? A) Translation eliminates the problems associated with comparing financial statements in the same language. B) Convenience translation means that a company converts both the language and the currency of its financial statements for the convenience of potential investors. C) Convenience translations require reconciliation to U.S. GAAP, U.S. format, as well as conversion to English. D) None of the above statements is true.
None of the above statements is true.
Which of the following is true about the format of financial reports? A) All multinational corporations report Sales Revenue on their income statements. B) Gross margin is a standard line item on income statements throughout the world. C) Notes to financial statements may clarify international differences in statement formats. D) In all countries, total assets are shown on the left side of the balance sheet and liabilities and owners' equity are shown on the right side.
Notes to financial statements may clarify international differences in statement formats.
What does it mean to say that the inflation rate last year was 5%? A) All prices are 5% more at the end of the year than they were at the beginning of the year. B) The price of specific products increased 5% between the beginning and the end of the year. C) On average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year. D) The general purchasing power of the dollar has increased 5% between the beginning of the year and the end of the year.
On average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year.
Mega Corporation acquired 65% of the voting shares of Forko Ltd and consolidated its accounts by restating assets and liabilities of the subsidiary at fair value on the date the shares were acquired. What method of accounting for the business combination is Mega Corporation using? A) Purchase method B) Fair value method C) Pooling method D) Current replacement cost method
Purchase method
What is an advantage of using ratio analysis in comparing financial statements from different countries? A) Ratios are expressed as percentages, making currency differences irrelevant to the analysis. B) Ratios highlight the holding gains or losses related to currency translation. C) Purchasing power gains and losses from currency translation show up clearly in ratio analysis. D) Comparing business ratios across countries removes the effect of economic conditions and business culture.
Ratios are expressed as percentages, making currency differences irrelevant to the analysis.
What would be a logical first step that should be taken to restate foreign financial statements to conform to U.S. GAAP, assuming a four-column worksheet will be used to post debit and credit adjustments and reclassifications to arrive at U.S. GAAP statements? A) Convert the foreign currency amounts to U.S. dollars. B) Restate historical costs to current cost basis. C) Re-order foreign financial statements to U.S. format. D) Determine the amount of foreign exchange gains or losses.
Re-order foreign financial statements to U.S. format.
One difference that exists between IFRS 8 and US GAAP is: A) There are no differences as the two pronouncements represent total convergence in segment reporting. B) SFAS 131 says that segment assets must be 5% or greater of the total combined assets to be separately disclosed. C) SFAS 131 does not require reporting of segment liabilities. D) SFAS 131 explicitly includes intangibles in the definition of long-lived assets for geographic disclosures.
SFAS 131 does not require reporting of segment liabilities.
What U.S. term was equivalent to "inventories" as it was used in financial statements of companies located in the United Kingdom, prior to adoption of IFRS in 2005? A) operating assets B) consumables C) stocks D) merchandise
Stocks
If an analyst saw an "Account of Stated Income and Costs" in a company's annual report, where would that company be located? A) The Netherlands B) Sweden C) China D) Mexico
Sweden
Which of the following is true about financial statement disclosure? A) When account balances are aggregated, the analyst has the greatest amount of information. B) The amount of financial statement disclosure varies widely from one country to another. C) The concept of full disclosure has been universally adopted around the world. D) An analyst can always disaggregate financial statement disclosures to obtain needed information.
The amount of financial statement disclosure varies widely from one country to another.
Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29? A) The cumulative inflation rate over a three-year period is 75% or higher. B) Interest rates are linked to a price index. C) The price of credit sales includes a "buffer" to compensate for the expected loss in purchasing power over the credit period. D) The general population thinks about prices in terms of a stable foreign currency, and prices may actually be quoted in that currency.
The cumulative inflation rate over a three-year period is 75% or higher.
Which of the following is the major limitation of using EBITDA for analyzing foreign financial statements? A) It is nearly impossible for most financial analysts to calculate this number. B) Few analysts understand what this earnings number represents. C) The excluded items may be important factors for evaluation. D) It cannot be converted from a foreign currency to a domestic currency.
The excluded items may be important factors for evaluation.
Under IAS 27, how is "control" defined? A) Ownership of 50% of more of the voting shares of another entity B) Representation on another entity's board of directors C) The power to govern financial and operating policies of an entity D) Ownership of 30% or more of the voting shares of another entity
The power to govern financial and operating policies of an entity
Under IFRS 8, which of the following criteria is NOT considered by all segments that are considered reportable business segments? A) The segment must have revenue that is one-tenth or more of combined revenue. B) The segment must have profit that is 10% or more of combined profit of all segments with profit. C) The segment must have revenue that is more than half from external sources. D) The segment must have assets that are 10% or more of combined segment assets.
The segment must have revenue that is more than half from external sources.
How are IASB requirements to account for joint ventures different from U.S. GAAP? A) International standards require the equity method, but U.S. GAAP allows for flexibility in accounting for joint ventures. B) U.S. GAAP requires the equity method, whereas the international standards allow for proportionate consolidation. C) IASB standards and U.S. GAAP are essentially the same for accounting for joint ventures. D) IASB standards do not specify which methods are allowed to account for joint ventures, whereas U.S. GAAP requires proportional consolidation.
U.S. GAAP requires the equity method, whereas the international standards allow for proportionate consolidation.
