Financial Accounting Standards Board (FASB)

Question 1

When the FASB’s Emerging Issues Task Force reaches a consensus on a particular reporting issue, generally the FASB does not address it further.

Answer 1

True

Question 2

“Economic consequences” is a concept used by the FASB to gain acceptance of its proposed standards.

Answer 2

False

Question 3

The Conceptual Framework is not GAAP.

Answer 3

True

Question 4

The SEC created the Committee on Accounting Procedure.

Answer 4

False

In 1939, the AICPA appointed its Committee on Accounting Procedure (CAP), the first private sector body charged with the responsibility of promulgating GAAP.

Question 5

The SEC has the ability to force the FASB to modify an accounting standard.

Answer 5

True

Question 6

The AICPA currently sets accounting standards.

Answer 6

False

The FASB is currently the standard-setting body in the United States.

Question 7

One of the principles used by the FASB in developing accounting standards is that the cost of complying with GAAP should be less than the benefit of those standards.

Answer 7

True

Question 8

FASB members serve four-year terms.

Answer 8

False

Each of the 7 FASB board members are appointed for five-year terms and are eligible for reappointment to one additional five-year term.

Question 9

It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

Answer 9

True

The SEC requires that all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP.

Question 10

The purpose of financial accounting is to provide information primarily for which of the following groups?

Answer 10

Investors and creditors.

Question 11

The FASB is a:

Answer 11

Private sector body.

The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.

Question 12

What group currently writes the Generally Accepted Accounting Principles?

Answer 12

FASB

Financial Accounting Standards Board

Question 13

What is an an example of an investing activity in a company’s statement of cash flows?

Answer 13

Collection of a note receivable from a related party.

The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.

Question 14

What is an an example of a financing activity in a company’s statement of cash flows?

Answer 14

Collection of proceeds from a note payable.

Question 15

Which document is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

Answer 15

A proposed accounting standards update.

Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).

Question 16

U.S. GAAP includes a very large set of accounting guidance. What is not included:

Answer 16

International accounting standards are not included in the FASB Accounting Standards Codification.

IFRS are not U.S. GAAP and thus are not included in the Codification.

Question 17

What is useful guidance for practicing accountants concerning the FASB Accounting Standards Codification?

Answer 17

The Codification is the sole source of U.S. GAAP, for nongovernmental entities.

The Codification includes all authoritative GAAP for nongovernmental entities.

Question 18

When the reported measure of an economic condition or situation aligns with the economic condition or situation, then it is representationally faithful.

Answer 18

True

Question 19

GAAP pertains primarily to general purpose financial statements rather than reports tailored to specific needs.

Answer 19

True

Question 20

GAAP assumes that most financial statement users are experts such as stock analysts.

Answer 20

False

Question 21

What are the three components of Relevance?

Answer 21

Predictive Value
Confirmatory Value
Materiality

Question 22

What are the three components of Faithful Representation?

Answer 22

Completeness
Neutrality
Free from error

Question 23

What are the four enhancing qualitative characteristics?

These relate to Relevance and Faithful Representation

Answer 23

Comparability
Verifiability
Timeliness
Understandability

Question 24

According to the conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:

Answer 24

Predictive Value

Question 25

What is the conceptual framework intended to establish?

Answer 25

The objectives and concepts for use in developing standards of financial accounting and reporting.

Question 26

According to the conceptual framework, neutrality is an ingredient of:

Answer 26

Faithful Representation

Question 27

According to the FASB conceptual framework, which of the following is not an enhancing qualitative characteristic?

Answer 27

Confirmatory Value

Question 28

According to the FASB conceptual framework, predictive value is an ingredient of:

Answer 28

Relevance

Question 29

Which characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?

Answer 29

Relevance

The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.

Question 30

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

Answer 30

Recognition

Question 31

Under the historical cost principle, are most assets recorded at market value on the purchase date?

Answer 31

Yes

Question 32

A firm has negative income for a period. Has the firm experienced a return on capital?

Answer 32

No

Question 33

The accounting assumption of separate entity supports the inclusion of prepaid insurance in total assets.

Answer 33

False

Question 34

A firm has income of exactly zero for a year during which both specific and general prices (inflation) have increased. The firm maintained its capital under the financial concept of capital maintenance.

Answer 34

True

Question 35

Reporting inventory at the lower of cost or market is a departure from the accounting principle of:

Answer 35

Historical cost

Question 36

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

Answer 36

Economic entity

Question 37

Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of:

Answer 37

Matching

The matching principle requires that we recognize and match expenses with the revenues generated. For all sales in a given period, some will be uncollectible. The cost of those uncollectible accounts is matched in the period that the revenue is recognized.

Question 38

On December 31, 2002, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 2002, the net realizable value of the equipment was below historical cost.

What is the appropriate measurement basis for equipment included in Brooks’ December 31, 2002, Balance Sheet?

Answer 38

Net realizable value.

When a firm is in liquidation, historical cost and entry values (replacement cost) are no longer relevant.

