CHAPTER 2
ANALYZING TRANSACTIONS AND THEIR EFFECTS ON
FINANCIAL STATEMENTS
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE
AND LEVEL OF DIFFICULTY
Item LO LOD Item LO LOD Item LO LOD Item LO LOD Item LO LOD
True-False Statements
1. 1 E 6. 2 E 11. 4 E 16. 5 E 21. 7 E
2. 1 E 7. 3 E 12. 4 E 17. 6 E
3. 1 M 8. 4 E 13. 4 E 18. 6 E
4. 2 H 9. 4 M 14. 4 M 19. 6 M
5. 2 E 10. 4 M 15. 5 E 20. 7 E
Multiple Choice Questions
22. 2 M 29. 4 E 36. 4 H 43. 4 M 50. 6 E
23. 2 M 30. 4 M 37. 4 M 44. 4 H 51. 6 H
24. 2 M 31. 4 M 38. 4 E 45. 4 M 52. 6 M
25. 3 E 32. 4 E 39. 4 E 46. 4 M 53. 7 E
26. 3,4 E 33. 4 E 40. 4 H 47. 6 M 54. 7 M
27. 4 E 34. 4 M 41. 4 M 48. 6 M 55. 7 M
28. 4 E 35. 4 H 42. 4 M 49. 6 E 56. 7 H
Exercises
57. 4 M 59. 4 M 61. 6 M 63. 6 H
58. 4 H 60. 6 E 62. 6 M
Matching
64. 4 M 65. 4 M
Short-Answer Essay
66. 6 H 67. 7 M
Essay
68. 3 E
Note: E = Easy M = Medium H = Hard
Copyright © 2015 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
,2-2 Test Bank for Understanding Financial Accounting, Canadian Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 2. TF 3. TF
Learning Objective 2
4. TF 5. TF 6. TF 22. MC 23. MC 24. MC
Learning Objective 3
7. TF 25. MC 26. MC 68. Es
Learning Objective 4
8. TF 13. TF 29. MC 34. MC 39. MC 44. MC 59. Ex
9. TF 14. TF 30. MC 35. MC 40. MC 45. MC 64. Ma
10. TF 26. MC 31. MC 36. MC 41. MC 46. MC 65. Ma
11. TF 27. MC 32. MC 37. MC 42. MC 57. Ex
12. TF 28. MC 33. MC 38. MC 43. MC 58. Ex
Learning Objective 5
15. TF 16. TF
Learning Objective 6
17. TF 19. TF 48. MC 50. MC 52. MC 61. Ex 63. Ex
18. TF 47. MC 49. MC 51. MC 60. Ex 62. Ex 66. SAE
Learning Objective 7
20. TF 21. TF 53. MC 54. MC 55. MC 56. MC 67. SAE
Note: TF = True-False Ex = Exercise SAE = Short-Answer Essay
MC = Multiple Choice Ma = Matching Es = Essay
Copyright © 2015 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
, Analyzing Transactions and Their Effects on Financial Statements 2-3
CHAPTER LEARNING OBJECTIVES
1. Identify the accounting standards used by Canadian companies.
• Canadian public companies (those whose shares trade on a public stock exchange)
are required to prepare their financial statements using International Financial Reporting
Standards (IFRS).
• Private companies in Canada generally follow Accounting Standards for Private
Enterprises (ASPE), but have the option of following IFRS.
2. Identify and explain the qualitative characteristics of useful financial
information and how the cost constraint affects these.
• Standards setters have developed conceptual frameworks (one for IFRS and another
for ASPE) to assist them in determining what “useful information” is.
• Useful information has two fundamental qualitative characteristics. It must be relevant
(it must matter to users’ decision-making) and it must be representationally faithful (it
must represent transactions and balances as they took place or are at present).
• To be relevant, the information must be material and have a predictive value or a
confirmatory value.
• To be representationally faithful, the information must be complete, neutral, and free
from error.
• Four other enhancing qualitative characteristics have been identified that can increase
the usefulness of financial information. These are comparability, verifiability, timeliness,
and understandability. These characteristics increase usefulness, but they cannot make
useless information useful.
3. Explain the difference between the cash basis of accounting and the accrual
basis of accounting.
• Under the cash basis of accounting, revenues are only recorded when cash is received
and expenses are recorded when cash is paid out.
• Under the accrual basis of accounting, revenues are recorded when they are earned
and expenses are recorded when they are incurred.
• Accounting standard setters have determined that financial information prepared using
the accrual basis of accounting is more useful than that resulting from the use of the
cash basis.
4. Analyze basic transactions and record their effects on the accounting equation.
• Every transaction must affect at least two accounts when it is recorded.
• The accounting equation must remain in balance as transactions are recorded; total
assets must equal the sum of total liabilities plus shareholders’ equity.
• Transactions affecting the Retained Earnings account (revenues, expenses, and the
declaration of dividends) should be referenced to indicate the nature of the transaction.
• Revenues increase Retained Earnings, while expenses and the declaration of
dividends decrease Retained Earnings.
