FAR-1 Flashcards
The FASB makes changes to the Accounting Standards Codification by issuing
Emerging Issues Task Force Releases.
Staff Technical Bulletins.
Statements of Financial Accounting Standards.
Accounting Standards Updates.
Accounting Standards Updates.
An Accounting Standards Update (ASU) is issued when the FASB approves an amendment to the Accounting Standards Codification (ASC). However, an ASU is not authoritative until it has been incorporated into the ASC. SEC pronouncements and the ASC are the only sources of authoritative financial accounting guidelines for nongovernmental entities in the U.S.
Form 10-K is filed with the SEC to update the information a company supplied when filing a registration statement under the Securities Exchange Act of 1934. Form 10-K is a report that is currently filed
Quarterly within 45 days of the end of each quarter.
Semiannually within 30 days of the end of a company’s second and fourth fiscal quarters.
Monthly within 2 weeks of the end of each month.
Annually within 90 days of the end of a company’s fiscal year for nonaccelerated filers.
Annually within 90 days of the end of a company’s fiscal year for nonaccelerated filers.
Form 10-K is the annual report to the SEC. It must be filed within 90 days (60 days for large accelerated filers and 75 days for accelerated filers) after the corporation’s year end. It must contain audited financial statements and be signed by the principal executive, financial, and accounting officers and by a majority of the board.
The objective of present value is to estimate fair value when used to determine accounting measurements for
Initial-Recognition Purposes Fresh-Start Purposes
No No
No Yes
Yes No
Yes Yes
Yes Yes
The objective of present value in initial-recognition or fresh-start measurements is to estimate fair value. A present value measurement includes five elements: (1) estimates of cash flows, (2) expectations about their variability, (3) the time value of money (the risk-free interest rate), (4) the price of uncertainty inherent in an asset or liability, and (5) other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.
An accrued expense can best be described as an amount
Not paid and currently matched with earnings.
Paid and not currently matched with earnings.
Not paid and not currently matched with earnings.
Paid and currently matched with earnings
Not paid and currently matched with earnings.
An accrued expense has been incurred but not paid. Thus, it should be charged (matched) against revenue in the current period and recorded as a liability.
Financial information is most likely to be verifiable when an accounting transaction occurs that
Allocates revenues or expense items in a rational and systematic manner.
Furthers the objectives of the entity.
Involves an arm’s-length transaction between two independent parties.
Is promptly recorded in a fixed amount of monetary units.
Involves an arm’s-length transaction between two independent parties.
Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm’s-length transaction between independent interests suggests that the transaction is verifiable.
Which of the following statements best describes an operating procedure for issuing a new Accounting Standards Update?
The Exposure Draft is modified per public opinion before issuing a Discussion Paper.
A new FASB statement can be rescinded by a majority vote of the AICPA membership.
A new update is issued only after a majority vote by the members of the FASB.
The Emerging Issues Task Force must approve a discussion paper before it is disseminated to the public.
A new update is issued only after a majority vote by the members of the FASB.
The first step in the FASB’s standards-setting process is identification of financial reporting issues based on communications with stakeholders, research, and other activities. After analysis by the FASB’s staff, the decision is made whether to add the project to the technical agenda. If it is added, the issues are deliberated at a public meeting(s). The next step is to publish an Exposure Draft to solicit stakeholder responses. In some projects, a Discussion Paper also may be issued at an early stage. A public meeting regarding the Exposure Draft may be held if needed. The staff analyzes the information obtained in the previous steps. The FASB then redeliberates the proposals with stakeholder input at a public meeting(s). The final step is a vote by the FASB on the final proposal. If a majority of the 7 board members approves, an Accounting Standards Update is issued that contains amendments to the Accounting Standards Codification.
Which of the following bodies has the original authority to set accounting standards for publicly traded companies in the U.S.?
The International Accounting Standards Board (IASB).
The Financial Accounting Standards Board (FASB).
The Securities and Exchange Commission (SEC).
The American Institute of Certified Public Accountants (AICPA).
The Securities and Exchange Commission (SEC).
The SEC establishes rules for financial reporting by publicly traded companies (called issuers) in the United States. But the SEC has delegated the authority for detailed rule making to the Financial Accounting Standards Board (FASB).
Which of the following is true regarding the comparison of managerial and financial accounting?
The emphasis on managerial accounting is relevance, and the emphasis on financial accounting is timeliness.
Managerial accounting has a past focus, and financial accounting has a future focus.
Managerial accounting need not follow generally accepted accounting principles (GAAP), while financial accounting must follow them.
