Intermediate Accounting, Vol. 1 (Lo/Fisher)
Chapter 1 Fundamentals of Financial Accounting Theory
1.1 Multiple Choice Questions
1) Which statement is not correct?
A) Financial accounting is the process of providing information to external parties.
B) Accounting is about the communication of financial information.
C) Accounting is the production of information about an enterprise and the transmission of
that information to those who need the information.
D) Financial accounting is the process of providing information to internal parties.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
2) How does an accountant decide on the appropriate method of accounting for a business
transaction?
A) evaluating if the particular method is consistent with the conceptual framework
B) ensuring that the accounting method agrees with that selected by other companies
C) evaluating whether the selected method differs from the underlying economics
D) testing the selected method for numerical accuracy and consistency
Answer: A
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
3) Which statement is correct?
A) Financial reporting is the process of preparing information for internal parties.
B) Financial reporting involves issuing financial statements to external parties.
C) Financial reporting provides the same information as management accounting.
D) Financial reporting is based on rules issued by the CICA or IASB.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
4) Which is not a question that financial accounting theory can answer?
A) Why do companies provide financial information to external parties?
B) Why do all companies use the same accounting policies?
C) Why is certain disclosure mandatory in financial reporting?
D) What is the role of financial accounting and reporting?
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
, 5) Which statement best explains 'information asymmetry'?
A) Information asymmetry means that there is uncertainty about the future.
B) Information asymmetry means that some people have more information than others.
C) Information asymmetry means that external parties need financial information.
D) Information asymmetry means information is material to a decision maker.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral
hazard to a variety of accounting, management and related situations.
6) Which statement best explains 'moral hazard'?
A) The term refers to a situation where one party has an information advantage over
another.
B) The term refers to the need external parties have for financial information.
C) The term refers to the fact that some people have more information than others.
D) The term refers to a situation where one party cannot observe the actions of another
party.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral
hazard to a variety of accounting, management and related situations.
7) Which statement best explains 'adverse selection'?
A) The term refers to a situation where one party has an information advantage over
another.
B) The term refers to the need external parties have for financial information.
C) The term refers to the fact that some people have more information than others.
D) The term refers to a situation where one party cannot observe the actions of another
party.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral
hazard to a variety of accounting, management and related situations.
8) Which statement is correct about the information needs of financial statement users?
A) All users require the same kind of information.
B) Forward looking information is useful for evaluating management stewardship.
C) Trade offs are necessary in accounting.
D) Historical cost information is useful for pricing the value of a company's shares.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.3 Describe the qualitative characteristics of accounting information that help
alleviate adverse selection and moral hazard.
Chapter 1 Fundamentals of Financial Accounting Theory
1.1 Multiple Choice Questions
1) Which statement is not correct?
A) Financial accounting is the process of providing information to external parties.
B) Accounting is about the communication of financial information.
C) Accounting is the production of information about an enterprise and the transmission of
that information to those who need the information.
D) Financial accounting is the process of providing information to internal parties.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
2) How does an accountant decide on the appropriate method of accounting for a business
transaction?
A) evaluating if the particular method is consistent with the conceptual framework
B) ensuring that the accounting method agrees with that selected by other companies
C) evaluating whether the selected method differs from the underlying economics
D) testing the selected method for numerical accuracy and consistency
Answer: A
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
3) Which statement is correct?
A) Financial reporting is the process of preparing information for internal parties.
B) Financial reporting involves issuing financial statements to external parties.
C) Financial reporting provides the same information as management accounting.
D) Financial reporting is based on rules issued by the CICA or IASB.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
4) Which is not a question that financial accounting theory can answer?
A) Why do companies provide financial information to external parties?
B) Why do all companies use the same accounting policies?
C) Why is certain disclosure mandatory in financial reporting?
D) What is the role of financial accounting and reporting?
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
, 5) Which statement best explains 'information asymmetry'?
A) Information asymmetry means that there is uncertainty about the future.
B) Information asymmetry means that some people have more information than others.
C) Information asymmetry means that external parties need financial information.
D) Information asymmetry means information is material to a decision maker.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral
hazard to a variety of accounting, management and related situations.
6) Which statement best explains 'moral hazard'?
A) The term refers to a situation where one party has an information advantage over
another.
B) The term refers to the need external parties have for financial information.
C) The term refers to the fact that some people have more information than others.
D) The term refers to a situation where one party cannot observe the actions of another
party.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral
hazard to a variety of accounting, management and related situations.
7) Which statement best explains 'adverse selection'?
A) The term refers to a situation where one party has an information advantage over
another.
B) The term refers to the need external parties have for financial information.
C) The term refers to the fact that some people have more information than others.
D) The term refers to a situation where one party cannot observe the actions of another
party.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral
hazard to a variety of accounting, management and related situations.
8) Which statement is correct about the information needs of financial statement users?
A) All users require the same kind of information.
B) Forward looking information is useful for evaluating management stewardship.
C) Trade offs are necessary in accounting.
D) Historical cost information is useful for pricing the value of a company's shares.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.3 Describe the qualitative characteristics of accounting information that help
alleviate adverse selection and moral hazard.
