Unit 1 questions

Question 1

As part of the process of amending the codification, FASB issues?

Answer 1

Accounting Standards Update

Question 2

The principal benefit of a single set of global financial reporting standards is

Answer 2

Increased ease of capital flow. The principal advantage of a single set of global financial reporting standards is that multinational companies do not have to rewrite their statements in (or perform a complex reconciliation to) the local financial reporting framework to trade their stock on the local exchange. Foreign investment is thereby made much easier, and the cost of capital is lowered.

Question 3

Accounting standards update is issued only after?

Answer 3

A majority vote by the members of the FASB approves.

Question 4

Which of the following bodies has the original authority to set accounting standards for publicly traded companies in the U.S.?

Answer 4

Original authority is SEC. The SEC establishes rules for financial reporting by publicly traded companies (called issuers) in the United States. But the SEC has delegated the authority for detailed rule making to the Financial Accounting Standards Board (FASB)

Question 5

What’s the difference between management and financial accounting?

Answer 5

Management accounting need not follow GAAP, while financial account must follow them.

Question 6

What are the Statements of Financial Accounting Concepts intended to establish?

Answer 6

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

Question 7

Which basis of accounting is most likely to provide the best assessment of an entity’s past and future ability to generate net cash inflows?

Answer 7

Accrual basis of accounting.

Question 8

According to the conceptual framework, the most basic objective of financial reporting is to convey information

Answer 8

That enables users to make decisions about a company. Financial reporting should provide information that is useful to current and potential investors and creditors and other users in making rational investment, credit, and other similar decisions. This objective has the broadest focus.

Question 9

General Purpose financial reports are significantly based on estimates and do not suffice to determine:

Answer 9

The value of the entity.

Question 10

Financial reporting by not-for-profit, nongovernmental entities should provide information:

Answer 10

(1) useful in making resource allocation decisions;
(2) useful in assessing services and ability to provide services;
(3) useful in assessing management stewardship and performance;
(4) about economic resources, obligations, net resources, and changes in them; and
(5) about managers’ explanations and interpretations to help users understand financial information.

Question 11

The operating environments of not-for-profit and business entities are similar in many ways. Both produce and distribute goods and services:

Answer 11

using scarce resources.

Question 12

Which of the following objectives of financial reporting is applicable to business entities, not to governmental entities? Provide information to

A. Assist in assessing services provided.

B. Assist in assessing cash flow prospects.

C. Assist in public accountability.

D. Assist in evaluating operating results.

Answer 12

Answer (B) is correct. Current and potential investors and creditors of a business entity want to assess their likelihood of receiving cash from (1) dividends or interest or (2) the proceeds from the sale, redemption, or maturity of securities or loans.

Question 13

Which of the following is not a characteristic of the governmental reporting environment?

A. Accountability.

B. Interperiod equity.

C. Balance sheet equity.

D. Legally binding budget.

Answer 13

Answer (C) is correct. State and local governments report net position or fund balances, not equity.

Question 14

What is one of the objectives that serves to assist in evaluating the operating results of a governmental entity?

Answer 14

Providing information for assessing service efforts and accomplishments.

Question 15

During the lifetime of an entity, accountants produce financial statements at arbitrary moments in time in accordance with which basic accounting concept?

Answer 15

Periodicity. A basic feature of the financial accounting process is that information about the economic activities of the business should be issued at regular intervals. These time periods should be of equal length to facilitate comparability. They also should be of relatively short duration, e.g., 1 year, to provide business information useful for decision making.

Question 16

Reporting inventory at the lower of cost or market (LCM) is a departure from the accounting principle of

Answer 16

historical cost.

Question 17

A newly acquired plant asset is to be depreciated over its useful life. What is the basis for this accounting method?

Answer 17

Going-concern assumption. A basic feature of financial accounting is that the business entity is assumed to be a going concern in the absence of evidence to the contrary. The going-concern concept is based on the empirical observation that many entities have indefinite lives. The reporting entity is assumed to have a life long enough to fulfill its objectives and commitments and therefore to depreciate wasting assets over their useful lives.

Question 18

A Midwestern public utility reports noncurrent assets as the first item on its statement of financial position. This practice is an example of the

Answer 18

Industry practice constraint. Assets are normally listed in the order of their importance, with current assets typically being the most important. For a public utility, the physical plant is the most important asset. Thus, public utilities often report their noncurrent assets as the first item on the balance sheet. This departure from the customary presentation in accordance with GAAP is justified by the unique operating characteristics of the industry.

Question 19

What is a conservatism constraint?

Answer 19

The conservatism constraint is a response to uncertainty. When alternative accounting methods are appropriate, the one having the less favorable effect on net income and total assets is preferable.

