Deck 1: Environment and Theoretical Structure of Financial Accounting

Question 1

Which of the following was the first private sector entity that set accounting standards in the United States?

A)Accounting Principles Board
B)Committee on Accounting Procedure
C)Financial Accounting Standards Board
D)AICPA

Answer 1

B

Question 2

The primary responsibility for properly applying GAAP when communicating with investors and creditors through financial statements lies with a firm's auditors.

Answer 2

False

Question 3

The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity responsible for setting auditing standards in the United States.

Answer 3

True

Question 4

Auditors play an important role in the resource allocation process by adding credibility to financial statements.

Question 5

Under federal securities laws, the SEC has the authority to set accounting standards in the U.S.

Question 6

Which of the following groups is not among financial intermediaries?

A)Mutual fund managers
B)Financial analysts
C)CPAs
D)Credit rating organizations

Question 7

The primary function of financial accounting is to provide relevant financial information to parties external to business enterprises.

Question 8

Materiality can be affected by the dollar amount of an item, the nature of the item, or both.

Question 9

The FASB is currently the public sector organization responsible for setting accounting standards in the U.S.

Question 10

Comprehensive income is another term for net income.

Question 11

SFAC No. 157 doesn't change the situations in which fair value is used under current GAAP.

Question 12

Which of the following is not true about net operating cash flow?

A)It is the difference between cash receipts and cash disbursements from providing goods and services.
B)It is a measure used in accrual accounting and is recognized as the best predictor of future operating cash flows.
C)Over short periods of time, it may not be indicative of long-run cash-generating ability.
D)It is easy to understand and all information required to measure it is factual.

Question 13

Equity is a residual amount representing the owner's interest in the assets of the business.

Question 14

External decision makers would not look primarily to financial accounting information to assist them in making decisions on:

A)Granting credit.
B)Capital budgeting.
C)Selecting stocks.
D)Mergers and acquisitions.

Question 15

Determining fair value by calculating the present value of future cash flows is a level 1 type of input.

Question 16

Accrual accounting attempts to measure revenues and expenses that occurred during accounting periods so they equal net operating cash flow.

Question 17

Gains or losses result, respectively, from the disposition of business assets for greater than, or less than, their book values.

Question 18

Conservatism is a desired qualitative characteristic of accounting information.

Question 19

Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing operations.

Question 20

A rules-based approach to standard setting stresses professional judgment as opposed to following a list of rules.

Question 21

In a recent annual report, Apple Computer reported the following in one of its disclosure notes: "Warranty Expense: The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized." This note exemplifies Apple's use of:

A)Conservatism
B)The matching principle
C)Realization principle
D)Full disclosure principle

Question 22

GAAP is an abbreviation for:

A)Generally authorized accounting procedures.
B)Generally applied accounting procedures.
C)Generally accepted auditing practices.
D)Generally accepted accounting principles.

Question 23

CPAs are licensed by:

A)The AICPA.
B)The SEC.
C)The federal government.
D)State governments.

Question 24

The full disclosure principle requires a balance between:

A)Comparability and consistency.
B)Relevance and cost effectiveness.
C)Reliability and neutrality.
D)Timeliness and predictive value.

Question 25

Which of the following has the authority to set accounting standards in the United States?

A)FASB
B)IRS
C)SEC
D)AICPA

Question 26

The FASB's standard-setting process includes, in the correct order:

A)Exposure draft, research, discussion memorandum, SFAS.
B)Research, exposure draft, discussion memorandum, SFAS.
C)Research, discussion memorandum, exposure draft, SFAS.
D)Discussion memorandum, research, exposure draft, SFAS.

Question 27

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002?

A)Corporate executive accountability.
B)Auditor rotation.
C)Retention of workpapers.
D)All of these are provisions of the Act.

Question 28

The most political issue in the FASB's most recent deliberations and pronouncements on business combinations was:

A)The negative effects on subsequent earnings of amortizing goodwill if firms were required to use the purchase method of accounting for the combination.
B)The negative effects on subsequent earnings of amortizing goodwill if firms were required to use the pooling method of accounting for the combination.
C)The unrealistic balance sheet assets that would be created if firms were required to use the purchase method of accounting for the combination.
D)The unrealistic balance sheet assets that would be created if firms were required to use the pooling method of accounting for the combination.

Question 29

A cause-and-effect relationship is implicit in the:

A)Realization principle.
B)Historical cost principle.
C)Matching principle.
D)Going concern assumption.

Question 30

The SEC issues accounting standards in the form of:

A)Accounting Research Bulletins.
B)Financial Reporting Releases.
C)Financial Accounting Standards.
D)Financial Technical Bulletins.

