Chap 2

Question 1

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

Answer 1

Comparability

Question 2

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

Answer 2

Timeliness.

Question 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.

Answer 3

Predictive value.

Question 4

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

Answer 4

Relevance.

Question 5

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

Answer 5

Neutrality.

Question 6

What is conceptual framework? Why is a conceptual framework necessary in financial accounting?

Answer 6

The conceptual framework is a system of theory, concepts, and principles that are the basis of the creation of financial reporting standards.
With a sound conceptual framework in place, the FASB is able to issue coherent and uniform standards. In addition, without an existing set of standards, it isn’t possible to resolve any new problems that emerge.

The framework also increases financial statement users’ understanding of and confidence in financial reporting and makes it easier to compare different companies’ financial statements.

(A conceptual framework is designed to ensure that a set of accounting standards is coherent and uniform. Thus, standard setters refer to the framework when developing and revising accounting standards. In this way, the individual standards are consistent and supported by the framework.)

(The conceptual framework includes the objective for financial reporting and the qualitative characteristics associated with high quality financial information. It also provides the elements of the financial reporting system and specifies the recognition and measurement criteria to be used in practice.)

Question 7

What is the primary objective of financial reporting?

Answer 7

To provide financial information about the reporting entity that is useful to present and potential creditors, equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

Question 8

What is meant by the term “qualitative characteristics of accounting information”?

Answer 8

“Qualitative characteristics of accounting information” are those characteristics which contribute to the quality or value of the information. The overriding qualitative characteristic of accounting information is usefulness for decision making.

Question 9

Briefly describe the two fundamental qualities of useful accounting information.

Answer 9

1. Relevance. To be relevant, accounting information must be capable of making difference in decision. Information with no bearing on a decision is irrelevant. Financial information is capable of making a difference when it has:
   - predictive value
   - confirmative value
   - materiality.
2. Faithful representation means that the numbers and descriptions match what ­really existed or happened. Faithful representation is a necessity because most users have neither the time nor the expertise to evaluate the factual content of the information. To be a faithful representation, information must be :
   - complete,
   - neutral, and
   - free of material error.

Question 10

How is materiality (or immateriality) related to the proper presentation of financial statements?

Answer 10

Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.
Information is immaterial, irrelevant if there is no impact on a decision-making.

Question 11

What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

Answer 11

relative size and importance of an item.

Question 12

What are the enhancing qualities of the qualitative characteristics?

Answer 12

1. comparability
2. verifiability
3. timeliness
4. understandability

Question 13

What is the role of enhancing qualities in the conceptual framework?

Answer 13

the 4 characteristics help distinguish more-useful information from less-useful information

Question 14

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

Answer 14

users of financial reports are assumed to have a reasonable knowledge of business and economic activities.

Question 15

What is the distinction between comparability and consistency?

Answer 15

Comparability - enables users to identify the real similarities and differences in economic events between companies
Consistency - when a company applies the same accounting treatment to similar events, from period to period

Question 16

Why is it necessary to develop a definitional framework for the basic elements of accounting?

Answer 16

At present, the accounting literature contains many terms that have specific meanings. Some of these terms have been in use for a long period of time, and their meanings have changed over time. Since the elements of financial statements are the building blocks with which the statements are constructed, it is necessary to develop a basic definitional framework for them

Question 17

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Answer 17

Distributions to owners differ from expenses and losses in that they represent transfers to owners, and they do not arise from activities intended to produce income. Expenses differ from losses in that they arise from the entity’s ongoing major or central operations. Losses arise from peripheral or incidental transactions.

Question 18

Revenues, gains, and investments by owners are all increases in net assets. What are the distinctions among them?

Answer 18

Investments by owners differ from revenues and gains in that they represent transfers by owners to the entity, and they do not arise from activities intended to produce income. Revenues differ from gains in that they arise from the entity’s ongoing major or central operations. Gains arise from peripheral or incidental transactions.

Question 19

What are the 4 basic assumptions that underlie the financial accounting structure?

Answer 19

1. Economic entity
2. Going concern
3. Monetary Unit
4. Periodicity.

Question 20

What is the basic accounting problem created by the monetary unit assumption when there is significant inflation?

Answer 20

The monetary unit assumption assumes that the unit of measure (the dollar) remains reasonably stable so that dollars of different years can be added without any adjustment. When the value of the dollar fluctuates greatly over time, the monetary unit assumption loses its validity.

