1A - Conceptual Framework and Standard-Setting for Business and Nonbusiness Entities Flashcards
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third-quarter interim financial statements for the three months ended September 30?
$0
$15,000
$75,000
$95,000
Under FASB ASC 270-10-45-4, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report.
Property taxes ($60,000 x 3/12) $15,000 Major repairs ($240,000 x 3/9) _80,000_ Total $95,000
Which of the following is not an item that is required to be disclosed about reportable segments’ profit or loss (assuming that the item was included in the determination of profit or loss)?
Interest expense
Revenues from transactions with other operating segments of the same enterprise
Depreciation, depletion, and amortization expense
Rent expense
Rent Expense
FASB ASC 280-10-50-22 specifically lists the following as requiring disclosure:
- Revenues from external customers
- Revenues from transactions with other operating segments of the same enterprise
- Interest revenue
- Interest expense
- Depreciation, depletion, and amortization expense
- Unusual items as described in FASB ASC 225-20
- Equity in the net income of investees accounted for by the equity method
- Income tax expense or benefit
- Significant noncash items other than depreciation, depletion, and amortization expense
Revenues
Below is required to be disclosed about reportable segments’ profit or loss
- Revenues from ___ customers
- Revenues from transactions with other operating segments of the same enterprise
- ___ revenue
- ___expense
- ___, depletion, and amortization expense
- Unusual items as described in FASB ASC 225-20
- Equity in the net income of investees accounted for by the equity method
- Income tax expense or benefit
- Significant noncash items other than depreciation, depletion, and amortization expense
External
Interest
Interest
Depreciation
An operating segment, under FASB ASC 280-10-50-1, must have all of the following characteristics, except:
discrete information about that part of the enterprise is available.
engages in activities that may earn revenues and incur expenses.
separate legal standing as a sole proprietorship, partnership, corporation, or corporate joint venture.
its operating results are regularly reviewed by the chief operating decision maker.
separate legal standing as a sole proprietorship, partnership, corporation, or corporate joint venture.
An important dimension of FASB ASC 280-10-50-1 is the notion of operating segments, which are defined as components of a business enterprise:
- that engage in business activities from which the enterprise may earn revenues and incur expenses (including transactions with other segments),
- whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resource allocation and to assess performance, and
- for which discrete financial information is available.
SFAC 4 indicates that financial reporting by nonbusiness organizations should provide information useful to present and potential resource providers (e.g., creditors, suppliers, employees, donors, taxpayers) and meet which of the following objectives?
Financial reporting should include explanations and interpretations to help users understand financial information provided.
All of the answer choices are correct.
Financial reporting should provide information about the performance of an organization during a period. Periodic measurement of the changes in the amount and nature of the net resources of a nonbusiness organization and information about the service efforts and accomplishments of an organization together represent the information most useful in assessing its performance.
Financial reporting should provide information about how an organization obtains and spends cash or other liquid resources, about its borrowings and repayment of borrowings, and about other factors that may affect an organization’s liquidity.
All of the answer choices are correct.
According to the FASB conceptual framework, which of the following correctly pairs a primary qualitative characteristic of accounting information with one of its components?
Relevance and neutrality
Relevance and free from error
Faithful representation and completeness
Faithful representation and materiality
Faithful representation and completeness
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 proposed accounting research bulletin
A proposed staff accounting bulletin
A proposed statement of position
A proposed accounting standards update
A proposed accounting standards update.
The process for issuing a new accounting standards update includes the following steps:
- The FASB identifies a financial reporting issue.
- The FASB Chairman adds a project to the technical agenda.
- Public meetings are held.
- An exposure draft (proposed accounting standards update) is issued.
- A public roundtable is held.
- The FASB staff collects and analyzes all comments and the FASB redeliberates the proposed standard at public meetings.
- The FASB issues an Accounting Standards Update. It becomes part of the Accounting Standards Codification.
According to the FASB’s conceptual framework, the objectives of financial reporting for business enterprises are based on:
the need for conservatism.
reporting on management’s stewardship.
the needs of the users of the information.
generally accepted accounting principles.
the needs of the users of the information.
The process for issuing a new accounting standards update includes the following steps:
- The __ identifies a financial reporting issue.
- The FASB Chairman adds a project to the _____.
- __ meetings are held.
- An __ draft (proposed accounting standards update) is issued.
- A public ___ is held.
- The ___ staff collects and analyzes all comments and the FASB redeliberates the proposed standard at public meetings.
