Introduction to Accounting and finance
Week1 test practice
UnansweredQuestion 1
0 / 1 pts
One purpose of accounting information is to help certain group of users assess how effectively the managers are running the business and make judgments about the likely levels of risk and return in the future.
Which one of the following user groups is likely to use accounting information for such purpose?
Employees
Community representatives
Customers
Owners and investors
Incorrect.
Owners entrust their own money to the company and expect to earn positive returns on their investment. Therefore, they use accounting information about the current and the future profitability of the firm to assess how well the managers are performing. If the firm generates insufficient profits, owners can vote to replace the board of directors. They can also sell their shares in that particular company and invest their money in another, more profitable one.
UnansweredQuestion 2
0 / 1 pts
Which of the following statements is incorrect?
The presentation and contents of financial accounting reports need to follow a standardised format.
Management accounting reports tend to be prepared more frequently than financial accounting reports.
Management accounting reports tend to contain more detailed information than financial accounting reports.
Financial reporting accounts are subject to less regulation than management accounting reports.
Incorrect.
Unlike management accounting reports which are prepared only for internal use within a firm, financial accounting reports are audited and made available to the general public. For that reason, financial accounting is regulated much more heavily than management accounting.
UnansweredQuestion 3
0 / 1 pts
Which of the following resources of a firm cannot be readily described by accounting information?
The value of the products ready for immediate sale.
The skills and knowledge of its employees.
The intellectual property trademarks the firm bought from a competitor.
The firm's office building.
Incorrect.
Unlike the physical resources of a firm, the knowledge and skills of its employees are very difficult to quantify, and therefore cannot easily be assigned a monetary value despite being a crucial determinant of a company's performance. Note that any intellectual property acquired from a third party, rather than generated internally, can be assigned a monetary value.
UnansweredQuestion 4
0 / 1 pts
Which of the following statements about reliability of accounting information is incorrect?
It requires that information is free from significant error and bias.
It allows a piece of information to be a faithful representation of the substance of the phenomenon it represents.
It implies that a piece of information can be depended upon to correspond to the relevant events it summarises.
It requires that information has to be perfectly accurate in all respects.
Incorrect.
Reliability implies that a piece of information faithfully represents the substance of the phenomenon it seeks to represent. To achieve that it has to be free from significant error and bias but does not have to be perfectly accurate in all respects.
UnansweredQuestion 5
0 / 1 pts
To assess how risky a new loan is, a lender must carefully assess the borrower's ability to generate enough cash over time to be able to pay the loan back.
What is the main source of information used to undertake such an assessment?
The borrower's financial accounting reports.
The borrower's financial and management accounting reports.
The borrower's management accounting reports.
Tea leaves.
Incorrect.
As management accounting reports are not available to external users of accounting information, such as lenders to a firm, the assessment in question would utilise information collected from the borrower's financial accounting reports. Tea leaves are no longer considered a suitable source of information to support decision-making processes.
UnansweredQuestion 6
0 / 1 pts
Consider the following two statements:
1) The main purpose of accounting is to prepare financial reports for users of accounting information on a regular basis.
2) There is normally no close substitute for the type of information included in accounting reports.
Which of the above statements are true?
Statement 2 is true but statement 1 is false
Statement 1 is true but statement 2 is false
Both statements are true
Both statements are false
Incorrect.
The objective of accounting is to summarise past events into numerical information which is then presented to managers and other stakeholders for decision-making and control purposes.
Such information may be presented to outside stakeholders in the form. of regularly published reports (this is known as financial accounting). However, accounting information may also be produced for internal purposes only, whenever managers deem it necessary, and presented in a non-standardised form (this is known as management accounting).
As accounting reports provide a numerical summary of nearly all activities undertaken by a business organisation, or all the factors relevant to a particular decision that is evaluated by managers, there is no close substitute for the information they provide.
UnansweredQuestion 7
0 / 1 pts
There are two branches of accounting.
Financial accounting, which deals with preparation of regular reports for outside users is one of them.
What is the other one?
Commercial accounting
Strategic accounting
Business accounting
Management accounting
Incorrect.
Management accounting is the second branch of accounting. It focuses on preparation of reports which focus on the current and the predicted future performance of the firm to aid managers' short-term decision-making.
UnansweredQuestion 8
0 / 1 pts
Which one of the following is an internal user of accounting information?
Local tax agency
Lenders to the business
Potential investors in the company
The board of directors
Incorrect.
The board of directors comprises the most senior managers of a business organisation, who are in a position of power and responsibility to make all the important decisions about the future direction of the firm.
Although the local tax agency, the lenders to the business, and the shareholders are important stakeholders in the firm, i.e. they all have an interest in how it performs, they are external users of accounting information, and cannot directly affect the decisions made at the organisation.
UnansweredQuestion 9
0 / 1 pts
The ability of a piece of accounting information to affect the decision of its user if it is not present or is misstated at the time is best summarised by which one of the following characteristics?
Comparability
Materiality
Understandability
Cost v benefit
Incorrect.
A piece of information is considered material if its absence or incorrect presentation affect the outcome of the decision-making process.
UnansweredQuestion 10
0 / 1 pts
The primary purpose of accounting is to support which of the following processes?
Performance evaluation
Data validation
Business analysis
Decision-making
Incorrect.
The objective of accounting is to aid users of information in making better decisions. This pertains to both internal and external users - accounting information can help the management team decide on what the best business strategy for their business is, or assist shareholders, lenders and government agencies in keeping the managers accountable.
Although some understanding of the business is necessary in order to appropriately analyse accounting data and to evaluate the performance of the firm, the main objective of accounting is to help the users make better decisions.