FAR 1.01 - GAAP Flashcards
FAR 1.01 - GAAP
According to the FASB Conceptual Framework, financial information is considered faithfully represented if it is…
Conservative, unbiased, and precise
Useful, understandable, and verifiable
Useful, precise, and free from error
Complete, neutral, and free from error
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.
FAR 1.01 - GAAP
According to the FASB conceptual framework, predictive value is an ingredient of…
Representational faithfulness, not relevance.
Both representational faithfulness and relevance.
Relevance, not representational faithfulness.
Neither representational faithfulness nor relevance.
Relevance, not representational faithfulness.
EXPLANATION:
According to the conceptual framework of accounting, there are two primary qualitative characteristics of accounting information.
One is representational faithfulness, the objective of which is to assure that the information is free from errors, neutral and complete.
The other is relevance, the objectives of which is to maximize the predictive value of the financial of the financial statements.
Predictive value is an element of relevance rather than representational faithfulness.
FAR 1.01 - GAAP
Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic?
Comparability
Feedback value
Timeliness
Relevance
Relevance
EXPLANATION:
The FASB’s Conceptual Framework, in paragraph QC5 of Statement of Financial Accounting Concepts 8 (SFAC 8), identifies relevance and faithful representation as the two fundamental qualitative characteristics of useful financial information.
FAR 1.01 - GAAP
General purpose external nancial
reporting of a corporation focuses primarily on the needs of which of the
following users?
Regulatory and taxing authorities
The board of directors of the corporation
The management of the corporation
Investors and creditors and their advisors
Investors and creditors and their advisors
EXPLANATION:
General purpose external financial reporting is focused primarily on the needs of external users with a vested financial interest in the financial status and performance of the corporation – investors and creditors who have made investments in or extended credit to the corporation, and their advisors, whose livelihood depends on giving sound advice regarding investment
and credit decisions
FAR 1.01 - GAAP
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an
entity is…
Recognition.
Realization.
Matching.
Allocation.
Recognition.
EXPLANATION:
Recognition is the process of reporting an item on the financial statements.
Allocation is the process of spreading a cost over more than one period.
Matching is the process of recognizing an expense in the same period in which a related benefit is recognized.
Realization is the conversion of an item or service into cash or a claim to cash.
FAR 1.01 - GAAP
According to the FASB conceptual framework, for financial reporting to be useful, it must…
Provide information useful for making business and investment decisions.
Be in accordance with generally accepted accounting principles.
Be understandable to those who have a limited knowledge of business activities.
Directly measure the value of the entity being reported on.
Provide information useful for making business and investment decisions.
EXPLANATION:
In the context of the FASB Conceptual Framework information is useful if it provides information that is helpful in the
making of business and investment decisions in relation to the reporting entity.
Although GAAP is a financial reporting framework that can be used to provide useful financial information, the information does not have to be prepared in accordance with GAAP in order to be useful.
To be useful, it must be understandable, but it is reasonable to expect users to have and apply more than limited knowledge of business activities.
Financial statements, particularly when fair value is not universally applied, do not necessarily provide a measure of the value of the entity being reported upon.
FAR 1.01 - GAAP
Materiality and relevance are both defined by…
The consistency in the application of methods over time.
What influences or makes a difference
to a decision maker.
The perceived benefits to be denied that exceed the perceived costs associated with it.
Quantitative criteria set by the Financial Accounting Standards Board.
What influences or makes a difference
to a decision maker.
EXPLANATION:
An item is considered material or relevant only if it will influence a user of financial statements in making investment or credit decisions in relation to the reporting entity.
They are a matter of professional judgment, different in every engagement, and are not measured on the basis of quantitative criteria established by the FASB.
Although consistency and comparability add to the reliability of financial information, they do not define materiality or relevance.
Evaluation of the providing of information
in relation to its cost is part of a cost/benefit analysis, which is affected by materiality and relevance, but does not define them.
FAR 1.01 - GAAP
The concept of verifiability means:
Information about the past can be used to make decisions about the future.
The information is capable of making a difference in the decisions made by users.
Different authorities will draw the same conclusions based on the information, such as different sources agreeing as to an amount.
The information is free from bias.
Different authorities will draw the same conclusions based on the information, such as different sources agreeing as to an amount.
EXPLANATION:
Verifiability means that different authorities will draw the same conclusions based on the information, such as different sources agreeing as to an amount.
Predictive value indicates that information about the past can be used to make decisions about the future.
Neutrality indicates that information is free from bias.
.
Whether or not information is capable of making a difference to users is determined by its materiality
FAR 1.01 - GAAP
According to Statements of Financial Accounting Concepts, neutrality is an ingredient of…
Neither representational faithfulness nor relevance.
Relevance, not representational faithfulness.
Both representational faithfulness and relevance.
Representational faithfulness, not relevance.
Representational faithfulness, not relevance.
EXPLANATION:
According to the conceptual framework of accounting, there are two primary qualitative characteristics of accounting information: representational faithfulness, which includes the principles of accuracy, neutrality and completeness; and relevance, which consists of the elements of predictive value and verifiability.
Neutrality is an element of representational faithfulness rather than relevance.
FAR 1.01 - GAAP
The enhancing qualitative characteristics of financial reporting are…
Completeness, neutrality, and free from error.
Relevance, reliability, and faithful representation.
Cost-benefit and materiality.
Comparability, understandability, timeliness, and veriability.
Comparability, understandability, timeliness, and veriability. (CUT-V)
EXPLANATION:
The enhancing qualitative characteristics of financial reporting are (Roger is CUT-V – CUT like a V) comparability, understandability, timeliness, and verifiability.
FAR 1.01 - GAAP
.
According to the FASB conceptual framework, which of the following choices correctly pairs a fundamental qualitative characteristic of accounting information with one of its ingredients?
Faithful representation and materiality
Relevance and free from error
Relevance and predictive value
Faithful representation and conrmatory
value
Relevance and predictive value
EXPLANATION:
Relevance, along with faithful representation, is one of the two fundamental qualitative characteristics of accounting information. It incorporates two ingredients, predictive value and confirmatory value, or both.