- The FASB issues an ___. It becomes part of the Accounting Standards Codification.
FASB
technical agenda
Public
exposure
roundtable
FASB
Accounting Standards Update
___ are the primary qualitative characteristics of accounting information. The components of relevance are predictive value, confirmatory value, and materiality. The characteristics of faithful representation are completeness, neutrality, and being free from error
Relevance and faithful representation
Changes to existing authoritative GAAP for nonissuer, nongovernmental entities are communicated by the Financial Accounting Standards Board through the issuance of:
Exposure Drafts.
Accounting Standards Updates.
Concepts Statements.
Statements of Financial Accounting Standards.
Accounting Standards Updates.
____update the FASB’s Accounting Standards Codification (ASC), present finalized changes, and provide the bases for conclusions surrounding changes in the Codification.
Accounting Standards Updates
According to the FASB conceptual framework, for financial reporting to be useful, it must:
provide information useful for making business and investment decisions.
be understandable to those who have a limited knowledge of business activities.
directly measure the value of the entity being reported on.
be in accordance with generally accepted accounting principles.
provide information useful for making business and investment decisions.
In general, an enterprise preparing interim financial statements should:
disregard permanent decreases in the market value of its inventory.
defer recognition of seasonal revenue.
use the same accounting principles followed in preparing its latest annual financial statements.
allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred.
use the same accounting principles followed in preparing its latest annual financial statements.
Because the standards generally treat interim periods as “integral parts” of the annual reporting periods, not as discrete periods or separate reporting periods, companies are required to use the same accounting principles for interim periods that they follow in preparing their annual financial statements.
In the process of setting accounting standards in the United States, how does the FASB respond when they receive significant, negative feedback regarding an Exposure Draft of a new accounting standard?
They contact those with negative views and seek to persuade them to change their views regarding the Exposure Draft.
They seek the help of the U.S. Congress to pass a law requiring the implementation of standard proposed in the Exposure Draft.
They inform the SEC of the negative feedback and turn the project over to the SEC.
They evaluate the feedback and consider how to revise the Exposure Draft.
They evaluate the feedback and consider how to revise the Exposure Draft.
When the Financial Accounting Standards Board (FASB) receives ___ feedback about an Exposure Draft, due process requires that they consider the ___ feedback and consider whether or not they should revise the Exposure Draft based upon the feedback.
Negative
Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?
$6,000
$5,000
$7,500
$3,500
Income tax expense for the second quarter is the total income for quarters one and two times the effective rate, less the income tax expense recorded at the end of the first quarter.
Income before tax expense (10,000 + 20,000) $30,000
Tax rate x 0.25
Total expense for second quarter $ 7,500
Less: Expense reported 1st quarter (1,500)
Income tax expense, 2nd quarter $ 6,000
ASB ASC 270-10-45-1 concluded that interim financial reporting should be viewed primarily in which of the following ways?
As reporting for an integral part of an annual period
As useful only if activity is spread evenly throughout the year
As reporting under a comprehensive basis of accounting other than GAAP
As if the interim period were an annual accounting period
As reporting for an integral part of an annual period
The Financial Accounting Standards Board in FASB ASC 270-10-45-1 noted that “each interim period should be viewed primarily as an integral part of an ___period.”
Annual
During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000 and its effective income tax rate was 15%. Worth’s effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first-quarter interim income statement, what amount of income tax expense should Worth report?
$15,000
$35,000
$25,000
$30,000
An estimate of the effective tax rate expected for the annual period is made at the end of each interim period. This rate is used in providing for income taxes on a current year-to-date basis.
Worth should use its expected rate of 25%: $100,000 × 0.25 = $25,000.
Generally accepted accounting principles are:
the basic concepts underlying financial accounting and reporting.
pronouncements of the Financial Accounting Standards Board.
established principles that rarely change.
guidelines that accountants may choose to follow.
the basic concepts underlying financial accounting and reporting.
Which of the following statements best describes an operating procedure for issuing a new Financial Accounting Standards Board (FASB) Accounting Standards Update?
A new FASB update can be rescinded by a majority vote of the AICPA membership.
The exposure draft is modified per public opinion before issuing the discussion memorandum.
An update is issued only after a majority vote by the members of the FASB.
The emerging issues task force must approve a discussion memorandum before it is disseminated to the public.
An update is issued only after a majority vote by the members of the FASB.
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?
