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32 Cards in this Set
- Front
- Back
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According to the FASB and IASB conceptual frameworks, the primary users of financial reports include all of the following, except: a. Lenders. b. Regulators. c. Investors. d. Creditors.
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Explanation Choice "b" is correct. The FASB and IASB conceptual frameworks indicates that regulators are not considered to be primary users. Choice "c" is incorrect. Investors are primary users. Choice "d" is incorrect. Creditors are primary users. Choice "a" is incorrect. Lenders are primary users. |
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According to the FASB and IASB conceptual frameworks, useful information must exhibit the fundamental qualitative characteristics of: a. Understandability and timeliness. b. Comparability and materiality. c. Neutrality and verifiability. d. Faithful representation and relevance.
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Explanation Choice "d" is correct. The fundamental qualitative characteristics of useful financial information are relevance and faithful representation. Choice "b" is incorrect. Comparability is an enhancing qualitative characteristic. Materiality is a component of relevance, in addition to predictive value and confirming value. Choice "a" is incorrect. Understandability and timeliness are enhancing qualitative characteristics of useful financial information. Choice "c" is incorrect. Verifiability is an enhancing qualitative characteristic. Neutrality is a component of faithful representation. |
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What is the underlying concept governing the recording of gain contingencies? a. Conservatism. b. Consistency. c. Relevance. d. Reliability.
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Explanation Choice "a" is correct. Gain contingencies should not be recognized prior to realization as a prudent reaction to the uncertainty surrounding the realization of the gain as reflected in the convention of conservatism. Choice "c" is incorrect. Overall, the qualities of information apply equally to all accounting information, not just gain contingencies. Relevance is a primary quality of information, which dictates that any information relative to the entity should be reported if it might be useful to the third party user (that is the information is timely with predictive and feedback value). Choice "b" is incorrect. Overall, the qualities of information apply equally to all accounting information, not just gain contingencies. This includes consistency, an element of comparability, the secondary quality of information, which specifies that, when a choice of accounting principles has been made, the same principle be used in accounting for subsequent years' transactions. Choice "d" is incorrect. Overall, the qualities of information apply equally to all accounting information, not just gain contingencies. This includes reliability, a primary quality, which requires that information be verifiable, neutral, and representationally faithful. |
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According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory? a. Net realizable value. b. Replacement cost. c. Present value of future cash flows. d. Historical cost. |
Explanation Choice "c" is correct. The present value of future cash flows is used to measure long-term receivables or payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows. SFAC 5 para. 67 Choice "d" is incorrect. Historical cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "b" is incorrect. Replacement (or current) cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "a" is incorrect. Net realizable value can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. |
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According to the FASB and IASB conceptual frameworks, the objective of general purpose financial reporting is to: a. Comply with generally accepted accounting principles. b. Provide financial information that is useful to primary users. c. Report on how effectively and efficiently management has used the entity's resources. d. Comply with the need for conservatism. Explanation |
Explanation Choice "b" is correct. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity. Choice "a" is incorrect. Generally accepted accounting principles are derived from and based on the objective of financial reporting, not the other way around. Choice "c" is incorrect. Information concerning how effectively and efficiently management has discharged its responsibility to use the entity's resources is only one aspect of the information financial reporting is intended to provide. Choice "d" is incorrect. Conservatism is not the objective of financial reporting, although it is an underlying concept. |
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According to the FASB and IASB conceptual frameworks, completeness is an ingredient of:
a. Relevance b. Faithful Representation
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b. Faithful Representation
(COMPLETEly neutral is free from error) |
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What is the underlying concept that supports the immediate recognition of a contingent loss? a. Consistency. b. Conservatism. c. Substance over form. d. Matching. |
Explanation Choice "b" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. Recognition of a contingent loss is the recording of an amount representing uncertainty and risk in a business situation. Choice "c" is incorrect. The substance over form concept presumes that the transaction form may not dictate the accounting treatment. Choice "a" is incorrect. Consistency is conformity from period to period with unchanging policies and procedures. Choice "d" is incorrect. The matching principle dictates that expenses be matched with the related revenues generated or the time period in which the expense is incurred and known. SFAS #5 cites matching as the one concept supporting the immediate recognition of a contingent loss, but it is not the primary underlying concept. |
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According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is: a. Recognition. b. Realization. c. Matching. d. Allocation.
