Test: Accounting Standards - CA Foundation MCQ

IASB stands for the International Accounting Standards Board . It is an independent, private-sector body responsible for developing and promoting the use of International Financial Reporting Standards (IFRS) worldwide.

Key Points about IASB:

1. Purpose of IASB:

   • The IASB develops and issues IFRS , which are a set of globally accepted accounting standards designed to bring transparency, accountability, and efficiency to financial reporting.
   • Its goal is to ensure that financial statements are consistent, comparable, and reliable across countries and industries.

2. Formation:

   • The IASB was established in 2001 as the successor to the International Accounting Standards Committee (IASC).
   • It continues the work of the IASC by issuing new standards and updating existing ones.

3. Structure:

   • The IASB operates under the oversight of the IFRS Foundation , which ensures its independence and public accountability.

4. Global Influence:

   • IFRS Standards issued by the IASB are used in over 140 jurisdictions, making them the most widely adopted accounting standards globally.

Why Other Options Are Incorrect:

• A: Indian Accounting Standards Board: This is incorrect because there is no such organization called the "Indian Accounting Standards Board." In India, the Accounting Standards Board (ASB) under the Institute of Chartered Accountants of India (ICAI) is responsible for formulating accounting standards.
• B: Indian Accounting Standards Bulletin: This is incorrect because it does not exist. The term "Bulletin" is unrelated to the IASB or its functions.
• C: International Accounting Standards Bulletin: This is incorrect because the correct name is International Accounting Standards Board , not "Bulletin."

The IASB stands for the International Accounting Standards Board , which is responsible for developing global accounting standards. Therefore, the correct answer is: D: International Accounting Standards Board

Accounting Standards are designed to provide a framework for financial reporting. They encompass both specific accounting principles and the methods of applying those principles.
Let’s break this down:
A: Principles

• Accounting Standards establish accounting principles , which are fundamental concepts or guidelines that govern how financial transactions should be recorded and reported.
• For example, the principle of accrual accounting requires revenues and expenses to be recognized when they are earned or incurred, regardless of cash flows.

B: Methods of Applying Those Principles

• Accounting Standards also specify methods for applying these principles in practice. This ensures consistency and comparability across entities.
• For instance, while the principle of inventory valuation may require recording inventory at the lower of cost or net realizable value, the standard also provides methods for determining cost (e.g., FIFO, weighted average).

Why "Both (a) and (b)" is Correct

• Accounting Standards are comprehensive and address both the principles (the "what") and the methods (the "how"). Together, they ensure that financial statements are prepared in a consistent, transparent, and reliable manner.

Why Other Options Are Incorrect:

• A: Principles: While principles are an essential part of Accounting Standards, standards go beyond just stating principles by also providing detailed methods for their application.
• B: Methods of Applying Those Principles: Similarly, focusing only on methods ignores the foundational principles that underpin the standards.
• D: None: This is incorrect because Accounting Standards clearly refer to both principles and methods.

Accounting Standards refer to both specific accounting principles and the methods of applying those principles. Therefore, the correct answer is: C: Both (a) and (b)

Let’s match each Accounting Standard (AS) with its corresponding topic:
(A) AS 26 – (iii) Intangible Assets: AS 26 deals with the accounting treatment of Intangible Assets , such as patents, trademarks, copyrights, and goodwill. It provides guidance on recognition, measurement, and amortization of intangible assets.

(B) AS 10 – (iv) Accounting for Fixed Assets: AS 10 focuses on Accounting for Fixed Assets , such as property, plant, and equipment. It covers the initial recognition, subsequent measurement, depreciation, and disposal of fixed assets.

(C) AS 28 – (i) Impairment of Assets: AS 28 addresses the Impairment of Assets , which involves determining whether an asset’s carrying amount exceeds its recoverable amount (the higher of fair value less costs to sell and value in use). If impairment exists, the asset must be written down.

