Deck 2: Conceptual Framework Underlying Financial Reporting

Question 1

Which of the following best describes why a conceptual framework is necessary?

A)to build all standards and rules upon a common foundation and increase financial statement users' understanding and confidence
B)to make financial statement preparation an automated process requiring no human intervention
C)to completely eliminate the potential for companies to exercise professional judgement in preparation of financial information
D)to decrease the comparability of different companies' financial statements

Answer 1

A

Question 2

Burton Ltd.operates in both Canada and the United States.The company wants to improve the qualitative characteristics of its financial statements.Which of the following would most likely improve the comparability of Burton's financial statements?

A)the restatement of its financial statements from Canadian GAAP to US GAAP for its American investors
B)the preparation of monthly financial statements
C)the introduction of a policy that specifies how Sunbury's capital assets should be depreciated
D)the use of U.S.-trained accountants

Answer 2

A

Question 3

Timeliness is increased by

A)quarterly reporting.
B)comparative financial statements.
C)representational faithfulness.
D)annual reporting.

Answer 3

A

Question 4

Accounting information is considered to be relevant when it

A)can be depended on to represent the economic conditions and events that it is intended to represent.
B)is capable of making a difference in a decision.
C)is understandable by reasonably informed users of accounting information.
D)is verifiable and neutral.

Question 5

Which of the following does NOT relate to the concept of relevance?

A)The information must be capable of making a difference in a decision.
B)Both material and immaterial information is important.
C)The information has predictive value.
D)The information has feedback/confirmatory value.

Question 6

The costs of providing useful information do NOT include

A)collecting, processing and distributing information.
B)auditing financial statements.
C)disclosure to competitors.
D)users' allocation of resources.

Question 7

Fundamental qualitative characteristics include

A)relevance and comparability.
B)representational faithfulness and timeliness.
C)relevance and representational faithfulness.
D)verifiability and relevance.

Question 8

The common characteristic of both assets and liabilities is that they both

A)provide an economic benefit.
B)result from a past transaction or event.
C)represent a present responsibility.
D)represent contractual or other rights.

Question 9

Which of the following is NOT part of the conceptual framework for financial reporting?

A)elements of financial statements
B)qualitative characteristics of accounting information
C)notes to financial statements
D)foundational principles

Question 10

The overriding criterion by which accounting information can be judged is that of

A)usefulness for decision making.
B)freedom from bias.
C)timeliness.
D)comparability.

Question 11

You want to improve the qualitative characteristics of your firm's financial statements.Which of the following options would most likely improve the timeliness of your company's financial statements?

A)increasing the number of disclosures
B)changing the timing of when revenues are recognized
C)increasing the frequency of statements from annually to quarterly
D)decreasing the useful life of property, plant and equipment from ten years to five

Question 12

Comparability allows any financial statement user to

A)make timely decisions.
B)understand all the information presented.
C)verify all the data provided.
D)identify the real similarities and differences in economic phenomena.

Question 13

Which of the following is NOT an objective of financial reporting?

A)to provide information about an entity's economic resources, obligations and equity/net assets
B)to provide information that is useful to investors and creditors and other users in making resource allocation decisions and/or assessing management stewardship
C)to provide information that is useful in assessing the economic performance of the entity
D)to provide the most useful information possible even if the costs exceed the benefits

Question 14

Which of the following is NOT a component of a conceptual framework for financial reporting?

A)accounting's goals and purposes
B)qualitative characteristics of accounting information
C)foundational principles
D)All of the above are components of a conceptual framework.

Question 15

Representational faithfulness includes

A)completeness, neutrality and comparability.
B)neutrality, completeness, and understandability.
C)relevance, completeness and freedom from material error.
D)neutrality, completeness and freedom from material error.

Question 16

Materiality refers to

A)the tangible nature of an item.
B)representational faithfulness.
C)the decision-making relevance of a piece of information.
D)None of these describe materiality.

Question 17

Which of the following statements regarding liabilities is true?

A)They must arise through a contractual obligation.
B)They may be attributable to a future transaction or event.
C)The duty or responsibility obligates the entity.
D)The entity often has reasonable discretion to avoid the obligation.

Question 18

Which of the following does NOT represent an essential characteristic of an asset?

A)There is some economic benefit to the entity.
B)The entity is able to transfer the economic benefit if it so chooses.
C)The entity has control over the economic benefit.
D)The benefits result from a past transaction or event.

