ACCT 370 Ch. 1

Make an assessment of a company's ability to meet its debt-related financial obligations.

Creditors

Form an educated opinion about the value of a company and its common and preferred stock and then make decisions based on that opinion.

Equity investors

Which of the following is not one of the four costs that can arise from informative financial disclosures? Competitive disadvantage costs SEC filing costs Litigation costs Political costs

SEC filing costs

True or false: Suppliers demand financial statements to assess a customer's ability to pay for goods purchased.

True

Financial statements and related disclosures provide information about -the prospects for a company's competitors. Reason: The information is for the specific company, not its competitors. -a company's economic activity. -an industry sector's prospects. Reason: The information is for a specific company. -a government's economic activity. Reason: The information is for a specific company.

a company's economic activity

Financial statements and related disclosures report -whether the company stock is undervalued. -how interest rates are expected to change. -a company's economic wealth. -what the company will be worth in 10 years.

a company's economic wealth.

Owners and managers have an economic incentive to supply the amount and type of financial disclosures that will enable them to raise capital at the lowest cost. as fast as possible. at the highest price. within one year.

at the lowest cost

The information asymmetry role of accounting is associated with -determining the amount of bonuses to be paid to managers. -paying the appropriate amount of commission to a salesperson -ensuring that the company complies with the terms of its loans. -communicating private information to people outside the company.

communicating private information to people outside the company.

The commercial and tax law approach to financial reporting -is designed to help investors and creditors. -originated in the United Kingdom and the United States. -creates inconsistent accounting across countries. -is consistent with the true and fair view.

creates inconsistent accounting across countries

The contract efficiency role of accounting is associated with -communicating private information to people outside the company. -determining the amount of bonuses to be paid to managers. -allowing a new lender to determine the risk of the company. -allowing potential stock investors to assess the future prospects of the company.

determining the amount of bonuses to be paid to managers.

The ability to raise additional cash by selling assets, issuing stock, or borrowing more is known as -loan covenant. -credit risk. -fundamental value. -financial flexibility.

financial flexibility.

The economic performance approach to financial reporting -varies greatly by country. -is designed to help investors and creditors. -is designed to stimulate capital investment. -is closely tied to tax law.

is designed to help investors and creditors.

An auditing firm discovered an error that increased the audit client's revenue by 0.1%, but it does not require the company to fix the error before releasing its financial statements. This is an application of materiality completeness. verifiability. neutrality.

materiality

The FASB is expected to serve a diverse constituency including -auditors, users of financial statements, and the public interest but not preparers. -preparers, auditors, users of financial statements, and the public interest. -preparers, users of financial statements, and the public interest but not auditors. -preparers, auditors, and the public interest but not users of financial statements.

preparers, auditors, users of financial statements, and the public interest.

The two primary characteristics of useful financial information are verifiability and understandability. relevance and faithful representation. comparability and neutrality. predictive value and completeness.

relevance and faithful representation.

The ASC structure includes all of the following categories except topics. subtopics. subsections. paragraphs. subtitles.

subtitles

Which of the following regulatory bodies currently has the primary responsibility for determining U.S. accounting standards? -Financial Accounting Standards Board (FASB) -International Accounting Standards Board (IASB) -American Institute of Certified Public Accountants (AICPA) -Securities and Exchange Commission (SEC)

FASB

True or false: The SEC, the FASB, and auditors completely eliminate the inherent flexibility in GAAP.

False

True or false: The United States requires annual uniform disclosures about climate change.

False

Provide information and advice to investors and creditors.

Financial advisors

Examine financial statements prepared by a company for accuracy.

Independent auditors

Which of the following are true of financial information disclosure? Multiple select question. -Companies frequently communicate more financial information than is required. -The SEC and FASB regulate financial reporting in the United States. -Companies frequently communicate less financial information than is required. -Financial reporting is only regulated in the United States.

-Companies frequently communicate more financial information than is required. -The SEC and FASB regulate financial reporting in the United States.

Which of the following is true of disclosure benefits? Multiple select question. -Firms cannot obtain economic benefits of disclosure at zero cost. -It is advantageous for a company to be perceived as offering a lemon. -An economic benefit of proper disclosure is the ability to raise capital at a lower cost. -Competition creates incentives for companies to reveal good news about the firm.

-Firms cannot obtain economic benefits of disclosure at zero cost. -An economic benefit of proper disclosure is the ability to raise capital at a lower cost. -Competition creates incentives for companies to reveal good news about the firm.

Which of the following are true of generally accepted accounting principles (GAAP)? (Check all that apply.) -Generally accepted accounting principles continue to develop and evolve in response to changing business conditions. -The goal of GAAP is to ensure that a company's financial statements clearly represent its economic condition and performance. -GAAP is a network of conventions, rules, and procedures that govern financial reporting. -The goal of GAAP is to guarantee that financial statements are always free of errors and fraud.

-Generally accepted accounting principles continue to develop and evolve in response to changing business conditions. -The goal of GAAP is to ensure that a company's financial statements clearly represent its economic condition and performance. -GAAP is a network of conventions, rules, and procedures that govern financial reporting.

Which of the following is a reason that lenders demand financial statement information? -To determine the security needed for a business loan. -To establish tax policies to enhance social welfare. -To monitor the health of company-sponsored pension plans. -To monitor adherence to covenants.