Question 21

What appears to be the FASB position on a stable monetary unit?

Answer 21

FASB in SFAC No. 5 indicated that it expects the dollar, unadjusted for inflation or deflation, to continue to be used to measure items recognized in financial statements

Question 22

What is the definition of fair value?

Answer 22

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value is therefore a market-based measure.

Question 23

What is the fair value option?

Answer 23

An option that allows companies to record fair value in their accounts for most financial instruments, including such items as receivables, investments, and debt securities.

Question 24

Explain how use of the fair value option reflects application of the fair value principle.

Answer 24

Because fair value information may be more useful than historical cost for certain types of assets and liabilities and in certain industries. GAAP calls for use of fair value option. Accordingly, the Board gives the fair value option to companies to promote fair value option.

Question 25

Briefly describe the fair value hierarchy

Answer 25

Level 1: least subjective, based on quoted prices
Level 2: relies on evaluating similar assets or liabilities in active markets
Level 3: most subjective, a lot of judgement needed to arrive at a relevant and representationally faithful fair value measurement

Question 26

Explain the revenue recognition principle

Answer 26

Companies must recognize revenue in the accounting period in which the performance obligation is satisfied. In the case of services, revenue is recognized when the services are performed. In the case a selling a product, the performance obligation is met when the product is delivered

Question 27

What is a performance obligation?

Answer 27

A promise to transfer a good or service.

Question 28

How is a performance obligation used to determine when revenue should be recognized?

Answer 28

A performance obligation is a promise to deliver a product or provide a service to a customer. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. In the case of services, revenue is recognized when the services are performed. In the case of selling a product, the performance obligation is met when the product is delivered.

Question 29

What are the 5 steps used to determine the proper time to recognize revenue?

Answer 29

1. I]identify the contract with the customer
2. identify the separate performance obligations in the contract
3. determine the transaction price
4. allocate the transaction price to separate performance obligations
5. recognize revenue when each performance obligation is satisfied

Question 30

Selane Eatery operates a catering service specializing in
business luncheons for large corporations. Selane requires
customers to place their orders 2 weeks in advance of the
scheduled events. Selane bills its customers on the tenth
day of the month following the date of service and requires
that payment be made within 30 days of the billing
date. Conceptually, when should Selane recognize revenue related to its catering service?

Answer 30

Revenues are recognized when a performance obligation is met. 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. Therefore, revenue for Selane Eatery should be recognized at the time the luncheon is served.

Question 31

Mogilny Company paid $135,000 for a machine. The Accumulated Depreciation—Equipment account has a balance of $46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a “right to this gain.” What does the president mean by this statement? Do you agree?

Answer 31

Yes, the president is correct the company has a right to gain. The president is talking about the profit that will arise if the machine is sold for $150000. Yes I agree the company can earn a profit if it sells the machine at present time and it will be a gain for the company. Mogilny Company had bought the machine for $ 135,000 and the accumulated Depreciation on the machine is $46,500. As per this the present value of the machine is: Cost of Purchase-Accumulated Depreciation on Machine = $135000-$46500 =$88,500

Question 32

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.

Answer 32

he cause and effect relationship can seldom be conclusively demonstrated, but many costs appear to be related to particular revenues and recognizing them as expenses accompanies recognition of the revenue. Examples of expenses that are recognized by associating cause and effect are sales commissions and cost of products sold or services provided.

Systematic and rational allocation means that in the absence of a direct means of associating cause and effect, and where the asset provides benefits for several periods, its cost should be allocated to the periods in a systematic and rational manner. Examples of expenses that are recognized in a systematic and rational manner are depreciation of plant assets, amortization of intangible assets, and allocation of rent and insurance.

Some costs are immediately expensed because the costs have no discernible future benefits or the allocation among several accounting periods is not considered to serve any useful purpose. Examples include officers’ salaries, most selling costs, amounts paid to settle lawsuits, and costs of resources used in unsuccessful efforts.

Question 33

Statement of Financial Accounting Concepts No. 5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics?

Answer 33

The four characteristics are:

(1) Definitions—The item meets the definition of an element of financial statements.
(2) Measurability—It has a relevant attribute measurable with sufficient reliability.
(3) Relevance—The information is capable of making a difference in user decisions.
(4) Reliability—The information is representationally faithful, verifiable, and neutral.

