Chapter 3

Notes to Financial Statement

Problem 3-1

1. Which is a purpose of notes to financial statements?

a. To present information about the basis of preparation of the statements and

accounting policies used.
b. To disclose the information required by PFRS not presented elsewhere in the
financial statement.
c. To provide additional information not presented but necessary for a fair
presentation
d. All of these can be considered a purpose of the notes

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Answer: d. All of these can be considered a purpose of the notes

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2. What is the first item in presenting the notes?

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a. Statement of compliance with PFRS
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b. Other disclosure, such as contingent liabilities and unrecognized contractual
commitments
c. Supporting information for items presented on the face of the financial
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statements
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d. Summary of significant accounting policies

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Answer: a. Statement of compliance with PFRS

3. An entity whose financial statements comply with PFRS shall

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a. Make an explicit statement of compliance in the notes

b. Make an unreserved statement of compliance in the notes
c. Make an explicit and unreserved statement of compliance in the notes
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d. Not describe financial statement as complying with PFRS.

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Answer: c. Make an explicit and unreserved statement of compliance in the

notes
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4. The presentation of the notes to financial statements in a systematic manner

a. Is voluntary
b. Is mandatory

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 c. Is mandatory, as far as practicable
d. Depends on the industry

Answer: c. Is mandatory, as far as practicable

5. Disclosure of information about estimation uncertainty and judgments

a. Is voluntary
b. Is mandatory
c. Is either voluntary or mandatory
d. Depends on the industry

Answer: c. Is either voluntary or mandatory

Problem 3-2

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1. Which statement is incorrect regarding notes to financial statements?

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a. IFRS requires specific note disclosures including disaggregation of

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inventories
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b. IFRS requires a maturity analysis for receivables
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c. IFRS requires that all notes should be clear, simple to understand and
nontechnical in nature.
d. All of the choices are correct regarding notes to financial statements.
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Answer: c. IFRS requires that all notes should be clear, simple to understand
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and nontechnical in nature

2. Notes to financial statements

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a. Must be quantifiable
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b. Must qualify as an element

c. Amplify items presented in the financial statements
d. All of the choices are correct
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Answer: d. All of the choices are correct

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3. Which of the following is not a method of disclosing pertinent information?

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a. Supporting schedule
b. Parenthetical explanation
c. Cross reference and contra item
d. All of these are methods of disclosing pertinent information

Answer: All of these are methods of disclosing pertinent information

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 4. The disclosure of accounting policies is important to financial statement readers
in determining

a. Net income for the year

b. Whether accounting policies are consistently applied from year to year.
c. The value of obsolete goods in ending inventory
d. Whether the working capital position is adequate for future operations

Answer: b. Whether accounting policies are consistently applied from year to

year

5. Accounting policies disclosed in the notes to financial statements typically include

all of the following, except

a. The cost flow assumption

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b. The depreciation method
c. Significant estimates

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d. Significant inventory purchasing policies

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Answer: d. Significant inventory purchasing policies
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6. Significant accounting policies may not be

a. Selected on the basis of judgment

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b. Selected from existing acceptable alternatives

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c. Unusual or innovative in application

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d. Omitted from financial statement disclosure

Answer: d. Omitted from financial statement disclosure

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7. An example of an inventory accounting policy that should be disclosed in a

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summary of significant accounting policies is

a. Composition of inventory into raw materials, work in process and finished

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goods
b. Major backlog of inventory orders
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c. Method used for pricing inventory

d. All of these should be disclosed in the summary of significant accounting
policies
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Answer: c. Method used for pricing inventory

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 8. Which of the following should be disclosed in a summary of significant
accounting policies?

a. Type of executor contract

b. Cumulative effect of change in accounting policy
c. Claims of equity holders
d. Depreciation method

Answer: d. Depreciation method

9. Note to financial statements

a. Are relatively unimportant facts

b. Documents the source of financial statements facts
c. Are an integral part of financial statements

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d. Are irrelevant and immaterial facts

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Answer: c. Are an integral part of financial statements

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10. Which best demonstrates the standard of adequate disclosure?
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a. The separate income statement
b. The auditor’s report
c. The tax return
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d. The note to financial statements

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Answer: d. The note to financial statements

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Problem 3-3
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1. What is the purpose of information presented in the notes to financial

statements?
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a. To provide disclosures required by generally accepted accounting principles

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b. To correct improper presentation in the financial statements

c. To provide recognition of amounts not included in the total of the financial
statements
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d. To present management response to auditor comments

Answer: a. To provide disclosures required by generally accepted

accounting principles

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 2. Which of the following information should be disclosed in the summary of
significant accounting policies?

a. Refinancing of debt subsequent to the reporting period

b. Guaranteed of indebtedness of others
c. Criteria for determining which investments are treated as cash equivalents
d. Adequacy of pension plan assets relative to the defined benefit obligation

Answer: c. Criteria for determining which investments are treated as cash

equivalents

3. Which of the following is not a required disclosure of accounting policies?

a. The measurement basis used

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b. Key management personnel involved in drafting the summary of significant
accounting policies

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c. Disclosure required by Standards
d. The nature of operations and the policies that the users of the financial

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statements would expect to be disclosed
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Answer: c. Disclosure required by Standards
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4. The notes to financial statements should not be used to

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a. Describe significant accounting policies

b. Describe depreciation method employed
c. Describe the principles and methods peculiar to the industry in which the
entity operates
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d. Correct an improper presentation in the financial statements

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Answer: d. Correct an improper presentation in the financial statements

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5. An entity shall disclose in the summary of significant accounting policies

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a. The measurement basis used in preparing the financial statements

b. All the measurement bases irrespective of whether used by the entity
c. The measurement basis used in preparing the financial statements and the
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accounting policies used.

d. All of the measurement bases and the accounting policy choices available to
the entity irrespective of whether used.

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 Answer: a. The measurement basis used in preparing the financial
statements

6. The summary of significant accounting policies should disclose

a. Proforma effect of retroactive application of an accounting change

b. Basis of profit recognition on long term construction contracts
c. Adequacy of pension plan assets in relation to vested benefits
d. Future lease payment

Answer: b. Basis of profit recognition on long term construction contracts

7. The summary of significant accounting policies should disclose

a. The composition of property, plant and equipment and the depreciation

method used

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b. The composition of property, plant and equipment only
c. The depreciation method used only

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d. Neither the composition of property, plant and equipment nor the depreciation
method used.

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Answer: c. The depreciation method used only
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8. Which of the following should be included in the summary of significant
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accounting policies?
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a. Property , plant and equipment recorded at cost with the depreciation

computed principally by straight line method
b. A business component was sold during the current year
c. Breakdown of sales attributable to business components
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d. Future ordinary share dividends are expected to approximate sixty percent of

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earnings

Answer: a. Property, plant and equipment recorded at cost with the

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depreciation computed principally by straight line method

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