ACCT Theory FINAL Prep

Which of the following findings would support the naive-investor hypothesis? a. A finding that security prices respond to income levels that differ solely because of alternative accounting methods with no cash flow consequences. b. A finding that security prices do not respond to artificial book-income differences. c. A finding that security prices do not respond to the adoption of LIFO for accounting for inventories and cost of goods sold. d. A finding that security prices do not respond to a change in reported accounting earnings from the prior year.

ANSWER: A A finding that security prices respond to income levels that differ solely because of alternative accounting methods with no cash flow consequences.

The accounting standard-setting process begins with which of the following steps? a. A problem is identified. b. A task force is formed. c. Public hearings are held. d. An exposure draft is issued.

ANSWER: A A problem is identified.

Circumstantial variables are environmental conditions that possess which of the following qualities? a. Excessive measurement costs b. A high degree of verifiability relative to other accounting methods c. Both a and b d. None of the above

ANSWER: A Excessive measurement costs

Which of the following is not a possible cause of post-earnings-announcement drift? a. Financial analysts over-react to fundamental signals stemming from securities. b. Shareholders do not distinguish well between the cash flow portions and the accrual portions of earnings. c. Financial analysts' forecast errors lead to incomplete security price adjustments. d. Transaction costs are too high relative to the potential gain that can be earned from the mispricing of the securities.

ANSWER: A Financial analysts over-react to fundamental signals stemming from securities.

Which of the following is a true statement? a. Finite uniformity should be more representationally faithful than rigid uniformity. b. Finite uniformity should be more verifiable than rigid uniformity. c. Rigid uniformity is more relevant than finite uniformity. d. Rigid uniformity can be obtained only at a greater cost that finite uniformity.

ANSWER: A Finite uniformity should be more representationally faithful than rigid uniformity.

Which of the following bodies was created to deal with municipal accounting issues? a. GASB b. FASB c. FAF d. EITF

ANSWER: A GASB

SFAC designated which of the following as the term to indicate the comprehensive or total change in net assets occurring during the period as a result of operations? a. Income b. Earnings c. Revenue d. Profits

ANSWER: A Income

Which of the following is not true regarding the discussion memorandum that preceded the conceptual framework? a. It represented the end product of the FASB's deliberations related to the conceptual framework project. b. The most important new issue brought up in the document was capital maintenance. c. It brought up three views of financial accounting and financial statements. d. It presented various definitions for basic accounting terms.

ANSWER: A It represented the end product of the FASB's deliberations related to the conceptual framework project.

Which of the following is not true regarding earnings and dividends? a. Managers adjust dividends primarily to reflect the change in current earnings. b. Stock price may be modeled as the present value of future expected dividends. c. Investors regard cash dividends as credible signals of future performance. d. Current income has a value in predicting future dividends.

ANSWER: A Managers adjust dividends primarily to reflect the change in current earnings.

Which of the following is a true statement? a. Predictive value refers to usefulness of inputs for predictions rather than being an actual prediction itself. b. Timeliness complements rather than conflicts with the other aspects of relevance because information is more complete and accurate if it is timely. c. The conceptual framework stressed predictive value rather than the importance of decision-making by outside users. d. Timeliness and predictive value are the two main aspects of relevance.

ANSWER: A Predictive value refers to usefulness of inputs for predictions rather than being an actual prediction itself.

Which statement in the conceptual framework is concerned with the objectives of business financial reporting? Note that SFAC 8 replaces this SFAC. a. SFAC No. 1 b. SFAC No. 2 c. SFAC No. 3 d. SFAC No. 5

ANSWER: A SFAC No. 1

Which of the following is not true regarding capital market research? a. Studies have found a low correlation between the variability of accounting earnings and beta. b. Studies have found a strong association between accounting-based ratios and the market measure of risk. c. Studies have found that supplemental segment (line of business) disclosures resulted in a revision of systematic risk, indicating that such information is useful for risk assessments. d. At least one study has found that pension information is not useful for risk assessments.

