1-3 Objective Demos

Question 1

Identify one of the six fundamental qualitative characteristics that matches the example.

Information reported in a 2020 income statement in a Form 10-K of a public company is used to assess the accuracy of forecasted 2020 sales.

Answer 1

Confirmatory Value

Question 2

Identify one of the six fundamental qualitative characteristics that matches the example.

Information reported in the 2020 income statement in a Form 10-K of a public company is used as the basis to prepare a forecast of 2021 sales.

Answer 2

Predictive Value

Question 3

Identify one of the six fundamental qualitative characteristics that matches the example.

A company discloses its accounting policy for estimated uncollectible accounts because the policy and the amount recorded could make a difference to users of the financial information.

Answer 3

Materiality

Question 4

Identify one of the six fundamental qualitative characteristics that matches the example.

Actual warranty repairs in 2021 pertaining to 2020 sales of products exceed the warranty reserve on December 31, 2020 by $10,000. Although warranty estimates proved inaccurate, the amounts were reasonable based on information available at the end of 2020.

Answer 4

Free From Error

Question 5

Identify one of the six fundamental qualitative characteristics that matches the example.

A company does not deliberately increase its allowance for doubtful accounts in a period of profitability in order to build a cushion for future unprofitable years.

Answer 5

Neutrality

Question 6

Identify one of the six fundamental qualitative characteristics that matches the example.

A company reports the cost of equipment ($500,000) and accumulated depreciation ($100,000) in its financial statements, which provides information on the extent to which assets have been depreciated or used.

Answer 6

Completeness

Question 7

Identify one of the six fundamental qualitative characteristics that matches the example.

“Management concludes that a depreciation error discovered will not make a difference to external financial statement users because it represents less than 1% of net income.”

Answer 7

Materiality

Question 8

Identify one of the six fundamental qualitative characteristics that matches the example.

“The computation for depreciation expense on equipment for 2020 was accurately computed using the original cost of equipment, plus an estimated salvage value and useful life based upon the company’s past experiences with similar equipment”

Answer 8

Free from Error

Question 9

Identify one of the six fundamental qualitative characteristics that matches the example.

“Income dividend from discontinued operations is reported separately from income derived from continuing operations in the income statement. This presentation helps financial statements users estimate the amount of income that will continue into future years.”

Answer 9

Predictive Value

Question 10

Identify one of the six fundamental qualitative characteristics that matches the example.

“A company supplies extensive information in a not accompanying its financial statements related to its pension plan, including the assumptions used to calculate the pension liability.”

Answer 10

Completeness

Question 11

Identify one of the six fundamental qualitative characteristics that matches the example.

“The drop in sales reported in 2020 was inconsistent with an investor’s projected level of sales based upon a 5-year trend of previously reported sales.”

Answer 11

Confirmatory Value

Question 12

Identify one of the six fundamental qualitative characteristics that matches the example.

“A company discloses a description and a dollar amount of sales to a company in which it has a 25% ownership interest.”

Answer 12

Neutrality

Question 13

Identify one of the four enhancing qualitative characteristics that matches the example.

“A company reporting inventory under the LIFO inventory method (last-in, last-out), discloses inventory values under the FIFO inventory method (first-in, first-out). This disclosure allows financial statement users to compare inventory amounts using similar accounting methods across entities.”

Answer 13

Comparability

Question 14

Identify one of the four enhancing qualitative characteristics that matches the example.

A company elects to reference accompanying notes to financial statement forms. For example, next to long-term debt in the liabilities section of the balance sheet is the reference, “see note 7.”

Answer 14

Understandability

Question 15

Identify one of the four enhancing qualitative characteristics that matches the example.

Two independent auditors determine that a company’s recorded bond payable value is supported by reviewing bond contracts with creditors.

Answer 15

Verifiability

Question 16

Identify one of the four enhancing qualitative characteristics that matches the example.

For certain filers with the Securities and Exchange Commission, annual financial statements are due 60 days following the end of the fiscal year.

Answer 16

Timeliness

Question 17

Identify one of the four enhancing qualitative characteristics that matches the example.

A company with a loan outstanding to a bank provides the bank with monthly, unaudited financial statements.

Answer 17

Timeliness

Question 18

Identify one of the four enhancing qualitative characteristics that matches the example.

An independent auditor uses indirect evidence (customer aging, historical collection history, etc.) to evaluate the adequacy of the allowance for doubtful account balance recorded by the client.

Answer 18

Verifiability

Question 19

Identify one of the four enhancing qualitative characteristics that matches the example.

A company consistently uses the same method of depreciation (straight-line) year after year, for the same class of assets.

Answer 19

Comparability

Question 20

Identify one of the four enhancing qualitative characteristics that matches the example.

The accounting standards require a tabular reconciliation of warranties, outlining changes in the warranty accrual from the beginning of the period to the end of period. The format of a tabular reconciliation provides a clear picture of how the accrual increased and decreased over the year.

Answer 20

Understandability

Question 21

Identify if the statement is an illustration of the cost effectiveness constraint or not.

“In determining whether to expand disclosure of loss contingencies, the FASB considered the cost to the preparers of disclosing information that may be prejudicial against companies involved in ongoing litigation.”

Answer 21

Yes

Question 22

Identify if the statement is an illustration of the cost effectiveness constraint or not.

“The objective of the newly issued accounting standard to simplify the balance sheet classification of debt is to reduce the cost and complexity of determining the current versus noncurrent balance sheet classification of debt.”

Answer 22

Yes

Question 23

Identify if the statement is an illustration of the cost effectiveness constraint or not.

“A company decides not to review all of its revenue contracts for proper classification under the newly issued revenue recognition standard because of the time and costs involved.”

Answer 23

No

Question 24

Identify if the statement is an illustration of the cost effectiveness constraint or not.

“A company’s main accountant left the company abruptly one month before the close of the company’s fiscal year. In preparing annual statements, the company will incur excessive costs to hire accounting services to compute the ending inventory balance under FIFO (first-in, first-out). The company’s president is considering whether to estimate the inventory balance based upon last year’s information due to the excessive cost of preparing the information.”

Answer 24

No

The company will need to incur the costs to provide the information that is routinely required by companies to prepare

Question 25

Identify if the statement is an illustration of the cost effectiveness constraint or not.

“A reporting error in the computation of an inventory balance in a prior year is estimated to be no more than $10,500. The company estimates that it would cost over $70,000 to perform the detailed research to find the exact amount of error. The company’s accountant is proposing to use the amount of $10,500 to adjust the financial statement to correct the error.”

Answer 25

Yes
The estimate may be used due to the excessive cost of determining an exact amount as the company is confident that the amount is not materially understated.