Question 34

Briefly describe the types of information concerning
financial position, income, and cash flows that might be
provided (a) within the main body of the financial statements,
(b) in the notes to the financial statements, or
(c) as supplementary information.

Answer 34

(a) To be recognized in the main body of financial statements, an item should meet the definition of a basic element, be measurable with sufficient certainty, and be relevant and reliable
(b) information provided in the notes to the financial statements amplifies or explains the items presented in the main body of the statements and is essential to an understanding of the per-formance and position of the enterprise. Information in the notes does not have to be quanti-fiable, nor does it need to qualify as an element..
(c) Supplementary information includes information that presents a different perspective from that adopted in the financial statements. It also includes management’s explanation of the financial information and a discussion of the significance of that information.

Question 35

In January 2015, Janeway Inc. doubled the amount of its
outstanding stock by selling on the market an additional
10,000 shares to finance an expansion of the business. You propose that this information be shown by a footnote on the balance sheet as of December 31, 2014. The president objects, claiming that this sale took place after December31, 2014, and therefore should not be shown. Explain your position.

Answer 35

The general guide followed with regard to the full disclosure principle is to disclose in the financial statements any facts of sufficient importance to influence the judgment of an informed reader.
The fact that the amount of outstanding common stock doubled in January of the subsequent reporting period probably should be disclosed because such a situation is of importance to present stockholders. Even though the event occurred after December 31, 2014, it should be disclosed on the balance sheet as of December 31, 2014, in order to make adequate disclosure. (The major point that should be emphasized throughout the entire discussion on full disclosure is that there is normally no “black” or “white” but varying shades of grey and it takes experience and good judgment to arrive at an appropriate answer).

Question 36

Describe the major constraint inherent in the presentation

of accounting information.

Answer 36

Accounting information is subject to the cost constraint. Information is not worth providing unless the benefits exceed the costs of preparing it.

Question 37

What are some of the costs of providing accounting information?
What are some of the benefits of accounting
information? Describe the cost-benefit factors that should be considered when new accounting standards are being
proposed.

Answer 37

The costs of providing accounting information are paid primarily to highly trained accountants who design and implement information systems, retrieve and analyze large amounts of data, prepare financial statements in accordance with authoritative pronouncements, and audit the information presented. These activities are time-consuming and costly. The benefits of providing accounting information are experienced by society in general, since informed financial decisions help allocate scarce resources to the most effective enterprises. Occasionally new accounting standards require presentation of information that is not readily assembled by the accounting systems of most companies. A determination should be made as to whether the incremental or additional costs of providing the proposed information exceed the incremental benefits to be obtained. This deter-mination requires careful judgment since the benefits of the proposed information may not be readily apparent.

Question 38

The treasurer of Landowska Co. has heard that conservatism
is a doctrine that is followed in accounting and,
therefore, proposes that several policies be followed that
are conservative in nature. State your opinion with
respect to each of the policies listed.
(a) The company gives a 2-year warranty to its customers
on all products sold. The estimated warranty costs incurred
from this year’s sales should be entered as an
expense this year instead of an expense in the period
in the future when the warranty is made good.
(b) When sales are made on account, there is always
uncertainty about whether the accounts are collectible.
Therefore, the treasurer recommends recording
the sale when the cash is received from the customers.
(c) A personal liability lawsuit is pending against the
company. The treasurer believes there is an even
chance that the company will lose the suit and have to
pay damages of $200,000 to $300,000. The treasurer
recommends that a loss be recorded and a liability
created in the amount of $300,000.

Answer 38

30. In general, conservatism should not be the basis for determining the accounting for transactions.
    (a) Acceptable if reasonably accurate estimation is possible. To the extent that warranty costs can be estimated accurately, they should be matched against the related sales revenue.
    (b) Not acceptable. Most accounts are collectible or the company will be out of business very soon. Hence sales can be recorded when made. Also, other companies record sales when made rather than when collected, so if accounts for Landowska Co. are to be compared with other companies, they must be kept on a comparable basis. However, estimates for uncollectible accounts should be recorded if there is a reasonably accurate basis for estimating bad debts.
    (c) Not acceptable. A provision for the possible loss can be made through an appropriation of retained earnings but until judgment has been rendered on the suit or it is otherwise settled, entry of the loss usually represents anticipation. Recording it earlier is probably unwise legal strategy as well. For the loss to be recognized at this point, the loss would have to be probable and reasonably estimable. (See FASB ASC 450-10-05 for additional discussion if desired.) Note disclosure is required if the loss is not recorded; however, conservatism is not part of the conceptual framework.