Managerial accounting is generally more precise.
Managerial accounting need not follow generally accepted accounting principles (GAAP), while financial accounting must follow them.
Managerial accounting assists management decision making, planning, and control. Financial accounting addresses accounting for an entity’s assets, liabilities, revenues, expenses, and other elements of financial statements. Financial statements are the primary method of communicating to external parties information about the entity’s results of operations, financial position, and cash flows. For general-purpose financial statements to be useful to external parties, they must be prepared in conformity with accounting principles that are generally accepted in the United States. However, managerial accounting information is primarily directed to specific internal users. Thus, it ordinarily need not follow such guidance.
According to the FASB’s conceptual framework, the process of reporting an item in the financial statements of an entity is
Matching.
Realization.
Recognition.
Allocation.
Recognition.
Recognition is the process of formally recording or incorporating an item in the financial statements as an asset, liability, revenue, expense, gain, or loss.
According to the FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of useful financial information with one of its aspects?
Relevance and materiality.
Faithful representation and confirmatory value.
Faithful representation and predictive value.
Relevance and neutrality.
Relevance and materiality.
Relevance is a fundamental qualitative characteristic, and materiality is an entity-specific aspect of relevance. Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Information is material if its omission or misstatement can influence user decisions based on a specific entity’s financial information.
The computation of the current value of an asset using the present value of future cash flows method does not include the
Cost of alternate uses of funds given up.
Future amounts of cash receipts or cash savings.
Productive life of the asset.
Applicable interest rate.
Cost of alternate uses of funds given up.
The calculation of the current value of an asset using the present value method requires (1) the discount period (the productive life of the asset), (2) the discount rate (the applicable interest rate), and (3) the future values (the future amounts of cash receipts or cash savings). This method does not consider opportunity costs (benefits of the best alternative use of funds).
Regulation S-X disclosure requirements of the Securities and Exchange Commission (SEC) apply to
Information about recent sales of unregistered securities.
The requirements for filing interim financial statements and pro forma financial information.
Summary information, risk factors, and the ratio of earnings to fixed charges.
Management’s discussion and analysis of the financial condition and the results of operations.
The requirements for filing interim financial statements and pro forma financial information.
Regulation S-X governs the reporting of financial statements, including notes and schedules. Both interim and annual statements are covered by Regulation S-X.
Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism during a particular reporting period?
Capitalization of research and development costs.
Accrual of a contingency deemed to be reasonably possible.
Reporting LIFO inventory at the lower of cost or market value.
Reporting investments with appreciated market values at market value.
Reporting LIFO inventory at the lower of cost or market value.
Under the conservatism constraint, when alternative accounting methods are appropriate, the one having the less favorable effect on net income and total assets is preferable. An understatement of assets is to be avoided so that earnings are not overstated when the assets are realized. For example, when inventory is accounted for using LIFO or the retail method, it is reported at the lower of cost or market value. The market measurement under the LCM rule for LIFO is subject to a ceiling of net realizable value and a floor of NRV minus a normal profit. Reporting inventory above NRV results in a loss on sale. Reporting inventory below NRV minus a normal profit overstates profit. The effect of the rule is to recognize all losses but not to anticipate gains.
What is the underlying concept governing the generally accepted accounting principles pertaining to recording gain contingencies?
Consistency.
Relevance.
Faithful representation.
Conservatism.
Conservatism.
Under the conservatism constraint, when alternative accounting methods are appropriate, the one having the less favorable effect on net income and total assets is preferable. However, conservatism does not permit a deliberate understatement of total assets and net income. Furthermore, the response to uncertainty reflects “a general tendency to emphasize purchase and sale transactions and to apply conservative procedures in accounting recognition” (SFAC 5). Thus, a loss, not a gain, contingency is recorded in the financial statements. If the probability of realization of a gain is high, the contingency is disclosed in the notes.
Which of the following is not a characteristic of the governmental reporting environment?
Balance sheet equity.
Interperiod equity.
Legally binding budget.
Accountability.
Balance sheet equity.
State and local governments report net position or fund balances, not equity.
What are the Statements of Financial Accounting Concepts intended to establish?
Generally accepted accounting principles in financial reporting by business enterprises.
The objectives and concepts for use in developing standards of financial accounting and reporting.
The hierarchy of sources of generally accepted accounting principles.
The meaning of “present fairly in accordance with generally accepted accounting principles.”
The objectives and concepts for use in developing standards of financial accounting and reporting.
