Brief Exercises

Question 1

Comparability

Answer 1

Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena

Question 2

Timeliness

Answer 2

Having information available to users before it loses its capacity to influence decisions

Question 3

Predictive value

Answer 3

Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future

Question 4

Relevance

Answer 4

Information that is capable of making a difference in the decisions of users in their capacity as capital providers

Question 5

Neutrality

Answer 5

Absence of bias intended to attain a predetermined result or to induce a particular behavior

Question 6

Faithful representation

Answer 6

Quality of information that assumes users that information represents the economic phenomena that it purports to represent

Question 7

Confirmatory value

Answer 7

Information about an economic phenomenon that corrects past or present expectations based on previous evaluations

Question 8

Free from error

Answer 8

The extent to which information is accurate in representing the economic substance of a transaction

Question 9

Completeness

Answer 9

Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent

Question 10

Understandability

Answer 10

Quality of information that allows users to comprehend its meaning

Question 11

Financial statement element for Retained Earnings

Answer 11

Equity

Question 12

Financial statement element for Sales

Answer 12

Revenue

Question 13

Financial statement element for Additional paid-in capital

Answer 13

Equity

Question 14

Financial statement element for Inventory

Answer 14

Assets

Question 15

Financial statement element for Depreciation

Answer 15

Expense

Question 16

Financial statement element for Loss on sale of equipment

Answer 16

Loss

Question 17

Financial statement element for Interest payable

Answer 17

Liability

Question 18

Financial statement element for Dividends

Answer 18

Distribution

Question 19

Financial statement element for Gain on sale of investment

Answer 19

Gain

Question 20

Financial statement element for Issuance of common stock

Answer 20

Investment by owner

Question 21

Periodicity

Answer 21

Company divides its economic activities into artificial time periods. Most common are monthly, quarterly, and yearly.

Question 22

Economic entity

Answer 22

A company keeps its activity separate and distinct from its owners and any other business unit

Question 23

Going concern

Answer 23

Assumption that the company will have a long life. Most companies have a fairly high continuance rate.

Question 24

Monetary unit

Answer 24

Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is relevant, simple, universally available, understandable, and useful.

Question 25

Measurement principle

Answer 25

We presently have a “mixed-attribute” system that permits the use of various measurement bases. The most commonly used measurements are based on historical cost and fair value.

Question 26

Historical cost

Answer 26

Account for and report many assets and liabilities on the basis of acquisition price

Question 27

Fair value

Answer 27

The price that would be received to sell an asset or paid to transfer a liability in an orderly transactions between market participants at the measurement date.

Question 28

Revenue recognition principle

Answer 28

When a company recognizes revenue in the accounting period in which the performance obligation is satisfied.

Question 29

Expense recognition principle

Answer 29

Companies recognize expenses not when they pay wages or make a product, but when the work (service) or the product actually contributes to revenue.

Question 30

Product costs

Answer 30

Such as material, labor, and overhead, attach to the product. Companies Catt these costs into future periods if they recognize the revenue from the product in subsequent periods.

Question 31

Period cost

Answer 31

Such as officers’ salaries and other administrative expenses, attach to the period. Companies charge off such costs in immediate period even though benefits associated with these costs may occur in the future.

Question 32

Full disclosure principle

Answer 32

It recognizes that the nature and amount of information included in financial reports reflect a series of judgmental trade-offs.

Question 33

Cost constraint

Answer 33

Companies must weigh the costs of providing the information against the benefits that can be derived from using it.