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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

INVESTMENTS - THEORY
Related standards: PAS 32, 39, 28, 31 & 40
1. A financial instrument is any contract that gives rise to
a. A financial asset only
b. A financial liability only
c. A financial asset of one entity and a financial liability of another entity only
d. A financial asset of one entity and a financial liability or equity instrument of another
entity
2. A financial asset is any asset that is (choose the incorrect one)
a. Cash
b. An equity instrument of another entity.
c. Contractual right to receive cash or another financial asset from another entity.
d. Contractual roght to exchange financial assets or financial liabilities with another
entity under conditions that potentially unfavorable to the entity.
3. Financial assets include
a. Accounts payable
b. Inventories

c. Notes receivable
d. Prepaid expenses

4. A financial liability is any liability that is a contractual obligation

I. To deliver cash or another financial asset to another entity.
II. To exchange financial assets or financial liabilities with another entity under
conditions that potentially unfavorable to the entity.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
5. Equity security
a. Encompasses any instrument representing ownership shares and the right to
acquire ownership shares.
b. Is a security that represents a creditor relationship with the enterprise.
c. Is the residual interest in the enterprise.
d. Includes redeemable preferred stock, treasury stock and convertible bonds.
6. Available for sale securities are
a. Debt securities acquired with positive intent and ability of holding them until
maturity.
b. Debt and equity securities acquired by an enterprise with the intent of selling them
in the near term or very soon.
c. Debt securities that are purchased and held indefinitely and will be available to be
sold in response to liquidity needs.
d. Financial assets with fixed or determinable payments that are not quoted in an
active market.
7. The following statements relate to investments in trading and available for sale
securities. Which is the incorrect statement?
I. Realized and unrealized gains and losses on trading securities are recognized in
income.
II. Realized and unrealized gains and losses on available for sale securities shall be
excluded from earnings and reported as a separate component of stockholders
equity
a. I only
b. II only
c. Both I and II
d. Neither I nor II

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8. Kyla Company purchased bonds at a discount on the open market and intends to hold
these bonds to maturity. Kyla should account for those bonds at
a. Cost
c.
Fair value
b. Amortized cost
d.
Lower at
cost or market
9. For a marketable debt securities portfolio classified as held to maturity, which of the
following amounts should be included in the net income?
I. Unrealized temporary losses during the period.
II. Realized gains during the period
III. Changes in the valuation allowance during the period.
a. III only
b. II only
c. I and II
d. I, II and III
10. Moira has a portfolio of marketable equity securities which it does not intend to sell in
the near term. How should Moira classify these and how should it report unrealized
gains and losses from these securities?
a. Trading securities and any unrealized gains and losses are reported as component
of income.
b. Available for sale securities and any unrealized gains and losses are reported as
component of equity.
c. Trading securities and any unrealized gains and losses are reported as component
of equity.
d. Available for sale securities and any unrealized gains and losses are reported as
component of income.
11. On both December 31, 2004 and 2005, Kate Companys only marketable equity
security had the same market value, which was below cost. Kate considered the
decline in value to be temporary in 2004 but other than temporary in 2005. At the end
of both years, the security was classified as a noncurrent asset. Kate considers the
investment as available for sale. What should be the effects of the determination that
the decline was other than temporary on Kates 2005 noncurrent assets and net
income?
a. No effect
b. No effect on noncurrent assets and decrease in net income
c. Decrease in noncurrent assets and no effect on net income
d. Decrease in both noncurrent assets and net income
12. The transfer of a security between categories of investments shall be accounted for at
fair value. Which is incorrect concerning the treatment of the securitys unrealized gain
or loss at the date of transfer?
a. For a security transferred from trading securities, the unrealized gain or loss at the
date of transfer shall be recognized in earnings.
b. For a security transferred into trading securities, the unrealized gain or loss at the
date of transfer shall be recognized in earnings.
c. For a debt security transferred into available for sale securities from held to
maturity, the unrealized gain or loss at the date of transfer shall be reported as a
separate component of stockholders equity.
d. For a security transferred into held to maturity from available for sale securities,
the unrealized gain or loss at the date of transfer shall be included in earnings.
13. It is an enterprise in which the investor has significant influence.
a. Subsidiary
c. Parent
b. Associate
d. Investee
14. Significant influence is to power
I. To participate in the financial and operating policy decisions of the investee but not
control over those policies

