Ch. 1 - Additional Questions

Question 0

What are the key variables in the investment decision?

Answer 0

The expected rate of return and the uncertainty or risk of the return.

Question 1

What are investors and creditors interested in?

Answer 1

They are interested in earning a fair return on the resources they provide.

Question 2

How can a company be able to provide a return to investors and creditors?

Answer 2

The company can provide a return to investors and creditors ONLY if it can generate a profit from selling its products or services.

Question 3

What is net operating cash flow?

Answer 3

The difference between cash receipts and cash disbursements from providing goods and services.

Question 4

True or False?

Over a SHORT PERIOD of time, operating cash flow are ALWAYS an accurate predictor of future operating cash flows.

Answer 4

False - Operating cash flows MAY NOT be an accurate predictor of future operating cash flows.

Question 5

This net income or current operating cash flows considered a better indicator of future operating cash flows?

Answer 5

Net income is considered a better indicator of future operating cash flows than is current net operating cash flow.

Question 6

What type of accounting model provides a measure of periodic performance called net income, the difference between revenues and expenses?

Answer 6

Accrual accounting model– not cash accounting model

Question 7

How was the Securities and Exchange Commission (SEC) created?

Answer 7

The Securities and Exchange Commission was created by Congress with the 1934 Securities Exchange Act.

Question 8

Why was the FASB established and what does it stand for?

Answer 8

FASB stands for Financial Accounting Standards Board and was established in 1973 to set U.S. accounting standards.

Question 9

What is the EITF and why was it formed?

Answer 9

The EITF is the Emerging Issues Task Force and was formed to identify financial reporting issues and attempt to resolve them without involving the FASB.

Question 10

Who is the highest accounting standard-setting authority?

Answer 10

Congress

Question 11

Is FASB in the private sector or the public sector?

Answer 11

Private sector.

Question 12

What is the only source of authoritative US GAAP other than rules and interpretative releases by the SEC?

Answer 12

The FASB Accounting Standards Codification

Question 13

What is the main objective of IASB and what does it stand for?

Answer 13

The IASB stands for International Accounting Standards Board. Their main objective is to develop a single set of global accounting standards.

Question 14

Does the conceptual framework prescribe GAAP?

Answer 14

No, the conceptual framework does not prescribe GAAP. It provides a
foundation for accounting standards.

Question 15

What are the 5 measurement attributes employed in GAAP?

Answer 15

1) historical cost
2) net realizable value
3) current cost
4) present (or discounted) value of future cash flows
5) fair value

Question 16

Their value can be measured using what 3 approaches?

Answer 16

1) market approach - market info
2) income approach- estimate future amounts
3) cost approach - how much to make/buy?

Question 17

Does GAAP give accompany the option to value financial assets and liabilities at fair value?

Answer 17

Yes, GAAP gives companies the option to report some or all of its financial assets and liabilities at fair value, on an instrument-by-instrument basis. However once the company has chosen a method, they cannot switch methods.