FAR 1.01 Flashcards
1.01 - GAAP: During a period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about
A) Enterprise performance but not directly provide information about management performance.
B) Both enterprise performance and management performance.
C) Management performance but not directly provide information about enterprise performance.
D) Neither enterprise performance nor management performance.
A) Enterprise performance but not directly provide information about management performance.
Explanation: The objectives of financial reporting include providing direct information about an entity’s cash flows, financial position, and performance. The financial statements also provide indirect information about management’s performance.
1.01 - GAAP: According to Statements of Financial Accounting Concepts, neutrality is an ingredient of
A) Relevance.
B) Faithful representation and relevance.
C) Neither faithful representation nor relevance.
D) Faithful representation.
D) Faithful representation.
Explanation: Faithful representation consists of the ingredients of Free from Error, Neutrality and Completeness. Remember that Roger is never on the FENC. Relevance consists of Predictive value and confirmatory value, or both. (Roger is P.C.)
1.01 - GAAP: According to the FASB Conceptual Framework, financial information is considered faithfully represented if it is
A) Useful, precise, and free from error
B) Useful, understandable, and verifiable
C) Conservative, unbiased, and precise
D) Complete, neutral, and free from error
D) Complete, neutral, and free from error
Explanation: 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.