Which of the following is most likely to affect an analyst's ability to make meaningful comparisons of financial statement ratios for companies in different countries? A) Differences in currency B) Language differences C) Varying business traditions D) Mathematical degrees of magnitude
Varying business traditions
Mega Corporation acquired 65% of the voting shares of Forko Ltd for €10 billion and used the purchase method of accounting for the merger. Mega Corporation's interest in Forko Ltd had a restated value of €950 million. How should Mega account for the difference? A) as Gain from Acquisition on the current period income statement B) as Goodwill on the consolidated balance sheet C) as a Loss from Merger on the current period income statement D) as Additional Paid-in Capital on the consolidated balance sheet
as Goodwill on the consolidated balance sheet
Under general purchasing power accounting, how is the gain or loss in purchasing power reported? A) as a prior period adjustment to Retained Earnings B) as an element of accumulated comprehensive income on the Balance Sheet C) as an element of income in the current year D) All of the above methods are acceptable under general purchasing power accounting.
as an element of income in the current year
What term is used to refer to presenting the financial statements for a group of enterprises as if it was a single entity? A) harmonization B) translation C) consolidation D) transformation
consolidation
Which method of dealing with inflation in financial reporting reflects current replacement cost of specific assets? A) current replacement cost method B) general purchasing power method C) temporal method D) current rate method
current replacement cost method
Lack of information about accounting methods used, operating segments, and interim financial results is a problem of: A) disclosure B) relevance C) comparability D) format
disclosure
Under IFRS 3, which concept must be used to report the assets and liabilities of an acquired company on the parent company financial statements? A) parent company concept B) equity concept C) entity concept D) historical cost concept
entity concept
In January 2003, the FASB released Interpretation 46, "Consolidation of Variable Interest Entities," which: A) re-emphasized the need for 50% stock ownership to exert effective control. B) expanded U.S. GAAP to consider effective control rather than legal control for consolidated financial statements. C) took a "form-over-substance" approach to define control in determining requirements for consolidated financial statements. D) defined effective control as ownership of 30% or more of another entity's voting shares.
expanded U.S. GAAP to consider effective control rather than legal control for consolidated financial statements.
Under both IFRS and U.S. GAAP, how should an investing entity report nonconsolidated subsidiaries? A) equity method B) fair value C) proportionate consolidation D) parent concept
fair value
Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies? A) current replacement cost B) general purchasing power C) historical cost for non-monetary assets and current replacement cost for monetary assets D) Companies have a choice between current replacement cost and general purchasing power methods.
general purchasing power
Which method of dealing with inflation in financial reporting updates assets by applying inflation rates to historical costs? A) current replacement cost method B) current rate method C) temporal method D) general purchasing power method
general purchasing power method
Under both IFRS 8 and US GAAP which of the following entity-wide disclosures is NOT required? A) information about products and services B) information about intersegmental transfer pricing C) information about major customers D) information about geographic areas
information about intersegmental transfer pricing
What term does IAS 31 use for "a contractual arrangement whereby two or more parties undertake an activity which is subject to joint control?" A) merger B) consolidation C) joint venture D) business combination
joint venture
Under ARB 51, "controlling financial interest "is: A) not defined B) defined as 50% ownership of another entity's voting shares. C) the direct or indirect ability to make decisions about another entity's activities D) the right to receive the expected residual returns of another entity if they occur
not defined
What is a term often used to describe the equity method of accounting? A) the 20% rule B) one-line consolidation C) significant influence D) disaggregated consolidation
one-line consolidation
Since 2001, which method of accounting for a business combination is required under U.S. GAAP? A) pooling B) purchase C) Both purchase and pooling are allowed. D) Purchase is required for transnational combinations, but pooling is allowed for domestic combinations.
purchase
Holding monetary liabilities during a period of inflation results in: A) purchasing power gains. B) purchasing power losses. C) transaction gains. D) translation losses.
purchasing power gains
Holding monetary assets during a period of inflation results in: A) purchasing power gains. B) purchasing power losses. C) transaction gains. D) translation losses.
purchasing power losses.
In addition to requiring separate reporting for operating segments, US GAAP requires companies to report: A) operating income for each country in which a material amount of revenue is derived. B) revenues from external customers and long-lived assets for all foreign countries where it has assets or derives revenue C) revenues and long-lived assets for each country that constitutes 10% of more of the combined revenues or assets D) operating income adjusted for inflation for each country where it has significant operations
revenues from external customers and long-lived assets for all foreign countries where it has assets or derives revenue
During the 1990's, a major problem in evaluating the financial statements of Eastern European companies that had been under the control of the Soviet Union was: A) that the statements had been used for government planning rather than for private investors. B) that few people spoke the languages in which the financial statements were written. C) that East European currencies had been greatly devalued relative to the U.S. dollar. D) that financial reporting had not been done since the Bolshevik Revolution.
that the statements had been used for government planning rather than for private investors.
According to both IFRS 8 and US GAAP, which of the following information should be disclosed for each separate reportable operating segment? A) the factors used to identify operating segments B) total liabilities for each operating segment C) total compensation expense for each operating segment D) total rent expense for each operating segment
the factors used to identify operating segments
What is a "holding gain?" A) the increase in owners' equity resulting from maintaining monetary assets during a period of inflation B) the increase in income caused by the use of general purchasing power accounting during a period of inflation C) the increase in owners' equity resulting from holding nonmonetary assets during a period of inflation D) the increase in income caused by paying liabilities with cheaper dollars
the increase in owners' equity resulting from holding nonmonetary assets during a period of inflation