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Explanation Choice "a" is correct. Recognition is the process of recording an item in the financial statements of an entity. SFAC 5 para. 6 Choice "d" is incorrect. Allocation is the accounting process of assigning or distributing an amount according to a plan or a formula. SFAC 6 para. 142 Choice "c" is incorrect. Matching of costs and revenues is simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. SFAC 6 para. 146 Choice "b" is incorrect. Realization is the process of converting noncash resources and rights into money. SFAC 6 para. 143 |
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Financial information provided in general purpose financial reports does not include information about: a. The resources of the entity. b. How effectively and efficiently the entity's governing board has discharged its responsibility to use the entity's resources. c. How effectively and efficiently the entity's shareholders' have discharged their responsibility to use the entity's resources. d. The claims against the entity. |
Explanation Choice "c" is correct. Shareholders do not have a responsibility (or a right) to use the entity's resources. Choices "a", "d", and "b" are incorrect. Financial information provided in general purpose financial reports should include information about the resources of the entity, the claims against the entity, and how effectively and efficiently the entity's management and governing board have discharged their responsibilities to use the entity's resources. |
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According to the FASB conceptual framework, which of the following statements conforms to the realization concept? a. Depreciated equipment was sold in exchange for a note receivable. b. Cash was collected on accounts receivable. c. Product unit costs were assigned to cost of goods sold when the units were sold. d. Equipment depreciation was assigned to a production department and then to product unit costs.
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Explanation Choice "a" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83. Choice "d" is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no realization associated with the assignment. Choice "b" is incorrect. The realization concept is integral to accounting for revenues and expenses and is not connected to collection of receivables. Choice "c" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an example of matching. There is no realization associated with this assignment. |
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On December 31, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in Brooks' December 31 balance sheet? a. Current reproduction cost. b. Current replacement cost. c. Net realizable value. d. Historical cost. |
Explanation Choice "c" is correct. Net realizable value is the appropriate measurement basis for equipment included in Brooks' Dec. 31 balance sheet, because of the decision to end operations and quickly (3 months) dispose of its assets. Choice "d" is incorrect. Historical cost is appropriate if operations were continuing. Choice "a" is incorrect. Current reproduction cost (producing new and substantially identical assets, at current prices, adjusted for depreciation to date) is appropriate in optional supplemental price level financial statements. Choice "b" is incorrect. Current replacement cost (acquiring new and substantially equivalent property at current prices, adjusted for estimated depreciation since acquisition) is appropriate in optional supplemental price level financial statements. |
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According to the FASB and IASB conceptual frameworks, which of the following is an enhancing qualitative characteristic? a. Materiality. b. Neutrality. c. Completeness. d. Timeliness.
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Explanation Choice "d" is correct. Timeliness, understandability, comparability and verifiability are characteristics that enhance the usefulness of information that is relevant and faithfully represented. Choice "b" is incorrect. Neutrality is not an enhancing qualitative characteristic. It is a key component of faithful representation. Choice "a" is incorrect. Materiality is not an enhancing qualitative characteristic. It is a key component of relevance. Choice "c" is incorrect. Completeness is not an enhancing qualitative characteristic. It is a key component of faithful representation. |
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A U.S. public company needs guidance in accounting for and reporting a complex derivative transaction that it entered into with a European subsidiary. This company is most likely to find the appropriate guidance in the: a. International Financial Reporting Standards. b. FASB Statements of Financial Accounting Concepts. c. FASB Statements of Financial Accounting Standards. d. FASB Accounting Standards Codification.
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Explanation Choice "d" is correct. The FASB Accounting Standards Codification is the single source of U.S. GAAP. U.S. public companies are required to follow U.S. GAAP. Choice "a" is incorrect. The International Financial Reporting Standards cannot be used by a U.S. public company as a source of U.S. GAAP. Choice "c" is incorrect. FASB Statements of Financial Accounting Standards are included in the FASB Accounting Standards Codification, which is the single source of U.S. GAAP. Choice "b" is incorrect. The FASB Statements of Financial Accounting Concepts are not GAAP. |
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Which of the following is not defined in FASB Statement of Financial Accounting Concepts Number 7 as one of the five elements of present value (or economic value) measurement used to establish the value of assets or liabilities using cash flow information? a. Timing Variations of Future Cash Flows. b. Time Value of Money. c. Estimate of Future Cash Flow. d. Risk Tolerance of Management.
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Explanation Choice "d" is correct. The risk tolerance of management is not defined by SFAC #7 as an element of present value measurement used to establish the value of assets or liabilities using cash flows. SFAC defines the following elements of present value measurement identified by the mnemonic UVOTE:
The Price for Bearing Uncertainty.
