FAR - F1

Question 1

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

Answer 1

Recognition.

Recognition is the process of recording an item in the financial statements of an entity. SFAC 5 para. 6.

Question 2

Which of the following is not defined in FASB Statement of Financial Accounting Concepts number 7 as one of the five elements of present value (or economic value) measurement used to establish the value of assets or liabilities using cash flow information?

Answer 2

Risk Tolerance of Management.

The risk tolerance of management is not defined by SFAC #7 as an element of present value management used to establish the value of assets or liabilities using cash flows. SFAC defines the following elements of present value measurement:

• The price for bearing uncertainty
• Expectations about timing variations of future cash flows
• Other factors (e.g., liquidity issues and market imperfections)
• Time value of money (the risk-free rate of interest)
• Estimate of future cash flow

Question 3

Which of the following characteristics enhances relevance and faithful representation?

Answer 3

Timeliness.

Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented.

Question 4

According to the FASB and IASB conceptual frameworks, to be relevant, information should have which of the following?

Answer 4

Predictive value.

To be relevant, information should have predictive value and/or confirming value, and must be material.

Question 5

Users of financial statements frequently rely upon the data displayed in the financial statements to predict future financial outcomes. Financial accounting concepts refer to the characteristics of financial accounting information that provides predictive value to users as the quality of:

Answer 5

Relevance.

The fundamental qualitative characteristic of useful accounting information described by the term “relevance” contemplates predictive value, confirming value, and materiality.

Question 6

According to the FASB conceptual framework, an entity’s revenue may result from:

Answer 6

A decrease in a liability from primary operations.

Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity’s on-going major operations, not from “incidental” operations.

An entity’s revenue may result from a decrease in a liability from primary operations.

Question 7

Which of the following should be included in general and administrative expenses?

• Interest?
• Advertising?

Answer 7

Interest - No
Advertising - No

Interest expense is classified as a separate line item on the income statement. Advertising is classified as a selling expense.