App_E

Student: ___________________________________________________________________________

1. In common law countries (such as the U.S., the U.K., and Canada), greater emphasis is placed on public
information than in code law countries (such as France and Germany).

True False
2. For countries whose tax standards are closely tied to financial reporting standards (Continental Europe and
Japan), accounting earnings tend to be lower so companies can minimize tax payments.

True False
3. In countries where debt financing is more common (Japan) compared to equity financing, there is greater
emphasis on reporting the ability of the company to earn profits for its investors rather than the ability to
repay debt.

True False
4. Some countries are more secretive (Brazil and Switzerland), leading to fewer financial disclosures.

True False
5. More economically developed economies (the U.S. and the U.K.) have a need for more complex
accounting standards.

True False
6. Convergence of accounting practices is expected to increase the flow of investment across borders.

True False
7. The primary objective of the IASB is to develop accounting standards in the U.S.

True False
8. By late 2007, over 100 jurisdictions, including China, Australia, and all of the countries in the European
Union (EU), either require or permit the use of IFRS.

True False
9. The Norwalk Agreement formalizes the commitment between the FASB and IASB to the convergence of
U.S. GAAP and IFRS.

True False
10. The FIFO inventory method is not allowed under IFRS.

True False
11. IFRS allows, but does not require, revaluation of property, plant and equipment to fair value.

True False
12. Under U.S. GAAP, development expenditures are capitalized, while under IFRS, these expenditures must
be expensed immediately.

True False
13. Under IFRS, inventory write-downs due to using the lower-of-cost-or-market rule are allowed to be
reversed in a future year if the market value subsequently increases.

True False
14. When preparing a statement of cash flows, IFRS allows companies to report cash outflows from interest
payments as either operating or financing cash flows, while U.S. GAAP requires these outflows to be
reported as only operating activities.

True False
15. When preparing a statement of cash flows, IFRS allows companies to report cash inflows from interest
and dividends as either operating or investing cash flows, while U.S. GAAP requires these inflows to be
reported as only operating activities.

True False
16. IFRS stands for:

A. Independent Financial Reporting System.

B. International Financing Reform System.
C. International Financial Reporting Standards.
D. International Financial Regulation of Securities.
17. Which of the following characteristics of a country most likely affects the extent of companies' financial
disclosure practices?

A. Inflation.
B. Tax laws.
C. Population.
D. Culture.
18. Which of the following is not a reason why accounting differs across countries?

A. Culture.
B. Population.
C. Tax laws.
D. Sources of financing.
19. Countries that have different rules for financial accounting and tax accounting, rely more on equity
financing, and have historical political and economic ties with Great Britain are referred to as what types of
countries?

A. Code law countries.

B. European Union countries.
C. Common law countries.
D. Conformist countries.
20. Countries that have similar rules for financial accounting and tax accounting, rely more on debt financing,
and have historical political and economic ties with Germany are referred to as what types of countries?

A. Code law countries.

B. European Union countries.
C. Common law countries.
D. Conformist countries.
21. When a country establishes financial reporting rules that closely resemble tax reporting rules, reported
accounting profits tend to be:

A. Negative.
B. Higher.
C. Lower.
D. Misreported.
22. One motivation for reducing differences in accounting practices across countries is to:

A. Decrease the flow of international capital.

B. Allow greater competition among companies.
C. Reduce companies' tax burdens.
D. Make it easier for investors to compare companies from different countries.
23. The body primarily responsible for establishing a single set of global accounting standards is the:

A. IASB.
B. SEC.
C. FASB.
D. IOSCO.
24. The Norwalk Agreement:

A. Allows foreign companies listed on U.S. stock exchanges to prepare financial statements in accordance
with IFRS.
B. Formalizes the commitment between the FASB and IASB to converge U.S. GAAP and IFRS.
C. Eliminates the requirement that U.S. firms report under U.S. GAAP.
D. Gives authority to the IASB to set accounting standards for U.S. companies.
25. For which of the following topics is accounting under both U.S. GAAP and IFRS essentially the same?

A. Receivables.
B. Long-term assets.
C. Inventory.
D. Research and development expenditures.
26. Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS?

A. Specific identification.
B. FIFO.
C. LIFO.
D. Average cost.
27. Which of the following statements is true regarding revaluation of property, plant, and equipment to fair
value?