(D) AS 24 – (ii) Discontinuing Operations: AS 24 provides guidance on the accounting for Discontinuing Operations , which refers to a component of an entity that has been disposed of or is classified as held for sale. It ensures proper disclosure and presentation of such operations in financial statements.

Why Other Options Are Incorrect:

• A: This option incorrectly matches AS 28 with "Discounting operations" instead of "Impairment of Assets."
• B: This option incorrectly matches AS 24 with "Discounting operations" twice and mismatches AS 28 with "Intangible Assets."
• C: This option incorrectly matches AS 28 with "Intangible Assets" instead of "Impairment of Assets."

The correct matching is: (A) – (iii), (B) – (iv), (C) – (i), (D) – (ii)

Thus, the correct answer is: D: (A) – (iii), (B) – (iv), (C) – (i), (D) – (ii)

AS 2 (Accounting Standard 2) in India deals with the Valuation of Inventories . It provides guidelines on how to measure and disclose inventories in financial statements.

Key Details about AS 2:

1. Scope of AS 2:

   • AS 2 applies to all entities that hold inventories, such as raw materials, work-in-progress, and finished goods.
   • It does not apply to specific types of inventories, such as those held by producers of agricultural and forest products, minerals, and other similar items, which are measured at net realizable value.

2. Key Provisions of AS 2:

   • Measurement of Inventories: Inventories should be valued at the lower of cost and net realizable value (NRV) .
     • Cost includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventory to its present location and condition.
     • Net Realizable Value (NRV) is the estimated selling price in the ordinary course of business, less the estimated costs of completion and disposal.
   • Cost Formulas: AS 2 allows different methods for determining the cost of inventories, such as:
     • FIFO (First-In-First-Out)
     • Weighted Average Cost
     • Specific Identification (for items that are not interchangeable)

3. Disclosure Requirements:

   • Entities must disclose the accounting policies adopted for inventories, including the cost formula used.
   • Any write-down of inventories to NRV and any reversal of such write-downs must also be disclosed.

Why Other Options Are Incorrect:

• A: Disclosure of Accounting Policies: This is covered under AS 1 , which deals with the disclosure of significant accounting policies followed by an entity.

• C: Revenue Recognition: This is covered under AS 9 , which provides guidance on when and how revenue should be recognized in financial statements.

• D: Depreciation Accounting: This is covered under AS 6 , which deals with the accounting treatment of depreciation on fixed assets.

AS 2 specifically addresses the Valuation of Inventories . Therefore, the correct answer is: B: Valuation of Inventories

Accounting Standards are designed to bring consistency, transparency, and comparability to financial reporting. However, they do have certain limitations.
Let’s analyze each option carefully:

A: The choice between different alternative accounting treatments is difficult: This is a limitation of Accounting Standards. Even though standards aim to standardize practices, there are often multiple acceptable methods for accounting treatments (e.g., inventory valuation methods like FIFO or weighted average). Choosing between these alternatives can be challenging and may lead to inconsistencies in financial reporting.

B: There may be a trend towards rigidity: This is also a limitation of Accounting Standards. Over time, strict adherence to standards may result in rigidity, reducing flexibility in addressing unique or evolving business situations. This rigidity can sometimes hinder innovation in financial reporting and make it harder to adapt to new circumstances.

C: Accounting Standards cannot override the statute: This is not a limitation but rather a fundamental principle of Accounting Standards. Accounting Standards must always comply with statutory laws and regulations (e.g., tax laws, corporate laws, etc.). The fact that Accounting Standards cannot override the statute is not a drawback; it ensures that financial reporting aligns with legal requirements.

D: All of the above: This is incorrect because Option C is not a limitation of Accounting Standards. It is a necessary feature to ensure compliance with the law.

Since "Accounting Standards cannot override the statute" is not a limitation but a fundamental principle, the correct answer is: C: Accounting Standards cannot override the statute

Accounting Standards provide a framework and set of accounting policies that ensure financial statements are prepared in a consistent and standardized manner. This standardization makes the financial statements of different enterprises comparable , enabling stakeholders (such as investors, regulators, and creditors) to make informed decisions.