ANSWER: A Studies have found a low correlation between the variability of accounting earnings and beta.

In which of the following ways did the charge to the Financial Accounting Standards Board (FASB) differ from that given to the Accounting Principles Board (APB)? a. The FASB was to establish standards of financial accounting and reporting in the most efficient and complete manner possible. b. The FASB was to work toward standard setting with a two-pronged approach. c. The FASB was expected to stipulate principles of accounting as an underlying framework. d. The accounting standards established by the FASB were to be advisory rather than mandatory.

ANSWER: A The FASB was to establish standards of financial accounting and reporting in the most efficient and complete manner possible.

In 1918, the American Institute of Accountants (AIA) worked with which of the following organizations to publish minimum standards for conducting a balance sheet audit? a. The Federal Trade Commission (FTC) b. The Securities and Exchange Commission (SEC) c. The American Society of Certified Public Accountants d. The New York Stock Exchange (NYSE)

ANSWER: A The Federal Trade Commission (FTC)

Which of the following is NOT true regarding the PCAOB? a. The PCAOB is a governmental sector regulatory body. b. The PCAOB is overseen by the SEC. c. The PCAOB was established by the Sarbanes-Oxley Act. d. The PCAOB has authority to set auditing standards.

ANSWER: A The PCAOB is a governmental sector regulatory body.

The objectives of business financial reporting detailed in the conceptual framework proceeded directly from which of the following documents? a. The Trueblood Report b. SATTA c. APB Statement 4 d. ASOBAT

ANSWER: A The Trueblood Report

Which of the following is a finding of previous capital market research studies? a. The market is not fooled by arbitrary accounting numbers. b. The direction of change in reported accounting earning is inversely correlated with security price movements. c. The market is affected by alternative accounting income numbers that do not affect cash flow, such as those related to a change from deferral to recognition of unrealized holding gains on marketable securities. d. Security prices are affected by a change from the deferral to flow-through method of accounting for the investment credit.

ANSWER: A The market is not fooled by arbitrary accounting numbers.

Which of the following is not a finding or conclusion of the research study by Ou and Penman that used traditional accounting measures to predict whether a company's income would increase or decrease? a. The researchers were unable to describe the following year earnings changes correctly in most cases. b. Markets are not as efficient as efficient-market advocates would like to believe. c. Better accounting standards might improve the predictive ability of accounting information. d. Fundamental analysis is still important for investment purposes.

ANSWER: A The researchers were unable to describe the following year earnings changes correctly in most cases.

Which of the following events resulted in shareholders' beginning to question whether accounting and reporting practices were adequate to assess investments? a. The stock market crash of 1929 b. The federal government's lump-sum payments for the retirement of Liberty Bonds c. The creation of the SEC in 1934 d. None of the above

ANSWER: A The stock market crash of 1929

Which of the following characteristics does not apply to accounting practices and procedures in the United States prior to 1930? a. They were applied uniformly among companies. b. They were considered confidential by the companies applying them. c. They met the needs of creditors to a greater extent than they met the needs of shareholders. d. They emphasized the disclosure of cash and near-cash resources.

ANSWER: A They were applied uniformly among companies.

The three forms of the efficient markets hypothesis are: a. Weak, semistrong, strong. b. Slow, quick, instantaneous. c. Past, current, future. d. Private, semipublic, public.

ANSWER: A Weak, semistrong, strong.

The term "present magnitudes" refers to: a. conditions known at the time of an event. b. conditions known only at a later date. c. events that will significantly affect the financial statements. d. none of the above.

ANSWER: A conditions known at the time of an event.

The research approach that examines the association between accounting data reported in annual financial statements and the levels of stock prices is called: a. cross-sectional valuation. b. investor survey analysis. c. accounting information usefulness research. d. time series analysis.

