Question 1

Levels of the conceptual framework
Provide a brief overview of the levels of a conceptual framework.

Accepted Answer

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Provide a brief...

Question 2

Under ASPE, where there is a significant uncertainty with respect to the measurement of an item,

Accepted Answer

Under ASPE, if there is a significant uncertainty with respect to the measurement of an item, the item should be recognized in the financial statements (either as an asset, liability, or equity), and the measurement uncertainty should be disclosed in the notes to the financial statements. This approach provides users of the financial statements with relevant information about the nature and extent of the uncertainty, and allows them to make informed decisions based on the available information. Options A and C are not appropriate because not recording anything in the financial statements would not provide users with relevant information. Option D is not appropriate because recording the maximum amount would not be a faithful representation of the uncertainty surrounding the item's measurement.

Question 3

Fraudulent financial reporting is a business reality. While it cannot be eliminated, the risk of fraudulent reporting can be decreased. Which of the following considerations is least likely to lessen that risk?

Accepted Answer

Tying bonuses to short-term company performance may actually increase the risk of fraudulent reporting, as management may be more inclined to manipulate financial statements to meet those targets. The other options (an independent audit committee, an internal audit function, and vigilant management) all contribute to decreasing the risk of fraudulent reporting.

Question 4

Moral hazard
In Chapter 1, the issue of information asymmetry, and the concept of moral hazard were introduced. Explain why the moral hazard issue is worse where some users (such as accountants and bankers) have expert knowledge.

Accepted Answer

The answer of Moral hazard
In Chapter 1, the issue of...

Question 5

Conceptual framework
Briefly describe the objectives of a soundly developed conceptual framework.

Accepted Answer

The answer of  Conceptual framework
Briefly describe the objectives of...

Question 6

Financial reporting is

Accepted Answer

Financial reporting requires the application of professional judgement to ensure that the financial statements present a true and fair view of the company's financial position. However, it can be influenced by various factors such as stakeholder interests, management bias, and the regulatory environment in which the company operates. Therefore, financial reporting is not completely free of bias and is influenced by the external environment.

Question 7

Principles-based GAAP is sometimes criticized for being

Accepted Answer

Principles-based GAAP is criticized for being too flexible because it relies on broad guidelines and principles, rather than specific rules and regulations. This can lead to varying interpretations and inconsistent application of accounting standards.

Question 8

Management Discussion and Analysis (MD&A) is

Accepted Answer

MD&A is a section in the annual report that provides supplementary information and analysis of the company's financial performance, future prospects, risks, and uncertainties. It is intended to help shareholders better understand the company's business and financial condition, and is therefore publicly available. It is not an internal document and is not limited to meetings between management and auditors. It may also include non-financial information that is important to investors such as strategic initiatives or market developments. It is different from the notes to the financial statements, which contain detailed information about the accounting policies and other technical aspects of the financial statements.

Question 9

The practice of matching

Accepted Answer

The practice of matching illustrates the cause and effect relationship between money spent to earn revenues and the revenues themselves. It is a fundamental concept in accrual accounting and helps to ensure that financial statements accurately reflect an entity's performance over a period of time.

Question 10

Management Discussion and Analysis (MD&A) does NOT include

Accepted Answer

MD&A refers to a specific section in a company's annual report that provides management's interpretation of the financial performance, current state, and future prospects of the company. While the notes to the financial statements may contain additional information that is relevant to understanding the financial statements, they are not part of the MD&A. The MD&A typically includes discussions on key performance drivers, the company's vision and strategy, and its capabilities.

Question 11

The concept of materiality is extremely important to the process of financial statement preparation and audit. Briefly explain the benchmarking approach to arriving at a materiality figure. What other factors might be considered in deciding whether an item is material?

Accepted Answer

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Question 12

Which of the following situations does NOT demonstrate an attempt at financial engineering?

Accepted Answer

Accounting for bona fide business transactions in a transparent manner is not an attempt at financial engineering. Financial engineering involves creating complex financial structures or manipulating accounting rules to achieve a specific financial outcome. Simply transparently accounting for legitimate business transactions is not an attempt at financial engineering. Choices A, B, and D all involve some form of financial engineering.

Question 13

Fair value (of an asset) is

Accepted Answer

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It represents an exit price, which is the price that an entity would receive when selling an asset or paying when transferring a liability. Option A is incorrect as entry price is not the same as fair value. Option B is incorrect as fair value is a market-based measure that is not entity-specific. Option D is incorrect as fair value is a widely used measurement under IFRS.