Expectations about Timing Variations of Future Cash Flows.
Other Factors (e.g., Liquidity Issues and Market Imperfections).
Time Value of Money (the Risk-free Rate of Interest).
Estimate of Future Cash Flow. |
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Which of the following is true regarding the comparison of managerial to financial accounting? a. Managerial accounting has a past focus and financial accounting has a future focus. b. Managerial accounting is generally more precise. c. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness. d. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.
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Explanation Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes. Choice "b" is incorrect. Financial accounting is generally more precise. Choice "a" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on reporting past results. Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial statement users (including the characteristic of relevance), while the emphasis of managerial accounting is providing timely information to management decision makers. |
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Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism during a particular reporting period? a. Reporting investments with appreciated market values at market value. b. Reporting inventory at the lower of cost or market value. c. Capitalization of research and development costs. d. Accrual of a contingency deemed to be reasonably possible.
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Explanation Choice "b" is correct. The rule of conservatism states that revenues and gains should be recognized when the earnings process is complete, but that expenses and losses should be expensed immediately. Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when market is lower than cost in the period the loss is sustained, rather than when the inventory is sold, consistent with the rule of conservatism. Choice "c" is incorrect. Because the future benefits of R&D costs are questionable, these cost should be expensed immediately, consistent with the rule of conservatism and the matching principle. Choice "d" is incorrect. The rule of conservatism only requires the accrual of "probable" losses. The accrual of a reasonably possible loss is not required and the accrual of any contingent gain, whether probable, reasonably possible, or remote, is prohibited. Choice "a" is incorrect. The reporting of marketable securities with appreciated values at market value requires the recording of a gain on the asset before the gain is realized. This contradicts the rule of conservatism, but is allowed because fair value is a more relevant measure of the value of marketable securities. |
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According to the FASB and IASB conceptual frameworks, the quality of information that helps users forecast future outcomes is: a. Representational faithfulness. b. Confirming value. c. Neutrality. d. Predictive value.
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Explanation Choice "d" is correct. The quality of information that helps users forecast future outcomes is predictive value. Forecasting is predicting. Choice "b" is incorrect. The quality of information that helps users forecast future outcomes is called predictive value, not confirming value. Confirming value provides feedback about evaluations previously made by users. Choice "a" is incorrect. The quality of information that helps users forecast future outcomes is called predictive value, not representational faithfulness. Representational faithfulness means that financial information faithfully represents the reported economic phenomena. Choice "c" is incorrect. The quality of information that helps users forecast future outcomes is called predictive value, not neutrality. Neutrality is the depiction of financial information that is free from bias in selection or presentation. |
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Which of the following characteristics enhances relevance and faithful representation? a. Neutrality. b. Materiality. c. Timeliness. d. Predictive value.
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Explanation Choice "c" is correct. Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented. Choice "b" is incorrect. Materiality is a component of relevance. Choice "d" is incorrect. Predictive value is a component of relevance. Choice "a" is incorrect. Neutrality is a component of faithful representation. |
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Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis? a. Economic entity. b. Monetary unit. c. Periodicity. d. Going concern.
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Explanation Choice "b" is correct. The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis. Choice "d" is incorrect. The going concern assumption has nothing to do with money per se. The going concern assumption presumes that an entity will continue to operate in the foreseeable future. Choice "c" is incorrect. The periodicity has nothing to do with money per se. The periodicity assumption is that economic activity can be divided into meaningful time periods. Choice "a" is incorrect. The economic entity assumption has nothing to do with money per se. The economic entity assumption is that economic activity can be accounted for when considering an identifiable set of activities. |
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According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept? a. Historical cost. b. Current market value. c. Replacement cost. d. Net realizable value.