Question 19

Which of the following is true about understandability as a qualitative characteristic of financial statements?

A)The onus to prepare understandable statements and to be able to understand them lies with the preparer.
B)Where the underlying transactions or economic events are more complex, the user is expected to understand them without the assistance of an advisor.
C)The onus to prepare understandable statements and to be able to understand them lies with the preparer and the user.
D)Users with no knowledge of business and financial accounting matters are expected to understand the financial statements.

Question 20

Which statement is correct regarding enhancing qualitative characteristics?

A)Full discussion of the information presented is a substitute for comparable information.
B)Numbers that are easily verifiable with a reasonable degree of accuracy are called soft numbers.
C)Information must be available before it loses its ability to influence users' decisions.
D)Financial information must be of sufficient quality and clarity that even uninformed readers can understand it.

Question 21

Generally, under ASPE, revenue from sales should be recognized at a point when

A)management decides it is appropriate to do so.
B)the product is available for sale.
C)an exchange has taken place and the earnings process is substantially complete.
D)the entire amount receivable has been collected from the customer and there remains no further warranty liability.

Question 22

Gains are defined as

A)increases in economic resources resulting from an entity's ordinary activities.
B)decreases in economic resources resulting from an entity's ordinary activities.
C)the residual interest remaining after liabilities are deducted from assets.
D)increases in equity resulting from an entity's peripheral or incidental transactions.

Question 23

During a major renovation project of its head office, a worker was seriously injured.While the company believes that it was not at fault, it does include the incident in the notes to its financial statements.This is consistent with the

A)full disclosure principle.
B)periodicity assumption.
C)going concern assumption.
D)economic entity assumption.

Question 24

Valuing assets at their liquidation values rather than their cost is inconsistent with the

A)periodicity assumption.
B)historical cost principle.
C)matching principle.
D)economic entity assumption.

Question 25

The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the

A)economic entity assumption.
B)monetary unit assumption.
C)fair value principle.
D)going concern assumption.

Question 26

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of

A)the economic entity assumption.
B)the matching principle.
C)comparability.
D)reliability.

Question 27

The matching principle is best demonstrated by

A)not recognizing any expense unless some revenue is realized.
B)associating effort (expense)with accomplishment (revenue).
C)recognizing prepaid rent received as revenue.
D)measuring expenses correctly.

Question 28

Financial statements prepared under ASPE include a

A)statement of comprehensive income.
B)statement of cash flows and a statement of changes in shareholders' equity.
C)balance sheet and a statement of retained earnings.
D)statement of retained earnings and a statement of comprehensive income.

Question 29

Which of the following elements of financial statements is NOT a component of comprehensive income?

A)Revenues
B)Distributions to owners
C)Losses
D)Expenses

Question 30

When deciding whether to recognize a financial statement element (or not), and how to measure it, the accountant should

A)always use estimates.
B)record "hard" numbers and ignore "soft" numbers.
C)determine an acceptable level of uncertainty.
D)recognize a financial statement element even if it cannot be measured.

Question 31

Under IFRS, "other comprehensive income" does NOT include

A)unrealized holding gains and losses on certain securities.
B)gains and losses on disposal of property, plant and equipment.
C)gains and losses related to certain types of hedges.
D)certain gains and losses related to foreign exchange transactions.

Question 32

Equitable obligations arise due to

A)statutory requirements.
B)contractual obligations.
C)moral or ethical considerations.
D)union agreements.

Question 33

Which of the following serves as the justification for the periodic recording of depreciation expense?

A)association of efforts (expense)with accomplishments (revenue)
B)minimization of income tax liability
C)immediate recognition of an expense
D)systematic and rational allocation of cost over the periods benefited

Question 34

Which of the following statements does NOT apply to the historical cost principle?

A)Historical cost represents a value at a point in time.
B)The principle does not apply to financial instruments.
C)Historical cost results from a reciprocal or two-way exchange.
D)Over time, historical cost becomes irrelevant in terms of predictive value.

Question 35

Under IFRS, equity does NOT include

A)long term leases.
B)common and/or preferred shares.
C)accumulated other comprehensive income.
D)retained earnings.

Question 36

A local businessman owns several different companies.His accountant prepares separate financial statements for each of these businesses.This is an application of the

A)full disclosure principle.
B)periodicity assumption.
C)going concern assumption.
D)economic entity assumption.