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II. Govern the financial and operating policies of an enterprise so as to obtain benefits
from its activities.
a.
Both I and II
b. Neither I nor
II
c. I only
d.
II
only
15. Which statement is correct concerning the equity method?
I.
The investment in an associate is initially recognized at cost and the carrying
amount is increased or decreased to recognize the investors share of the profit or
loss of the investee after the date of acquisition.
II.
Adjustments to the carrying amount may also be necessary for changes in the
investors proportionate interest in the investee arising from changes in the
investees equity that have not been recognized in the investees profit or loss.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
16. An investor uses the equity method to account for an investment in common stock.
After the date of acquisition, the investment account of the investor would
a. Not be affected by its share of the earnings or losses of the investee
b. Not be affected by its share of the earnings of the investee but be decreased by its
share of the losses of the investee
c. Be increased by its share of the earnings of the investee but not be affected by its
share of the losses of the investee
d. Be increased by its share of the earnings of the investee and decreased by its share
of the losses of the investee
17. When an investor uses the equity method to account for investment in common stock,
cash dividends received by the investor from the investee should be recorded as
a. Dividend income
b. A deduction from the investors share of the investees earnings
c. A deduction from investment account
d. A deduction from goodwill
18. An investor uses the equity method to account for investment in common stock. The
purchase price implies a fair value of the investees depreciable assets in excess of the
investees net asset carrying values. The investors amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account
19. Which statement is incorrect concerning significant influence?
I. A substantial or majority ownership by another investor does necessarily preclude an
investor from having significant influence.
II. If the investor holds, directly or indirectly through subsidiaries, less than 20% of the
voting power of the investee, it is presumed that the investor does not have
significant influence unless such influence can be clearly demonstrated.
III.If an investor holds, directly or indirectly through subsidiaries, 20% or more of the
voting power of the investee, it is presumed that the investor does have significant
influence, unless it can be demonstrated that this is not the case.
a. I only
b. II only
c. III only
d. I and II only
20. An investment in associate should not be accounted for under the equity method
I. When the investor ceases to have significant influence.
II. When the investment is acquired and held exclusively with a view to its subsequent
disposal within twelve months from acquisition.
III. When the associate operates under severe long-term restrictions that significantly
impair its ability to transfer funds to the investor but the investor continues to have
significant influence.
a. I, II and III
c. I and III only

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b. I and II only

d. II and III only

21. If under the equity method, an investors share of losses of an associate equals or
exceeds the carrying amount of an investment, which of the following is an incorrect
accounting treatment?
a. The investment is reported at NIL value.
b. Additional losses are provided to the extent the investor has incurred obligations or
made payments on behalf of the associate to satisfy obligations of the associate
that the investor has guaranteed or otherwise committed.
c. If the associate subsequently reports profits, the investor resumes its share of those
profits without regard to the share of net losses not previously recognized.
d. The investor ordinarily discontinues its share of further losses.
22. If an associate has outstanding cumulative preferred stock, the investor computes its
share profits or losses
a. After adjusting for preferred dividends which were actually paid during the year.
b. After adjusting for preferred dividends only when declared.
c. Without regard for preferred dividends
d. After adjusting for preferred dividends whether or not the dividends have been
declared.
23. How is the premium or discount on bonds purchased as temporary investment
reported in financial statements?
a. As an integral part of the cost of the asset acquired and amortized over the
remaining life of the bond issue.
b. As an integral part of the cost of the asset acquired until such time as the
investment is sold.
c. As expense or revenue in the period the bonds are purchased.
d. As an integral part of the cost of the asset acquired and amortized over the period
the bonds are expected to be held.
24. An increase in the cash surrender value of a life insurance policy owned by an
enterprise would be recorded by
a. Decreasing annual insurance expense
b. Increasing investment income
c. Recording a memorandum entry only
d. Decreasing deferred charge
PAS 32 - FINANCIAL INSTRUMENTS : DISCLOSURE AND PRESENTATION
25. A financial liability is any liability that is
I. A contractual obligation to deliver cash or another financial asset to another entity.
II. A contractual obligation to exchange financial assets or financial liabilities with
another entity under conditions that are potentially favorable to the entity.
III. A contract that will or may be settled in the entity's own equity instruments.
a. I, II and III
b. I and II only
c. I and III only
d. I only
26. Which statement is incorrect regarding the classification of financial instruments as
liability or equity?
a. The fundamental principle of PAS 32 is that a financial instrument should be
classified as either a financial liability or an equity instrument according to the
substance of the contract.
b. The enterprise must make the decision every balance sheet date.
c. The classification is not subsequently changed based on changed circumstances.

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d. A financial instrument is an equity instrument only if (a) the instrument includes no

contractual obligation to deliver cash or another financial asset to another entity and
(b) if the instrument will or may be settled in the issuer's own equity instruments.