Question 31

Pronouncements issued by the Committee on Accounting Procedures:

A)Dealt with specific accounting and reporting problems.
B)Were based on exposure drafts and public comment letters.
C)Originated from congressional studies and SEC directives.
D)Were the outcome of research studies and a theoretical framework.

Question 32

The International Accounting Standards Board:

A)Was the predecessor to the IASC.
B)Can overrule the FASB when their policies disagree.
C)Promotes the use of high-quality, understandable global accounting standards.
D)Has its headquarters in Geneva.

Question 33

The most likely important flaw leading to the demise of the APB was the perceived lack of:

A)Confidence.
B)Competence.
C)Independence.
D)Importance.

Question 34

The primary professional organization for those accountants working in industry is the:

A)AAA
B)AICPA
C)IIA
D)IMA

Question 35

Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act

A)Changed the entity responsible for setting auditing standards.
B)Increased corporate executive responsibility for financial statements.
C)Limited nonaudit services that can be performed by auditors for audit clients.
D)Changed the entity responsible for setting accounting standards.

Question 36

A firm's comprehensive income is always:

A)The same as its net income.
B)Greater than its net income.
C)Less than its net income.
D)Could be greater than or less than net income.

Question 37

When a registrant company submits its annual filing to the SEC, it uses:

A)Form 10-A.
B)Form 10-K.
C)Form 10-Q.
D)Form S-1.

Question 38

Which of the following does not apply to secondary markets?

A)Transactions are important to the efficient allocation of resources in our economy.
B)New resources are provided when shares of stock are sold by the corporation to the initial owners.
C)Transactions help to establish market prices for additional shares that may be issued in the future.
D)Many investors might be unwilling to provide resources to corporations if there is no available mechanism for the future sale of their stocks and bonds to others.

Question 39

Which of the following groups is not among the external users for whom financial statements are prepared?

A)Customers
B)Suppliers
C)Employees
D)All of these are external users of financial statements.

Question 40

Accounting standard setting has been characterized as:

A)A political process.
B)Using the scientific method.
C)Pure deductive reasoning.
D)Pure inductive reasoning.

Question 41

The recognition of which of the following expenses exemplifies the application of the matching principle?

A)President's salary.
B)Research and development.
C)Cost of goods sold.
D)Advertising.

Question 42

SFAC No.5 focuses on:

A)Objectives of financial reporting.
B)Qualitative characteristics of accounting information.
C)Recognition and measurement concepts in accounting.
D)Elements of financial statements.

Question 43

Financial reporting objectives state that financial statements should be comprehensible to

A)Accounting experts.
B)Those who have a reasonable understanding of business and economic activities and are willing to study the information.
C)Large investors.
D)The average investor with average communication skills and average training and experience.

Question 44

The conceptual framework's recognition and measurement concepts recognize which of the following as a principle, rather than an assumption?

A)Periodicity.
B)Monetary unit.
C)Conservatism.
D)Full disclosure.

Question 45

SFAC No.1 focuses on:

A)Objectives of financial reporting.
B)Qualitative characteristics of accounting information.
C)Recognition and measurement concepts in accounting.
D)Elements of financial statements.

Question 46

The conceptual framework's qualitative characteristic of relevance includes:

A)Timeliness.
B)Verifiability.
C)Representational faithfulness.
D)Neutrality.

Question 47

Gains are:

A)Inflows from selling a product or service to a customer.
B)Increases in equity resulting from transfers of assets to the company from owners.
C)Increases in equity from peripheral transactions of an entity.
D)None of these.

Question 48

Financial reporting objectives do not include providing information:

A)About resources, obligations, and changes.
B)To determine market values, assess profit potential, and evaluate management.
C)To assess the amounts and timing of prospective cash receipts.
D)To make rational investment, credit, and similar decisions.

Question 49

The most recent example of the political process at work in standard setting is the heated debate that occurred on the issue of:

A)Pension plan accounting.
B)Accounting for posteretirement benefits other than pensions.
C)Accounting for business combinations.
D)Accounting for stock-based compensation.

Question 50

The conceptual framework's recognition and measurement concepts recognize which of the following as an assumption, rather than a principle?

A)Going concern.
B)Historical cost.
C)Full disclosure.
D)Realization.

Question 51

Net income equals:

A)Assets minus liabilities.
B)Revenues minus cost of goods sold.
C)Revenues minus expenses.
D)Cash receipts minus cash payments.

Question 52

The FASB's conceptual framework's qualitative characteristics of accounting information include:

A)Historical cost.
B)Realization.
C)Reliability.
D)Full disclosure.

Question 53

The main issue in the debate over accounting for employee stock options was:

A)Which employees should receive options.
B)The amount of compensation expense that a company should recognize.
C)How many options should be granted to key executives.
D)The tax consequences of employee stock options.

Question 54

Financial accounting information should provide information about:

A)Resources of an enterprise.
B)Claims to resources.
C)The effects of transactions that cause changes in resources.
D)All of these.

