Deck 2: Financial Reporting: Its Conceptual Framework

Question 1

The accounting projects portion of the FASB's conceptual framework project deals with all of the following except

A)how elements should be measured
B)when various elements should be reported
C)which accounting elements should be reported
D)how financial reports should be displayed

Answer 1

D

Question 2

How many Statements of Financial Accounting Concepts have been issued?

A)6
B)7
C)31
D)over 100

Answer 2

B

Question 3

The FASB concluded that the most general objective of financial reporting is to

A)provide information useful in the decisions made by external users
B)meet the needs of internal users
C)provide information about an entity's earnings
D)provide information about an entity's cash flows

Answer 3

A

Question 4

Which of the following statements is not true with regard to the benefits derived from the FASB's conceptual framework of accounting?

A)It serves as a guide in establishing standards for the FASB.
B)The Statements of Financial Accounting Concepts is the primary source of GAAP for accountants.
C)It establishes the objectives of financial reporting.
D)It enhances comparability between different companies' financial statements.

Question 5

Accrual accounting relates the financial effects of a company's transactions

A)so that the costs of nonoperating events are matched to the balance sheet in the period impacted
B)to the period in which they occur rather than to when the cash receipts or payment occurs
C)so that the revenue impact of every transaction in a period is properly reflected in the income statement
D)so that the impact of every transaction is reflected in the statement of cash flows

Question 6

GAAP emphasizes the importance of full disclosure by management including all of the following enhancements except

A)explanations to enhance understanding of major transactions
B)interpretations of the effects of dividing continuous operations into accounting periods
C)outlines of internal control procedures in use
D)explanations of underlying assumptions and methods used

Question 7

Which qualitative characteristic is an ingredient of relevance?

A)verifiability
B)timeliness
C)neutrality
D)representational faithfulness

Question 8

A primary focus of financial reporting about a company's performance during an accounting period is information related to the company's

A)balance sheet
B)income statement
C)comprehensive income
D)cash flows

Question 9

The first part of the conceptual framework project had to do with

A)elements
B)objectives
C)qualitative characteristics
D)recognition and measurement

Question 10

According to the FASB hierarchy of qualitative characteristics, the two primary qualities making accounting information useful are

A)understandability and decision usefulness
B)relevance and reliability
C)verifiability and neutrality
D)predictive value and feedback value

Question 11

The FASB divided its conceptual framework activities into several projects.Which of the following was not one of those projects?

A)objectives project
B)qualitative characteristics project
C)financial reporting project
D)accounting project

Question 12

Which of the following is a specific objective of financial reporting?

A)provide information that is useful to investors in making investment decisions
B)provide information useful in assessing the amounts, timing, and uncertainty of prospective cash receipts
C)provide information useful in assessing the amounts, timing, and uncertainty of prospective cash inflows
D)provide information about a company's economic resources, obligations, and owners' equity

Question 13

Information about comprehensive income is useful to external users for all of the following purposes except

A)evaluating management's performance
B)examining cash flows for the current period
C)predicting future income
D)assessing the risk of lending to the company

Question 14

The FASB has determined that the primary focus of financial reporting about an entity's performance is information on

A)resources and obligations
B)management's stewardship of resources
C)comprehensive income and its components
D)cash flows and financial flexibility

Question 15

In its "Objectives of Financial Reporting by Business Enterprises" the FASB identified a variety of primary users including all of the following except

A)internal management
B)investors
C)creditors
D)security analysts

Question 16

According to GAAP, which is not a specific objective?

A)to provide information about an enterprise's cash flows
B)to provide information that is useful to present to potential investors, creditors, and other users in making rational investment, credit, and similar decisions
C)to provide information about an enterprise's comprehensive income and its components
D)to provide information about an enterprise's economic resources, obligations, and owners' equity

Question 17

Which of the following statements regarding financial flexibility is true?

