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EXERCISE 6 – 1

MULTIPLE CHOICE QUESTIONS

1. It is a contract that gives rise to both a financial asset of one entity and a financial liability or
equity instrument of another entity.
a. Financial instrument c. Debt instrument
b. Equity instrument d. Derivative instrument

2. A financial asset is any asset that is (choose the incorrect one)

a. Cash
b. A contractual right to receive cash or another financial asset from another entity.
c. A contractual right to exchange financial instruments with another entity under conditions
that are potentially unfavorable.
d. An equity instrument of another entity.

3. A financial liability is any liability that is a contractual obligation. I. To deliver cash or

other financial asset to another entity.
II. To exchange financial instruments with another entity under conditions that are
potentially unfavorable
a. I only b. II only c. Both I and II d. Neither I nor II

4. It is any contract that evidences residual interest in the assets of an entity after deducting all
of its liabilities.
a. Equity instrument
b. Debt instrument
c. Loan and receivable
d. Financial asset with indeterminable fair value

5. Financial assets include all of the following, except

a. Prepaid expenses c. Trade accounts receivable
b. Cash in bank d. Loans receivable

6. Financial liabilities include all of the following, except

a. Trade accounts payable c. Bonds payable
b. Notes payable d. Income taxes payable

7. Equity instruments include all of the following, except

a. Ordinary shares
b. Preference shares
c. Warrants or options that allow the holder to purchase a fixed number of ordinary shares
of the issuing entity in exchange for a fixed amount of cash or another financial asset.
d. Corporate bonds and other debt instruments issued by the entity.
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8. A preference share that provides for mandatory redemption on a specific date or at the option
of the holder is
a. A financial asset c. An equity instrument
b. A financial liability d. None of the above

9. Which of the following is not a financial instrument?

a. Cash deposited in bank
b. Gold bullion deposited in bank
c. A perpetual debt instrument, meaning no maturity date, that pays interest annually
extending into the indefinite future.
d. Ordinary share capital issued by the entity.

10. Which of the following statements in relation to dividends is true?

I. Dividends in respect of ordinary shares are debited directly to equity.
II. Dividends in respect of redeemable preference shares are debited directly to
equity.
a. I only b. II only c. Both I and II d. Neither I nor II

11. Which of the following is not classified as a financial instrument?

a. Convertible bond c. Warranty provision
b. Foreign currency contract d. Loan receivable

12. Which should be classified as financial instruments?

a. Patents b. Trade receivables c. Inventories d. Land and building

13. Which is not a financial asset?

a. Cash
b. An equity instrument of another entity
c. A contract that may or will be settled in the entity’s own instrument and is not classified
as an equity instrument of the entity.
d. Prepaid expense

14. Which instrument is best described as a contract that evidences a residual interest in the
assets of an entity after deducting the liabilities?
a. Financial liability c. Equity
b. Guarantee d. Financial asset

15. Changes in fair value of securities are reported in the income statement for which type of
securities?

a. Marketable equity securities c. Trading securities

b. Available-for-sale securities d. Held-to-maturity securities
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