A. Only IFRS allows revaluation of property, plant, and equipment to fair value.
B. Only U.S. GAAP allows revaluation of property, plant, and equipment to fair value.
C. Both U.S. GAAP and IFRS allow revaluation of property, plant, and equipment to fair value.
D. Neither U.S. GAAP nor IFRS allows revaluation of property, plant, and equipment to fair value.
28. Compared to that in the U.S, the cost to companies in other countries of documenting effective internal
controls is:

A. Much greater.
B. Slightly greater.
C. About the same.
D. Much less.
29. Why are some U.S. companies opposed to elimination of the LIFO inventory method?

A. Inventory amounts are more difficult to calculate under FIFO.

B. LIFO most likely matches actual flow of inventory.
C. Increased tax burden.
D. Most international companies use LIFO.
30. Assuming rising costs, the switch from LIFO to FIFO or average cost would most likely have what
effect(s)?

A. Increase reported net income in the income statement.

B. Decrease tax obligations to the Internal Revenue Service (IRS).
C. Increase reported net income and tax obligations.
D. Decrease reported net income and tax obligations.
31. Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under
IFRS, what amount would be reported as an expense in the current year's income statement?

A. $100,000.
B. $150,000.
C. $200,000.
D. $300,000.
32. Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under
U.S. GAAP, what amount would be reported as an expense in the current year's income statement?

A. $100,000.
B. $150,000.
C. $200,000.
D. $300,000.
33. Would a company be more likely to report a contingent liability under U.S. GAAP or IFRS?

A. U.S. GAAP.
B. IFRS.
C. Equally likely.
D. Contingent liabilities are not reported under IFRS.
34. Suppose a severe storm floods a company's headquarters, causing damages to the building of $300,000
and destruction of inventory of $200,000. Because of the unusual nature of this event, the company
had no flood insurance to cover these losses. Under IFRS, how much would the company report as an
extraordinary loss in the current year's income statement?

A. $0.
B. $200,000.
C. $300,000.
D. $500,000.
35. Suppose a severe storm floods a company's headquarters, causing damages to the building of $300,000
and destruction of inventory of $200,000. Because of the unusual nature of this event, the company had
no flood insurance to cover these losses. Under U.S. GAAP, how much would the company report as an
extraordinary loss in the current year's income statement?

A. $0.
B. $200,000.
C. $300,000.
D. $500,000.
36. Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two years. Under
IFRS, what is the most the company can report as cash outflows from financing activities?

A. $10,000.
B. $2,000.
C. $5,000.
D. $0.
37. How is the organization responsible for standard setting in the U.K. different from that in France? Which of
these organizations is closer to the FASB in the U.S.?
38. Describe at least five reasons why accounting practices differ across countries. Which reason do you think
is most important? Explain why.

39. Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? Explain why some
U.S. companies will lobby strongly to keep this method as an allowable alternative.

40. What does it mean to revalue a long-term asset? How do U.S. GAAP and IFRS differ regarding revaluation
of long-term assets?

41. How is preferred stock reported differently under U.S. GAAP and IFRS? Do you think preferred stock is a
liability or an equity item? Why?
42. Listed below are seven reasons why accounting practices differ across countries followed by a list of
descriptions. Match each description with the best reason placing the letter designating the reason in the
space provided.

The extent of public disclosure depends on the__

1. Inflation secretiveness of society.__

2. Political and In some countries, asset values increase__

economic ties rapidly because of the general price level changes.__

Countries share business activities and have political__

3. Culture connections.__

Some countries rely more heavily on debt__

4. Tax laws capital than on equity capital to fund operations.__

Common law countries rely more heavily on public__

5. Legal system information.__

6. Economic More developed economies have more complex__

development business transactions.__

7. Sources Alignment between financial reporting and tax__

of financing reporting rules.__
43. Below are seven reasons for differences in accounting practices among countries. For each reason, at least
two options are provided. For each reason, select the option that best describes the United States.
Low inflationInflation

1. Transparent Legal system Options ____

2. More equity financing Tax laws ____
3. Different tax and financial accounting rules Sources of financing ____
4. British ties Culture ____
Political and economic
5. Common law ties ____
6. Developed economy Economic development ____
44. Below are seven reasons for differences in accounting practices among countries. For each reason, at least
two options are provided. For each reason, select the option that best describes Germany.