A)It is the ability of a company to provide a return on investment.
B)It is the ability of a company to take effective actions to insure the return of capital to the company.
C)It is the ability of a company to take effective actions to change the amounts and timing of cash flows.
D)It is the ability of a company to maintain a given level of operations.

Question 18

When investors and creditors make investment and credit decisions, they need information to assist them in assessing future cash receipts.Their focus is on assessing the potential of generating

A)a return of investment of capital
B)a return on investment of capital
C)both a return of and a return on investment of capital
D)neither a return of nor a return on investment of capital

Question 19

The accounting projects portion of the FASB's conceptual framework project deals with

A)which accounting elements should be reported and how they should be measured
B)which accounting elements should be reported and where the information should be reported
C)how the accounting elements should be measured and how information should be displayed in financial reports
D)when accounting elements should be recognized and how information should be displayed in financial reports

Question 20

Which of the following types of information was specifically identified by the FASB as being useful in assessing the amounts, timing, and uncertainty of a company's future cash flows?

A)liquidity
B)return of investment
C)financial capability
D)credit standing

Question 21

The materiality of an item of financial information refers to the likelihood that its omission or misstatement would affect the judgments of those relying on that information.This concept most closely relates to the

A)financial magnitude of the item
B)verifiability of the item
C)neutrality of the item
D)feedback value of the item

Question 22

In the FASB hierarchy of qualitative characteristics, understandability is a characteristic that is

A)a secondary and interactive quality
B)a threshold for recognition
C)an overall quality
D)a user-specific quality

Question 23

For fixed-price construction contracts that require more than one accounting period to complete and for which the costs can be reasonably estimated, revenue should be recognized

A)during production
B)at the completion of production
C)when title to the project is transferred to the buyer
D)when the cash is received from the buyer

Question 24

The state legislature is currently debating a bill that, if passed, would require the Sandiken Company to go out of business.Which of the following principles or assumptions related to the preparation of Sandiken's financial statements is most directly affected by this impending vote of the legislature?

A)going concern
B)verifiability principle
C)entity concept
D)materiality concept

Question 25

Intracompany comparability would be violated if

A)a company used LIFO as its inventory cost method while other companies in the same industry used FIFO
B)a company changed its bad debts expense estimate from one percent to two percent
C)a bank did not classify its assets as current assets and noncurrent assets
D)a company expenses all expenditures of less than $500 even if the expenditures result in probable future economic benefit

Question 26

Using the straight-line method to amortize patents is an application of expense recognition using

A)association of cause and effect
B)a systematic and rational allocation method
C)immediate recognition
D)the percentage-of-completion method

Question 27

The city of Fairbanks sold land for its appraised value to the Big Oil Company on June 1, 2010, that originally cost the city $1, 000, 000.On June 1, 2010, the land was appraised at a value of $1, 250, 000, and on December 31, 2010, the land's value was estimated to be $1, 400, 000.On Big Oil Company's balance sheet at December 31, 2010, the land should be valued at

A)$1, 400, 000
B)$1, 250, 000
C)$1, 000, 000
D)$ 0

Question 28

In order to be relevant, accounting information should have

A)timeliness
B)verifiability
C)neutrality
D)representational faithfulness

Question 29

According to GAAP, verifiability is an ingredient of

A)comparability
B)reliability
C)representational faithfulness
D)relevance

Question 30

Which of the following items would most likely be a violation of the materiality constraint?

A)A company did not separately report an unusual gain of $50, 000.Its income from operations was $5, 000, 000.
B)A company having reported total assets of $20, 000, 000 immediately expensed the purchase of 20 pencil sharpeners that have an estimated useful life of three years.
C)A $25, 000 illegal bribe by an executive of the company to a foreign official was not separately disclosed in the annual report.
D)A $5, 000 expenditure to improve a building that originally cost $5, 000, 000 was immediately expensed.

Question 31

Using an allowance method of accounting to recognize uncollectible accounts receivable is an application of which accounting convention?