The going concern assumption supports the historical cost principle. The firm is no longer a going concern. The only amounts relevant are the amounts to be received on sale of the assets. Net realizable value is the net value to be received, after the costs of getting the asset ready for sale are deducted.

Question 39

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

Answer 39

Replacement cost.

Replacement cost is the amount to be paid for an item at the current time. This concept is used in the lower-of-cost-or-market inventory valuation procedure. Replacement cost is an example of an entry price-the amount required to be paid currently to obtain an asset already held.

Question 40

General Motors rounds its balance sheet amounts to the nearest million dollars. This is an example of materiality.

Answer 40

True

Question 41

A firm did not disclose a relatively small payment to a foreign government that is in conflict with the Foreign Corrupt Practices Act. This is a violation of full-disclosure.

Answer 41

True

Question 42

During periods of deflation, the use of FIFO rather than LIFO is an example of liberal accounting.

Answer 42

False

Question 43

A new Accounting Standards Update is not adopted based on the view that, although users would benefit from the information, reporting firms would be unduly burdened by the proposed requirement. This is an example of conservatism.

Answer 43

False

Question 44

For completeness, footnotes must accompany the financial statements. This is an example of full disclosure.

Answer 44

True

Question 45

In order for revenues to be recognized, the seller must be substantially finished with its work, and cash collection must be reasonably assured.

Answer 45

True

Question 46

A firm has reported a 20% increase in earnings for the past three years. To dampen investor expectations, it has decided to understate revenues and overstate expenses. Is this an appropriate application of the conservatism constraint?

Answer 46

No

Question 47

What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?

Answer 47

Conservatism

Gain contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.

Question 48

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:

Answer 48

Cost-benefit

Question 49

The fair value of a liability is based on the amount that would be paid to transfer the liability.

Answer 49

True

Question 50

The use of fair value measurement is required by a number of GAAP pronouncements.

Answer 50

True

Question 51

Fair value is based on an exit price.

Answer 51

True

Question 52

The fair value of a nonfinancial asset is based on its highest and best use by the reporting entity.

Answer 52

False

Question 53

The price determined in the principal or most advantageous market should be adjusted for transportation cost in arriving at fair value in applying the fair value option.

Answer 53

True

Question 54

The price determined in the principal or most advantageous market should be adjusted for transaction cost in arriving at fair value in applying the fair value option.

Answer 54

False

Question 55

The fair value of an asset is based on the price that would be paid to acquire the asset.

Answer 55

False

Question 56

The determination of fair value may be for:

Answer 56

A Standalone Asset or Liability or
A Group of Assets or Liabilities

While the determination of fair value is for a particular (identified) asset or liability, that asset or liability, in fact, may be either a standalone asset or liability (e.g., a financial instrument or an operating asset) or a group of assets or liabilities taken as a unit (e.g., an asset group or a line of business).

Question 57

In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account:

Answer 57

What is physically possible
What is financially feasible
What is legally permissible

Question 58

The fair value for an asset or liability is measured as

Answer 58

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants. (exit price)

Question 59

What benefits is the fair value framework intended to accomplish with respect to fair value measurement and fair value reporting?

Answer 59

Increased Consistency & Increased Comparability

Question 60

What are the purposes of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?

Answer 60

Provide a uniform definition of “fair value” for GAAP purposes.

Provide a framework for determining fair value for GAAP purposes.

Establish expanded disclosures about fair value when it is used.

Question 61

On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.’s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?

Answer 61

$16,000

Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.

Question 62

An employer’s prepaid pension asset account can be measured and reported at fair value.

Answer 62

False

Question 63

The price paid to acquire an asset or the price received to assume a liability is an exit price.

Answer 63

False

Question 64

Financial liabilities arising from a lease contract obligation can be measured and reported at fair value.

Answer 64

False

Question 65

Property, plant, and equipment may be measured and reported using fair value.

Answer 65

False

Question 66

If, at acquisition of an asset or liability, the exit price of the item is different than the transaction price, a gain or loss should be recognized.

Answer 66

True

Question 67

Discounting a future stream of cash flows to its current value would be an example of the income approach to determining fair value.

Answer 67

True

Question 68

Multiple valuation approaches will always be required to determine fair value.

Answer 68

False

Question 69

A subsidiary that is to be consolidated with its parent may elect the fair value option for eligible assets and liabilities on its books.

Answer 69

True

Question 70

A firm may not use the fair value option for investment in common stock which gives the investor significant influence over the investee.

Answer 70

False

Question 71

The valuation technique(s) used to measure fair value can be changed every reporting period.

Answer 71

False

Question 72

A firm may elect to use the fair value option for an eligible firm commitment when it enters into the contract that establishes the firm commitment.

Answer 72

True

Question 73

A change in valuation technique(s) used to measure fair value would be treated as a change in accounting principle.

Answer 73

False

Question 74

A firm may elect at the beginning of each of its fiscal years to use the fair value option for eligible financial assets and financial liabilities.

