1.1 Flashcards
According to the FASB’s conceptual framework, which of the following is an essential characteristic of a liability?
Liabilities are obligations resulting from previous transactions or events.
A liability has three essential characteristics: (1) It represents an obligation that requires settlement by a probable future transfer or use of assets, (2) the entity has little or no discretion to avoid the obligation, and (3) the transaction or other event resulting in the obligation has already occurred.
The FASB makes changes to the Accounting Standards Codification by issuing
Accounting Standards Update.
An Accounting Standards Update (ASU) is issued when the FASB approves an amendment to the Accounting Standards Codification (ASC). However, an ASU is not authoritative until it has been incorporated into the ASC. SEC pronouncements and the ASC are the only sources of authoritative financial accounting guidelines for nongovernmental entities in the U.S.
According to SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements, a required element of every present value measurement is
The time value of money.
According to SFAC 7, the elements of a present value measurement are (1) estimates of future cash flows; (2) expected variability of their amount and timing; (3) the time value of money based on the risk-free interest rate; (4) the price of uncertainty inherent in an asset or liability; and (5) other factors, such as lack of liquidity or market imperfections.
According to the FASB’s conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called
Predictive value.
Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Financial information has predictive value if it can be used as an input in a predictive process.
The primary needs of resource providers of nongovernmental not-for-profit entities are for information about
I. Financial return on investment
II. Services provided by the not-for-profit entity
III. The continuing ability of the not-for-profit entity to provide services
IV. Determining compliance with laws, rules, and regulations
II & III.
Resource providers of NFPs primarily need information about the services provided by the entity and the ability of the entity to continue to provide those services. These needs differ from the needs of resource providers for business entities, who primarily emphasize financial return.
Financial information is most likely to be verifiable when an accounting transaction occurs that
Involves an arm’s-length transaction between two independent parties.
Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm’s-length transaction between independent interests suggests that the transaction is verifiable.
Which of the following is true regarding the comparison of managerial and financial accounting?
Managerial accounting need not follow generally accepted accounting principles (GAAP), while financial accounting must follow them.
Managerial accounting assists management decision making, planning, and control. Financial accounting addresses accounting for an entity’s assets, liabilities, revenues, expenses, and other elements of financial statements. Financial statements are the primary method of communicating to external parties information about the entity’s results of operations, financial position, and cash flows. For general-purpose financial statements to be useful to external parties, they must be prepared in conformity with accounting principles that are generally accepted in the United States. However, managerial accounting information is primarily directed to specific internal users. Thus, it ordinarily need not follow such guidance.
Reporting LIFO inventory at the lower of cost or market (LCM) is a departure from the accounting principle of
Historical cost.
Historical cost is the amount of cash, or its equivalent, paid to acquire an asset. Thus, the LCM rule departs from the historical cost principle when the utility of the inventory is judged no longer to be as great as its cost.
Each of the following events is required to be reported to the United States Securities and Exchange Commission on Form 8-K, except
The quarterly results of operations and financial condition of a registrant.
Form 8-K is a current report to disclose material events within 4 business days after such an event occurs. However, the quarterly results of operations and financial condition of a registrant (interim financial information) must be reported not on Form 8-K but on Form 10-Q, the quarterly report to the SEC. It is not required to be audited. If it is not, it must be reviewed.
Which of the following is a true statement about the objective of general-purpose financial reporting?
The information provided relates to the entity’s economic resources and claims.
The information reported relates to the entity’s economic resources and claims to them (financial position) and to changes in those resources and claims.
Which of the following most likely are not identified by the GASB as users of financial reporting for state and local governmental-type activities?
Portfolio analysis.
Analysts of investment portfolios are users of financial information primarily related to nongovernmental activities. The FASB is the standards setter for nongovernmental entities.
The computation of the current value of an asset using the present value of future cash flows method does not include the
Cost of alternate uses of funds given up.
The calculation of the current value of an asset using the present value method requires (1) the discount period (the productive life of the asset), (2) the discount rate (the applicable interest rate), and (3) the future values (the future amounts of cash receipts or cash savings). This method does not consider opportunity costs (benefits of the best alternative use of funds).
Which of the following is a characteristic of nongovernmental not-for-profit entities (NFPs)?
Both NFPs and business entities use scarce resources in the production and distribution of goods and services.
The operating environments of NFPs and business entities are similar in many ways. Both produce and distribute goods and services using scarce resources.
State and local governmental financial reports should have the qualitative characteristic of
Reliability.
Reliability is a qualitative characteristic in the GASB’s conceptual framework. Reliability generally is high for initial amounts of assets and liabilities, but allocation of certain amounts to periods may decrease reliability. The assessment of the reliability of remeasured amounts may be complex. However, the existence of active markets usually permits reliable remeasurement. Reliability also is improved when a valuation method, e.g., present value, is available that is (1) verifiable, (2) representationally faithful, and (3) reasonably free of bias. Moreover, reliability does not indicate certainty or precision. Also, reliability is inversely correlated with uncertainty.
Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved. According to the FASB’s conceptual framework, recognition of revenue does not occur until
The revenue is realized and earned.
According to the FASB’s conceptual framework, revenues should be recognized when they are realized or realizable and earned. Revenues are realized when products, merchandise, or other assets are exchanged for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.