A)revenue recognition
B)historical cost
C)matching principle
D)period of time

Question 32

Two constraints mentioned by GAAP on qualitative characteristics are

A)understandability and decision usefulness
B)comparability and consistency
C)relevance and reliability
D)benefits greater than costs and materiality

Question 33

Which of the following qualitative characteristics may have to be sacrificed in order to achieve timeliness?

A)relevance
B)reliability
C)comparability
D)predictive value

Question 34

All of the following items are classified as accounting assumptions and conventions except for

A)going concern
B)timeliness
C)monetary unit
D)entity

Question 35

Which is not one of the four recognition criteria identified by the FASB?

A)reliable
B)understandable
C)meets the definition of an element
D)measurable

Question 36

According to the recognition criteria established for revenue, revenue is normally recognized

A)during production
B)at the completion of production
C)at the point of sale
D)when the cash is received from the customer

Question 37

Which of the following are considered secondary characteristics of accounting information?

A)verifiability and feedback value
B)predictive value and timeliness
C)comparability and consistency
D)representational faithfulness and neutrality

Question 38

Representational faithfulness is a relationship between the reported accounting measurements or descriptions and the economic resources, obligations, and the transactions and events causing changes in these items.This is important because the

A)bias associated with financial measurements can be reduced
B)validity of accounting data is an important economic resource
C)accounting information is relevant for all decisions
D)financial information is faithfully reported in the accounting records

Question 39

If collectibility of the revenue is highly uncertain, an appropriate method that should be used to recognize revenue would be

A)the percentage-of-completion method
B)at the point of sale
C)the proportional performance method
D)the installment method

Question 40

Which qualitative characteristic is an ingredient of reliability?

A)predictive value
B)feedback value
C)timeliness
D)neutrality

Question 41

The model for business reporting is designed to fit the decision processes of users to

A)make projections
B)value companies
C)assess the likelihood of loan repayments
D)do all of these

Question 42

Of the following reporting assumptions or reporting principles, the one most widely criticized is the

A)consistency principle
B)full-disclosure principle
C)entity assumption
D)historical cost principle

Question 43

A company that uses accounting methods in preparing its tax returns that differ from the accounting methods used to prepare its financial statements is

A)in violation of the consistency principle
B)not necessarily violating either the income tax laws or generally accepted accounting principles
C)probably guilty of tax evasion
D)in violation of the relevance assumption

Question 44

Revenue may be recognized by an entity at the completion of production during an accounting period

A)only if full payment was received from the buyer before production began
B)when no specific point of sale can be identified
C)when there is a fixed selling price, and there are no limitations on the amount that can be sold
D)when collectibility is highly uncertain

Question 45

Distributions that are paid to owners would affect both the

A)balance sheet and statement of cash flows
B)balance sheet and income statement
C)income statement and statement of changes in equity
D)income statement and statement of cash flows

Question 46

The financial statement that would be most useful in evaluating a company's financial flexibility is the

A)balance sheet
B)income statement
C)statement of owners' equity
D)statement of retained earnings

Question 47

The AICPA's Special Committee on Financial Reporting issued a report on a model for business reporting that addresses concerns about

A)the reliability and flexibility of financial reports
B)the relevance and timeliness of financial reports
C)the verifiability and neutrality of financial reports
D)the relevance and usefulness of financial reports

Question 48

The principle of revenue recognition results in

A)recording revenue in the income statement
B)recording realized revenue when it is earned
C)measuring relevant and reliable information whenever a transaction has occurred
D)assuring the existence of all amounts recorded as net income

Question 49

Which of the following transactions would be reported in the cash flows from investing activities section in the statement of cash flows for the Haleem Company?

A)Haleem sold a piece of land for $500, 000.
B)Haleem borrowed $2, 000, 000.
C)Haleem issued common stock for $800, 000 to investors.
D)Haleem paid a cash dividend to its stockholders.

