09.24 Flashcards
Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic?
- Relevance
- Timeliness
- Comparability
- Confirmatory value
Relevance
**Relevance and faithful representation are the two primary qualitative characteristics of financial information.
Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization? Reliability. Timeliness. Neutrality. Relevance.
Relevance.
**The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.
What is the conceptual framework intended to establish?
- Generally Accepted Accounting Principles in financial reporting by business enterprises.
- The meaning of “present fairly in accordance with Generally Accepted Accounting Principles.”
- The objectives and concepts for use in developing standards of financial accounting and reporting.
- The hierarchy of sources of Generally Accepted Accounting Principles.
The objectives and concepts for use in developing standards of financial accounting and reporting.
**The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a “constitution” for developing specific accounting principles. The concepts statements are not GAAP, however.
During the period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:
- Both enterprise performance and management performance.
- Management performance but does not directly provide information about enterprise performance.
- Enterprise performance but not directly provide information about management performance.
- Neither enterprise performance nor management performance.
Enterprise performance but not directly provide information about management performance.
**The financial statements provide a wealth of information about the performance and financial position of the enterprise, but they do not directly allow an evaluation of management. There are too many factors that affect the firm’s performance to be able to single out management’s contribution (or lack of it). Many factors interact to determine the performance of the enterprise, one of them being management’s performance. Also, for example, current enterprise performance is affected by the past actions of managers that may no longer be with the enterprise.
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:
- Reliability.
- Materiality.
- Legal entity.
- Economic entity.
Economic entity.
**Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity, making this the correct response.
According to the conceptual framework, the process of reporting an item in the financial statements of an entity is: Allocation. Matching. Realization. Recognition.
Recognition.
**Recognition is the strongest reporting action that can be taken. When an item is recognized, that means it will appear in the financial statements, perhaps not as an individual line item, but definitely part of one. Many other items find their way into the footnotes, but are not recognized.
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? Replacement cost. Current market value. Historical cost. Net realizable value.
Replacement cost.
**Replacement cost is the amount to be paid for an item at the current time. This concept is used in the lower-of-cost-or-market inventory valuation procedure. Replacement cost is an example of an entry price-the amount required to be paid currently to obtain an asset already held.
A company owns land and a building that houses its manufacturing operations. When the company purchased the manufacturing facility 10 years ago, the purchase price allocated to the land account was $120,000. The manufacturing facility is located in an area that was once the site of many factories. The owners of many of the neighboring factories have recently sold their facilities to residential real estate developers. The company's land is also suitable for residential development. The estimated current value of the land as part of the manufacturing facility is $150,000. The estimated current value of the land as an undeveloped investment is $130,000, and the current value of the land as part of a residential development would be $180,000. What is the fair value of the land? $120,000 $130,000 $150,000 $180,000
$180,000
**This response is correct because it is the value of the land as if used for residential development. The fair value of a nonfinancial asset assumes the highest and best use of the asset by market participants, even if the intended use of the asset by the reporting entity is different. The highest and best use must consider what is physically possible, legally permissible, and financially feasible. The fair value is the maximum value of the asset to market participants. The maximum value of the land is as if the land was sold as part of the residential development.
In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for
- Transaction Cost
- Transportation Cost
- Transaction Cost-NO
- Transportation Cost-YES
**In determining the fair value of an asset in the most advantageous market, the market-based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.
Which of the following is an example of the expense recognition principle of associating cause and effect?
- Allocation of insurance cost.
- Sales commissions.
- Depreciation of fixed assets.
- Officers’ salaries.
Sales commissions.
**sales commissions are recognized as an expense on the basis of a presumed direct association with the related sales revenue (SFAC 5).
On November 1, 20X5, Key Co. paid $3,600 to renew its insurance policy for three years. At December 31, 20X5, Key’s unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense.
What amounts should be reported for prepaid insurance and insurance expense in Key’s December 31, 20X5, financial statements?
- Prepaid Insurance
- Insurance expense
- Prepaid Insurance-3,400
- Insurance expense-1,100
**Prepaid insurance at year end is $3,400, which is the portion of the prepayment on November 1 that continues to the next three years. Of the 36 months of coverage purchased, 34 months remain at December 31: $3,400 = (34/36)($3,600). Insurance expense includes three items: (1) the $90 of prepaid insurance remaining in the trial balance that has expired, (2) the $200 of insurance expense related to the November 1 purchase above ($3,600−$3,400 remaining prepaid), and (3) the expense portion of the $4,410 insurance expense amount in the unadjusted trial balance ($4,410−$3,600) = $810. This firm must have expensed the entire $3,600 November 1 purchase because it was not reflected in prepaid insurance. The difference of $810 reflects actual expense. Therefore, total insurance expense equals $1,100 = $90 + $200 + $810.
James Lee, M.D., keeps his accounting records on a cash basis. During year 2, Dr. Lee collected $100,000 in fees from his patients. At December 31, year 1, Dr. Lee had accounts receivable of $20,000. At December 31, year 2, Dr. Lee had accounts receivable of $30,000, and unearned fees of $1,000. On an accrual basis, how much was Dr. Lee’s patient service revenue for year 2? $111,000 $109,000 $ 90,000 $ 89,000
$109,000
**The following formula is used to adjust service revenue from the cash basis to the accrual basis:
Accrual basis Service Revenue=Cash Fees Collec+EndAR-Beg AR-Beg unearned fees-End unearned fees
Therefore, Dr. Lee’s patient service revenue for year 2 is $109,000 ($100,000 + $30,000 – $20,000 + $0 − $1,000). As an alternative, T-accounts can be used.
Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:
Front Market Side Market
Selling Price $52/sh $50/sh
Transaction Cost $ 6/sh $ 1/sh
If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?
$52/sh
$50/sh
$49/sh
$46/sh
$52/sh
**Since Front market is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.
Ward, a consultant, keeps her accounting records on a cash basis. During year 2, Ward collected $200,000 in fees from clients. At December 31, year 1, Ward had accounts receivable of $40,000. At December 31, year 2, Ward had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Ward's service revenue for year 2? $175,000 $180,000 $215,000 $225,000
215,000
**$200,000 + $60,000 − $40,000 + 0 − $5,000 = $ 215,000
Cash fees Collec+End AR-Beg AR+Beg Unearned Fees-End Unearned fees=Accrual Basis Services Rev.
According to the FASB Conceptual Framework, which of the following relates to both relevance and faithful representation?
Consistency
Verifiability
Consistency-Yes
Verifiability-Yes
**verifiability and consistency (a component of comparability) are both enhancing qualitative characteristics relating to both relevance and faithful representation.