-To determine the security needed for a business loan. -To monitor adherence to covenants.

Which of the following are functions of public and private sector regulatory agencies? Multiple select question. -To enforce financial reporting requirements. -To aid companies in the preparation of voluntary disclosures. -To establish financial reporting requirements. -To perform cost/benefit analysis to determine the amount of disclosure required for individual companies.

-To enforce financial reporting requirements. -To establish financial reporting requirements.

Employees demand financial statement information for which of the following reasons? (Check all that apply.) -To know about union contracts -To monitor the health of company-sponsored pension plans -To determine the collateral needed for a business loan -To assess the company's potential future solvency

-To know about union contracts -To monitor the health of company-sponsored pension plans -To assess the company's potential future solvency

Customers use financial statement information to -decide whether to purchase a supplier's goods and services. -monitor a supplier's financial health. -determine the seller's ability to provide replacement parts and technical support after the sale. -know about union contracts that may link negotiated wage increases to company performance.

-decide whether to purchase a supplier's goods and services. -monitor a supplier's financial health. -determine the seller's ability to provide replacement parts and technical support after the sale.

Shareholders and investors use financial statement information: (Check all that apply.) -to determine the loan amount, interest rate, and collateral needed for a business loan. Reason: This is a use of lenders. -to help decide on a portfolio that meets their preferences. -when evaluating the performance of the company's top executives. -to assess risk, dividend yield, and other firm attributes.

-to help decide on a portfolio that meets their preferences. -when evaluating the performance of the company's top executives. -to assess risk, dividend yield, and other firm attributes.

Government and regulatory agencies demand financial statement information Multiple select question. -to resolve contractual disputes. -to regulate businesses. -to monitor compliance with securities laws. -to measure management bonus compensation.

-to resolve contractual disputes. -to regulate businesses. -to monitor compliance with securities laws.

Which of the following professionals use financial statements to project future cash flows? -Equity investors and creditors, but not auditors. -Equity investors, creditors, and auditors. -Equity investors and auditors, but not creditors. -Creditors and auditors, but not equity investors.

Equity investors, creditors and auditors

For what reason did many firms in countries that did not require it, feel compelled to provide financial statements prepared using U.S. GAAP or IFRS? -In order to hide losses from domestic investors. -In order to reduce the company's overall interest liability. -In order to reduce the tax liability in their home country. -In order to be more understandable to foreign investors.

In order to be more understandable to foreign investors.

Which of the following is a reason managers demand financial statement data? -To determine the interest rate charged on a business loan. -To monitor compliance with securities laws and ensure investors have a level playing field. -To establish tax policies designed to enhance social welfare. -To execute contracts that are linked to financial statement variables.

To execute contracts that are linked to financial statement variables.

Which of the following is a financial statement use of customers? -To monitor financial health and make purchasing decisions. -To monitor compliance with securities laws. -To determine the interest rate for a business loan. -To establish tax policies for social welfare.

To monitor financial health and make purchasing decisions.

True or false: The SEC can override FASB determinations and positions.

True

A manager could make a firm look less risky by -decreasing its revenue. -increasing the variability of its income. -increasing its expenses. -decreasing the amount of debt on its balance sheet.

decreasing the amount of debt on its balance sheet.

A manager could increase his or her accounting income-based bonus by -decreasing the amount of debt on its balance sheet. -delaying discretionary expenses. -delaying shipments of its products. -disclosing additional contingent liabilities.

delaying discretionary expenses.

The term "professional analyst" refers to -equity investors and creditors, but not auditors. -equity investors, creditors, and auditors. -equity investors and auditors, but not creditors. -creditors and auditors, but not equity investors.

equity investors, creditors, and auditors.

Financial statement information is demanded by ______ for regulatory intervention. customers suppliers and lenders employees government agencies

government agencies

When preparing financial statements, company management -reports the precise fair values of all assets and liabilities. -measures reported items with equal precision. -has discretion in how it applies accounting methods. -often commits fraud.

has discretion in how it applies accounting methods.

Fundamental analysis attempts to -determine whether a company can meet its pension promises. -ascertain whether a company can meet its warranty obligations. -identify which companies can pay their bills on time. -identify mispriced stocks.

identify mispriced stocks.

A company may be reluctant to disclose information because -it could lead to less government regulation. -it could increase the probability of winning a lawsuit. -it is cheap to produce. -it could be used by competitors.

it could be used by competitors.

The three components of relevance are -predictive value, completeness, and verifiability. -predictive value, confirmatory value, and materiality. -confirmatory value, free from material error, and understandability. -materiality, neutrality, and timeliness.

predictive value, confirmatory value, and materiality.

Reservations regarding a requirement for U.S. companies to use IFRS include -the U.S. legal environment could easily adapt to IFRS. -enforcement of standards is similar across jurisdictions. -the U.S. does not have enough influence over the IASB. -the transition to IFRS would be inexpensive.

the U.S. does not have enough influence over the IASB.

Currently, accounting authoritative literature is contained in -the accounting standards codification, which is arranged by topic. -the original pronouncements, which is arranged by topic. -the accounting standards codification, which is arranged by date of passage. -the original pronouncements, which is arranged by date of passage.

the accounting standards codification, which is arranged by topic.