Key Points:

1. Purpose of Accounting Standards:

   • Accounting Standards establish uniform rules and guidelines for recording, measuring, and disclosing financial information.
   • By ensuring consistency in accounting practices, they eliminate discrepancies and make financial statements comparable across entities, industries, and even countries.

2. Why Accounting Standards Enable Comparability:

   • Without standardized rules, companies could adopt different accounting methods for the same transactions, making it difficult to compare their financial performance or position.
   • For example, if one company uses the straight-line method for depreciation while another uses the reducing balance method, their financial statements would not be directly comparable. Accounting Standards ensure that such differences are minimized or properly disclosed.

3. Examples of Accounting Standards:

   • In India, the Institute of Chartered Accountants of India (ICAI) issues Accounting Standards (AS).
   • Globally, International Financial Reporting Standards (IFRS) provide a common framework for financial reporting.

Why Other Options Are Incorrect:

• A: Business standards: "Business standards" is a vague term and does not specifically refer to a framework for financial reporting. It is not related to accounting policies or comparability of financial statements.
• C: Market standards: "Market standards" typically refer to practices or benchmarks in the market (e.g., pricing, quality, etc.) and are unrelated to accounting policies or financial reporting.
• D: None of the above: This is incorrect because Accounting Standards explicitly provide the framework and policies needed for comparability of financial statements.

Accounting Standards provide the necessary framework and policies to ensure that financial statements of different enterprises are comparable. Therefore, the correct answer is: B: Accounting standards

AS 10 (Accounting for Fixed Assets) is the Accounting Standard in India that deals with the accounting treatment of fixed assets . It provides guidelines on how to recognize, measure, and disclose fixed assets in financial statements.

Key Details about AS 10:

1. Scope of AS 10:

   • AS 10 applies to all entities that own or use fixed assets, such as property, plant, equipment, machinery, buildings, and furniture.
   • It covers the accounting treatment for the acquisition, subsequent measurement, depreciation, and disposal of fixed assets.

2. Key Provisions of AS 10:

   • Initial Recognition: Fixed assets should be recorded at cost, which includes the purchase price and any directly attributable costs necessary to bring the asset to its intended use.
   • Subsequent Measurement: After initial recognition, fixed assets may be carried at cost less accumulated depreciation and impairment losses, or at revalued amounts (if the entity adopts a revaluation model).
   • Depreciation: The standard requires systematic allocation of the depreciable amount of an asset over its useful life using appropriate methods (e.g., straight-line method, reducing balance method).
   • Disclosure: Entities must disclose details such as the gross book value, accumulated depreciation, additions, disposals, and depreciation methods used.

Why Other Options Are Incorrect:

• A: AS 6: AS 6 deals with Depreciation Accounting , which is related to the depreciation of assets but does not cover the broader aspects of fixed assets like acquisition, revaluation, or disposal.

• C: AS 3: AS 3 deals with Cash Flow Statements , which focuses on classifying and reporting cash flows into operating, investing, and financing activities. It does not address fixed assets specifically.

• D: AS 2: AS 2 deals with Valuation of Inventories , which focuses on the accounting treatment of inventory, not fixed assets.

The Accounting Standard that specifically addresses Accounting for Fixed Assets is AS 10. Therefore, the correct answer is: B: AS 10

Accounting Standards are designed to achieve several key objectives in financial reporting. Let’s analyze each option and understand why all of the above is the correct answer.

A: Harmonise accounting policies.

• Accounting Standards aim to create uniformity in how financial transactions are recorded and reported across different entities, industries, and even countries.
• For example, International Financial Reporting Standards (IFRS) and Indian Accounting Standards (Ind AS) provide a common framework for preparing financial statements, ensuring that similar transactions are treated consistently regardless of where they occur.
• This harmonization facilitates better understanding and trust among stakeholders, including investors, regulators, and creditors.

B: Eliminate the non-comparability of financial statements.

• One of the primary goals of Accounting Standards is to make financial statements comparable between different entities.
• Without standardized rules, companies might use different methods to account for the same transactions, making it difficult for stakeholders to compare financial performance or position.
• By eliminating non-comparability, Accounting Standards enable users of financial statements to make informed decisions based on consistent and reliable information.

C: Improve the reliability of financial statements.

• Accounting Standards enhance the credibility and reliability of financial statements by providing clear guidelines on how to measure, recognize, and disclose financial information.
• Reliable financial statements reduce the risk of errors, misstatements, or manipulation of data, thereby increasing trust in the reported financial information.
• For example, standards like AS-1 (Disclosure of Accounting Policies) ensure that companies disclose their accounting policies, improving transparency and reliability.

Why "All of the Above" (Option D) is Correct:

• Accounting Standards achieve all three objectives : harmonizing accounting policies, eliminating non-comparability, and improving reliability.
• These objectives are interrelated and collectively contribute to the overall goal of ensuring high-quality financial reporting.

Since Accounting Standards serve all these purposes—harmonizing accounting policies, eliminating non-comparability, and improving reliability—the correct answer is: D: All of the above.

Accounting Standards in India are issued by the Institute of Chartered Accountants of India (ICAI) , which is the professional body responsible for regulating the accounting and auditing professions in India.
Here's a detailed explanation:

1. Role of ICAI in Issuing Accounting Standards:

• The Accounting Standards Board (ASB) of the ICAI is the authority that formulates and issues Accounting Standards in India.
• These standards provide guidelines for the preparation and presentation of financial statements to ensure consistency, transparency, and comparability across entities.

2. Why Not Other Options?

• A: Central Government: While the Central Government may adopt or enforce certain accounting standards (e.g., through the Companies Act), it does not issue them. The formulation of Accounting Standards is the responsibility of the ICAI.
• B: State Government: State governments have no role in issuing Accounting Standards. Financial reporting standards are formulated at the national level by professional bodies like the ICAI.
• D: Reserve Bank of India (RBI): The RBI regulates banking and monetary policies in India but does not issue Accounting Standards. However, the RBI may require banks to follow specific accounting practices as per the standards issued by the ICAI.

3. Applicability of Accounting Standards:

• The Accounting Standards issued by the ICAI are applicable to all entities in India unless they are specifically required to follow Ind AS (Indian Accounting Standards) based on IFRS (International Financial Reporting Standards).
• For example:
  • Listed companies and large entities are required to follow Ind AS.
  • Small and medium-sized enterprises (SMEs) and other entities typically follow the Accounting Standards issued by the ICAI.

The Institute of Chartered Accountants of India (ICAI) is the body responsible for issuing Accounting Standards in India. Therefore, the correct answer is: C: Institute of Chartered Accountants of India.

The Institute of Chartered Accountants of India (ICAI) has issued 32 Accounting Standards (AS) under the Indian Accounting Standards framework. These standards are designed to ensure uniformity, transparency, and comparability in financial reporting across entities in India.

Key Points:

1. Purpose of Accounting Standards:

   • The ICAI issues these standards to guide companies in preparing and presenting their financial statements in a consistent and reliable manner.
   • They cover various aspects of accounting, such as revenue recognition, inventory valuation, depreciation, intangible assets, and more.

2. Number of Standards:

   • As of now, there are 32 Accounting Standards issued by the ICAI.
   • These standards are numbered AS 1 to AS 32, though some numbers (e.g., AS 8) have been withdrawn or replaced by newer standards (e.g., AS 8 was replaced by AS 26).

3. Applicability:

   • The applicability of these standards depends on the type of entity (e.g., listed companies, unlisted companies, small and medium enterprises, etc.) and whether the company follows Indian GAAP or Ind AS (Indian Accounting Standards based on IFRS).

Why Other Options Are Incorrect:

• A: 25 – This is incorrect because the total number of Accounting Standards issued by ICAI is 32.
• B: 20 – This is incorrect for the same reason as above.
• D: 2 – This is clearly incorrect, as there are far more than two Accounting Standards.

The ICAI has issued 32 Accounting Standards , making the correct answer: C: 32

Consistency in accounting refers to the application of the same accounting principles, methods, and procedures over time within an entity. This ensures that financial statements are comparable across different periods, allowing users to identify trends and make informed decisions.

Let’s analyze each option:

A: All the companies in the same industries should use identical procedures and methods.

• This is incorrect because consistency does not require all companies in the same industry to use identical accounting methods. While comparability across companies is desirable, it is not the primary purpose of consistency.
• Different companies may adopt different accounting methods (e.g., one company might use the straight-line method for depreciation, while another uses the reducing balance method), as long as they apply their chosen methods consistently over time.

B: Income and assets have not been overstated.

• This is incorrect because this statement pertains more to the concept of reliability or prudence (conservatism) rather than consistency.
• Consistency focuses on the uniform application of accounting methods over time, not directly on whether income or assets are overstated.

C: Accounting methods and procedures used have to be consistently applied from year to year.

• This is correct because consistency specifically requires that once an entity adopts a particular accounting method or procedure, it should continue to apply it consistently in subsequent periods unless there is a valid reason for change (e.g., a new standard or a better method).
• For example, if a company uses the FIFO (First-In, First-Out) method for inventory valuation, it should continue to use FIFO in future periods unless there is a compelling justification to switch to another method like weighted average.

D: Any accounting method or procedure can be utilized.

• This is incorrect because while companies have some flexibility in choosing accounting methods, they must adhere to the applicable accounting standards and ensure that the chosen methods are applied consistently over time.
• Arbitrary changes in accounting methods would undermine the reliability and comparability of financial statements.

Consistency in accounting means that accounting methods and procedures must be applied consistently from year to year to ensure meaningful comparisons of financial performance and position over time.

Thus, the correct answer is: C: Accounting methods and procedures used have to be consistently applied from year to year.

Standardizing accounting principles and policies is crucial for ensuring transparency, consistency, and comparability in financial reporting. Let’s break down why each of these objectives is essential:

1. Transparency (Option A):

• Standardized accounting principles ensure that financial statements are prepared in a way that provides a clear and accurate picture of an organization's financial position and performance.
• Transparency helps stakeholders (investors, creditors, regulators, etc.) to understand how financial information is derived and what it represents, reducing ambiguity and fostering trust.

2. Consistency (Option B):

• Consistency refers to the application of the same accounting methods and policies over time within an organization. This allows users of financial statements to track trends and assess performance reliably.
• For example, if a company changes its depreciation method frequently without justification, it would be difficult to compare its financial performance across periods. Standardized principles ensure that accounting practices remain consistent unless there is a valid reason for change.

3. Comparability (Option C):

• Comparability ensures that financial statements of different entities can be compared meaningfully. When all organizations follow the same standardized accounting principles, stakeholders can easily compare their financial performance and position.
• For instance, investors can compare the profitability, liquidity, and solvency of two companies operating in the same industry if both adhere to the same accounting standards.

Why "All of the Above" (Option D) is Correct:

• Transparency, consistency, and comparability are interrelated objectives of standardizing accounting principles. Together, they enhance the quality of financial reporting and enable stakeholders to make informed decisions.
• Therefore, the standardization of accounting principles serves all three purposes simultaneously.

Since standardizing accounting principles ensures transparency, consistency, and comparability , the correct answer is: D: All of the above.

AS-8 (Accounting for Research and Development) was an accounting standard in India that provided guidance on how to account for expenses related to research and development activities. However, AS-8 has been replaced by AS-26 (Intangible Assets).

Here’s a detailed explanation of why this is the case:
AS-8 Replaced by AS-26

• AS-26 (Intangible Assets) provides a comprehensive framework for accounting for intangible assets, including those arising from research and development activities.
• Under AS-26, research and development expenditures are classified into two phases:
  • Research Phase : Costs incurred during the research phase are expensed as incurred because they are exploratory in nature and do not meet the criteria for recognition as an asset.
  • Development Phase : Costs incurred during the development phase can be capitalized as an intangible asset if certain criteria are met (e.g., technical feasibility, intention to complete, ability to use or sell the asset, etc.).
• Since AS-26 covers the treatment of research and development costs more comprehensively, AS-8 was withdrawn and replaced by AS-26 .