Question 20

What is matching?

Answer 20

Matching is the combined recognition of revenues and expenses that result directly and jointly from the same transactions and events.

Question 21

What are the two Fundamental Qualitative Characteristics?

Answer 21

• Relevance
• Faithful Representation

Question 22

What are the elements of relevance?

Answer 22

• Predictive value
• Confirmatory value
• Materiality

Question 23

What are the elements of faithful representation?

Answer 23

• Completeness
• Neutrality
• Freedom from error

Question 24

What are the elements of Enhancing Qualitative Characteristics?

Answer 24

• Comparability
• Verifiability
• Timeliness
• Understandability

Question 25

One of the elements of financial statements is comprehensive income. Comprehensive income for a period excludes changes in equity resulting from:

Answer 25

Dividends paid to shareholders.

According to the FASB’s conceptual framework, comprehensive income of a business entity is the periodic change in equity of a business from nonowner sources. Thus, dividends paid (distributions to owners) are excluded from comprehensive income.

Question 26

What is the definition of an asset?

Answer 26

Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. Valuation allowances, such as premiums on notes receivable, are part of the related assets, not assets or liabilities.

Assets do no have to be tangible and do not have to be obtained at a cost.

Question 27

An accrued expense can best be described as an amount:

Answer 27

Not paid and currently matched with earnings.

An accrued expense is one that has been incurred but not paid. Thus, it should be charged (matched) against revenue in the current period and recorded as a liability.

Question 28

What is the difference between losses and expenses?

Answer 28

Expenses result from ongoing operations, and losses result from peripheral transactions.

Question 29

What are the two elements that are not reported separately when prepared in accordance with IFRS?

Answer 29

Gains and losses.

Question 30

What is the definition of a liability?

Answer 30

(1) It represents an obligation that requires settlement by a probable future transfer or use of assets,
(2) the entity has little or no discretion to avoid the obligation, and
(3) the transaction or other event resulting in the obligation has already occurred.

Question 31

Asset valuation accounts are separate items sometimes found in financial statements that reduce or increase the carrying amount of an asset. The conceptual framework considers asset valuation accounts to be part of the related asset account. They are not considered to be:

Answer 31

be assets or liabilities in their own right.

Question 32

According to the FASB’s conceptual framework, an entity’s revenue may result from a(n)

Answer 32

Decrease in a liability from primary operations.

Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity’s ongoing major or central operations. Thus, a revenue may result from a decrease in a liability from primary operations, for example, by delivering goods that were paid for in advance.

Question 33

Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?

Answer 33

To match the costs of production with revenues as earned.

If costs benefit more than one accounting period, they should be systematically and rationally allocated to all periods benefited. This is done by capitalizing the costs and depreciating or amortizing them over the periods in which the asset helps generate revenue. The term “matching” is most narrowly defined as the expense recognition principle of associating cause and effect, but it is sometimes used more broadly (as here) to apply to the entire process of expense recognition or even of income determination.

Question 34

Under a royalty agreement with another entity, a company will receive royalties from the assignment of a patent for 3 years. The royalties received should be reported as revenue

Answer 34

In the period earned.

Question 35

According to the revenue recognition principle under U.S. GAAP, revenues and gains should be recognized when (1) realized or realizable and (2) earned. IFRS, however, have separate sets of recognition criteria for:

Answer 35

sale of goods and for rendering a service.

Question 36

Under IFRS, for a sale of goods, revenue is recognized when the following conditions are met:

Answer 36

(1) The entity has transferred the significant risks and rewards of ownership,
(2) the entity has neither continuing management involvement to an extent associated with ownership nor effective control over the goods,
(3) the amount of the transaction can be reliably measured,
(4) it is probable that the economic benefits will flow to the entity, and
(5) transaction costs can be reliably measured.

Question 37

Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to

Answer 37

Accrual accounting.

Question 38

An item and information about the item should be recognized when the following four fundamental recognition criteria are met:

Answer 38

• The item must meet the definition of an element of FSs
• It must have a relevant attribute measurable with sufficient reliability
• The information must be relevant. it must be capable of making a difference in user decisions.
• The information must be reliable. It must be representationally faithful, verifiable, and neutral.

Question 39

According to the FASB’s conceptual framework, noncurrent payables are usually measured and reported at

Answer 39

Present value of future cash flows.

Present value is in theory the most relevant method of measurement because it incorporates time value of money concepts. In practice, it is used only for noncurrent receivables and payables. Determination of the present value of an asset or liability requires discounting at an appropriate interest rate the related future cash flows expected to occur in the due course of business.

