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MGT220H5 Study Guide - Midterm Guide: Public Company Accounting Oversight Board, Deferral, Accounts Payable

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Yue Li
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MGT220 Midterm Review
Please note that this review is intended for the purpose of complementing your
independent study. It is in no way intended to represent the entire amount of
information covered in lectures.
Chapter 1: The Canadian Financial Reporting Environment
Multiple Choice Questions:
1. An effective process of capital allocation is critical to a healthy economy because it:
A. promotes productivity.
B. encourages innovation.
C. provides an efficient and liquid market for buying and selling securities.
D. All of the options are correct.
2. Canadian accountants need to be aware of the standards set by FASB in the United
States because:
A. U.S. GAAP can be used by companies listed on the Canadian stock markets
B. many Canadian companies are listed on U.S. stock markets and therefore must
follow U.S. GAAP.
C. Canadian and U.S. GAAP are very similar although Canadian GAAP is more rule
D. U.S. GAAP is replacing the international accounting standards and will soon
become acceptable around the world
3. Financial accounting can be broadly defined as the area of accounting that prepares
financial statements to be used by:
A. parties internal to the business only
B. by investors only
C. parties both internal and external to the business enterprise
D. primarily by management
4. Which of the following is not a key provision of the Sarbanes-Oxley Act?
A. CEO/CFO certification of the financial statements
B. creation of the Public Company Accounting Oversight Board
C. requirement for an audit by an external public accounting firm
D. mandatory implementation of independent audit committees

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Chapter 2: Conceptual Framework Underlying Financial Accounting
Multiple Choice Questions:
1. West Jet Airlines recognizes depreciation expense for an airplane over the 5-year period
during which that airplane helps the company earn revenue. Which basic principle of
accounting is best described in the above statement?
A. Historical cost
B. Going concern
C. Matching
D. Revenue recognition
2. The assumption that a business enterprise will not be sold or liquidated in the near future
is known as the:
A. economic entity assumption.
B. going concern assumption.
C. conservatism assumption.
D. none of these
3. Which of the following statements about materiality is not correct?
A. An item must make a difference or it need not be disclosed.
B. Materiality is a matter of relative size or importance.
C. An item is material if its inclusion or omission would influence or change the
judgment of a reasonable person.
D. All of these are correct statements about materiality.
4. Number Crunchers Inc. is in the industry of producing designer calculators for university
students and has been in competition with Texas Instruments over the rights to be the
exclusive calculator distributor to UTM Commerce students. Other competitors in the
industry use the FIFO method of accounting for inventory cost. Number Crunchers Inc.
decides to use the FIFO method for accounting for inventory as well. Which qualitative
characteristic does this describe?
A. understandability
B. relevance
C. comparability
D. consistency
5. A company reports land on its balance sheet at the price that it paid to acquire it 5 years
ago although its current fair value is significantly higher. By doing this, the company is
A. going concern assumption
B. historical cost principle
C. matching principle
D. periodicity assumption
6. The objective of financial reporting according to CICA HB s. 1000 is to
A. assist in resource allocation decisions
B. calculate the liquidation value of the entity
C. eliminate management bias to produce neutral financial statements
D. show the net income of a publicly accountable enterprise

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Short Answer Questions:
1. Penron Ltd. is a public company and has established a reputation for not following the
foundational concepts of GAAP. To add to this problem, the company’s auditors, Arty
Flandersen LLP engaged in numerous unethical practices and breached many of the
prescribed standards of the profession. For each of the following scenarios, identify which
GAAP has been violated and give a brief description of the principle.
A. One of Penron’s main business activities is engaging in large projects with the provincial
or federal government to fix roads, build community centres, etc. During the current year,
Penron entered into a long term contract with the provincial government to build a bridge
over the South Building at UTM. The contract price is $4 million and Penron expects to
complete the bridge in 4 years. The company accountant recorded the entire amount as
revenue in the current period.
B. During the year, while constructing the bridge at UTM, there was an incident which
resulted in the serious injury of student due to the company not placing appropriate
warning signs. As a result Penron was heavily sued and the lawsuit is still pending.
Since Penron did not want its share price to fall, the company accountant made no note
of this issue in the financial statements.
C. Penron’s executives are paid large salaries and are paid on a biweekly basis. The
company has a January 31 year end. The fiscal year end landed in the middle of the
biweekly pay period for these top executives. Since Penron was applying for a bank
loan, they did not want to show a large payable account on the balance sheet related to
the payment of these salaries and therefore, decided that they will expense the entire
amount of the executives’ salaries in the next period.
2. US GAAP has been identified as being a rules-based framework whereas Canadian GAAP
and IFRS are more principles-based. Provide two advantages and two disadvantages of
using a principles-based financial reporting framework such as Canadian GAAP or IFRS.
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