1. Similar tax and __

financial accounting rules Legal system Options__

__
2. Low inflation Tax laws__

Sources of financing__
3. Developed economy (a) More equity financing__

__
4. More debt financing Inflation__

__
5. Secretive Culture__

__
6. German ties Political and economic ties__

__
7. Code law Economic development__
 App_E Key
1. TRUE

2. TRUE

3. FALSE

4. TRUE

5. TRUE

6. TRUE

7. FALSE

8. TRUE

9. TRUE

10. FALSE

11. TRUE

12. FALSE

13. TRUE

14. TRUE

15. TRUE

16. C

17. D

18. B

19. C

20. A

21. C

22. D

23. A

24. B

25. A

26. C

27. A

28. D

29. C

30. C

31. A

32. D
33. B

34. A

35. D

36. A

37. The organization responsible for standard setting in the U.K. is a private standard setter. In France, the organization responsible for standard
setting is part of the government. The U.K. is closer to the format used for standard setting in the U.S., as both countries develop standards using a
private standard setter.

38. Financial accounting standards and practices differ from country to country for many reasons, including different legal systems, the influence of
tax laws, sources of financing, inflation, culture, political influence of other countries, and the level of economic development. See Illustration D-1 in
the textbook for further details.
Legal system (common law vs. code law) is often used as a way to describe overall differences in accounting practices between countries. Common
law countries, such as the U.S., U.K., Australia, and Canada, have separate rules for financial accounting and tax accounting, rely more on equity
financing, and have political and economic ties with Britain. Code law countries such as those in Central Europe and Japan, have similar rules for
financial accounting and tax accounting, rely more on debt financing, and many have political and economic ties with Germany.

39. LIFO is allowed under U.S. GAAP, but not under IFRS. U.S. companies currently using LIFO will lobby to keep this method because a switch
from LIFO would greatly increase taxes for many U.S. companies.

40. To revalue a long-term asset is to periodically adjust the asset to fair value. Under U.S. GAAP, companies are not allowed to revalue long-term
assets to fair value for financial reporting purposes. IFRS allows, but does not require, revaluation of long-term assets to fair value.

41. Under U.S. GAAP, preferred stock is usually recorded as stockholders' equity with dividends reported as a reduction of retained earnings. Under
IFRS, most preferred stock is reported as debt with the dividends reported in the income statement as interest expense.
As we learned in Chapter 10, preferred stock has characteristics of both liabilities and stockholders' equity. Preferred stock can have characteristics
nearly identical to bonds or characteristics nearly identical to common stock.

42. Culture :: The extent of public disclosure depends on the secretiveness of society. and Inflation :: In some countries, asset values increase
rapidly because of the general price level changes. and Political and economic ties :: Countries share business activities and have political
connections. and Sources of financing :: Some countries rely more heavily on debt capital than on equity capital to fund operations. and Legal
system :: Common law countries rely more heavily on public information. and Economic development :: More developed economies have more
complex business transactions. and Tax laws :: Alignment between financial reporting and tax reporting rules.

43. Common law :: Legal system Options and Different tax and financial accounting rules :: Tax laws and More equity financing :: Sources of
financing and Transparent :: Culture and British ties :: Political and economic ties and Developed economy :: Economic development

44. Code law :: Legal system Options and Similar tax and financial accounting rules :: Tax laws and More debt financing :: Sources of financing
(a) More equity financing and Low inflation :: Inflation and Secretive :: Culture and German ties :: Political and economic ties and Developed
economy :: Economic development
 App_E Summary
Category # of Questions
AACSB: Analytic 5
AACSB: Reflective 3
AACSB: Reflective Thinking 36
AICPA: Critical Thinking 24
AICPA: Measurement 5
AICPA: Reporting 15
Blooms: Analysis 5
Blooms: Application 4
Blooms: Comprehension 19
Blooms: Knowledge 14
Blooms: Synthesis 2
Difficulty: Easy 15
Difficulty: Hard 2
Difficulty: Medium 27
Learning Objective: AppE-01 Determine the financial statement effects of inventory errors. 18
Learning Objective: AppE-02 Understand the role of the International Accounting Standards Board (IASB) in the 5
development of International Financial Reporting Standards (IFRS).
Learning Objective: AppE-03 Recognize the major differences between U.S. GAAP and IFRS. 21
Spiceland - Appendix E... 44