Question 1

The degree to which the accounting actually represents the underlying economic events is faithful representation.

Accepted Answer

Faithful representation is one of the fundamental qualitative characteristics of financial reporting. It means that the accounting information provided should be complete, accurate, and free from error, and represent the economic substance of a transaction rather than just its legal form. In other words, the financial statements should provide a true and accurate picture of an entity's financial position, performance, and cash flows.

Question 2

In the United States,the accounting rules that businesses use for external financial reporting purposes differ from the accounting rules required for taxation purposes.

Accepted Answer

Generally accepted accounting principles (GAAP) are used for external financial reporting purposes, while the Internal Revenue Service (IRS) has its own set of tax accounting rules. These two sets of rules have some differences and businesses must comply with both for financial reporting and tax purposes.

Question 3

Generally accepted accounting principles are set by the Securities and Exchange Commission.

Accepted Answer

Generally accepted accounting principles (GAAP) in the United States are established by the Financial Accounting Standards Board (FASB), not the Securities and Exchange Commission (SEC). However, the SEC does require publicly traded companies to follow GAAP in their financial reporting.

Question 4

The convention in accounting that strives to ensure business risks and uncertainties are adequately reflected in the financial statements is conservatism.

Accepted Answer

Conservatism is a convention in accounting that requires caution in financial reporting to ensure that business risks and uncertainties are adequately reflected in the financial statements. This convention recognizes that uncertainty and risks are inherent in business transactions and seeks to avoid overstating assets and income while understating liabilities and expenses.

Question 5

Companies can change accounting methods,but the changes are restricted to situations where it can be persuasively argued that the newly adopted accounting method is preferable to the old one.

Accepted Answer

Companies can change accounting methods, but they must demonstrate that the new method is preferable to the old one. This is in accordance with Generally Accepted Accounting Principles (GAAP) and Securities and Exchange Commission (SEC) regulations. The changes must also be disclosed in financial statements, and the impact on prior years' financial statements must be adjusted accordingly.

Question 6

Fair value accounting is widely touted as a means to avoid future financial crises as it will prevent banks from collapsing.

Accepted Answer

Fair value accounting is not a foolproof method to prevent future financial crises. While it provides more transparency and accuracy in financial reporting, it is not a guarantee against bank failures or economic downturns. Other factors such as inadequate regulations, risky lending practices, and macroeconomic conditions can still contribute to financial crises.

Question 7

The accounting standards codification was created by the IASB to harmonize U.S.and international GAAP.

Accepted Answer

The accounting standards codification was actually created by the Financial Accounting Standards Board (FASB), not the International Accounting Standards Board (IASB). Its purpose was to organize and simplify U.S. GAAP, not harmonize it with international standards.

Question 8

Accounting standard-setting in the U.S.is a technical process and thus little affected by political considerations.

Accepted Answer

Accounting standard-setting in the U.S. is not completely immune to political considerations as there are various stakeholders involved, including government agencies, industry groups, and special interest groups, that can influence the process. Additionally, the Financial Accounting Standards Board (FASB) that sets the accounting standards is overseen by the Securities and Exchange Commission (SEC), which is a government agency that can influence accounting rule-making.

Question 9

For years,two widely divergent financial reporting approaches existed in the world (the economic performance approach and the commercial and tax law approach).

Accepted Answer

This statement is true. Prior to the convergence of global accounting standards, different countries and regions had varying approaches to financial reporting, with some emphasizing economic performance and others relying on commercial and tax laws.

Question 10

The network of conventions,rules,guidelines,and procedures used by the accounting profession is known as generally accepted auditing standards.

Accepted Answer

The network described is known as Generally Accepted Accounting Principles (GAAP), not auditing standards. Generally Accepted Auditing Standards (GAAS) refer to the standards that guide auditors in the conduct of audits.

Question 11

Financial statements follow rigid guidelines that require adherence to specific procedures.

Accepted Answer

The answer of Financial statements follow rigid guidelines that require...

Question 12

Under certain circumstances,it is permissible to issue financial statements that contain a material departure from GAAP.

Accepted Answer

While it is generally not permissible to issue financial statements that depart from GAAP, there are some circumstances where alternative accounting principles may be used or disclosure of the departure made. Some examples of when a departure from GAAP may be allowed include when the application of GAAP would result in misleading financial statements, or if compliance with GAAP would be excessively burdensome or costly. In such cases, the financial statements must clearly disclose the nature and financial impact of the departure.

Question 13

Although the SEC has the legal authority to set accounting principles in the U.S.,it has looked to private-sector organizations (e.g.,the FASB)to establish and enforce these principles.

Accepted Answer

The SEC retains enforcement authority over financial reporting in the U.S.

Question 14

While until recently accounting standards were developed by home-country organizations for use by domestic companies,countries in (at least)the European Union based their standards on a common philosophy and shared financial reporting objectives.

Accepted Answer

The answer of While until recently accounting standards were developed...

Question 15

Companies can smooth reported income by strategically timing the recognition of revenue and expenses to dampen the normal ups and downs of business activity.

Accepted Answer

This statement is true. Companies can manipulate the timing of revenue and expenses to show a more consistent stream of income, which can be perceived as favorable by investors and analysts. However, this practice can also be misleading if it does not accurately reflect the true financial health of the company.

Question 16

Some countries' philosophy of financial reporting differs from GAAP because their financial reports are required to conform to tax law.

Accepted Answer

Some countries, such as Japan and Germany, follow a philosophy of financial reporting known as "tax-oriented financial reporting," where financial reports are required to conform to tax law rather than GAAP. This can result in differences in reporting standards and practices between countries.

Question 17

GAAP frequently requires financial statement users to accept a compromise that favors reliability over faithful representation.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) prioritize reliability over faithful representation in financial statements. While faithful representation aims to present the economic reality of transactions and events, reliability ensures that the information provided is accurate and verifiable. As a result, GAAP standards often require a compromise that favors reliability over faithful representation.

Question 18

GAAP financial reports in the U.S.are intended to reflect the economic condition and performance of the reporting entity.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) are a set of accounting rules and standards that are used to prepare financial reports in the U.S. These reports are intended to provide accurate and reliable information about the economic condition and performance of the reporting entity, and are used by investors, creditors, and other stakeholders to make informed decisions. Therefore, it is true that GAAP financial reports in the U.S. are intended to reflect the economic condition and performance of the reporting entity.

Question 19

Management has considerable discretion over the particular accounting procedures used in the statements and over the details contained in supplemental footnotes and related disclosures.

Accepted Answer

Management has significant control over the accounting procedures and disclosures in the financial statements. However, they must comply with generally accepted accounting principles (GAAP) and other regulatory requirements.

Question 20

The Financial Accounting Standards Board has the sole responsibility for setting generally accepted auditing standards.

Accepted Answer

The Financial Accounting Standards Board (FASB) is responsible for setting generally accepted accounting principles (GAAP) in the United States. The Public Company Accounting Oversight Board (PCAOB) is responsible for setting the generally accepted auditing standards (GAAS) for public companies.

Quiz 1: The Economic and Institutional Setting for Financial Reporting