Question 50

Which of the following sets includes only accounting assumptions and conventions?

A)timeliness, prudence, historical cost, and neutrality
B)matching, comparability, period of time, and reliability
C)monetary unit, going concern, relevance, and materiality
D)monetary unit, entity, going concern, and realization-recognition

Question 51

Solon Corporation has adopted the policy of charging to expense at the time of purchase all assets having a cost of less than $100, regardless of the life expectancy of the asset.This policy is most closely related to the

A)historical cost principle
B)period-of-time assumption
C)verifiability principle
D)materiality principle

Question 52

The use of the historical cost principle is justified because the resulting information has the primary quality ingredients of

A)neutrality and predictive value
B)representational faithfulness and neutrality
C)timeliness and neutrality
D)verifiability and feedback value

Question 53

The framework for the model of business reporting includes all of the following except

A)financial and nonfinancial data
B)independent analysis of the financial data
C)forward-looking information
D)information about management and shareholders

Question 54

Expenses are recognized and matched against revenues on the basis of three principles.Which of the following is not one of these principles?

A)immediate recognition
B)associating cash flows
C)systematic and rational allocation
D)associating cause and effect

Question 55

The CFA's Comprehensive Business Reporting Model argues that certain key weaknesses in the current financial reporting model exist.The weaknesses include all of the following except

A)current financial statements are not presented in a structure that is useful to investors
B)current financial statements do not present sufficient information to enable investors to make effective decisions.
C)current financial statements contain inaccurate measurements
D)investors must resort to estimates and best guesses to generate the information they need

Question 56

The goal of the boards of the IASB and FASB is to develop a joint conceptual framework project that is both complete and internally consistent.However, as a limitation the boards concluded that

A)a comprehensive reconsideration of all concepts underlying financial reporting would slow the progress but would be a necessary use of their time
B)the project would have to be split into four phases and worked on one at a time
C)the project would have to be split into eight phases, and all phases would be worked on simultaneously
D)a comprehensive reconsideration of all concepts underlying financial reporting would not be an efficient use of their time

Question 57

The AICPA's Special Committee on Financial Reporting issued a report on a model for business reporting.The "Financial Reporting" sources of information used in external decision making outlined in the model included all of the following except

A)parenthetical and footnote disclosures
B)financial statements
C)macroeconomic statistics
D)management discussion and analysis

Question 58

Under current GAAP, most resources of a business entity are to be valued in its financial statements at

A)a value that is most relevant to the needs of users of the financial statements
B)historical cost
C)the current cost of replacing the resource
D)current appraisal values

Question 59

Which one of the following assumptions or principles most logically supports the preparation of a single set of consolidated financial statements that combines the financial information of several wholly owned but separately identifiable businesses?

A)historical cost
B)industry practices
C)entity
D)materiality

Question 60

FASB suggests that revenues are considered to be earned

A)at a date subsequent to the point of sale
B)throughout the earnings process
C)when the company is entitled to its benefits
D)when cash is received

Question 61

The AICPA Special Committee on Financial Reporting developed a comprehensive model of business reporting in an attempt to provide a foundation for future improvement in business reporting.The five statements below relate to the five categories of information outlined in the committee's work.
a. $\underline{\quad\quad}$ and $\underline{\quad\quad}$ including(1) financial statements and related disclosures and.(2) high-level operating data and performance measurements.

b. $\underline{\quad\quad}$ of the financial and nonfinancial data, including(1) reasons for changes in the data and (2) the identity and past effect of key trends.

c. $\underline{\quad\quad}$ including(1) assessment of opporturities and risks, (2) management's plans, and (3) comparis on of actual performance to previously disclosed opportunities, risks, and plans.

d. $\underline{\quad\quad}$ about $\underline{\quad\quad}$ and $\underline{\quad\quad}$ including(1) directors, management, compensation, and major shareholders and (2) transactions and relationships among related parties.

e. $\underline{\quad\quad}$ about the $\underline{\quad\quad}$ including (1) broad objectives and strategies, (2) scope and description of the company's business and properties, and (3) the impact of incustry structure. Required:
Fill in the blanks in each statement above with the appropriate information category.