Question 40

Costs that can be reasonably associated with specific revenues but not with specific products should be

Answer 40

Expensed in the period in which the related revenue is recognized.

The expense recognition principle of associating cause and effect (matching) applies when a direct cause-and-effect relationship can be demonstrated between costs and particular revenues. A typical example of expenses recognized by the association of cause and effect is cost of goods sold that is recognized in the periods in which the related revenue is recognized. Association of costs with revenues also can be applied to services. Association of costs with specific products is not necessary.

Question 41

Revenues and gains are recognized when:

Answer 41

realized or realizable and earned

Question 42

Which of the following is an example of the expense recognition principle of associating cause and effect?

A.Allocation of insurance cost.

B.Officers’ salaries.

C.Sales commissions.

D.Depreciation of fixed assets.

Answer 42

Answer (C) is correct.
If a direct cause-and-effect relationship can be established between costs and revenues, the costs should be recognized as expenses when the related revenue is recognized. Costs of products sold or services provided and sales commissions are examples of costs that can be associated with specific revenues.

Question 43

Comprehensive income includes earnings (net income) but also such other nonowner changes in equity as:

Answer 43

holding gains and losses on available-for-sale securities and foreign currency translation adjustments.

Question 44

A measurement based on present value should reflect uncertainty so that variations in risks are incorporated. Accordingly, the following are the necessary elements of a present value measurement:

Answer 44

• Estimates of future cash flows,
• Expected variability of their amount and timing,
• The time value of money (risk-free interest rate),
• The price of uncertainty inherent in an asset or liability, and
• Other factors, such as liquidity or market imperfections.

Question 45

the objective of present value measurements is to:

Answer 45

estimate FV by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty.

Question 46

According to the FASB’s conceptual framework, the expected cash flow (ECF) approach to measuring present value

Answer 46

Encompasses all expectations about possible cash flows.

Question 47

The objective of present value is to estimate FV when use to determine accounting measurements for:

Answer 47

• Measurements for initial recognition
• Fresh start measurements, and
• Applications of the interest method of allocation

Question 48

The interest method is mostly likely to be applied when:

Answer 48

(1) the transaction is a borrowing and a lending;
(2) assets or liabilities similar to those being accounted for are allocated using the interest method;
(3) the asset or liability has closely related, reasonably estimable cash flows; or
(4) the initial measurement was at present value. A typical example of the interest method is the amortization of the discount or premium on bonds.

Question 49

The MD&A section pertains to:

Answer 49

liquidity, capital resources, and results of operations.

Question 50

U.S. Securities and Exchange Commission (SEC) regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in

Answer 50

Regulation S-X.

Regulation S-X applies to the reporting of financial statements, including notes and schedules.

Question 51

Form 8-K is a current report to disclose material events. Material events that must be reported include:

Answer 51

(1) a change in control;
(2) acquisition or disposition of a significant amount of assets not in the ordinary course of business;
(3) bankruptcy or receivership;
(4) resignation of directors; and
(5) the resignation or dismissal of the registrant’s certifying accountants. Reporting of other material events that are deemed by the registrant to be of importance to security holders is optional.

Question 52

Regulation S-X governs the reporting of financial statements, including notes and schedules. What else is covered by S-X?

Answer 52

Both interim and annual statements are covered by Regulation S-X.

Question 53

The information provided by financial reporting pertains to

Answer 53

Individual business enterprises rather than to industries or an economy as a whole, or members of society as consumers.

Question 54

Regulation S-X disclosure requirements of the Securities and Exchange Commission (SEC) concern

Answer 54

The requirements for filing interim financial statements and pro forma financial information.

Regulation S-X governs the reporting of financial statements, including notes and schedules. Both interim and annual statements are covered by Regulation S-X.

Question 55

Which of the following is a difference between IFRS and U.S. GAAP regarding revenue recognition?

A.IFRS allow both the percentage-of-completion and completed contract methods.

B.Both sets of standards use the same requirements.

C.IFRS have different requirements for a sale of goods or performance of a service.

D.IFRS contain more detailed requirements than U.S. GAAP.

Answer 55

Answer (C) is correct.
According to the revenue recognition principle under U.S. GAAP, revenues and gains should be recognized when (1) realized or realizable and (2) earned. IFRS, however, have separate sets of recognition criteria for a sale of goods and for rendering a service.

Question 56

An item and information about the item should be recognized when the following four fundamental recognition criteria are met:

Answer 56

(1) The item meets the definition of an element of financial statements;
(2) it has a relevant attribute measurable with sufficient reliability;
(3) the information about the item is capable of making a difference in user decisions; and
(4) the information is representationally faithful, verifiable, and neutral. Decision usefulness is a user-specific quality of accounting information.