ANSWER: A cross-sectional valuation.

The liability concept that restricts liability to each defendant's share of the damages based upon the judge or jury's assessment of their share of the damages is called: a. proportionate liability. b. compensatory liability. c. joint and several liability. d. disproportionate liability.

ANSWER: A proportionate liability.

The degree of consensus among measurers is referred to in the conceptual framework as: a. reliability. b. relevance. c. representational faithfulness. d. understandability.

ANSWER: A reliability.

Which of the following represented the first formal attempt to develop "generally accepted accounting principles"? a. "Approved Methods for the Preparation of Balance Sheet Statements" in 1918 b. "Five broad accounting principles" in 1932 c. Accounting Research Bulletin (ARB) 43 d. The FASB's conceptual framework project

ANSWER: B "Five broad accounting principles" in 1932

Which of the following statements is true regarding post-earnings-announcement drift? a. Security prices do not react significantly at the time of earnings announcements. b. At least part of the blame for this effect has been laid at the feet of financial analysts. c. This effect is more important for larger firms than for smaller firms. d. Security prices never fully reflect the effects of earnings announcements.

ANSWER: B At least part of the blame for this effect has been laid at the feet of financial analysts.

Which of the following is not listed by Fields, Lys, and Vincent as a possible reason underlying management choice? a. Minimizing agency cost b. Comparability c. Signaling d. Influencing outside parties

ANSWER: B Comparability

Which of the following is not part of the conceptual framework? a. Conservatism b. Economic consequences c. Consistency d. None of the above are in the conceptual framework

ANSWER: B Economic consequences

Which one of the following statements is not part of the incomplete revelation hypothesis (IRH)? a. Some accounting numbers or relationships may not be fully revealed in security prices. b. Footnote disclosure is all that is needed for information to fully impact security prices. c. Some individuals' trading habits do not respond in a rational way to new information. d. Some individuals respond to information is such a way as to impede the market from acting in a fully efficient manner.

ANSWER: B Footnote disclosure is all that is needed for information to fully impact security prices.

Under which of the following circumstances should rigid uniformity be used? a. If the event is a not a simple event. b. If the event is a complex event in which finite uniformity cannot be instituted in a cost-effective manner. c. Both a and b. d. None of the above

ANSWER: B If the event is a complex event in which finite uniformity cannot be instituted in a cost-effective manner.

Which of the following is true regarding the Committee on Accounting Procedures (CAP)? a. It developed a comprehensive statement of accounting principles. b. It adopted a policy of attacking specific problems and recommending preferred methods of accounting when possible. c. It was formed by the SEC in 1936. d. It eliminated the use of alternative accounting practices by establishing an underlying accounting theory.

ANSWER: B It adopted a policy of attacking specific problems and recommending preferred methods of accounting when possible.

Which of the following is true regarding the term residual income? a. Residual income is the income over and above the amount needed to cover current expenses. b. Residual income is the income in excess of a charge for the capital that is employed to generate that income. c. Residual income is equal to economic income. d. Residual income is called abnormal earnings when applied to the enterprise's operating income and invested capital.

ANSWER: B Residual income is the income in excess of a charge for the capital that is employed to generate that income.

Which statement in the conceptual framework deals with qualitative characteristics of accounting information? Note that SFAC No. 8 replaces this older SFAC. a. SFAC No. 1 b. SFAC No. 2 c. SFAC No. 3 d. SFAC No. 5

ANSWER: B SFAC No. 2

Which of the following is a true statement? a. SFAC No. 5 makes clear that the concepts discussed in the conceptual framework apply to other means of disclosure in addition to financial statements. b. SFAC No. 5 appears to deny one of the main tenets of the efficient markets hypothesis, that disclosure outside of the body of financial statements is as effective as disclosure within statements themselves. c. SFAC No. 5 made a clear attempt to resolve the issues of recognition and measurement. d. SFAC No. 5 was successful because it addressed measurement prior to discussing recognition.