Question 37

Use of an allowance for doubtful accounts is an application of the

A)matching principle.
B)revenue recognition principle.
C)historical cost principle.
D)full disclosure principle.

Question 38

The economic entity assumption

A)is inapplicable to unincorporated businesses.
B)recognizes the legal aspects of business organizations.
C)requires periodic income measurement.
D)is applicable to all forms of business organizations.

Question 39

Which of the following is NOT a good example of the matching principle?

A)A machine that produces certain goods is depreciated over its useful life.The depreciation expense is matched with the proceeds from the sale of those goods.
B)The entire amount of a two-year insurance premium is expensed in the first year.
C)An uncollectible receivable is written off in the year that the sale was made.
D)Recognition of revenue for which associated expenses cannot yet be determined is delayed until such determination can be made.

Question 40

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with the

A)full disclosure principle.
B)periodicity assumption.
C)going concern assumption.
D)economic entity assumption.

Question 41

Under GAAP, inflation has been historically ignored due to the

A)economic entity assumption.
B)going concern assumption.
C)monetary unit assumption.
D)periodicity assumption.

Question 42

The practice of matching

A)dictates that efforts (expenditures)be matched with associated cash flow.
B)requires arbitrary allocation of an asset's contribution to a revenue stream.
C)illustrates the cause and effect relationship between money spent to earn revenues and the revenues themselves.
D)is required by GAAP to approximate an asset's contribution to an entity's periodic cash flow.

Question 43

Principles-based GAAP is sometimes criticized for being

A)too inflexible.
B)too flexible.
C)too inconsistent.
D)too difficult for the reader to understand.

Question 44

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

A)creating complex legal arrangements and financial instruments
B)structuring debt financing so that it meets the GAAP definition of equity rather than debt
C)accounting for bona fide business transactions in a transparent manner
D)aggressively interpreting GAAP so that the impact on critical ratios is minimized

Question 45

Application of the full disclosure principle

A)is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
B)is violated when important financial information is buried in the notes to the financial statements.
C)is demonstrated by the inclusion of information such as information about contingencies.
D)requires that the financial statements be consistent and comparable.

Question 46

Where there is a significant uncertainty with respect to the measurement of an item,

A)do not record anything in the financial statements.
B)recognize the item in the financial statements and disclose the measurement uncertainty in the notes to the financial statements.
C)do not record anything in the financial statements but disclose the measurement uncertainty in the notes to the financial statements.
D)record the maximum amount in the financial statements.

Question 47

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.

A)i, ii, and iii
B)i and iii
C)i and iv
D)ii and iv

Question 48

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

A)notes to the financial statements.
B)key performance drivers.
C)the company's vision and strategy.
D)the company's capabilities (capital and other resources).

Question 49

Fair value (of an asset)is

A)an entry price.
B)an entity-specific measure.
C)an exit price.
D)not used when following IFRS.

Question 50

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?

A)an independent audit committee
B)an internal audit function
C)vigilant management
D)an increased focus on tying bonuses to short-term company performance

Question 51

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

A)the application of professional judgement.
B)the full disclosure principle.
C)representational faithfulness.
D)good management stewardship.

Question 52

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

A)economic entity assumption
B)going concern assumption
C)periodicity assumption
D)monetary unit assumption

Question 53

Regarding the concept of materiality, what does the current IASB research project hope to accomplish?

A)Augment IAS1 with a paragraph that sets out key characteristics of materiality.
B)Develop a broadly applicable quantitative materiality threshold that all reporting entities will use.
C)Identify and develop an IAS 25, a distinct section discussing the concept of materiality.
D)A review of existing standards to identify conflicts, duplication, and overlaps.

Question 54

The IASB issued an Exposure Draft relating to the conceptual framework in 2015.Regarding presentation and disclosure, what change does this draft propose?

A)renaming the balance sheet to the periodic statement of performance
B)renaming the statement of profit or loss to the statement of income or deficit
C)renaming the balance sheet to the statement of financial health
D)renaming the statement of profit or loss to the statement of financial performance

Question 55

Financial reporting is

A)independent of the environment in which it operates.
B)the result of carefully applied professional judgement.
C)influenced by the decisions of individuals who act in the interest of stakeholders at the expense of themselves.
D)completely free of bias.

Question 56

Management Discussion and Analysis (MD&A)is

A)notes on meetings between management and auditors.
B)internal documents not released to shareholders.
C)supplementary information included in the annual report.
D)supplementary information included in the notes to the financial statements.