1.2 Flashcards
NFPs most likely should report
Service efforts.
Financial reporting by an NFP should provide information about economic resources, obligations, net resources, and changes in them. They include (1) performance during a period, (2) nature and relationship of resource inflows and outflows, (3) service efforts and accomplishments, and (4) factors affecting liquidity.
All of the following are objectives of financial reporting by nongovernmental not-for-profit entities except
To provide information about performance, including a single indicator comparable to a business enterprise’s net income, that permits resource providers to assess how effectively the entity is competing with others.
NFPs often have no single indicator of performance comparable to a business enterprise’s net income. Accordingly, other performance indicators are needed. The most useful is information measuring the changes in the amount and nature of net resources that is combined with information about service efforts and accomplishments.
The principal benefit of a single set of global financial reporting standards is
increase ease of capital flow.
Financial reporting based on a set of global standards eliminates the need for multinational companies to revise their statements or reconcile them to the local financial reporting framework. Trading their securities on local exchanges is facilitated. Foreign investment is thereby made much easier, and the cost of capital is lowered.
According to the FASB’s conceptual framework, the expected cash flow (ECF) approach to measuring present value
Considers all possible estimated cash flows.
The traditional approach to calculating present value uses one set of estimated cash flows and one interest rate. This approach is expected to continue to be used in many cases, for example, when contractual cash flows are involved. However, according to the FASB’s conceptual framework, the ECF approach is applicable in more complex circumstances, such as when no market or no comparable item exists for an asset or liability. The ECF results from multiplying each possible estimated amount by its probability and adding the products. The ECF approach emphasizes explicit assumptions about the possible estimated cash flows and their probabilities. The traditional method merely includes those uncertainties in the choice of interest rate. Moreover, by allowing for a range of possibilities, the ECF approach permits the use of present value when the timing of cash flows is uncertain.
Which of the following is considered a pervasive constraint by the FASB’s conceptual framework?
Cost.
Cost is a pervasive constraint on the information provided by financial reporting. The benefits of financial information should exceed the costs of reporting.
Which of the following statements about FASB procedures for promulgation of accounting pronouncements is false?
Official pronouncements require a unanimous vote for approval.
The issuance of official pronouncements of the FASB requires a simple majority of the members.
The FASB’s due process for setting accounting standards includes which of the following procedures?
The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
The FASB typically issues an exposure draft of the proposed Accounting Standards Update and then requests that interested parties (academics, businesses, accountants, regulators, etc.) provide feedback on the new standard either in writing or in public meetings at various stages of its due process activities. The FASB then makes a final decision based on the feedback and its deliberations.
According to the FASB’s conceptual framework, which of the following bases is the best indication that rental revenue should be recognized as realized and earned?
The passage of time.
Revenues should be recognized when they are realized or realizable and earned. The most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers. Rental revenue should be recognized evenly over the period of time during which the asset is being rented.
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.
According to Statements of Financial Accounting Concepts, predictive value relates to
Relevance:
Faithful representation:
Yes
No
Relevance is a fundamental qualitative characteristic of useful financial information. It is the capacity of information to make a difference in a decision. It must have (1) predictive value, (2) confirmatory value, or both. Moreover, materiality is an entity-specific aspect of relevance. Something has predictive value if it can be used in a predictive process. Something has confirmatory value with respect to prior evaluations if it provides feedback that confirms or changes (corrects) them.
Which of the following is least likely to be accomplished by providing general-purpose financial information useful for making decisions about providing resources to an entity?
To provide sufficient information to determine the value of the entity.
General-purpose financial reports are significantly based on estimates and do not suffice to determine the value of the entity.
Which of the following characteristics relates to both accounting relevance and faithful representation?
Verifiablity, comparability, and timeliness.
Verifiability, timeliness, comparability, and understandability are qualitative characteristics that enhance the relevance and faithful representation of accounting information.
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.
The FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?
Currently reported net income:
Comprehensive income:
Financial capital
Financial capital
The financial capital maintenance concept is the basis of (1) traditional financial statements (including net income) and (2) the full set of financial statements (including comprehensive income), discussed in the conceptual framework. Under this concept, a return on investment (defined in terms of financial capital) results only if the financial amount of net assets at the end of the period exceeds the amount at the beginning after excluding the effects of transactions with owners. Under a physical capital concept, a return on investment (in terms of physical capital) results only if the physical productive capacity (or the resources needed to achieve that capacity) at the end of the period exceeds the capacity at the beginning after excluding the effects of transactions with owners. The physical capital concept requires many assets to be measured at current (replacement) cost.
Which of the following objectives of financial reporting is applicable to governmental entities? Provide information
For assessing service efforts and accomplishments.
Providing information for assessing service efforts and accomplishments is one of the objectives that serves to assist in evaluating the operating results of a governmental entity.