Equity interest
Residual interest
Ownership interest
Donor’s interest
Residual interest
Net assets of a nongovernment not-for-profit are defined to be the __ ___in the assets of the entity that remains after deducting its liabilities. In a business enterprise, its equity represents the ownership interest, but not for a nongovernmental not-for-profit.
residual interest
Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic?
Timeliness
Feedback value
Comparability
Relevance
Relevance
The fundamental qualitative characteristics of accounting information are ___and ___representation.
relevance
faithful
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is:
matching.
allocation.
recognition.
realization.
recognition.
__ is the process of formally recording or incorporating an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like.”
Reconignition
Reporting inventory at the lower of cost or market is a departure from the accounting principle of:
consistency.
full disclosure.
historical cost.
conservatism.
historical cost.
Financial accounting is primarily based on the__principle which specifies that assets be recorded and carried at their historical acquisition cost
historical cost
According to the FASB conceptual framework, which of the following does not relate to both relevance and faithful representation?
Timeliness
Comparability
Verifiability
Confirmatory value
Confirmatory value
____, ___, ___and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.”
Comparability, verifiability, timeliness,
What is the primary objective of financial reporting?
To provide forecasts for future cash flows and financial performance
To provide management with an accurate evaluation of their financial performance
To provide economic information that is comprehensible to all users
To provide information that is useful for economic decision making
To provide forecasts for future cash flows and financial performance
SFAC 5 states that one of the characteristics of ___ ____is to provide financial information (not managerial or economic) that is useful to decision making
financial statements
According to the FASB conceptual framework, which of the following is not an essential characteristic of a revenue?
Revenues can result from major or central operations.
Revenues are inflows or other enhancements of assets.
Revenues can result from delivering or producing goods or rendering services.
Revenues can result from peripheral or incidental transactions.
Revenues can result from peripheral or incidental transactions.
SFAC 6, Elements of Financial Statements, defines ___as “inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.”
Revenues
How are amendments incorporated into the FASB Accounting Standards Codification?
By publishing a statement of financial accounting standards
By producing a discussion paper
By issuing an exposure draft
By releasing an accounting standards update
By releasing an accounting standards update
The FASB has established procedures for developing accounting standards; the last step in the process is for the FASB to issue an ___ ___ ____describing the amendment(s) to the Accounting Standards Codification.
Th Accounting Standards Update
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of:
substance over form.
consistency.
going concern
matching.
matching.
__ is recording expenses and expired costs necessary to generate revenue in the same period as the revenue.
Matching
What is the purpose of SFAC 4 as stated in that concepts statement?
All of the answer choices are correct.
To provide the methods for preparing financial statements for nonbusiness entities
To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities
To provide detailed accounting and reporting standards for nonbusiness entities
To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities
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?
Economic entity
Monetary unit
Periodicity
Going concern
Monetary unit
The four assumptions that underlie GAAP are the____
economic entity assumption, the going concern assumption, the periodicity assumption, and the monetary unit assumption
The SEC’s rulemaking procedures identified on their website include which of the following steps?
Commission deliberation
Rule adoption
Issue identification
None of the answer choices are correct.
Rule adoption
A corporation issues quarterly interim financial statements and uses the lower of cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?
Only the cost method of valuation should be used.
Gains from valuations in previous interim periods should be fully recognized.
Inventory losses generally should be recognized in the interim statements.
Temporary market declines should be recognized in the interim statements.
Inventory losses generally should be recognized in the interim statements.
If___ recognized in early interim periods are recovered in the same year, such recoveries are recognized as ___ in the appropriate interim periods
losses
gains
Which of the following statements is true?
None of the answer choices are correct.
GAAP applicable to nonbusiness organizations differ significantly from those applicable to business enterprises.
GAAP applicable to nonbusiness organizations differ significantly from those applicable to business enterprises and among the various types of nonbusiness organizations.
Applicable GAAP differ significantly among the various types of nonbusiness organizations.
GAAP applicable to nonbusiness organizations differ significantly from those applicable to business enterprises and among the various types of nonbusiness organizations.
According to the FASB conceptual framework, which of the following situations violates the concept of reliability?
Financial statements include property with a carrying amount increased to management’s estimate of market value.
Financial statements are issued nine months late.
Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits.
Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results.
Financial statements include property with a carrying amount increased to management’s estimate of market value.
The ___ is supposed to embody “a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.”
conceptual framework
The basic accounting principle that states that income or loss is determined by a process of associating realized revenues with those expenses necessary to generate them is the principle of:
going concern.
revenue realization.
disclosure.
matching principle.
matching principle.