Question 14

In the absence of specific GAAP guidance, an entity should adopt accounting policies that are i. consistent with specific GAAP guidance.
Ii) consistent with the most conservative reporting choices.
Iii) collaboratively developed with the assistance of all business units.
Iv) developed through exercising professional judgement and applying the conceptual framework.

Accepted Answer

When there is no specific guidance provided by GAAP, the entity should adopt accounting policies that are consistent with the principles of GAAP, which is option i. The entity should also develop accounting policies by exercising professional judgement and applying the conceptual framework, which is option iv. Option ii, which suggests choosing the most conservative reporting choices, may not always be appropriate or necessary. Option iii, suggesting collaborative development with all business units, may be beneficial, but is not necessary or required. Therefore, the best choice is C, which includes the two most important options - i and iv.

Question 15

Fundemental characteristics of useful information
What steps should be taken to ensure that both fundamental characteristics of useful information, relevance and representational faithfulness, are present?

Accepted Answer

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Question 16

Under GAAP, inflation has been historically ignored due to the

Accepted Answer

The monetary unit assumption states that financial transactions are recorded and reported in a common monetary unit, such as the US dollar, and that changes in the value of money over time are not considered. Therefore, inflation is historically ignored under GAAP due to this assumption.

Question 17

Which basic assumption may NOT be followed when a firm in bankruptcy reports financial results?

Accepted Answer

The going concern assumption assumes that the company will continue to operate in the foreseeable future. However, in the case of a firm in bankruptcy, this assumption may not hold true, as the company is facing liquidity and solvency issues and may not be able to continue its operations in the future. Therefore, the going concern assumption may not be followed in such cases.

Question 18

The operations of a resource company's oil sands operations results in environmental damage. While the extent of the damage cannot be determined at this time, the situation is disclosed in its financial statements. This best demonstrates

Accepted Answer

The situation of environmental damage being disclosed in the financial statements demonstrates the company adhering to the full disclosure principle, which requires all relevant information to be disclosed to the users of financial statements.

Question 19

Accounting terminology - fill in the blanks
Fill in the blanks below with the accounting term(s) that best completes each sentence.
1. A soundly developed conceptual framework is a ______ set of standards and rules. ______ and ______ are the fundamental qualitative characteristics that make accounting information useful for decision making.
2. Enhancing qualitative characteristics are ______, ______, ______ and ______.
3. Liabilities have three essential characteristics:
 1. They reprecent a_________,2. the entity has a_______________,and 3.______________ 
4. While consolidated financial statements are prepared from the perspective of the ______, taxes are paid from the perspective of the ______.
5. Collectibility is one of the three conditions of the revenue recognition principle. Assuming the other two conditions are met, revenue should only be recognized if collectibility is ______.
6. The ______ stipulates that anything that is relevant to decisions should be included in the financial statements.
7. A company's Management Discussion and Analysis (MD&A) is an example of ______.
8. A ______- based approach, as used in Canadian GAAP and IFRS, is sometimes criticized for being too ______.
9. Under the ______ principle, ______ incurred during a particular period are matched with ______ earned during that same period.
10. The ______ is based on the assumption that a business enterprise will continue to operate for the foreseeable future.
11. One of the assumptions of the ______ is valuation at a particular point in time.
12. ______ is defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
13. Standard setters have given companies the option to use ______ instead of historical costs.

Accepted Answer

The answer of Accounting terminology - fill in the blanks
Fill...

Question 20

Application of the full disclosure principle

Accepted Answer

The full disclosure principle requires a company to disclose all relevant and important information in the financial statements, including contingencies. This allows users to make informed decisions about the company's financial position and future prospects. While complete disclosure may be costly, it is considered necessary for transparency and accountability in financial reporting. B is incorrect because burying important financial information in the notes to the financial statements violates the full disclosure principle. D is incorrect because consistency and comparability are qualities of reliable financial information, but not necessarily tied to the full disclosure principle. A is incorrect because while complete disclosure may be costly, it is still considered a practical and necessary part of financial reporting.

Quiz 2: Conceptual Framework Underlying Financial Reporting

Levels of the conceptual framework Provide a brief overview of the levels of a conceptual framework.