Question 62

The task of developing the conceptual framework was so enormous that the FASB had to divide it into several projects.
Required:
Identify each of the projects by name and provide a brief description of their results.

Question 63

Below is a list of the qualitative characteristics identified by GAAP.Following the list is a series of descriptive phrases.
Required:
Match each characteristic with the appropriate phrase.

Question 64

Presented below are five inappropriate accounting procedures that are being used by the Devin Corporation.
a. On the yerr-end balance sheet, DevinCorporation reported its inventory at market value, which was greater than cost. As a result of this proce chue, a gain was recogrized on the company's income statement.

b. Mrs. Devin, the president of the company, purchased an aut omobile for her son using the company's money. The company's accountant recorded the expenditure as salaries expense.

Devin Carporation reported income from operations of $\$ 5,000,000$ for the current year. During the year, Devin settled and paid a $\$ 5,000,000$ class action lawsut against the company resulting from damages incurred from the sale of defective products. The settlementwas reported as a miscellane ous expense with no footnotes provided.

d. Devin Corporation is going to issue additional common stock next year. In order to improve its income, the company switched from the LIFO inventory cost flow method to FIFO. The company did not disclose the accounting change. Comparative finencial statements were prepared.

e.The company made $\$ 3,000,000$ of expenditures to expand a building that originally cost $\$ 5,000,000$ . The expenditures are expected to benefit operations over the building s remaining useful life of ten years. The expencitureswere expensed as maintenance. Required:
For each of the above items, list the accounting assumption(s), convention(s), or principle(s)that is (are)being violated.

Question 65

The IASB and FASB boards have agreed that the objective of general purpose financial reporting is to provide

A)financial information about a company that is useful to external users in making decisions in their capacity as capital providers
B)mainly cash flow information about a company that is useful to external users in making decisions in their capacity as capital providers
C)financial information about a company that is useful to internal users in making decisions in their capacity as capital custodians
D)financial information about a company that is useful to government regulators in making decisions in their capacity as capital markets monitors

Question 66

Below is a list of accounting assumptions, conventions, and principles.Following the list is a series of descriptive statements.
Required:
Match each item in the list with its descriptive statement by placing the appropriate letter in the space provided.

Question 67

A list of statements follows:
a. $\underline{\quad\quad}$ on $\underline{\quad\quad}$ provides a measure of overall company performance.
b. $\underline{\quad\quad}$ is the uncertainty or umpredictability of the future results of a company.
c. $\underline{\quad\quad}$ is the ability of a company to take effective actions to change the amounts and timing of cash flows.
d. $\underline{\quad\quad}$ is the term used to describe how quickly a company can convert its assetsinto cash to pay a liability.
e. $\underline{\quad\quad}$ refers to the ability of a company to maint ain a given physical level of operations
Required:
Fill in the words necessary to complete the statements.

Question 68

One of the differences between the IASB/FASB joint conceptual framework and the FASB conceptual framework is that while the FASB identifies relevance and reliability as the primary decision-specific qualities, the tentative joint framework identifies the fundamental qualitative characteristics to be

A)relevance and completeness
B)reliability and completeness
C)relevance and faithful representation
D)reliability and faithful representation

Question 69

A list of statements follows:
a. GAAP identifies the $\underline{\quad\quad}$ of financial reporting
b. Financial repating should, above all, provide information that is $\underline{\quad\quad}$ to external decision makers.
c. A company's financial statements and other me ans of financial reporting should include explanations and interpret ations by its management to help external users under stand the financial infomation provided. This represents management's $\underline{\quad\quad}$ to outsiders.
Required:
Fill in the words necessary to complete the statements.