Copyright © 2015 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
ANALYZING TRANSACTIONS AND THEIR EFFECTS ON
FINANCIAL STATEMENTS
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE
AND LEVEL OF DIFFICULTY
Item LO LOD Item LO LOD Item LO LOD Item LO LOD Item LO LOD
True-False Statements
1. 1 E 6. 2 E 11. 4 E 16. 5 E 21. 7 E
2. 1 E 7. 3 E 12. 4 E 17. 6 E
3. 1 M 8. 4 E 13. 4 E 18. 6 E
4. 2 H 9. 4 M 14. 4 M 19. 6 M
5. 2 E 10. 4 M 15. 5 E 20. 7 E
Multiple Choice Questions
22. 2 M 29. 4 E 36. 4 H 43. 4 M 50. 6 E
23. 2 M 30. 4 M 37. 4 M 44. 4 H 51. 6 H
24. 2 M 31. 4 M 38. 4 E 45. 4 M 52. 6 M
25. 3 E 32. 4 E 39. 4 E 46. 4 M 53. 7 E
26. 3,4 E 33. 4 E 40. 4 H 47. 6 M 54. 7 M
27. 4 E 34. 4 M 41. 4 M 48. 6 M 55. 7 M
28. 4 E 35. 4 H 42. 4 M 49. 6 E 56. 7 H
Exercises
57. 4 M 59. 4 M 61. 6 M 63. 6 H
58. 4 H 60. 6 E 62. 6 M
Matching
64. 4 M 65. 4 M
Short-Answer Essay
66. 6 H 67. 7 M
Essay
68. 3 E
Note: E = Easy M = Medium H = Hard
Copyright © 2015 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
,2-2 Test Bank for Understanding Financial Accounting, Canadian Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 2. TF 3. TF
Learning Objective 2
4. TF 5. TF 6. TF 22. MC 23. MC 24. MC
Learning Objective 3
7. TF 25. MC 26. MC 68. Es
Learning Objective 4
8. TF 13. TF 29. MC 34. MC 39. MC 44. MC 59. Ex
9. TF 14. TF 30. MC 35. MC 40. MC 45. MC 64. Ma
10. TF 26. MC 31. MC 36. MC 41. MC 46. MC 65. Ma
11. TF 27. MC 32. MC 37. MC 42. MC 57. Ex
12. TF 28. MC 33. MC 38. MC 43. MC 58. Ex
Learning Objective 5
15. TF 16. TF
Learning Objective 6
17. TF 19. TF 48. MC 50. MC 52. MC 61. Ex 63. Ex
18. TF 47. MC 49. MC 51. MC 60. Ex 62. Ex 66. SAE
Learning Objective 7
20. TF 21. TF 53. MC 54. MC 55. MC 56. MC 67. SAE
Note: TF = True-False Ex = Exercise SAE = Short-Answer Essay
MC = Multiple Choice Ma = Matching Es = Essay
Copyright © 2015 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
, Analyzing Transactions and Their Effects on Financial Statements 2-3
CHAPTER LEARNING OBJECTIVES
1. Identify the accounting standards used by Canadian companies.
• Canadian public companies (those whose shares trade on a public stock exchange)
are required to prepare their financial statements using International Financial Reporting
Standards (IFRS).
• Private companies in Canada generally follow Accounting Standards for Private
Enterprises (ASPE), but have the option of following IFRS.
2. Identify and explain the qualitative characteristics of useful financial
information and how the cost constraint affects these.
• Standards setters have developed conceptual frameworks (one for IFRS and another
for ASPE) to assist them in determining what “useful information” is.
• Useful information has two fundamental qualitative characteristics. It must be relevant
(it must matter to users’ decision-making) and it must be representationally faithful (it
must represent transactions and balances as they took place or are at present).
• To be relevant, the information must be material and have a predictive value or a
confirmatory value.
• To be representationally faithful, the information must be complete, neutral, and free
from error.
• Four other enhancing qualitative characteristics have been identified that can increase
the usefulness of financial information. These are comparability, verifiability, timeliness,
and understandability. These characteristics increase usefulness, but they cannot make
useless information useful.
3. Explain the difference between the cash basis of accounting and the accrual
basis of accounting.
• Under the cash basis of accounting, revenues are only recorded when cash is received
and expenses are recorded when cash is paid out.
• Under the accrual basis of accounting, revenues are recorded when they are earned
and expenses are recorded when they are incurred.
• Accounting standard setters have determined that financial information prepared using
the accrual basis of accounting is more useful than that resulting from the use of the
cash basis.
4. Analyze basic transactions and record their effects on the accounting equation.
• Every transaction must affect at least two accounts when it is recorded.
• The accounting equation must remain in balance as transactions are recorded; total
assets must equal the sum of total liabilities plus shareholders’ equity.
• Transactions affecting the Retained Earnings account (revenues, expenses, and the
declaration of dividends) should be referenced to indicate the nature of the transaction.
• Revenues increase Retained Earnings, while expenses and the declaration of
dividends decrease Retained Earnings.
Copyright © 2015 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