Why Other Options Are Incorrect

• B: Is applicable only to listed companies: This is incorrect because AS-8 was applicable to all entities (both listed and unlisted) that followed Indian Accounting Standards (AS). However, it has since been replaced by AS-26, which applies to all entities as well.

• C: Is mandatory for Research Institutions: This is incorrect because AS-8 was never specifically "mandatory" for research institutions alone. Instead, it applied to all entities undertaking research and development activities. Moreover, AS-8 has been replaced by AS-26, which now governs such accounting.

• D: Is still in use: This is incorrect because AS-8 is no longer in use. It has been officially withdrawn and replaced by AS-26.

Since AS-8 has been replaced by AS-26 , the correct answer is: A: Is replaced by AS – 26

Accounting Standards are a set of guidelines and rules designed to ensure consistency, transparency, and comparability in financial reporting. However, they cannot override the statute (i.e., laws or legal requirements).
Here's why:

1. Hierarchy of Authority:

   • Accounting Standards are issued by professional bodies or regulatory authorities, such as the International Accounting Standards Board (IASB) for IFRS or the Financial Accounting Standards Board (FASB) for US GAAP. These standards are not laws themselves but are often adopted into law or regulatory frameworks by governments.
   • Statutes (laws) are enacted by legislative bodies (e.g., parliaments or congresses) and have higher authority than accounting standards. If there is a conflict between an accounting standard and a statute, the statute will always prevail.

2. Legal Framework:

   • Accounting Standards must operate within the legal framework established by statutes. For example, tax laws, corporate laws, and securities regulations are statutory requirements that companies must follow, regardless of what accounting standards dictate.
   • If an accounting standard conflicts with a statutory requirement, companies are obligated to follow the statute.

3. Purpose of Accounting Standards:

   • The purpose of accounting standards is to guide the preparation and presentation of financial statements in a way that ensures consistency and transparency. However, these standards are not intended to override legal requirements or statutes.

Why Other Options Are Incorrect:

• A: Can over-ride – This is incorrect because accounting standards do not have the authority to override laws or statutes.
• C: May over-ride – This is also incorrect because accounting standards cannot override statutes under any circumstances.

Accounting Standards cannot override the statute , as they must always comply with the legal requirements established by statutes. Therefore, the correct answer is B: Cannot over-ride .

Accounting Standards are established to ensure consistency, transparency, and reliability in financial reporting. They serve several important purposes, which are reflected in the options provided:

1. Harmonise Accounting Policies (Option A):

   • Accounting Standards aim to create uniformity in how financial transactions are recorded and reported across different organizations and jurisdictions. This harmonization ensures that similar transactions are treated consistently, regardless of where they occur or who prepares the financial statements.
   • For example, International Financial Reporting Standards (IFRS) are designed to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.

2. Eliminate the Non-Comparability of Financial Statements (Option B):

   • One of the main goals of accounting standards is to make financial statements comparable between different entities. Without standardized rules, companies could use different methods to account for the same transactions, making it difficult for investors, regulators, and other stakeholders to compare financial performance across companies.
   • By eliminating non-comparability, accounting standards enable stakeholders to make informed decisions based on consistent and reliable financial information.

3. Improve Reliability of Financial Statements (Option C):

   • Accounting Standards enhance the reliability and credibility of financial statements by providing clear guidelines on how to measure, recognize, and disclose financial information. This reduces the risk of errors, misstatements, or manipulation of financial data.
   • Reliable financial statements are essential for decision-making by investors, creditors, and other users of financial information.

Since all three objectives—harmonizing accounting policies, eliminating non-comparability, and improving reliability—are fundamental purposes of Accounting Standards, the correct answer is D: All of the above .