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Explanation Choice "c" is correct. Replacement cost is defined as the amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost. Choice "b" is incorrect. Current market value, or fair value, is the price to sell (not acquire) an asset. Choice "a" is incorrect. Historical cost is the amount paid by a company to acquire an asset. Choice "d" is incorrect. Net realizable value is the selling price of an asset less any disposal costs. |
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Which of the following statements best describes an operating procedure for issuing FASB Accounting Standards Update? a. The emerging issues task force must approve a discussion memorandum before it is disseminated to the public. b. A new Accounting Standards Update can be rescinded by a majority vote of the AICPA membership. c. An Accounting Standards Update is issued only after a majority vote by the members of the FASB. d. The exposure draft is modified per public opinion before issuing the discussion memorandum. |
Explanation Choice "c" is correct. An Accounting Standards Update is issued only after a majority vote of the members of the FASB. Choice "a" is incorrect. There is no necessity for the EITF to approve a discussion memorandum before it is disseminated to the public. Choice "d" is incorrect. There is no necessity for an exposure draft to be modified per public opinion before issuing the discussion memorandum (a question can be raised here as to "what" discussion memorandum"). Exposure drafts are quite/most often modified before they are issued as FASB statements, but they do not have to be. Whether they are or are not modified is a function of whether the FASB thinks they should be modified, partly due to the public comments that have been received. Choice "b" is incorrect. There is no way to rescind a new Accounting Standards Update, although, in reality, an ASU can be rescinded by the issuance of a new ASU on the same subject. |
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According to the FASB and IASB conceptual frameworks, to be relevant, information should have which of the following? a. Neutrality. b. Completeness. c. Predictive value. d. Verifiability.
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Explanation Choice "c" is correct. To be relevant, information should have predictive value and/or confirming value, and must be material. Choice "b" is incorrect. Completeness is a component of faithful representation. Choice "d" is incorrect. Verifiability is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented. Choice "a" is incorrect. Neutrality is a component of faithful representation. |
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According to the FASB and IASB conceptual frameworks, one of the fundamental qualitative characteristics of useful financial information is: a. Timeliness. b. Comparability. c. Relevance. d. Verifiability.
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Explanation Choice "c" is correct. Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information. Choice "b" is incorrect. Comparability is an enhancing qualitative characteristic. Choice "a" is incorrect. Timeliness is an enhancing qualitative characteristic. Choice "d" is incorrect. Verifiability is an enhancing qualitative characteristic. |
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According to the FASB and IASB conceptual frameworks, neutrality is an ingredient of: a. Timeliness. b. Relevance. c. Comparability. d. Faithful representation.
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Explanation Choice "d" is correct. Neutrality, which is freedom from bias in selection or presentation, is an ingredient of faithful representation. Choice "b" is incorrect. Relevance is a fundamental qualitative characteristic along with faithful representation, and not an ingredient. Choice "c" is incorrect. Comparability is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented. It is not an ingredient of relevance or faithful representation. Choice "a" is incorrect. Timeliness is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented. It is not an ingredient of relevance or faithful representation. |
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According to the IASB conceptual framework, which of the following is an underlying assumption of financial statement preparation and presentation? a. Periodicity. b. Historical cost. c. Going concern. d. Monetary unit.
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Explanation Choice "c" is correct. Under the IASB framework, going concern is the underlying assumption of financial statement preparation and presentation. Choice "a" is incorrect. This is a fundamental assumption under the FASB framework, not the IASB framework. Choice "b" is incorrect. This is a fundamental assumption under the FASB framework, not the IASB framework. Choice "d" is incorrect. This is a fundamental assumption under the FASB framework, not the IASB framework. |
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Which of the following is the most authoritative source of U.S. GAAP? a. FASB Accounting Standards Codification. b. FASB Statements of Financial Accounting Standards. c. FASB Statements of Financial Accounting Concepts. d. International Financial Reporting Standards.
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Explanation Choice "a" is correct. The FASB Accounting Standards Codification is the single source of authoritative nongovernmental U.S. GAAP. Choice "d" is incorrect. The International Financial Reporting Standards are not an authoritative source of U.S. GAAP. Choice "b" is incorrect. FASB Statements of Financial Accounting Standards are included in the Accounting Standards Codification. Choice "c" is incorrect. Per the FASB, the Statements of Financial Accounting Concepts are not GAAP. |
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Which of the following statements best describes an operating procedure for issuing a new International Financial Reporting Standard? a. An exposure draft is issued after approval by at least nine members of the IASB. b. Exposure drafts are only released to selected interested parties. c. The IASB issues a required discussion paper as its first publication on the new topic. d. The IASB and IFRIC must jointly approve a new IFRS by majority vote. |
Explanation Choice "a" is correct. Before an exposure draft is issued for public comment, it must be approved by at least nine members of the IASB. Choice "c" is incorrect. The issuance of a discussion paper is not required. Choice "d" is incorrect. The IASB must approve a new IFRS by a vote of at least nine of the fifteen members. The IFRIC issues Interpretations and does not vote on the issuance of new IFRS. Choice "b" is incorrect. Exposure drafts are issued for public comment. |
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According to the FASB and IASB conceptual frameworks, which of the following correctly pairs a fundamental qualitative characteristic of useful information with one of its components? a. Relevance and materiality. b. Faithful representation and verifiability. c. Faithful representation and predictive value. d. Relevance and timeliness. |
Explanation Choice "a" is correct. Under the FASB and IASB conceptual frameworks, relevance is a fundamental qualitative characteristic, and materiality is a component of relevance. Choice "d" is incorrect. Relevance is a fundamental qualitative characteristic, but timeliness is not a component of relevance. Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented. Choice "b" is incorrect. Faithful representation is a fundamental qualitative characteristic, but verifiability is not a component of relevance. Verifiability is a characteristic that enhances the usefulness of information that is relevant and faithfully represented. Choice "c" is incorrect. Faithful representation is a fundamental qualitative characteristic, but predictive value is not a component of faithful representation. Predictive value is a component of relevance. |
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Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization? a. Reliability. b. Neutrality. c. Relevance. d. Timeliness.
