Wiley - Constraints and Present Value

Question 1

Define “cost effectiveness.”

Answer 1

This constraint on generally accepted accounting principles (GAAP) limits recognition and
disclosure if the cost of providing the information exceeds its benefit.

Question 2

What is the constraints to setting accounting standards?

Answer 2

Cost effectiveness (or cost-benefit)

Question 3

What is cost effectiveness?

Answer 3

This constraint on generally accepted accounting principles (GAAP) limits recognition and
disclosure if the cost of providing the information exceeds its benefit.

Question 4

What is Conservatism?

Answer 4

Conservatism (also called prudence) is the reporting of less optimistic amounts (lower
income, net assets) under conditions of uncertainty or when Generally Accepted Accounting
Principles (GAAP) provides a choice from among recognition or measurement methods

Question 5

List the elements included in a full set of financial statements.

Answer 5

Balance sheet
Income statement
Statement of comprehensive income
Statement of cash flows
Statement of owner's equity

Question 6

What are the four criteria that must be met to be recognized and measured in a financial
report?

Answer 6

Definition

2. Measurability
3. Relevance
4. Faithful representation

Question 7

What does a fresh start measurement do?

Answer 7

Establishes a new carrying value after an initial recognition and is unrelated to previous
amounts (e.g., mark-to-market accounting and recognition of asset impairments)

Question 8

List the elements which a present value measurement that fully captures economic
differences should include.

Answer 8

(An estimate of future cash flows
Expectations about variations in amount or timing of those cash flows
Time value of money as measured by the risk-free rate of interest
The price for bearing the uncertainty inherent in the asset or liability
Any other relevant factors