SFACs do not establish accounting and reporting requirements. They are nonauthoritative guidance for nongovernmental entities. SFACs describe the objectives, qualitative characteristics, elements, and other fundamental concepts that guide the FASB in developing sound accounting principles.
Which of the following characteristics relates to both accounting relevance and faithful representation?
Comparability.
Timeliness.
Verifiability.
All of the answers are correct.
All of the answers are correct.
Verifiability, timeliness, comparability, and understandability are qualitative characteristics that enhance the relevance and faithful representation of accounting information.
According to the conceptual framework, the most basic objective of financial reporting is to convey information
About the liquidity and solvency of a company.
That enables users to make decisions about a company.
About the economic resources and obligations of a company.
About the future cash flows of a company.
That enables users to make decisions about a company.
Financial reporting should provide information that is useful to current and potential investors and creditors and other users in making rational investment, credit, and other similar decisions. This objective has the broadest focus.
The reporting model described in the guidance on not-for-profit financial statements applies to
Business entities and governmental not-for-profit entities.
Business entities and nongovernmental not-for-profit entities.
Governmental not-for-profit entities that also use proprietary fund accounting.
Nongovernmental not-for-profit entities.
Nongovernmental not-for-profit entities.
The reporting model for not-for-profit financial statements applies to nongovernmental not-for-profit entities (NFPs). The information needs of resource providers of NFPs differ from those of resource providers of business entities. Resource providers of business entities primarily need information about financial return. Resource providers of NFPs primarily need information about the services provided by the NFP and its continuing ability to provide those services.
According to the FASB’s conceptual framework, which of the following attributes should not be used to measure inventory?
Present value of future cash flows.
Replacement cost.
Historical cost.
Net realizable value.
Present value of future cash flows.
The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.
Form 8-K ordinarily must be submitted to the SEC after the occurrence of a significant event. All of the following events are reported on Form 8-K except
The resignation of several directors.
A change in inventory cost flow method from moving average to first-in, first-out.
The acquisition of a major company.
A change in the registrant’s certifying accountant.
A change in inventory cost flow method from moving average to first-in, first-out.
Form 8-K is a current report to disclose material events. Material events that must be reported include (1) a change in control; (2) acquisition or disposition of a significant amount of assets not in the ordinary course of business; (3) bankruptcy or receivership; (4) resignation of directors; and (5) the resignation or dismissal of the registrant’s certifying accountants. Reporting of other material events that are deemed by the registrant to be of importance to security holders is optional. A change in accounting principle does not require reporting on Form 8-K.
An external auditor’s involvement with Form 10-Q that is being prepared for filing with the SEC most likely will consist of a(n)
Review of the interim financial statements included in Form 10-Q.
Comfort letter that covers stub-period financial data.
Audit of the financial statements included in Form 10-Q.
Compilation report on the financial statements included in Form 10-Q.
Review of the interim financial statements included in Form 10-Q.
Form 10-Q is the quarterly report to the SEC. It need not contain audited financial statements, but it should be prepared in accordance with GAAP. Thus, an SEC registrant must obtain a review by an independent auditor of its interim financial information that is to be included in a quarterly report to the SEC.
One of the elements of financial statements is comprehensive income. Comprehensive income for a period excludes changes in equity resulting from which of the following?
Dividends paid to shareholders.
Prior-period error correction.
Unrealized loss on available-for-sale debt securities.
Loss from discontinued operations.
Dividends paid to shareholders.
According to the FASB’s conceptual framework, comprehensive income of a business entity is the periodic change in equity of a business from nonowner sources. Thus, dividends paid (distributions to owners) are excluded from comprehensive income.
The objective of present value when used to determine an accounting measurement for initial recognition purposes is to
Capture the value of an asset or liability in the context of a given entity.
Estimate value in use.
Estimate fair value.
Calculate the effective-settlement amount of assets.
Estimate fair value.
The objective of present value measurements is to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty. A present value measurement includes five elements: (1) estimates of cash flows, (2) expectations about their variability, (3) the time value of money, (4) the price of uncertainty inherent in an asset or liability, and (5) other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.
According to the FASB’s conceptual framework, for financial reporting to be useful, it must
Directly measure the value of the entity being reported on.
Provide information useful for making business and investment decisions.
Be understandable to those who have a limited knowledge of business activities.
Be in accordance with generally accepted accounting principles.
Provide information useful for making business and investment decisions.
The objective of general-purpose financial reporting is to report financial information that is useful in making decisions about providing resources to the reporting entity. This information must have the fundamental qualitative characteristics of relevance and faithful representation.