Question 55

Secondary qualitative characteristics of accounting information include:

A)Relevance and comparability.
B)Comparability and consistency.
C)Reliability and relevance.
D)Reliability and consistency.

Question 56

The conceptual framework's qualitative characteristic of reliability includes:

A)Predictive value.
B)Neutrality.
C)Feedback value.
D)Timeliness.

Question 57

The primary historical reason for the FASB reversing its positions when political pressures occur is:

A)The cost gathering data was prohibitive.
B)The difficulties in measurement were too great.
C)They have no authority in such situations.
D)The SEC did not support the FASB position.

Question 58

The FASB issues a Statement of Accounting Standards if _________ FASB members support it.

A)5 of 9
B)5 of 7
C)4 of 7
D)None of these is correct.

Question 59

The FASB's conceptual framework's qualitative characteristics of accounting information include:

A)Full disclosure.
B)Relevance.
C)Going concern.
D)Historical cost.

Question 60

Primary qualitative characteristics of accounting information are:

A)Relevance and comparability.
B)Comparability and consistency.
C)Reliability and relevance.
D)Reliability and consistency.

Question 61

The best argument in support of historical cost information is:

A)Relevance.
B)Predictive quality for future cash flows.
C)Materiality.
D)Verifiability.

Question 62

The assumption that in the absence of contrary information a business entity will continue indefinitely is the:

A)Periodicity assumption.
B)Entity assumption.
C)Going concern assumption.
D)Historical cost assumption.

Question 63

One of the elements that many believe distinguishes a profession from other occupations is the acceptance by its members of a responsibility for the interests of those it serves, often articulated in:

A)Its conceptual framework.
B)Its code of ethics.
C)Federal laws.
D)State laws.

Question 64

Land was acquired in 2009 for a future building site at a cost of $40,000. The assessed valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a recent firm offer for the land was for a cash payment of $46,000. The land should be reported in the financial statements at:

A)$40,000.
B)$27,000.
C)$46,000.
D)$48,000.

Question 65

According to the conceptual framework, verifiability implies:

A)Legal evidence.
B)Logic.
C)Consensus.
D)Legal verdict.

Question 66

Of the following, the most important objective for financial reporting is to provide information useful for:

A)Predicting cash flows.
B)Determining taxable income.
C)Providing accountability.
D)Increasing future profits.

Question 67

If an independent auditing firm expresses dissatisfaction with a company's financial statements, it issues:

A)A qualified opinion.
B)An unqualified opinion.
C)A disqualified opinion.
D)A rejection of opinion.

Question 68

If a company has gone bankrupt, its financial statements likely violate:

A)The matching principle.
B)The realization principle.
C)The stable monetary unit assumption.
D)The going concern assumption.

Question 69

Independent auditors express an opinion on the:

A)Fairness of financial statements.
B)Accuracy of financial statements.
C)Soundness of a company's future.
D)Quality of a company's management.

Question 70

Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change?

A)Comparability.
B)Representational faithfulness.
C)Consistency.
D)Feedback value.

Question 71

Constraints on qualitative characteristics of accounting information include:

A)Timeliness.
B)Going concern.
C)Neutrality.
D)Conservatism.

Question 72

Which of the following Statements of Financial Accounting Concepts defines the 10 elements of financial statements?

A)SFAC 1
B)SFAC 2
C)SFAC 5
D)SFAC 6

Question 73

Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by ten days the time to get information to investors and creditors. The qualitative concept improved is:

A)Comparability.
B)Consistency.
C)Relevance.
D)Reliability.

Question 74

Primecoat could get its annual financial statements two days earlier if it shifted substantial human resources from other operations to the annual report project. Management decided the value of the earlier report was not worth the added commitment of resources. The concept demonstrated is:

A)Timeliness.
B)Materiality.
C)Relevance.
D)Cost effectiveness.

Question 75

Elements of financial statements do not include:

A)Monetary unit.
B)Investments by owners.
C)Comprehensive income.
D)Losses.

Question 76

Recognizing expected losses immediately, but deferring expected gains, is an example of:

A)Materiality.
B)Conservatism.
C)Cost effectiveness.
D)Timeliness.

Question 77

When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?

A)Verifiability.
B)Predictive value.
C)Representational faithfulness.
D)Timeliness.

Question 78

The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:

A)An ethical dilemma.
B)An accounting theory issue.
C)A technical accounting issue.
D)None of these is correct.

Question 79

Mega Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debt expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The concept demonstrated is:

A)Comparability.
B)Representational faithfulness.
C)Cost effectiveness.
D)Materiality.

Question 80

Change in equity from nonowner sources is:

A)Comprehensive income.
B)Revenues.
C)Expenses.
D)Gains and losses.