Financial Accounting Standards Board (FASB) Flashcards
1
Q
When the FASB’s Emerging Issues Task Force reaches a consensus on a particular reporting issue, generally the FASB does not address it further.
A
True
2
Q
“Economic consequences” is a concept used by the FASB to gain acceptance of its proposed standards.
A
False
3
Q
The Conceptual Framework is not GAAP.
A
True
4
Q
The SEC created the Committee on Accounting Procedure.
A
False
In 1939, the AICPA appointed its Committee on Accounting Procedure (CAP), the first private sector body charged with the responsibility of promulgating GAAP.
5
Q
The SEC has the ability to force the FASB to modify an accounting standard.
A
True
6
Q
The AICPA currently sets accounting standards.
A
False
The FASB is currently the standard-setting body in the United States.
7
Q
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.
A
True
8
Q
FASB members serve four-year terms.
A
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.
9
Q
It is a violation of SEC regulations for publicly traded companies to depart from GAAP.
A
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.
10
Q
The purpose of financial accounting is to provide information primarily for which of the following groups?
A
Investors and creditors.
11
Q
The FASB is a:
A
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.
12
Q
What group currently writes the Generally Accepted Accounting Principles?
A
FASB
Financial Accounting Standards Board
13
Q
What is an an example of an investing activity in a company’s statement of cash flows?
A
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.
14
Q
What is an an example of a financing activity in a company’s statement of cash flows?
A
Collection of proceeds from a note payable.
15
Q
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?
A
A proposed accounting standards update.
Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).
16
Q
U.S. GAAP includes a very large set of accounting guidance. What is not included:
A
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.
17
Q
What is useful guidance for practicing accountants concerning the FASB Accounting Standards Codification?
A
The Codification is the sole source of U.S. GAAP, for nongovernmental entities.
The Codification includes all authoritative GAAP for nongovernmental entities.
18
Q
When the reported measure of an economic condition or situation aligns with the economic condition or situation, then it is representationally faithful.
A
True
19
Q
GAAP pertains primarily to general purpose financial statements rather than reports tailored to specific needs.
A
True
20
Q
GAAP assumes that most financial statement users are experts such as stock analysts.
A
False
21
Q
What are the three components of Relevance?
A
Predictive Value
Confirmatory Value
Materiality
22
Q
What are the three components of Faithful Representation?
A
Completeness
Neutrality
Free from error
23
Q
What are the four enhancing qualitative characteristics?
These relate to Relevance and Faithful Representation
A
Comparability
Verifiability
Timeliness
Understandability
24
Q
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:
A
Predictive Value
25
What is the conceptual framework intended to establish?
The objectives and concepts for use in developing standards of financial accounting and reporting.
26
According to the conceptual framework, neutrality is an ingredient of:
Faithful Representation
27
According to the FASB conceptual framework, which of the following is not an enhancing qualitative characteristic?
Confirmatory Value
28
According to the FASB conceptual framework, predictive value is an ingredient of:
Relevance
29
Which characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?
Relevance
The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.
30
According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:
Recognition
31
Under the historical cost principle, are most assets recorded at market value on the purchase date?
Yes
32
A firm has negative income for a period. Has the firm experienced a return on capital?
No
33
The accounting assumption of separate entity supports the inclusion of prepaid insurance in total assets.
False
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.
True
35
Reporting inventory at the lower of cost or market is a departure from the accounting principle of:
Historical cost
36
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:
Economic entity
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:
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.
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?
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.
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?
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.
40
General Motors rounds its balance sheet amounts to the nearest million dollars. This is an example of materiality.
True
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.
True
42
During periods of deflation, the use of FIFO rather than LIFO is an example of liberal accounting.
False
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.
False
44
For completeness, footnotes must accompany the financial statements. This is an example of full disclosure.
True
45
In order for revenues to be recognized, the seller must be substantially finished with its work, and cash collection must be reasonably assured.
True
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?
No
47
What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?
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.
48
According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
Cost-benefit
49
The fair value of a liability is based on the amount that would be paid to transfer the liability.
True
50
The use of fair value measurement is required by a number of GAAP pronouncements.
True
51
Fair value is based on an exit price.
True
52
The fair value of a nonfinancial asset is based on its highest and best use by the reporting entity.
False
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.
True
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.
False
55
The fair value of an asset is based on the price that would be paid to acquire the asset.
False
56
The determination of fair value may be for:
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).
57
In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account:
What is physically possible
What is financially feasible
What is legally permissible
58
The fair value for an asset or liability is measured as
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)
59
What benefits is the fair value framework intended to accomplish with respect to fair value measurement and fair value reporting?
Increased Consistency & Increased Comparability
60
What are the purposes of the fair value framework as set forth in ASC 820, "Fair Value Measurement"?
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.
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?
$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.
62
An employer's prepaid pension asset account can be measured and reported at fair value.
False
63
The price paid to acquire an asset or the price received to assume a liability is an exit price.
False
64
Financial liabilities arising from a lease contract obligation can be measured and reported at fair value.
False
65
Property, plant, and equipment may be measured and reported using fair value.
False
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.
True
67
Discounting a future stream of cash flows to its current value would be an example of the income approach to determining fair value.
True
68
Multiple valuation approaches will always be required to determine fair value.
False
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.
True
70
A firm may not use the fair value option for investment in common stock which gives the investor significant influence over the investee.
False
71
The valuation technique(s) used to measure fair value can be changed every reporting period.
False
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.
True
73
A change in valuation technique(s) used to measure fair value would be treated as a change in accounting principle.
False
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.
False
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?
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.)
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?
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!!!!
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?
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.
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?
As a change in accounting estimate.
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?
Asset Fair Value - Exit Price
| Liability Fair Value - Exit Price
80
What valuation methods may be used to measure investments classified as held-to-maturity?
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.
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?
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.
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?
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.
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?
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.
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?
$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.
85
In the fair value hierarchy, level 1 inputs may need to be adjusted for the blockage factor.
False
86
Observable inputs, other than quoted prices in active markets for identical items, would constitute what level in the fair value hierarchy?
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.
87
Required disclosures under the fair value option must be made only in annual financial statements.
False
88
Required disclosures under the fair value option must be made in both interim and annual financial statements.
True
89
If other pronouncements require the use of fair value measurement and related disclosures, those disclosure requirements are superseded by fair value option disclosures.
False
90
Required disclosures about the use of the fair value option must be made for both the balance sheet and the income statement.
True
91
Management's reasons for electing the fair value option must be disclosed for each elected eligible item.
True
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.
True
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.
True
94
The methods and significant assumptions used to estimate fair value must be disclosed in both annual and interim reports.
False
95
The methods and significant assumptions used to estimate fair value must be disclosed only in annual reports.
True
96
Most fair value disclosures must be provided only in annual reports.
False
97
Most fair value disclosures must be provided in both interim and annual reports.
True
98
Required fair value quantitative disclosures must be presented in a tabular format.
True
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?
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.
100
Under U.S. GAAP the disclosure requirements when fair value measurement is used are differentiated by what classification?
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.