ANSWER: B SFAC No. 5 appears to deny one of the main tenets of the efficient markets hypothesis, that disclosure outside of the body of financial statements is as effective as disclosure within statements themselves.

Which of the following is NOT true regarding the passage of the Sarbanes-Oxley (SOX) Act? a. SOX more clearly defined auditor independence. b. SOX was intended to erode public confidence in the accounting profession due to recent scandals. c. SOX replaced peer review with inspection by the PCAOB. d. SOX implementation became the immediate focus of public companies and CPA firms.

ANSWER: B SOX was intended to erode public confidence in the accounting profession due to recent scandals.

Post-SOX, the accounting auditing standards setting function has been relegated to: a. The FASB alone. b. The FASB and the PCAOB. c. The AICPA. d. The IASB.

ANSWER: B The FASB and the PCAOB.

In 1930, the AICPA began working with which of the following organizations to prepare "five broad accounting principles," one of the most important documents in the development of accounting rule making? a. The SEC b. The NYSE c. The AAA d. The FTC

ANSWER: B The NYSE

Which of the following applies to the clean surplus theory? a. It is a theory that is applied to security valuation, but is not very attuned to accounting concepts and numbers. b. The theory values a firm's equity based on the beginning of the period book value plus the present value of expected future abnormal earnings. c. The theory considers a firm's abnormal earnings amount to be equal to its beginning of the period book value multiplied by the cost of equity capital. d. This theory does not tie in well with the FASB's concept of comprehensive income.

ANSWER: B The theory values a firm's equity based on the beginning of the period book value plus the present value of expected future abnormal earnings.

Which of the following statements does not apply to the market model? a. It is a simpler approach than the standard version of the capital asset pricing model. b. This approach is seldom used in accounting research. c. In this model, the risk-free return is dropped from the equation. d. Abnormal returns are captured in the error term of the model.

ANSWER: B This approach is seldom used in accounting research.

The treatment of loss contingencies required in SFAS No. 5 is an example of: a. elastic uniformity. b. conservatism. c. flexible uniformity. d. rigid uniformity.

ANSWER: B conservatism.

The determination of whether a lease is a capital or operating lease is an example of: a. elastic uniformity. b. finite uniformity. c. flexible uniformity. d. rigid uniformity.

ANSWER: B finite uniformity.

The quality of being capable of "making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations" is referred to in the conceptual framework as: a. reliability. b. relevance. c. representational faithfulness. d. understandability.

ANSWER: B relevance.

Prescribing one method for generally similar transactions even though relevant circumstances may be present is referred to as: a. finite uniformity. b. rigid uniformity. c. inflexible uniformity. d. measurable uniformity.

ANSWER: B rigid uniformity.

The Committee on Accounting Procedures (CAP) was immediately succeeded by: a. the Financial Accounting Standards Board (FASB). b. the Accounting Principles Board (APB). c. the Accounting Research Board (ARB). d. the Financial Accounting Foundation (FAF).

ANSWER: B the Accounting Principles Board (APB).

Pre-SFAC No. 8, the three components of reliability are: a. predictive value, feedback value, timeliness. b. verifiability, neutrality, representational faithfulness. c. verifiability, predictive value, feedback value. d. relevance, comparability, materiality.

ANSWER: B verifiability, neutrality, representational faithfulness.

Where rigid uniformity is in effect, the underlying reasons may be attributable to all but which one of the following factors? a. A desire for conservatism b. An inability of the standard-setting organization to determine meaningful relevant circumstances c. An attempt to increase representational faithfulness of the measurement d. Recognition of the fact that an allocation is involved

ANSWER: C An attempt to increase representational faithfulness of the measurement

Which component of the conceptual framework is perhaps the most difficult to apply in practice? a. Confirmatory value b. Understandability c. Benefits greater than costs d. Faithful representation

ANSWER: C Benefits greater than costs

Which of the following is not a true statement? a. Comparability refers to accounting for similar transactions similarly and different circumstances differently. b. Comparability refers to comparing alternatives in order to make a decision. c. Comparability is an inherent quality of accounting numbers in the same sense that relevance and reliability are. d. Uniformity influences comparability.