Answer 74

False

Question 75

Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny’s carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa’s consolidated statements prepared immediately after the transaction?

Answer 75

Land $60,000
Building $50,000

Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be “eliminated” so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.)

Question 76

Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny’s carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should Papa record the land and building on its books at the date of the transaction?

Answer 76

Land $75,000
Building $35,000

Papa should record the land and building on its books at the appropriately determined fair value at the date of the transaction. The prior carrying values on Sonny’s books are not relevant to the amounts at which Papa should record the assets on its books, but are relevant to the amounts that should be reported in the consolidated financial statements. NOT CONSOLIDATED!!!!

Question 77

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. What term describes this fair value measurement approach?

Answer 77

Income

The income approach to fair value measurement of an asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

Question 78

If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?

Answer 78

As a change in accounting estimate.

Question 79

In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?

Answer 79

Asset Fair Value - Exit Price

Liability Fair Value - Exit Price

Question 80

What valuation methods may be used to measure investments classified as held-to-maturity?

Answer 80

Amortized cost & Fair Value

Both amortized cost and fair value may be used to measure and report investments classified as held-to-maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value, which is permitted by the fair value option.

Question 81

Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by Alphaco. Alphaco and Betaco have elected to measure their respective investments held-to-maturity at fair value. Charlieco measures its investments held-to-maturity using amortized cost. In its consolidated financial statements, for which companies, if any, may Alphaco elect to report investment held-to-maturity at fair value?

Answer 81

Alphaco, Betaco, and Charlieco.

As the parent, Alphaco may elect to report all of the investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.

Question 82

On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able’s fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by FASB #159, “The Fair Value Option… “, on which one of the following dates must Able elect to implement the fair value option?

Answer 82

January 15, 2008

If Able Co. intends to elect to implement the fair value option for its investment in Baker’s debt, it must make its election on the date it first recognizes the investment, which is January 15, 2008.

Question 83

When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, what valuation techniques has been used?

Answer 83

Cost approach.

When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), the cost approach has been used.

Question 84

Multico is a securities dealer whose principal market is with other securities dealers. To take advantage of a perceived opportunity, on December 31, the end of its fiscal year, Multico acquired a financial asset in a market other than its principal market for $50,000. At that date, the identical instrument could be sold in Multico’s principal market for $50,100 with a $200 transaction cost. Which of the following amounts would constitute fair value to Multico for the financial asset at December 31?

Answer 84

$50,100

Since fair value is based on an exit price, the amount at which Multico could have sold the asset in its principal market is its fair value to Multico. Since the asset could have been sold by Multico in its principal market for $50,100, that is its fair value to Multico. The transaction cost to execute the sale should not be deducted from the market price to get fair value.

Question 85

In the fair value hierarchy, level 1 inputs may need to be adjusted for the blockage factor.

Answer 85

False

Question 86

Observable inputs, other than quoted prices in active markets for identical items, would constitute what level in the fair value hierarchy?

Answer 86

Level 2

Level 2 inputs are observable for assets or liabilities, either directly or indirectly, other than quoted prices in level 1. For example, quoted prices for similar items in an active market would be level 2 inputs.

Question 87

Required disclosures under the fair value option must be made only in annual financial statements.

Answer 87

False

Question 88

Required disclosures under the fair value option must be made in both interim and annual financial statements.

Answer 88

True

Question 89

If other pronouncements require the use of fair value measurement and related disclosures, those disclosure requirements are superseded by fair value option disclosures.

Answer 89

False

Question 90

Required disclosures about the use of the fair value option must be made for both the balance sheet and the income statement.

Answer 90

True

Question 91

Management’s reasons for electing the fair value option must be disclosed for each elected eligible item.

Answer 91

True

Question 92

For each line item in the balance sheet which contains items measured under the fair value option, the amount of gains and losses from fair value changes included in the income statement must disclosed.

Answer 92

True

Question 93

For each item measured under the fair value option that provides interest or dividend income, how those items of income are measured and where they are reported in the income statement must be disclosed.

Answer 93

True

Question 94

The methods and significant assumptions used to estimate fair value must be disclosed in both annual and interim reports.

Answer 94

False

Question 95

The methods and significant assumptions used to estimate fair value must be disclosed only in annual reports.

Answer 95

True

Question 96

Most fair value disclosures must be provided only in annual reports.

Answer 96

False

Question 97

Most fair value disclosures must be provided in both interim and annual reports.

Answer 97

True

Question 98

Required fair value quantitative disclosures must be presented in a tabular format.

Answer 98

True

Question 99

For a firm that elects to use fair value to measure eligible financial assets and financial liabilities, specific disclosures are required for which financial statements?

Answer 99

Quarterly and Annual Financial Statements

Firms which elect to measure financial assets and financial liabilities at fair value are required to make significant additional disclosures in both interim (quarterly, etc.) and annual financial statements.

Question 100

Under U.S. GAAP the disclosure requirements when fair value measurement is used are differentiated by what classification?

Answer 100

Between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis.

Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-trading. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.