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FAR > Conceptual Framework > Flashcards

Conceptual Framework Flashcards

1
Q

Equation to determine expense charges with prepaid beginning and ending balance.

A

Beginning prepaid balance+Premiums paid−Expense charges =Ending prepaid balance

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2
Q

Under the cash basis of accounting, sales equals cash collections.

A

Beginning balance acct receivable +sales − cash collections − write-offs =ending balance acct recievables

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3
Q

Total revenues would exclude:

A
  1. Purchase discounts
  2. Recovery of accounts written off (prior period adjustments are shown on Statements of Retained Earnings as adjustment to beg. balance of retained earnings)
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4
Q

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

A

Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.

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5
Q

Items not reflected in net income:

A
  1. Prior period adjustments
  2. Unrealized gains/losses from AFS securities
  3. Adjustments in calculation of pension liability
  4. Foreign currency translation adjustments
  5. Deferrals of come gains/losses from hedging
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6
Q

Measurement basis of PPE and intangibles

A

Historical cost and depreciated/amortized historical cost

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7
Q

Measurement basis of receivables

A

Net realizable value

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8
Q

Measurement basis of inventory

A

Lower of cost or market

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9
Q

Measurement basis investments in marketable securities

A

Market value

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10
Q

Measurement basis of liabilities

A

Present value

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11
Q

Measurement basis of owner’s equity

A

Historical value of cash inflows and residual value

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12
Q

Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB Accounting Standards Codification.

A

The Codification is the sole source of U.S. GAAP, for nongovernmental entities.

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13
Q

The FASB amends the Accounting Standards Codification through the issuance of

A

Accounting Standards Updates.

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14
Q

Which of the following characteristics relates to both accounting relevance and faithful representation?

A

Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and faithfully represented.

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15
Q

According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:

A

Recognition is the process of formally recording and reporting an item as one of the elements of financial statements. It is the “strongest” application an item can receive.

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16
Q

What is the conceptual framework intended to establish?

A

The objectives and concepts for use in developing standards of financial accounting and reporting.

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17
Q

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

A

Economic entity. Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity.

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18
Q

Reporting inventory at the lower of cost or market is a departure from the accounting principle of:

A

Historical cost. LCM departs from historical cost because it provides an ending valuation below cost when market value is below cost. The inventory is actually written down to a value below what was originally paid. This is one of the few such departures.

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19
Q

What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?

A

Conservatism, Gain contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.

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20
Q

Which of the following statements is correct regarding fair value measurement?

A

Fair value is a market-based measurement. A market-based measurement is the price the entity would receive to sell an asset or pay to transfer a liability and takes into consideration risk and restrictions.

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21
Q

Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?

A

Establish new measurement requirements for financial instruments. The framework allows for increased consistency and comparability. It can be used for a stand-alone asset or group of assets/liabilities.

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22
Q

For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, “Fair Value Measurement,” least likely to apply?

A

The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity’s common stock. ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.

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23
Q

In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for

A

Transportation cost, NOT transaction cost

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24
Q

On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able’s fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by ASC 820 on which one of the following dates must Able elect to implement the fair value option?

A

If Able Co. intends to elect to implement the fair value option for its investment in Baker’s debt, it must make its election on the date it first recognizes the investment, which is January 15, 2008.

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25
Q

Disclosures for fair value:

A

I. The fair value hierarchy level within which fair value measurements fall must be disclosed.
II. Quantitative fair value measurement disclosures must be in tabular format.

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26
Q

Under U.S. GAAP the disclosure requirements when fair value measurement is used are differentiated by which of the following classifications?

A

Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-trading. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.

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27
Q

When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is not an expected outcome of the disclosures required of that entity?

A

Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value. The disclosures required when the fair value option is used are not intended to replace the kind and amount of information that would have been provided if the fair value option had not been used. Rather, the intent is to provide the same kind and amount of information that would have been provided if the fair value option had not been elected.

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28
Q

Which one of the following is not a required disclosure in annual financial reports for an entity that uses fair value measurement?

A

Combined disclosures about fair value measurements required by all pronouncements

29
Q

According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is

A

Income…This answer is correct because the IASB Framework has five elements: asset, liability, equity, income, and expense. The definition given is that of income. Note that income includes both revenues and gains.

30
Q

According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes

A

Neutrality, completeness, and free from error. The IASB Framework for the Preparation and Presentation of Financial Statements has converged with the FASB’s SFAC 8. The concept of faithful representation, includes completeness, neutrality, and free from error.

31
Q

According to the IASB Framework, the process of reporting an item in the financial statements of an entity is:

A

Recognition. According to the IASB’s Framework, recognition is “the process of incorporating in the Balance Sheet or Income Statement an item that meets the definition of an element and satisfies the criteria for recognition.” The element must be both probable that any future economic benefit will flow to or from the entity and have a cost or value that can be measured with reliability

32
Q

Identify which of the following is an assumption(s) underlying the preparation and presentation of financial statements under the IASB Framework.

A

Accrual accounting and going concern

33
Q

Which one of the following is not an other comprehensive basis of accounting (OCBOA)?

A

IFRS for SMEs. IFRS for SMEs is not an other comprehensive basis of accounting, but rather is one form of generally accepted accounting principles (GAAP). The cash basis of accounting, the modified cash basis, and the income tax basis are all regarded as an other comprehensive basis of accounting (OCBOA) systems.

34
Q

Which one of the following is a characteristic of accounting under IFRS for SMEs?

A

Goodwill must be amortized. Goodwill is assumed to have a limited life and is amortized over that life, or a period not to exceed 10 years if the life cannot be reasonably estimated. Under U.S. GAAP, goodwill is assumed to have an unlimited life and is not amortized.