Question 39

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

Answer 39

Faithful representation.

Question 40

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

Answer 40

Confirmatory value.

Question 41

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

Answer 41

Free from error.

Question 42

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

Answer 42

Completeness.

Question 43

Quality of information that allows users to comprehend its meaning.

Answer 43

Understandability.

Question 44

Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.)

The annual reports of Best Buy Co. are audited by certified public accountants.

Answer 44

Verifiability

Question 45

Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.)

Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption

Answer 45

Comparability

Question 46

Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.)

Starbucks Corporation has used straight-line depreciation since it began operations.

Answer 46

Comparability (Consistency)

Question 47

Motorola issues its quarterly reports immediately after each quarter ends.

Answer 47

Timeliness.

Question 48

Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material.

(a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income.

Answer 48

Companies and their auditors for the most part have adopted the general rule of thumb that anything under 5% of net income is considered not material. Recently, the SEC has indicated that it is okay to use this percentage for the initial assessment of materiality, but other factors must be considered. For example, companies can no longer fail to record items in order to meet consensus analyst’s earnings numbers, preserve a positive earnings trend, convert a loss to a profit or vice versa, increase management compensation, or hide an illegal transaction like a bribe. In other words, both quantitative and qualitative factors must be considered in determining when an item is material.

(a) Because the change was used to create a positive trend in earnings, the change is considered material.

Question 49

(b) Hindi Co. has an extraordinary gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.’s income for the current year was $10 million.

Answer 49

(b) Each item must be considered separately and not netted. Therefore each transaction is considered material

Question 50

(c) Damon Co. expenses all capital equipment under $25,000 on the basis that it is immaterial. The company has followed this practice for a number of years.

Answer 50

(c) In general, companies that follow an “expense all capital items below a certain amount” policy are not in violation of the materiality concept. Because the same practice has been followed from year to year, Damon’s actions are acceptable.

Question 51

For each item below, indicate to which category of elements of financial statements it belongs.

a. Retained earnings.
b. Sales.
c. Additional paid-in capital.
d. Inventory.
e. Depreciation.
f. Loss on sale of equipment.
g. Interest payable.
h. Dividends.
i. Gain on sale of investment.
j. Issuance of common stock.

Answer 51

a. Equity
b. Revenue
c. Equity
d. Assets
e. Expenses
f. Losses
g. Liability
h. Distribution to owners
i. Gain
j. Investments from owners

Question 52

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a. Legal fees paid in connection with the purchase of land are $1,500.
b. Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000.
c. A meat market purchases a meat-grinding machine at a cost of $3,500.
d. On June 30, Monroe and Meno, medical doctors, pay 6 months’ office rent to cover the month of July and the next 5 months.
e. Smith’s Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business.
f. Alvarez’s Florists pays wages of $2,100 for the month to an employee who serves as driver of their delivery truck.

Answer 52

(a) Should be debited to the Land account, as it is a cost incurred in acquir¬ing land
(b) As an asset, preferably to a Land Improvements account. The driveway will last for many years, and therefore it should be capitalized and depreciated.
(c) Probably an asset, as it will last for a number of years and therefore will contribute to operations of those years.
(d) If the fiscal year ends December 31, this will all be an expense of the current year that can be charged to an expense account. If statements are to be prepared on some date before December 31, part of this cost would be expense and part asset. Depending upon the circumstances, the original entry as well as the adjusting entry for statement purposes should take the statement date into account.
(e) Should be debited to the Building account, as it is a part of the cost of that plant asset which will contribute to operations for many years.
(f) As an expense, as the service has already been received; the contri-bution to operations occurred in this period

Question 53

Identify which basic assumption of accounting is best described in each item below.

a. The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.
b. Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.
c. Walgreen Co. reports current and noncurrent classifications in its balance sheet.
d. The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

Answer 53

a. Periodicity
b. Monetary unit
c. Going concern
d. Economic entity.

Question 54

If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in the financial statements for the following items.

a. Land.
b. Unamortized bond premium.
c. Depreciation expense on equipment.
d. Inventory.
e. Prepaid insurance.

