Financial Reporting Environment

Question 1

How does the FASB amend an Accounting Standards Codification?

Answer 1

Using Accounting Standards Updates

Question 2

WHAT are the (2) Qualitative Characteristics of Accounting Information?

Answer 2

(1) Relevance

(2) Representational Faithfulness

Question 3

WHAT are the Four Accounting Pronouncements and what is the order of the authority for the (4)?

Answer 3

(1) Financial Accounting Standards
(2) FASB Interpretations
(3) AICPA Accounting Principles Board Opinions
(4) AICPA Accounting Research Bulletins

Question 4

True or False.

Pronouncements of the FASB’s predecessor bodies remain in force until amended or superseded by the FASB.

Answer 4

FALSE.

The FASB’s Accounting Standards Codification and SEC pronouncements are the only sources of authoritative guidance for nongovernmental entities in the U.S.

Question 5

True or False.

The Financial Accounting Foundation oversees the FASB.

Answer 5

TRUE.

The Financial Accounting Foundation oversees the FASB.

Question 6

HOW is information “Verifiable?”

Answer 6

Knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented.

E.g. An arm’s-length transaction between two independent parties

Question 7

WHAT is the purpose of the Statement of Financial Accounting Concepts (SFAC)?

Answer 7

To create a conceptual framework for accounting

i.e. They are used to develop standards of financial accounting and reporting

Question 8

WHAT is the objective of present value when used to determine an accounting measurement for initial recognition purposes?

Answer 8

To Estimate Fair Value as it encompasses all financial statement elements using the estimates and expectations of participants in the market.

Question 9

WHAT would be considered appropriate means of measuring an element of financial reporting in monetary terms?

Answer 9

(a) Replacement cost
(b) Net Realizable Value
(c) Present Value
(d) Historical Cost

Question 10

TRUE or FALSE.

The most important accomplishment in accomplished providing general-purpose financial information useful for making decisions about providing resources to an entity is sufficient information to determine the value of the entity.

Answer 10

FALSE.

This is false as general-purpose financial reports are significantly based on estimates and do not suffice to determine the value of the entity.

Question 11

WHAT does “FENCe” stand for?

Answer 11

Free from Error

Neutrality

Completeness

Note: These are all element(s) or “ingredients” of Faithful Representation

Question 12

WHAT does P.C. stand for?

Answer 12

Predictive Value

Confirmatory Value

Note: These are element(s) or “ingredients” of Relevance

Question 13

WHAT are the three types of inputs involving the valuation technique?

Answer 13

Level I - Most Reliable. Observable data from actual market

Level II - Observable market data from similar market transactions; except transactions did not occur in ACTIVE market

Level III - Unobservable inputs (e.g. internal data and estimates - Based on management’s judgement)

Question 14

WHAT is the primary purpose of the statement of activities of the government-wide financial statements?

Answer 14

TO provide information to assess “Operational accountability.”

NOTE: It is important to make the distinction between Fiscal accountability which is for governmental funds and Operational accountability which is for government-wide funds.

Question 15

According to FASB, how are noncurrent payables are usually measured and reported?

Answer 15

AT Present value of future cash flows.

WHY? - because it incorporates time value of money concepts which is important when dealing with noncurrent receivables and payables.

Question 16

WHAT is the “Realization” Concept?

Answer 16

This is the conversion of an item to cash or a claim to cash

e.g. Realization occurs when an entity converts goods or services into an Accounts Receivable

This does NOT involve the collection of the receivable – Just the conversion

Question 17

WHAT are the valuation techniques used to measure or estimate fair value?

Answer 17

Market Approach - Use of information generated by market transactions

Income Approach - Analyzing future amounts in the form of Revenue

Cost Approach - Measuring the cost that would be incurred to replace benefit received from an asset

I.e. Rock the “MIC”

Question 18

TRUE or FALSE.

Notes to Financial Statements are considered to be one of the 10 Financial Statement Elements according to FASB.

Answer 18

FALSE.

Information disclosed in notes or parenthetically on the face of financial statements amplifies or explains information recognized in the financial statements.

However, they are NOT considered one of the (10) Financial Statement Elements.

Question 19

WHAT does an enterprise’s Financial Statements provide direct information on?

Answer 19

THE Enterprise’s Performance

Note: The financial reporting can also provide information on management’s performance; however this is considered “indirect”

Question 20

WHAT are the “Enhancing” characteristics of financial reporting?

Answer 20

Comparability

Understandability

Timeliness

Verifiability

“CUT-V”