ANSWER: C Comparability is an inherent quality of accounting numbers in the same sense that relevance and reliability are.

Which of the following are possible sources of abnormal earnings? a. Recognizing the positive excess present value above the cost of a project on the balance sheet b. The use of current values in reporting marketable securities c. Conservative matching and recognition procedures under historical costing d. All of the above

ANSWER: C Conservative matching and recognition procedures under historical costing

Under which of the following circumstances should finite uniformity be used? a. If the event is a simple event. b. If the event is a complex event in which relevant circumstances cannot be measured and implemented in a cost-effective manner. c. If the event is a complex event in which relevant circumstances can be measured and implemented in a cost-effective manner. d. Both a and b.

ANSWER: C If the event is a complex event in which relevant circumstances can be measured and implemented in a cost-effective manner.

Which of the following is a value judgment found in SFAC No. 1? a. Accounting reports should become the only relevant source of information about enterprises. b. Cash basis accounting is extremely useful in assessing and predicting earning power and cash flows of an enterprise. c. Information is not costless to provide, so benefits of usage should exceed costs of production. d. Users of accounting information have limited ability regarding financial information and reporting.

ANSWER: C Information is not costless to provide, so benefits of usage should exceed costs of production.

Which of the following is not true regarding Accounting Series Release No. 4? a. It stated that financial statements filed with the SEC and prepared in accordance with accounting principles for which there is no substantial authoritative support would be presumed to be misleading. b. It implied that the SEC might in the future determine acceptable accounting practices and mandate methods to be used in reports filed with it. c. It established an authoritative body for the development of accounting standards. d. It indicated that the SEC was growing impatient with the accounting profession.

ANSWER: C It established an authoritative body for the development of accounting standards.

Which of the following is not true regarding the FASB's conceptual framework? a. It is supposed to embody a system of interrelated objectives. b. It is an attempt to provide a metatheoretical structure for financial accounting. c. It establishes generally accepted accounting principles. d. It includes seven statements of financial accounting concepts.

ANSWER: C It establishes generally accepted accounting principles.

Which of the following statements does not apply to portfolio theory? a. It is the foundation for the capital asset pricing model. b. It is the foundation for capital market or security price research. c. It holds that risk can be eliminated by holding a portfolio of investments. d. It is a theory of rational investment choice and utility maximization.

ANSWER: C It holds that risk can be eliminated by holding a portfolio of investments.

Which of the following is true regarding the Emerging Issues Task Force (EITF)? a. It has formal authority to establish GAAP. b. Members of this group consist of CEOs of six major corporations and the chief accountant of the SEC. c. It is concerned with highly technical issues, such as financial instruments, which may affect firms in virtually every industry. d. All of the above

ANSWER: C It is concerned with highly technical issues, such as financial instruments, which may affect firms in virtually every industry.

Which of the following is a pervasive constraint under the "original" qualitative characteristics of accounting, pre-SFAC No. 8? It is an entity-specific constraint post SFAC No. 8. a. Decision usefulness b. Understandability c. Materiality d. Neutrality

ANSWER: C Materiality

Flexibility applies to which of the following situations? a. Situations in which there are relevant circumstances and more than one possible accounting method exists. b. Situations in which there are relevant circumstances but only one possible accounting method exists. c. Situations in which there are no observable relevant circumstances and more than one possible accounting method exists. d. All of the above.

ANSWER: C Situations in which there are no observable relevant circumstances and more than one possible accounting method exists.