Question 70

The IASB and FASB joint boards have identified the primary user groups of financial information as all of the following except

A)equity investors
B)labor groups
C)lenders
D)other creditors (capital providers)

Question 71

Similar to the constraints in the FASB's qualitative characteristics, the joint IASB/FASB boards have identified two constraints including

A)benefits that justify the costs and consistency
B)benefits that justify the costs and materiality
C)consistency and materiality
D)objectivity and materiality

Question 72

The joint IASB and FASB boards identified several "enhancing" characteristic of financial information including

A)comparability, verifiability, timeliness, and understandability
B)materiality, verifiability, timeliness, and understandability
C)comparability, verifiability, timeliness, and materiality
D)comparability, relevance, timeliness, and understandability

Question 73

At lunch recently, two accountants were discussing the merits of the FASB's conceptual framework project, which resulted in the publication of seven Statements of Financial Accounting Concepts and required more than ten years of effort.One accountant thought the effort was a waste of resources, since accounting was unlike physics, chemistry, and biology, where natural laws apply.The other accountant thought the effort was very valuable.He stated that "accounting, like any other discipline, benefits from having a coherent theory."
Required:
Write a brief essay that discusses the advantages that are derived from the existence of a conceptual framework for financial accounting and reporting.

Question 74

The FASB identified several objectives of financial reporting, which are listed below.Following the list is a series of descriptive statements.
Required:
Match each objective with the appropriate statement by placing the appropriate letter in the space provided.

Question 75

A list of statements follows:
a.GAAP states that the two primary qualitative characteristics that make accounting information useful for decision-making purposes are $\underline{\quad\quad}$ and $\underline{\quad\quad}$

b.Corporations prepre quarterly financial statements in order to help achieve $\underline{\quad\quad}$ an ingrecient of the primary quality of relevance.

c.Expensing the purchase of waste paper baskets that have a three-ye es estimated useful life at the clate of acquisition is a permissible procedure accordingto the $\underline{\quad\quad}$ constraint.
d. The three components of reliability are $\underline{\quad\quad}$ , $\underline{\quad\quad}$ and $\underline{\quad\quad}$
e. $\underline{\quad\quad}$ is the overall qualitative characteristic to be used in judging the quality of accountine information
Required:
Fill in the words necessary to complete the statements.

Question 76

Following the list below is a series of descriptions of inappropriate accounting procedures.
Required:
Indicate which item (or items)on the list was (were)violated in each description by placing the appropriate letter(s)in the space provided.

Question 77

The joint IASB/FASB qualitative characteristics Exposure Draft identifies a logical order in which to evaluate the qualities.That order (first, second, third)is

A)faithful representation, relevance, enhancing characteristics
B)relevance, enhancing characteristics, faithful representation
C)relevance, faithful representation, enhancing characteristics
D)enhancing characteristics, relevance, faithful representation

Question 78

The IASB and FASB joint boards feel that financial reporting should

A)be general purpose
B)be useful in assessing a company's future cash flows
C)provide information on an accrual basis
D)all of these are true

Question 79

Certain elements of the financial statements are listed below, followed by a series of descriptive statements.
Required:
Match each element with the appropriate statement by placing the appropriate letter in the space provided.

Question 80

Part of the hierarchy of qualitative characteristics is presented below.
Required:
Provide the qualitative characteristic for each lettered box.
a. $\underline{\quad\quad\quad\quad\quad\quad\quad\quad}$
b. $\underline{\quad\quad\quad\quad\quad\quad\quad\quad}$
c. $\underline{\quad\quad\quad\quad\quad\quad\quad\quad}$
d. $\underline{\quad\quad\quad\quad\quad\quad\quad\quad}$
e. $\underline{\quad\quad\quad\quad\quad\quad\quad\quad}$
f. $\underline{\quad\quad\quad\quad\quad\quad\quad\quad}$