Question 1

The best argument in support of historical cost information is:
A)Relevance.
B)Predictive quality for future cash flows.
C)Materiality.
D)Verifiability.

Accepted Answer

Historical cost information is verifiable because it is based on actual transactions that have occurred, making it reliable and objective.

Question 2

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.

Accepted Answer

The going concern assumption states that a business will continue to operate indefinitely, unless there is evidence to the contrary. This assumption is a foundation for financial reporting, as it allows for the preparation and presentation of financial statements that reflect the business's current and future operations. Without the going concern assumption, financial statements would reflect a liquidation value rather than a going-concern value.

Question 3

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.

Accepted Answer

A code of ethics is a set of guidelines for expected behavior and professional conduct, which embodies a profession's responsibility to serve the interests of its clients. A code of ethics is a key element that distinguishes a profession from other occupations. The other answer options (A, C, and D) may be relevant to a profession as well, but they do not necessarily embody a profession's responsibility to serve its clients' interests.

Question 4

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.

Accepted Answer

Land should be reported at its historical cost, which is the amount paid for it, $40,000.

Question 5

According to the conceptual framework, verifiability implies:
A)Legal evidence.
B)Logic.
C)Consensus.
D)Legal verdict.

Accepted Answer

Verifiability in the context of the conceptual framework for financial reporting implies that different knowledgeable and independent observers can reach a consensus that a particular depiction of an event is faithfully represented. This does not necessarily involve legal evidence or verdicts, nor is it solely about logic, but rather about the ability to verify the information through consensus among observers.

Question 6

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.

Accepted Answer

The primary objective of financial reporting is to provide information that is useful to investors, creditors, and others in making decisions about providing resources to the entity, particularly in predicting future cash flows.

Question 7

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.

Accepted Answer

If an independent auditing firm expresses dissatisfaction with a company's financial statements, it issues a qualified opinion. This means that while the auditors have found some issues with the financial statements, they believe that they are overall fairly presented, but with certain exceptions. It is important to note that a qualified opinion is still a form of opinion, however, it alerts readers that there may be certain caveats or limitations to the information presented in the financial statements.

Question 8

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.

Accepted Answer

The going concern assumption assumes that a company will continue to operate and meet its financial obligations in the foreseeable future. If a company has gone bankrupt, it means that it has failed to meet its financial obligations and is no longer going concern. Therefore, the financial statements produced after the bankruptcy no longer adhere to the going concern assumption.

Question 9

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.

Accepted Answer

Independent auditors evaluate financial statements to determine whether they are prepared in accordance with generally accepted accounting principles and fairly represent the financial position of the company. The auditor expresses an opinion on the fairness of the financial statements, not on their accuracy, the soundness of the company's future, or the quality of its management.

Question 10

Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change?
A)Comparability.
B)Representational faithfulness.
C)Consistency.
D)Feedback value.

Accepted Answer

Changing the inventory valuation method reduces the consistency in the financial statements as the method used for valuation of inventory is changed. It affects the comparability and representational faithfulness of the financial statements in a negative way. However, the feedback value is not directly affected by this change.

Question 11

Constraints on qualitative characteristics of accounting information include:
A)Timeliness.
B)Going concern.
C)Neutrality.
D)Conservatism.

Accepted Answer

The answer of Constraints on qualitative characteristics of accounting information...

Question 12

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

Accepted Answer

SFAC 6 defines the 10 elements of financial statements, replacing SFAC 3.

Question 13

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.

Accepted Answer

The qualitative concept improved in this scenario is relevance as the faster dissemination of financial information makes it more timely and useful to investors and creditors in making their decisions. Comparability and consistency may also be affected by this change, but they are not the primary focus. Reliability is not mentioned as a factor in this scenario.

Question 14

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.

Accepted Answer

The concept demonstrated in this scenario is cost effectiveness, as management is weighing the cost of committing additional resources to the annual report project against the benefits of receiving the financial statements two days earlier. Timeliness, materiality, and relevance are not as relevant to the specific decision being made in this scenario.

Question 15

Elements of financial statements do not include:
A)Monetary unit.
B)Investments by owners.
C)Comprehensive income.
D)Losses.

Accepted Answer

The elements of financial statements typically include assets, liabilities, equity, income, expenses, and, in broader frameworks, items like comprehensive income and investments by owners. However, "Monetary unit" is not considered an element of financial statements; it is a measurement concept used within those statements.

Question 16

Recognizing expected losses immediately, but deferring expected gains, is an example of:
A)Materiality.
B)Conservatism.
C)Cost effectiveness.
D)Timeliness.

Accepted Answer

This is an example of conservatism, which dictates that losses should be recognized as soon as they are expected, but gains should only be recognized when they are realized. This conservative approach to accounting helps to prevent overstating the financial position of a company.

Question 17

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.

Accepted Answer

The characteristic described - agreement between a measure or description and the phenomenon it represents - is commonly known as representational faithfulness.

Question 18

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.

Accepted Answer

The scenario describes a situation where a company's management may face an ethical dilemma concerning the accuracy of reported financial statements. They may feel compelled to break accounting rules to meet the expectations of the capital markets, which could create a conflict of interest with stakeholders and compromise the company's integrity. Therefore, this is a relevant example of an ethical dilemma faced by businesses today.

Question 19

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.

Accepted Answer

The concept demonstrated is materiality, as the company's independent accountants did not protest the deviation from GAAP as the losses from uncollectible accounts were negligible. Materiality concept allows for deviations from GAAP if the impact of the deviation is immaterial to the financial statements.

Question 20

Change in equity from nonowner sources is:
A)Comprehensive income.
B)Revenues.
C)Expenses.
D)Gains and losses.

Accepted Answer

Comprehensive income includes all changes in equity during a period from non-owner sources, including revenues, expenses, gains, and losses.

Quiz 1: Environment and Theoretical Structure of Financial Accounting

The best argument in support of historical cost information is:

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

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:

According to the conceptual framework, verifiability implies:

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

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

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

Independent auditors express an opinion on the:

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

Constraints on qualitative characteristics of accounting information include:

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

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:

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:

Elements of financial statements do not include:

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

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

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:

Change in equity from nonowner sources is: