Deck 2: Financial Reporting Theory

Question 1

Which of the following best characterizes the current situation concerning revisions to the conceptual framework?

A) The FASB is considering revisions to their conceptual framework but IASB is not.
B) The IASB is considering revisions to the conceptual framework but FASB is not.
C) The FASB and the IASB are working independently on their conceptual frameworks.
D) The FASB and the IASB are working cooperatively on a single conceptual framework.

Answer 1

C

Question 2

U.S. GAAP and IFRS set forth the same objective of financial reporting and the same qualitative characteristics in their respective conceptual frameworks.

Answer 2

True

Question 3

List the active phases in the FASB conceptual framework project.

Answer 3

Four active phases in the FASB conceptual framework project are:
- Elements
- Measurement
- Presentation and
- Disclosure

Question 4

What is the primary purpose of the conceptual framework?

A) to override accounting standards
B) to assist standard setters in developing and revising accounting standards
C) to revise the objective of financial reporting
D) All of the above

Question 5

The IASB and FASB share the goal that standards will be based on an agreed set of fundamental ________.

A) practices
B) constraints
C) standards
D) concepts

Question 6

The conceptual framework assists with ________.

A) the development of a set of standards which provide absolute answers for accounting questions
B) the development of a set of standards for auditors to use when looking for material misstatements or fraud
C) the development of a set of standards which ensure that accounting standards are coherent and uniform
D) All of the above

Question 7

Which of the following is not a purpose of FASB's conceptual framework?

A) aid in development of new standards
B) support understanding of accounting standards
C) assist with revision of accounting standards
D) override existing accounting standards

Question 8

The FASB is currently working on the objectives of financial reporting and presentation.

Question 9

The conceptual framework indicates that the primary users of financial information are investors, lenders, and other creditors who cannot demand information from the entity.

Question 10

When comparing FASB's Conceptual Framework to the IASB's Conceptual Framework, ________.

A) the objective and qualitative characteristics are identical
B) they differ in the descriptions of elements of financial reporting
C) they differ in the principles of recognition and measurement
D) All of the above

Question 11

Under U.S. GAAP, the conceptual framework overrides accounting standards.

Question 12

At the present time, the FASB and IASB are working together on the conceptual framework.

Question 13

Before issuing a new standard, the standard setters weigh constraints, which may deter requiring the new standard.

Question 14

________ are identical under U.S. GAAP and IFRS.

A) Elements and Recognition
B) Presentation and Disclosure
C) Objective and Qualitative Characteristics
D) Subjective and Quantitative Characteristics

Question 15

All of the following are components of the conceptual framework for financial reporting except ________.

A) qualitative characteristics
B) standards
C) principles of recognition and measurement
D) elements of the financial reporting system

Question 16

When developing a new proposed accounting standard, after FASB has determined that the proposed standard meets the objective of financial reporting, the next step in the development process is to ________.

A) determine which elements of the financial statements are affected by the proposed standard
B) consider whether the proposed standard possesses the qualitative characteristics that make accounting information useful
C) weigh constraints on issuing the new standard, which may deter requiring the new standards
D) identify recognition and measurement concepts used to support the proposed standard

Question 17

Currently the FASB and IASB have two separate conceptual frameworks which are partially converged.

Question 18

When developing new standards, the standard setters must first determine ________.

A) which elements of the financial statements are affected by the proposed standard
B) if the proposed standard possesses the qualitative characteristics that make accounting information useful
C) if the proposed standard meets the objective of financial reporting
D) which recognition and measurement concepts are used to support the proposed standard

Question 19

The conceptual framework defines the objective of financial reporting as providing financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions.

Question 20

The purpose of the conceptual framework is to assist standard setters in developing and revising accounting standards.

Question 21

The primary purpose of the conceptual framework is to provide guidance to ________.

A) preparers of financial statements
B) auditors
C) standard setters
D) CEOs

Question 22

List the three primary components of the conceptual framework for financial reporting and the two subcomponents of each component.

Question 23

What is the purpose of the conceptual framework?

Question 24

Information exhibits the characteristic of faithful representation if it is complete, neutral, and free from error.

Question 25

Verifiability is a characteristic of faithful representation.

Question 26

The two fundamental characteristics of financial information are ________.

A) comparability and understandability
B) relevance and timeliness
C) reliability and faithful representation
D) faithful representation and relevance

Question 27

Who are the primary users of financial information? Discuss how FASB and IASB take them into account.

Question 28

Which of the following types of information is not a focus of the primary objective of financial reporting?

A) information that helps a banker decide to provide a loan
B) information that helps a manager assess the efficiency and effectiveness of operations
C) information that helps a creditor evaluate the amount and timing of cash flows of its customers
D) information that helps an investor form an opinion about a company's future cash flows

Question 29

In the conceptual framework, what are the two types of qualitative characteristics of financial information?

A) fundamental and enhancing
B) point-in-time and period-of-time
C) recognition and measurement
D) elements and principles

Question 30

Information is relevant if it reliably depicts the substance of an economic event.

Question 31

Information that is not material is never relevant.

Question 32

Materiality cannot always be expressed quantitatively and sometimes requires judgment.

Question 33

Relevance is an enhancing characteristic of financial information.

Question 34

Information that is not accurate can be considered faithfully representative.

Question 35

Which of the following is not considered to be a primary user of financial information for which financial reporting standards are designed?

A) creditors that are suppliers
B) investors such as stockholders and bondholders
C) regulators
D) lenders such as banks

Question 36

Information has predictive value if it provides feedback about prior evaluations.

Question 37

The two types of qualitative characteristics are fundamental characteristics and elective characteristics.

Question 38

Discuss how standard setters use the conceptual framework in developing new standards.

Question 39

The role of qualitative characteristics in the conceptual framework is to increase the decision usefulness of financial information.

Question 40

Frank Smith is a student getting his degree in business administration. He does not like his accounting class very much, and doesn't understand why he needs to study accounting - stating "I'm never going to be an accountant - why do I need to know this?" Explain to Frank why it is important for business students to learn about accounting and give examples.

Question 41

Baxter Company issues its annual financial reports within one month of the end of the year. This is an example of which enhancing quality of accounting information?

A) confirmatory value
B) relevance
C) verifiability
D) timeliness

Question 42

Which of the following characteristics is fulfilled by separating current and noncurrent assets on the balance sheets?

A) Relevance
B) Faithful representation
C) Comparability
D) Understandability

Question 43

Complete the following table - identify which fundamental characteristic and which attribute are indicated in each independent scenario.
$\begin{array}{|l|l|l|}\hline\text{ Scenario } &\text{ Fundamental Characteristics }& \text{Attribute} \\\hline\text{ Moss Inc.'s accountant has} & & \\\text{verified that all equipment has} & & \\\text{been depreciated according to} & & \\\text{the company's depreciation }& & \\\text{schedule. }& & \\\hline \text{Cross \& Grant Company }& & \\\text{includes in a note all relevant} & & \\\text{details relating to the company's }& & \\\text{equipment - including }& & \\\text{depreciation method, estimated }& & \\\text{useful life, historical cost, and }& & \\\text{accumulated depreciation. }& & \\\hline \text{Excellent Foundation discloses }& & \\\text{plans to dispose of a major }& & \\\text{operating segment.} & & \\\hline\text{ TLR Studios discloses }& \\\text{information relating to a} & & \\\text{pending lawsuit that is likely to }& & \\\text{have an unfavorable outcome. }& & \\\hline\end{array}$

Question 44

The attribute ________ relates to information that is relevant.

A) comparative value
B) predictive value
C) neutrality
D) verifiability

Question 45

What is the cost constraint and how does it affect financial reporting?

Question 46

Which of the following is not a characteristic of relevance?

A) confirmatory value
B) materiality
C) free from error
D) predictive value

Question 47

Complete the following table - identify which enhancing characteristic is indicated in each independent scenario and whether it was satisfied or violated.
$\begin{array}{|l|l|l|}\hline\text{ Scenario } & \text{ Enhancing Characteristics} & \text{ Satisfied or Violated }\\\hline \text{ Search Engine Corporation} & & \\\text{ reports the historical cost of its} & & \\\text{ archery park on the balance} & & \\\text{ sheet.} & & \\\hline \text{ Creighton's Fine Products} & & \\ \text{ produces very basic financial} & & \\\text{ statements, without }& & \\\text{ classification or notes. They do} & & \\\text{ have complicated lease and }& \\\text{ borrowing agreements, and }& \\\text{ have changed depreciation} & \\\text{ estimates. }& \\\hline\text{ Realistic Ventures Company} & & \\\text{ switched to fair value} & \\\text{ accounting for standing timber,} & & \\\text{ which is the method used by }& & \\\text{ most companies in the industry. }& & \\\hline \text{ Roy \& Quinn's Lakeside }& & \\\text{ Properties provides financial} & & \\\text{ statement information every} & & \\\text{ other year.} & &\\\hline\end{array}$

Question 48

What are the attributes of relevant information?

A) predictive value, timeliness, free from error
B) materiality, predictive value, and confirmatory value
C) comparability, verifiability, and predictive value
D) complete, neutral, free from error

Question 49

Coffee Mugs Inc. is aware that a large portion of its receivables may become uncollectible because the customer is in talks for bankruptcy. By choosing not to disclose this information, the information provided in the statements ________.

A) is not verifiable
B) does not faithfully represent the firm's financial position
C) Both A & B
D) Neither A nor B

Question 50

Southcoast Warehousing Inc. reported earnings per share of $3.41. This surpassed the average analyst forecast of $2.90. This information has ________ to users of financial information.

A) confirmatory value
B) comparable value
C) consistent value
D) Both A & C

Question 51

________ means that a group of reasonably informed financial statement users are able to reach a consensus decision that reported information is a faithful representation of an underlying economic event.

A) Comparability
B) Verifiability
C) Understandability
D) Freedom from error

Question 52

Information that is reported free from error ________.

A) contains no mistakes or omissions in the description of an event or in the process used to produce financial information
B) is accurate in all respects
C) does not include estimates
D) All of the above

Question 53

________ characteristics distinguish useful financial information from information that is not useful.

A) Representative
B) Relevant
C) Fundamental
D) Quantitative

Question 54

U.S. GAAP and IFRS identify the same seven period-of-time elements.

Question 55

All of the following are enhancing characteristics except ________.

A) understandability
B) verifiability
C) consistency
D) comparability

Question 56

Financial statements should provide all financial information that is relevant and faithfully representative within the limitations of the ________ constraint.

A) benefit
B) materiality
C) usefulness
D) cost

Question 57

Which of the following is a characteristic of faithful representation?

A) timely
B) comparable
C) material
D) complete

Question 58

Do you agree or disagree with the following statement: "Financial statements that are free from error are accurate." Explain your answer.

Question 59

Caesar & Company is planning a major expansion, and is in negotiations with their bank for a loan. The bank requested that Caesar & Co provide them with financial statements as soon as possible after the end of the year. Caesar & Co has several suppliers that are slow to submit invoices, so they are considering making estimates for the amounts associated with those liabilities in order to expedite the preparation of the financial statements for the bank. Discuss the qualitative characteristics that they need to consider.

Question 60

________ indicates whether financial information depicts an economic event in a way that is complete, neutral, and free from error.

A) Relevance
B) Faithful representation
C) Verifiability
D) Truthfulness

Question 61

According to IFRS, there are two types of capital maintenance adjustments: financial and physical.

Question 62

IFRS and U.S. GAAP both identify assets as ________ elements.

A) phase-in-time
B) period-of-time
C) point-in-time
D) piece-of-time

Question 63

IFRS identifies ________ period-in-time elements.

A) four
B) five
C) six
D) seven

Question 64

Which term is described as the building blocks of the financial statements?

A) fundamental characteristics
B) enhancing characteristics
C) elements
D) assets

Question 65

According to U.S. GAAP, period-of-time elements include performance, income, expenses, and capital maintenance adjustments.

Question 66

IFRS identifies ________ point-in-time elements.

A) one
B) three
C) five
D) seven

Question 67

U.S. GAAP identifies ________ point-in-time elements.

A) two
B) three
C) four
D) five

Question 68

In the conceptual framework, what are the two types of elements of financial reporting?

A) fundamental and enhancing
B) point-in-time and period-of-time
C) recognition and measurement
D) elements and principles

Question 69

U.S. GAAP identifies ________ period-in-time elements.

A) four
B) five
C) six
D) seven

Question 70

According to U.S. GAAP, elements are categorized by whether they are relevant or faithfully representative.

Question 71

Comprehensive income is the residual interest in the assets of an entity that remains after deducting its liabilities.

Question 72

________ elements appear on the balance sheet.

A) Period-of-time
B) Point-in-time
C) Piece-of-time
D) Phase-in-time

Question 73

IFRS does not treat transactions with owners as separate elements.

Question 74

Under U.S. GAAP, comprehensive income includes which of the following?

A) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Operating Income } \\\hline \text { No } & \text { Yes } \\\hline\end{array}$$
B) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Operating Income } \\\hline \text { Yes } & \text { No } \\\hline\end{array}$$
C) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Operating Income } \\\hline \text { No } & \text { No } \\\hline\end{array}$$
D) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Operating Income } \\\hline \text { Yes } & \text { Yes } \\\hline\end{array}$$

Question 75

Under U.S. GAAP, ________ is an example of a period-of-time element and appears on the ________.

A) accounts receivable; balance sheet
B) depreciation expense; statement of shareholders' equity
C) salary payable; balance sheet
D) sales revenue; income statement

Question 76

According to IFRS, point-in-time elements include assets, liabilities, and equity.

Question 77

U.S. GAAP and IFRS identify the same three point-in-time elements.

Question 78

The IFRS element capital maintenance is identical to the GAAP element comprehensive income.

Question 79

According to IFRS, period-of-time elements include income, expenses, performance, and transactions with owners.

Question 80

According to the FASB's conceptual framework, gains include increases in equity from which of the following activities?

A) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Peripheral Transactions } \\\hline \text { Yes } & \text { No } \\\hline\end{array}$$
B) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Peripheral Transactions } \\\hline \text { Yes } & \text { Yes } \\\hline\end{array}$$
C) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Peripheral Transactions } \\\hline \text { No } & \text { No } \\\hline\end{array}$$
D) $$\begin{array} { | c | c | } \hline \text { Investments by Owners } & \text { Peripheral Transactions } \\\hline \text { No } & \text { Yes } \\\hline\end{array}$$