35
Q

Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence?

A

Cost or equity method. US GAAP allows only the equity method.

36
Q

IFRS requires a classified Statement of Financial Position. What are the required classifications?

A

Current and non-current assets and liabilities.

37
Q

In financial statements prepared on the income-tax basis, how should the nondeductible portion of expenses, such as meals and entertainment, be reported?

A

Included in the expense category in the determination of income.Despite the fact that these expenses are not deductible for tax purposes, they are still business expenses and need to be included in the determination of income on the financial statements.

38
Q

Hahn Co. prepared financial statements on the cash basis of accounting. The cash basis was modified so that an accrual of income taxes was reported.

Are these financial statements in accordance with the modified cash basis of accounting?

A

Yes

39
Q

The fair value for an asset or liability is measured as

A

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

40
Q

For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, “Fair Value Measurement,” not apply?

A

Inventory reported at lower of cost or market.

41
Q

Which one of the following financial items may not be measured and reported at fair value at the election of an entity?

A

Investment in a subsidiary that is to be consolidated. Can report accounts payable and receivable at fair value.

42
Q

In its consolidated financial statements, for which companies, if any, may Alphaco elect to report debt investment held-to-maturity at fair value?

A

As the parent, Alphaco may elect to report all of the debt investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.

43
Q

Which of the following valuation methods may be used to measure debt investments classified as held-to-maturity?

A

Amortized cost or fair value

44
Q

If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?

A

As a change in accounting estimate.

45
Q

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?

A

Relevance

46
Q

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:

A

Historical cost. Reporting accounts receivable at net realizable value is a departure from the principle of historical cost. Accounts receivable is usually aged by some method and reported at net realizable value.

47
Q

Calculation of retained earnings from trial balance:

A 
Revenue [4,500,000] - Expenses [3,750,000]=750,000
Income taxes = 0.30 * 750,000=(225,000)
Net income=525,000
Retained earnings, 1/1/Yr. 5=350,000
Retained earnings, 12/31/Yr. 5=875,000
48
Q

Would freight out and delivery be considered a selling expense?

A

Yes, interest and advertising would NOT be general and administrative expense, advertising is selling expense

49
Q

Which of the following is a component of other comprehensive income?

A

Cumulative currency-translation adjustments, Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS debt securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

50
Q

When a full set of general-purpose financial statements are presented, comprehensive income and its components should

A

Be presented as part of the Income Statement or as a separate a financial statement following the Income Statement.

51
Q

The Statement of Changes in Equity:

A

Reconciles all of the beginning and ending balances in the equity accounts.

52
Q

Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?

A

Statement of Cash Flows

53
Q

Which of the following information should be disclosed as supplemental information in the statement of cash flows?

A

Conversion of debt to equity. Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts.

54
Q

Payne’s unamortized bond discount account decreased by $25,000 during the year.

How should Payne report the change in the unamortized bond discount in its Statement of Cash Flows?

A

As an addition to net income in the operating activities section. Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account.

The semiannual journal entry is: dr. Interest expense; cr. Discount; cr. Cash.

Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount).

Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow.

Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

55
Q

How should the amortization of a bond discount on long-term debt be reported in a Statement of Cash Flows prepared using the indirect method?

A

In operating activities as an addition to income

56
Q

What information about estimates is not required to be disclosed?

A

The old and new estimate in quantitative terms, The actual numerical estimates typically are not disclosed. Rather, it is the effect of the change which is of interest to financial statement users.

57
Q

Which of the following is not a source of risk and uncertainty for which disclosures are required by GAAP?

A

Effects of changes in government regulations

58
Q

A multi-step Income Statement is prepared:

A

Because it is more meaningful presentation of revenue and expenses.

59
Q

Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?

A

Disclosed but NOT accrued, Contingencies are accrued and recognized as a liability when the occurrence of the liability is probable and the amount can be reasonably estimated. This lawsuit is reasonably possible, but not probable. Reasonably possible is typically a 50/50 chance of occurrence, where probable is a higher likelihood of occurrence.

60
Q

Which type of material related-party transactions require disclosure?

A

All those other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. Material related party transactions must be disclosed unless they are ordinary business transactions, such as payment of employees and other routine transactions.

61
Q

Where in its financial statements should a company disclose information about its concentration of credit risks?

A

The notes to the financial statements.

62
Q

Successful use of leverage is evidenced by a

A

Rate of return on investment greater than the cost of debt.

63
Q

IAS 1 requires a complete set of financial statements to be prepared annually. A complete set of financial statements includes

A

Statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.

64
Q

Under IFRS, interest and dividends received may be reported on the statement of cash flows as

A

Either operating or investing activities.

65
Q

Which of the following statements is true regarding developing fair value measurements for financial statement purposes?

A

It assumes the highest and best use of the asset.

66
Q

Sterling Corporation prepares its financial statements in accordance with IFRS. Sterling paid $10,000 of interest during the year. Sterling must report these finance costs on the statement of cash flows

A

IFRS permits finance costs (interest expense) to be reported in either in the operating or financing section of the statement of cash flows. However, once it is disclosed in a particular section, it must be reported on a consistent basis.

67
Q

According to the FASB conceptual framework, earnings

A

Exclude certain gains and losses that are included in comprehensive income.

Per SFAC 5, earnings and comprehensive income have the same broad components–revenues, expenses, gains, and losses, but are not the same because certain classes of gains and losses are included in comprehensive income but are excluded from earnings.

68
Q

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method?

A

Dividends received from investments

ASC Topic 230 specifically states that dividends received from investments be reported separately under operating activities when the direct method is used.

FAR (9 decks)

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