Which of the following is a true statement? a. The eight SFACs that comprise the conceptual framework were not evolutionary because they were derived from previous documents such as the Trueblood Report and ASOBAT. b. The definitions of SFAC No. 6 were basically a restatement of the definitions of APB Statement 4. c. The Achilles' heel of the document is SFAC No. 5, which reaffirmed historical cost as the basic measurement system. d. The key document in the series of SFACs that comprise the conceptual framework is SFAC No. 1.

ANSWER: C The Achilles' heel of the document is SFAC No. 5, which reaffirmed historical cost as the basic measurement system.

Which of the following is a true statement? a. The SEC initially required the accounting profession to consult with it before setting any specific accounting principles. b. The SEC was created by Congress to oversee the accounting profession. c. The SEC was given authority to prescribe the form and content of financial information filed with the SEC. d. The SEC formed the Committee on Accounting Procedure to develop a comprehensive set of accounting principles.

ANSWER: C The SEC was given authority to prescribe the form and content of financial information filed with the SEC.

Which of the following is a possible reason why security prices were found to respond to changes from pooling to purchase accounting for combinations? a. A change from pooling to purchase accounting does not affect cash flow. b. Differences between purchase and pooling accounting affect only book income. c. The change could have affected dividend distribution because of debt covenants. d. Income would normally be higher under purchase accounting than pooling.

ANSWER: C The change could have affected dividend distribution because of debt covenants.

In security-price research, which of the following is an indirect consequence of an accounting policy change? a. The value of the firm is affected through an effect on cash flow. b. The value of the firm is affected through an effect on net income. c. The value of the firm is affected through an effect on owners. d. The value of the firm is not affected.

ANSWER: C The value of the firm is affected through an effect on owners.

Which of the following statements is not supported by empirical evidence from capital market research? a. Accounting earnings appear to have information content and to affect security prices. b. Alternative accounting policies with no apparent direct or indirect cash flow consequences to the firm do not seem to affect security prices. c. There are no incentives to choose certain alternative accounting policies over others because there are never cash consequences. d. Accounting-based risk measures correlate with market risk measures, suggesting that accounting numbers are useful for risk assessment.

ANSWER: C There are no incentives to choose certain alternative accounting policies over others because there are never cash consequences.

Which of the following are true regarding the Financial Accounting Standards Board (FASB)? a. The FASB includes ten members, each serving a term of three years. b. Each member of the FASB must be a Certified Public Accountant. c. There must be no conflict between the FASB members' private interest and the public interest. d. All of the above are true.

ANSWER: C There must be no conflict between the FASB members' private interest and the public interest.

Major complaints aimed at the FASB's standard setting process include: a. the cost of preparing standards is too high. b. some standards are very difficult to understand. c. both a and b d. none of the above

ANSWER: C both a and b

Criticism of the standard-setting process under the APB included: a. exposure for tentative opinions was too limited and occurred too late in the process. b. the standard-setting process was too long and subject to too many outside pressures. c. both a and b. d. none of the above.

ANSWER: C both a and b.

Excess income over and above the expected amount of after-tax operating income is called: a. extraordinary profit. b. remaining profit. c. economic profit. d. monetary profit.

ANSWER: C economic profit.

The idea that a measurement should correspond with the phenomenon it is attempting to measure is referred to in the conceptual framework as: a. reliability. b. relevance. c. faithful representation. d. understandability.

ANSWER: C faithful representation.

Accounting for inventory and cost of goods sold and for depreciation is an example of: a. elastic uniformity. b. finite uniformity. c. flexibility. d. rigid uniformity.

ANSWER: C flexibility.

The liability concept that can result in one party having to pay for more than its proportionate share of damages is called: a. proportionate liability. b. compensatory liability. c. joint and several liability. d. punitive liability.

ANSWER: C joint and several liability.

Which of the following is a true statement? a. Transactions are events that may be either external or internal to an enterprise. b. Events that are internal to the firm do not require entries in the firm's accounts. c. Transactions are economic or financial events that may or may not be recorded in the firm's accounts. d. "Simple events" do not have any significant economic variables that lead to essentially different recording.

