FAR 1-1: Accounting Standards & Conceptual Frameworks

Question 1

Name the single source of authoritative nongovernmental U.S. GAAP

Answer 1

The FASB “Accounting Standards Codification” (ASC)

Question 2

The term “International Financial Reporting Standards” includes what standards?

Answer 2

• International Accounting Standards (IAS)
• International Financial Reporting Standards (IFRS)
• IFRIC Interpretations
• SIC Interpretations

Question 3

What are 3 objectives of financial reporting by business enterprises?

Answer 3

To provide:

• Information useful in investment, credit, & similar decisions
• Information useful in assessing cash flow prospects
• Information about enterprise resources, claims to those resources, & changes in them

Question 4

Who are the primary users of general purpose financial reports?

Answer 4

Existing & potential:

• Investors
• Lenders
• Other creditors

Question 5

Name the pervasive constraints in the hierarchy of accounting qualities under the FASB concept statements & the IFRS framework

Answer 5

FASB concept statements:

• Benefit > Cost
• Materiality

IFRS framework:

• Timeliness
• Benefit > Cost
• Balance between qualitative characteristics

Question 6

Name the pervasive constraint on the information provided in financial reporting

Answer 6

Cost constraint: the benefits of reporting financial information must be greater than the costs of obtaining & presenting the information

Question 7

Name the 2 primary decision-specific qualities of useful accounting information

Answer 7

Relevance & reliability

Question 8

Name the fundamental qualitative characteristics of useful financial information

Answer 8

Relevance & faithful representation

Question 9

Name the 3 elements of relevance

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Answer 9

• Predictive value
• Materiality
• Confirmatory value

Question 10

Name the 3 elements of reliability

NRFV

Answer 10

• Neutrality
• Representational Faithfulness
• Verifiability

Question 11

Name the 3 elements of faithful representation

Financials are not faithfully represented unless complete

Answer 11

• Neutrality
• Completeness
• Freedom from error

Question 12

Name the enhancing qualitative characteristics of financial information

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Answer 12

• Comparability
• Understandability
• Timeliness
• Verifiability

Question 13

Name the 2 secondary characteristics of accounting information

Answer 13

Comparability & consistency

Question 14

According to SFAC #5, what should a full set of financial statements include?

Answer 14

• Statement of financial position (the balance sheet)
• Statement of earnings (the income statement)
• Statement of comprehensive income
• Statement of cash flows
• Statement of changes in owners’ equity

Question 15

What is the difference between realization & recognition?

Answer 15

• Realization: When sold & converted to cash (or claims to cash)
• Recognition: When recorded in the financial statements

Question 16

List the 10 elements of financial statements according to SFAC #6

CREG and LALEID

Answer 16

*Comprehensive Income
*Revenues
*Expenses
*Gains
and
*Losses
*Assets
*Liabilities
*Equity (of Net Assets)
*Investments by Owners
*Distributions to Owners

Question 17

List the 6 elements of the financial statements according to the IASB Framework

ALEIEC

Answer 17

• Assets
• Liabilities
• Equity
• Income (revenue & gains)
• Expenses (expenses & losses)
• Capital maintenance adjustments

Question 18

Name the 5 elements of present value measurement per SFAC #7

EVTUO

Answer 18

• ESTIMATE of future cash flows
• Expectations about time VARIATIONS of future cash flows
• TIME value of money (the risk-free rate of interest)
• The price for bearing UNCERTAINTY
• OTHER factors (e.g., liquidity issues & market imperfections)

Question 19

Describe the expected cash flow approach for present value computations

Answer 19

Considers a range of possible cash flows & assigns a (subjective) probability to each cash flow in the range to determine the weighted-average, or “expected,” future cash flow