27. Which statement is correct regarding the classification of financial instruments as

liability or equity?
a. If an enterprise issues preferred shares that pay a fixed rate of dividend and that
have a mandatory redemption feature at a future date should be recognized as
equity.
b. A financial instrument that gives the holder the right to return it to the issuer for cash
or another financial asset is a financial liability.
c. A contractual right or obligation to receive or deliver a number of its own shares or
other equity instruments that varies so that the fair value of the entity's own equity
instruments to be received or delivered equals the fixed monetary amount of the
contractual right or obligation is equity.
d. When a derivative financial instrument gives one party a choice over how it is
settled, it is usually treated as equity.
28. Which statement is incorrect regarding compound financial instruments
a. Compound instruments have both a liability and an equity component from the
issuer's perspective.
b. The component parts should be accounted for and presented separately according
to their substance based on the definitions of liability and equity.
c. The split is made at issuance and not revised for subsequent changes in market
interest rates, share prices, or other event that changes the likelihood that the
conversion option will be exercised.
d. When the initial carrying amount of a compound financial instrument is required to
be allocated to its equity and liability components, the liability component is
assigned the residual amount after deducting from the fair value of the instrument
as a whole the amount separately determined for the equity component.
PAS 39 - FINANCIAL INSTRUMENTS : RECOGNITION AND MEASUREMENT
29. Which statement is incorrect regarding derivatives?
a. Its value changes in response to the change in an underlying variable such as an
interest rate, commodity or security price, or index.
b. It requires no initial investment, or one that is smaller than would be required for a
contract with similar response to changes in market factors.
c. It is not settled.
d. None of the above.
30. Contracts to purchase or sell a specific quantity of a financial instrument, a commodity,
or a foreign currency at a specified price determined at the outset, with delivery or
settlement at a specified future date.
a. Forwards
c. Interest rate swap
b. Options
d. Caps and floors
31. Embedded derivative should be separated from its host contract and accounted for as
a derivative when:
a. The economic risks and characteristics of the embedded derivative are not closely
related to those of the host contract.
b. A separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative.
c. The entire instrument is not measured at fair value with changes in fair value
recognized in the income statement.
d. All of the above.

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32. Which statement is incorrect regarding classification of financial assets?

a. Financial assets at fair value through profit or loss has two subcategories
designated and held for trading.
b. Available-for-sale financial assets (AFS) are any non-derivative financial assets
designated on initial recognition as available for sale.
c. Loans and receivables are non-derivative financial assets with fixed or determinable
payments, originated or acquired, that are not quoted in an active market, not held
for trading, and not designated on initial recognition as assets at fair value through
profit or loss or as available-for-sale.
d. Held-to-maturity investments are derivative financial assets with fixed or
determinable payments that an entity intends and is able to hold to maturity and that
do not meet the definition of loans and receivables and are not designated on initial
recognition as assets at fair value through profit or loss or as available for sale.
33. Which of the following should be valued at fair value subsequent to initial recognition?
a. Held-to-maturity investments.
b. Financial assets and liabilities that are designated as a hedged item or hedging
instrument.
c. Investments in equity instruments with no reliable fair value measurement.
d. Financial assets acquired or held for the purpose of selling in the short term.
34. Which statement is incorrect regarding measurement of financial assets?
a. Derivatives are measured at fair value.
b. AFS financial assets are measured at fair value.
c. Loans and receivables are measured at cost.
d. Held-to-maturity investments are measured at amortized cost.
35. Categories of hedges include
a. Fair value hedge
b. Hedge of a net investment in a foreign operation

c. Cash flow hedge

d. All of these

PAS 31 INTERESTS IN JOINT VENTURES

36. Characteristic(s) common to all joint ventures include
a. One or more venturers are bound by a contractual arrangement.
b. The contractual arrangement establishes joint control.
c. The use of proportionate consolidation.
d. Both a and b.
37. A party to a joint venture and has joint control over that joint venture
a. Venturer
b. Investor
c. Operator
d. Manager
38. A method of accounting whereby a venturers share of each of the assets, liabilities,
income and expenses of a jointly controlled entity is combined line by line with similar
items in the venturers financial statements or reported as separate line items in the
venturers financial statements
a. Equity method
c. Proportionate consolidation method
b. Cost method
d. Combination method
39. This form of joint venture maintains own records and prepares and presents financial
statements in accordance with GAAP.
a. Jointly controlled operations
c. Jointly controlled entities
b. Jointly controlled assets
d. All of the above
40. This form of joint venture involves the use of assets and other resources of the
venturers rather than the establishment of a separate entity
a. Jointly controlled operations
c. Jointly controlled entities
b. Jointly controlled assets
d. All of the above