ANSWER: D "Simple events" do not have any significant economic variables that lead to essentially different recording.

The qualitative characteristics of accounting information detailed in the conceptual framework proceeded directly from which of the following documents? a. The Trueblood Report b. SATTA c. APB Statement 4 d. ASOBAT

ANSWER: D ASOBAT

In which of the following ways has the Financial Executives Institute (FEI) become involved in the accounting standard-setting process? a. By funding research projects in accounting and related areas b. By reviewing FASB discussion memorandums and exposure drafts and communicating an official position to FASB. c. By participating in FASB public hearings d. All of the above

ANSWER: D All of the above

The establishment of which of the following groups has resulted in a challenge to the FASB's standard-setting powers? a. The Governmental Accounting Standards Board (GASB) b. The Emerging Issues Task Force (EITF) c. The Accounting Standards Executive Committee (AcSEC) d. All of the above

ANSWER: D All of the above

What was the purpose of APB Statement 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises? a. To provide a foundation for evaluating existing accounting practices b. To assist in solving accounting problems and to guide the future development of financial accounting c. To enhance understanding of the purposes of financial accounting d. All of the above

ANSWER: D All of the above

Which of the following factors led to significant changes in accounting practices? a. The Great Depression of 1929 b. The election of Franklin D. Roosevelt to the presidency in 1932 c. The enactment of the New Deal legislation d. All of the above

ANSWER: D All of the above

Which of the following professional associations has an interest in the accounting standard-setting process? a. The AICPA b. The Financial Executives Institute (FEI) c. The American Accounting Association (AAA) d. All of the above

ANSWER: D All of the above

Which of the following was a controversial issue faced by the Accounting Principles Board (APB)? a. The investment tax credit b. Income tax allocation c. Business combinations and goodwill d. All of the above

ANSWER: D All of the above

Which of the following was an accomplishment of the American Association of Public Accountants? a. The passage of a law in 1896 that created the professional designation of "Certified Public Accountant" b. The founding of The Journal of Accountancy in 1905 c. The development of a list of terms and definitions in 1915 d. All of the above

ANSWER: D All of the above

Which of the following would give rise to abnormal earnings? a. Accelerated depreciation b. LIFO costing for inventories and cost of goods sold c. Immediate write-off of research and development d. All of the above

ANSWER: D All of the above

Which of the following is a true statement regarding feedback value? a. It concerns confirming or correcting decision-makers' earlier expectations. b. It refers to assessing where the firm presently stands. c. It is closely related to accountability. d. All of the above.

ANSWER: D All of the above.

Which of the following concepts was referred to as a convention in SFAC No. 2? a. Consistency b. Materiality c. Comparability d. Conservatism

ANSWER: D Conservatism

Which state passed the law that first created the designation "Certified Public Accountant"? a. Massachusetts b. California c. Ohio d. New York e. Iowa

ANSWER: D Iowa

Which of the following statements applies to the capital asset pricing model? a. It assumes that individual securities are priced solely on unsystematic risk. b. It uses beta to represent unsystematic risk of individual securities. c. It assumes that if the rate of return on an individual security is greater than the market average, systematic risk of the security must be smaller. d. It assumes that if beta equals 1, the systematic risk of an individual security is equal to the average risk of the market as a whole.

ANSWER: D It assumes that if beta equals 1, the systematic risk of an individual security is equal to the average risk of the market as a whole.

Which of the following are characteristics of the FASB? a. It is part of the AICPA. b. Members are part-time employees of the FASB. c. A member must be a CPA. d. It makes more extensive use of research than its predecessors.

ANSWER: D It makes more extensive use of research than its predecessors.