Answer 54

(a) Net realizable value.
(b) Would not be disclosed. Liabilities would be disclosed in the order to be paid.
(c) Would not be disclosed. Depreciation would be inappropriate if the going concern assumption no longer applies.
(d) Net realizable value.
(e) Net realizable value (i.e., redeemable value).

Question 55

Identify which basic principle of accounting is best described in each item below.

a. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
b. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
c. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
d. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater

Answer 55

a. Revenue recognition
b. Expense recognition
c. Full disclosure
d. Measurement (Historical cost)

Question 56

Vande Velde Company made three investments during 2020. (1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model. (2) It purchased 2,000 shares of GE stock, which trades on the NYSE. (3) It invested $10,000 in local development authority bonds. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds. Where will Vande Velde report these investments in the fair value hierarchy?

Answer 56

Investment 1 - Level 3
Investment 2 - Level 1
Investment 3 - Level 2

Question 57

What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below?

a. Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.
b. Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.
c. Target records the purchase of a new Dell PC at its cash equivalent price.

Answer 57

a. Full disclosure
b. Expense recognition
c. Historical cost

Question 58

(Usefulness, Objective of Financial Reporting) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

a. Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements.
b. General-purpose financial reports are most useful to company insiders in making strategic business decisions.
c. Accounting standards based on personal conceptual frameworks generally will result in consistent and comparable accounting reports.
d. Capital providers are the only users who benefit from general-purpose financial reporting.
e. Accounting reports should be developed so that users without knowledge of economics and business can become informed about the financial results of a company.
f. The objective of financial reporting is the foundation from which the other aspects of the framework logically result.

Answer 58

a. True
b. False, most useful to creditors and investors in making investment decisions
c. False. Accounting standards are based on individual conceptual frameworks will lead to different conclusions about identical or similar issues than it did previously
d. False. General-purpose financial reporting provides financial reporting information to a wide variety of users, including: shareholders, creditors, suppliers, employees, and regulators.
e. False. It is assumed that users of the reports have a reasonable knowledge of business and economic activities.
f. True.

Question 59

(Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

a. The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.
b. Relevant information only has predictive value, confirmatory value, or both.
c. Information that is a faithful representation is characterized as having predictive or confirmatory value.
d. Comparability pertains only to the reporting of information in a similar manner for different companies.
e. Verifiability is solely an enhancing characteristic for faithful representation.
f. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

Answer 59

a. False. Relevance and Faithful representation.
b. False. Predictive value, confirmative value and materiality.
c. False. Faithful representation: Complete, Neutral and free from error.
d. False. Comparability also refers to comparison of a firm over time (consistency).
e. False. Completeness, Free from error, and Neutrality.
F. True

Question 60

What is the quality of information that enables users to confirm or correct prior expectations

Answer 60

Confirmatory value

Question 61

dentify the pervasive constraint developed in the conceptual framework.

Answer 61

Cost constraint.

Question 62

The chairman of the SEC at one time noted, “If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined.” Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

Answer 62

neutrality.

Question 63

Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

Answer 63

Comparability (consistency).

Question 64

Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

Answer 64

Neutrality.

Question 65

What are the two fundamental qualities that make accounting information useful for decision-making?

Answer 65

relevance and faithful representation.

Question 66

Watteau Inc. does not issue its first-quarter report until after the second quarter’s results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

Answer 66

Timeliness.

Question 67

Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes

Answer 67

Relevance.

Question 68

Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

Answer 68

Comparability.

Question 69

Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

Answer 69

Verifiability

Question 70

Qualitative characteristic being employed when companies in the same industry are using the same accounting principles

Answer 70

Comparability.

Question 71

Quality of information that confirms users’ earlier expectations.

Answer 71

Confirmatory value.

Question 72

Ignores the economic consequences of a standard or rule.

Answer 72

Neutrality

Question 73

Requires a high degree of consensus among individuals on a given measurement.

Answer 73

Verifiability

Question 74

Four qualitative characteristics that are related to both relevance and faithful representation.

Answer 74

Comparability, Verifiability, Timeliness, Understandability

Question 75

An item is not recorded because its effect on income would not change a decision.

Answer 75

Materiality

Question 76

Neutrality is an ingredient of this fundamental quality of accounting information.

Answer 76

Faithful representation.