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ACG4104- Financial accounting > Ch.1 Environment And Theoretical Structure Of F/A > Flashcards

Ch.1 Environment And Theoretical Structure Of F/A Flashcards

1
Q

Obligation to transfer cash or other resources as a result of a past transaction.

A

Liability

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2
Q

Dividends paid by a corporation to its shareholders.

A

Distribution to owners

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3
Q

Inflow of an asset from providing a good or service.

A

Revenue

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4
Q

The financial position of a company.

A

Assets, liabilities, and equity

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5
Q

Increase in equity during a period from non owner transactions.

A

Comprehensive income

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6
Q

Increase in equity from peripheral or incidental transaction.

A

Gain

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7
Q

Sale of an asset used in the operations of a business for less than the asset’s book value.

A

Loss

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8
Q

The owners’ residual interest in the assets of a company.

A

Equity

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9
Q

An item owned by the company representing probable future benefits.

A

Assets

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10
Q

Revenues plus gains less expenses and losses.

A

Net income

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11
Q

An owner’s contribution of cash to a corporation in exchange for ownership shares of stock.

A

Investment by owner

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12
Q

Outflow of an asset related to the production of revenue.

A

Expense

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13
Q

FASB’s conceptual framework: predictive value

A

Information is useful in predicting the future

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14
Q

FASB’s conceptual framework: relevance

A

Pertinent to the decision at hand.

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15
Q

FASB’s conceptual framework: timeliness

A

Information is available prior to the decision.

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16
Q

FASB’s conceptual framework: distribution to owners

A

Decreases in equity resulting from transfers to owners.

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17
Q

FASB’s conceptual framework: confirmatory value

A

Information confirms expectations.

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18
Q

FASB’s conceptual framework: understandability

A

Users understand the information in the context of the decision being made.

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19
Q

FASB’s conceptual framework: gain

A

Increase in equity from peripheral or incidental transactions of an entity.

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20
Q

FASB’s conceptual framework: faithful representation

A

Agreement between a measure and the phenomenon it purports to represent.

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21
Q

FASB’s conceptual framework: comprehensive income

A

The change in equity from nonowner transactions.

22
Q

FASB’s conceptual framework: materiality

A

Concerns the relative size of an item and it’s effect on decisions.

23
Q

FASB’s conceptual framework: Comparability

A

Important for making interfirm comparisons.

24
Q

FASB’s conceptual framework: neutrality

A

The absence of bias.

25
Q

FASB’s conceptual framework: recognition

A

The process of admitting information into financial statements.

26
Q

FASB’s conceptual framework: consistency

A

Apply the same accounting practices over time

27
Q

FASB’s conceptual framework: cost effectiveness

A

Requires consideration of the costs and value of information.

28
Q

FASB’s conceptual framework: verifiability

A

Implies consensus among different measures.

29
Q

FASB: Which component would allow a large company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset?

A

Materiality

30
Q

FASB: Donald Kirk, former chairman of the FASB, once noted that “ . . there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests…” Which characteristic is implicit in Mr. Kirk’s statement?

A

Neutrality

31
Q

FASB: Allied Appliances, Incorporated, changed its revenue recognition policies. Which characteristic is jeopardized by this change?

A

Consistency

32
Q

FASB: National Bancorp, a publicly traded company, files quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings?

A

Timeliness

33
Q

FASB: In general, relevant information possesses which qualities?

A

Predictive value and /or confirmatory value

34
Q

FASB: When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?

A

Faithful representation

35
Q

FASB: Jeff Brown is evaluating two companies for future investment potential. Jeff’s task is made easier because both companies use the same accounting methods when preparing their financial statements.
Which characteristic does the information Jeff will be using possess?

A

Comparability

36
Q

FASB: A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe?

A

Cost effectiveness

37
Q

Femblatt Incorporated recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash Femblatt’s accounting approach is an example of:
A) cash basis accounting
B) matching
C) periodicity
D) accrual accounting

A

D

38
Q

The underlying assumption that assumes that the life of a company can be divided into artificial time periods is:
A) periodicity
B) Going concern
C) monetary unit
D) economic entity

A

A

39
Q

In general, revenue is recognized when:
A) a purchase order is received
B) production is completed
C) goods or services are transferred to the customer
D) cash is collected

A

C

40
Q

Net sales $10,808
Total assets $4,438
End of year balance in cash $1,167
Total stockholders ‘ equity $468
Gross profit (Sales Cost of Sales ) $2,505
Net increase in cash for the year $23
Operating expenses $2,062
Net operating cash flow $739
Other income expense ), net $(13)

Compute Orinoco’s total liabilities at the end of the year.

A

Total assets ($4,438) = Total liabilities (?)+ Total Stockholders’ equity (468)

= $4438-$468= $3970 total liabilities

41
Q

An investor provides a company with $120,000 of cash by purchasing stock at the end of 2022, receives $1,400 of dividends from the company during 2023, and sells the ownership interest at the end of 2023 for $146,200. What is the rate of return that will be generated for 2023?