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41. Separate financial statements include financial statements

a. In which the investments are accounted for on the basis of the direct equity interest.
b. In which the investments are accounted for on the basis of the reported results and
net assets of the investees.
c. In which proportionate consolidation is applied.
d. Of an entity that does not have a subsidiary, associate or venturers interest in a
jointly controlled entity.
42. Allowed accounting treatment for interests in jointly controlled entity include
a. Proportionate consolidation
c. Either a or b
b. Equity method of accounting
d. None of the above
PAS 40 INVESTMENT PROPERTY
43. Investment property excludes
a. Land held for long-term capital appreciation.
b. Building leased out under an operating lease.
c. Property held for future use for administrative purposes.
d. None of the above.
44. Investment property includes
a. Property being constructed or developed on behalf of third parties.
b. Property that is being constructed or developed for use as an investment property.
c. Property leased to another entity under a finance lease.
d. Property that is being redeveloped for continuing use as investment property.
45. A property interest that is held by a lessee under an operating lease may be classified
and accounted for as investment property provided that:
I. The rest of the definition of investment property is met.
II. The operating lease is accounted for as if it were a finance lease.
III. The lessee uses the cost model.
a. I only
b. I and II only
c. I and III only
d. I, II and III
46. Which of the following is incorrect if the owner uses part of the property for its own use,
and part to earn rentals or for capital appreciation?
a. If the portions can be sold or leased out separately, they are accounted for
separately.
b. If the portions can be sold or leased out separately, the part that is rented out is
investment property.
c. If the portions cannot be sold or leased out separately, the property is investment
property only if the owner-occupied portion is insignificant.
d. None of the above.
47. Which of the following is incorrect if the enterprise provides ancillary services to the
occupants of a property held by the enterprise?
a. The appropriateness of classification as investment property is determined by the
significance of the services provided.
b. If the services provided are relatively insignificant component of the arrangement as
a whole (for instance, the building owner supplies security and maintenance
services to the lessees), then the enterprise may treat the property as investment
property.
c. Where the services provided are more significant (such as in the case of an ownermanaged hotel), the property should be classified as owner-occupied.
d. None of the above.
48. Which statement is correct concerning property leased to an affiliate?
I. From the perspective of the individual enterprise that owns it, the property leased to
an affiliate is considered an investment property.

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II. From the perspective of the affiliates as a group and for purposes of consolidated
financial statements, the property is treated as owner-occupied property.
a. Both I and II
b. Neither I nor II
c. I only
d. II only

49. Which statement is incorrect regarding the initial measurement of an investment

property?
a. The investment property should be measured initially at cost.
b. The cost of the purchased investment property includes its purchase price and any
directly attributable expenditure.
c. The cost of self-constructed investment property is its cost at the date the
construction or development is complete.
d. If payment for an investment property is deferred, its cost is the total payments
during the credit period.
50. Investment property is initially measured at cost, including transaction costs. Such cost
includes
a. Start-up costs
c. Property transfer taxes
b. Abnormal waste
d. Initial operating losses
51. Which statement is incorrect regarding measurement of investment property
subsequent to initial recognition using the fair value model?
a. Change to the cost method is permitted only if this results in a more appropriate
presentation.
b. Gains or losses arising from changes in the fair value of investment property must
be included in net profit or loss for the period in which it arises.
c. Fair value should reflect the actual market state and circumstances as of the
balance sheet date.
d. Where a property has previously been measured at fair value, it should cease to be
measured at fair value, if comparable market transactions become less frequent or
market prices become less readily available.
52. Which of the following rules is incorrect regarding accounting for transfers (to or from
investment property) between categories?
a. For a transfer from investment property carried at fair value to owner-occupied
property or inventories, the fair value at the change of use is the 'cost' of the
property under its new classification.
b. For a transfer from owner-occupied property to investment property carried at fair
value, PAS 16 should be applied up to the date of reclassification. Any difference
arising between the carrying amount under PAS 16 at that date and the fair value
should be recognized in net profit or loss for the period.
c. For a transfer from inventories to investment property at fair value, any difference
between the fair value at the date of transfer and it previous carrying amount should
be recognized in net profit or loss for the period.
d. When an entity completes construction/development of an investment property that
will be carried at fair value, any difference between the fair value at the date of
transfer and the previous carrying amount should be recognized in net profit or loss
for the period.
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