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Explanation Choice "c" is correct. According to SFAC No.8, financial information is relevant if it is capable of making a difference in the decisions made by users and has predictive and/or confirming value. Choice "a" is incorrect. Reliability, referred to as faithful representation in SFAC No. 8, requires completeness, neutrality and freedom from error. Choice "d" is incorrect. Timeliness is an enhancing qualitative characteristic and means that information is available to users in time to be capable of influencing their decisions. Choice "b" is incorrect. Neutrality is a component of faithful representation, not reliability. |
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Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification? a. A proposed accounting research bulletin. b. A proposed statement of position. c. A proposed accounting standards update. d. A proposed staff accounting bulletin. |
Explanation Choice "c" is correct. A proposed accounting standards update is prepared by the FASB as part of the due-process activities. Choice "b" is incorrect. A proposed statement of position is issued by the American Institute of Certified Public Accountants (AICPA) and not the FASB. Choice "a" is incorrect. A proposed accounting research bulletin is not a document issued as part of the due-process activities of the FASB for amending the FASB Accounting Standards Codification. Accounting research bulletins were never issued by the FASB, and are no longer issued at all. Choice "d" is incorrect. A proposed staff accounting bulletin is issued by the U.S. Securities and Exchange Commission (SEC) and is not part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification. |
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Materiality and relevance are both defined by: a. Quantitative criteria set by the Financial Accounting Standards Board. b. The perceived benefits to be denied that exceed the perceived costs associated with it. c. The consistency in the application of methods over time. d. What influences or makes a difference to a decision maker. |
Explanation Choice "d" is correct. The accountant's determination of materiality and relevance is based on professional judgment and is affected by the needs of those who will be using the financial statements to make decisions. Choice "a" is incorrect. The Financial Accounting Standards Board does not establish quantitative criteria that define materiality and relevance. Choice "c" is incorrect. Materiality and relevance are not defined by consistency in the application of methods over time. Consistency in the application of methods over time is a quality needed for the overall accounting process. Choice "b" is incorrect. The perceived benefits to be denied that exceed the perceived costs associated with it does not define materiality and relevance. The perceived benefits achievedthat exceed the costs associated with them better describes the cost constraint, which holds that the benefits of financial reporting must be greater than the costs of obtaining and presenting the information. |
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According to the FASB conceptual framework, for financial reporting to be useful, it must: a. Directly measure the value of the entity being reported on. b. Be understandable to those who have a limited knowledge of business activities. c. Be in accordance with generally accepted accounting principles. d. Provide information useful for making business and investment decisions.
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Explanation Choice "d" is correct. According to the FASB conceptual framework, for financial reporting to be useful it must provide information which is useful to existing and potential investors, lenders, and other creditors in making decisions about the reporting entity based on the financial information provided. Choice "c" is incorrect. Being in accordance with generally accepted accounting principles is not a qualitative characteristic for financial reporting to be useful in accordance with the FASB conceptual framework. Choice "b" is incorrect. According to the FASB conceptual framework, for the accounting information to be useful, it does not have to be understandable to those who have a limited knowledge of business activities. According to the conceptual framework, for financial reporting to be useful it should be understandable by those who have a reasonable knowledge of business and economic activities and who are willing to study the information carefully. Choice "a" is incorrect. Directly measuring the value of the entity being reported on is not a qualitative characteristic of useful information in accordance with the FASB conceptual framework. |