A. 23%
B. Cannot be determined from the information supplied.
C. 1%
D. 22%

A

A

Share price appreciation = $146,200 - $120,000 = $26,200

Rate of return = ($1,400 dividends + $26,200 share price appreciation) /
$120,000 initial investment = 23%

42
Q

Relevance requires that information possess predictive and/or:

A) Completeness.
B) Freedom from error
C) Confirmatory value
D) Neutrality

A

C

The three components/aspects of relevance are predictive value, confirmatory value and materiality. Neutrality, completeness and freedor from error are the components/aspects of faithful representation.

43
Q

Which of the following characteristics does not describe an asset?

A) Result of a past transaction
B) Probable future economic benefits
C) Controlled by an entity
D) Requires the receipt of cash

A

D

Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

44
Q

The two primary decision-specific qualities that make accounting information useful are:

A) Predictive value and feedback value
B) Cost effectiveness and materiality
C) Relevance and faithful representation
D) Verifiable and representational faithfulness

A

C

Relevance and faithful representation are the two fundamental characteristics of financial information.

45
Q

The underlying assumption that presumes a company will continue indefinitely is:

A) periodicity
B) going concern
C) economic entity
D) monetary unit

A

B

Going concern assumes the company will continue to operate indefinitely.

46
Q

Consistency and feedback relate most closely to which two of the following accounting concepts, respectively?

A) Predictive value and confirmatory value
B) Recognition and full disclosure
C) Conservatism and cost/benefit
D) Recognition and matching

A

A

Consistency is associated with predictive value since, when items are accounted for consistently from one year to another, users can identify trends and use this information to anticipate what might be expected to occur in the future. Feedback is associated with confirmatory value as feedback, such as actual results, provides information as to the degree to which predictions made in the past were accurate. Recognition relates to when items will appear on financial statements and full disclosure relates to the completeness of information provided. Cost/benefit refers to the fact that an entity should not incur a cost to obtain or provide information which exceeds the benefit of having that information.

47
Q

Under accounting principles generally accepted in the United States, in order for an item to qualify for recognition in the financial statements of a company, the item must

I. Be measurable in monetary terms
II. Reflect the consensus expectations of investors
III. Meet the definition of an element of the financial statements

A) l only
B) l and ll only
C) l, ll, and, lll.
D) ll and lll only

A

B

In order for an item to qualify for recognition on the financial statements, it should meet the definition of an element of financial statements; be measurable with reasonable reliability; be relevant to users; and should be based on information that is representationally faithful, verifiable, and neutral. It is not required to meet the consensus expectations of investors.
An element of financial statements may be an element of the balance sheet or the income statement.

48
Q

Alpha Co. reports inventory on its balance sheet using the same generally accepted methods as applied by Beta Co. These facts relate most closely to which of the following qualitative characteristics of financial reporting?

A) comparability
B) materiality
C) verifiability
D) understandability

A

A

When different entities apply the same principles in presenting their financial information, it is easier for users to compare the financial positions and results reported. Materiality relates to the magnitude or importance of items on financial statements and how they will influence the decisions of financial statement users. Verifiability relates to information being free from bias and based on the consensus that would be reached by different and knowledgeable users. Understandability relates to the clarity with which information is presented. None of these relate to the application of similar principles by different entities.

49
Q

According to the FASB Conceptual Framework, financial information is considered faithfully represented if it is

A) Useful, precise, and free from error.
B) Complete, neutral, and free from error.
C) Conservative, unbiased, and precise.
D) Useful, understandable, and verifiable.

A

B

Faithful representation means that information provided in the financial statements is, in fact, what it appears to be. To faithfully represent the financial position and results of operations of an entity, the information provided must be complete in that it provides users with all of the relevant information available, subject to the cost/benefit constraint, which they need to make decisions. It must be neutral in that it provides factual information and, where subjectivity is involved, such as when estimates are needed, the use of judgment is disclosed. The information must also be free from error in that it must be as accurate as the circumstances allow.
Information will not be perfectly accurate, or precise, since it may involve estimates. The fact that information is faithfully represented makes it useful, not vice versa.

50
Q

Conceptually, interim financial statements can be described as emphasizing which of the following?

I. Timeliness
II. Relevance
III. Verifiability

A) l and lll only
B) l and ll only
C) ll and lll only
D) l only

A

B

When decisions are made during an entity’s year, the most recent financial statements may be outdated and the decision may need to be made before the next annual statements are available. Interim financial reports are designed to give financial statements users updated information that is relevant to decisions on a timely basis, sometimes at the sacrifice of other qualities, such as verifiability.

51
Q

Information is considered material to the financial statements if

I. It falls within industry-specific quantitative guidelines published by the Financial Accounting Standards Board.
I. Its omission could make a difference in the decisions made by a user relying on the financial statements.
III. Its misstatement could make a difference in the decisions made
by a user relying on the financial statement.

A) ll and lll only
B) l only
C) l and lll only
D) l, ll, and lll

A

A

An item is material if it would make a difference to users of financial statements in making decisions about their relationship with the reporting entity. As a result, an item that is omitted or misstated will be considered material if the financial statement user would have made a different decision or derived additional support bolstering their existing decision if the item had not been omitted or misstated. What is or is not material is dependent on the users of the financial statements and how they are being used and, as a result, there can be no industry specific guidelines.

ACG4104- Financial accounting (7 decks)

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