Which qualitative characteristic pertains wholly to the attitude of board members as opposed to being more directly concerned with specific aspects of information contained in the financial statements? a. Representational faithfulness b. Verifiability c. Consistency d. Neutrality

ANSWER: D Neutrality

Which of the following ranks below annual reports on surveys that ask investors to weigh the importance of different types of investment information? a. Information from company reports b. Information about general economic conditions c. Company announcements on products and markets d. None of the above rank below annual reports

ANSWER: D None of the above rank below annual reports

Under SFAC No. 8, which of the following are aspects of relevance? a. Comparability and understandability b. Timeliness and comparability c. Representational faithfulness and decision usefulness d. Predictive value and confirmatory value

ANSWER: D Predictive value and confirmatory value

Which of the following terms represents the two general types of relevant circumstances? a. Present circumstances and future contingencies b. Present conditions and future contingencies c. Present magnitudes and future conditions d. Present magnitudes and future contingencies

ANSWER: D Present magnitudes and future contingencies

Which of the following would be an argument in favor of using residual income models in performance measurement? a. All forms of residual income are consistent with discounted net cash flows for any method of depreciation. b. Residual income focuses on historical performance. c. The determination of residual income is dependent on an accurate estimate of the cost of capital. d. Residual income recognizes that all capital, debt as well as equity, has a cost.

ANSWER: D Residual income recognizes that all capital, debt as well as equity, has a cost.

Which of the following is not a true statement? a. SFAC No. 3 defines 10 elements of financial statements. b. SFAC No. 3 is a resolution of the definitions presented in the discussion memorandum for the conceptual framework project. c. SFAC No. 3 was amended by SFAC No. 6. d. SFAC No. 3 discusses in detail the three views of financial accounting mentioned in the discussion memorandum.

ANSWER: D SFAC No. 3 discusses in detail the three views of financial accounting mentioned in the discussion memorandum.

Which of the following is not true regarding SFAC No. 7? a. SFAC No. 7 requires that estimated future cash flows be used for asset measurement in certain circumstances. b. SFAC No. 7 concerns specific measurement issues rather than conceptual-type issues. c. SFAC No. 7 applies only to initial recognition and not subsequent revaluations. d. SFAC No. 7 is divided into two parts: asset measurement and income measurement.

ANSWER: D SFAC No. 7 is divided into two parts: asset measurement and income measurement.

Which of the following statements does not apply to the study by Lev that examined earnings numbers and stock returns? a. According to Lev, over time, the correlation between earnings numbers and stock returns has been low. b. Lev believed that earnings have very little explanatory power relative to changes in stock prices. c. Lev believed that one of the primary reasons for the level of correlation between earning and stock returns lies with the low quality of reported income numbers. d. The study's results contradicted those of the Ou and Penman study.

ANSWER: D The study's results contradicted those of the Ou and Penman study.

Early advocates of security-price research now recognize there are limitations to this research for use in choosing the best accounting policies and evaluating the economic consequences of alternative accounting policies on security prices. Which of the following is not a reason for these limitations? a. The public-good nature of accounting information b. The existence of free riders c. The resultant market failure in terms of optimal resource allocation d. The use of historical costing distorts financial statement amounts

ANSWER: D The use of historical costing distorts financial statement amounts

Which of the following is not a true statement? a. There is empirical evidence that future cash flows are better forecasted with accrual data than with cash flow data. b. Accrual accounting numbers incorporate the attribute that determines firm valuation-net cash flow data. c. Changes in reported accounting earnings affect firm valuation through changes in stock prices. d. The value to investors of the information in financial reporting lies in its role as an historical record.

ANSWER: D The value to investors of the information in financial reporting lies in its role as an historical record.

Which of the following is not true of accounting allocations? a. Examples include depreciation and cost of good sold. b. They are arbitrary. c. No method can be proved superior to another method. d. They are not useful in providing financial information.

ANSWER: D They are not useful in providing financial information.

Which of the following is an assumption of fundamental analysis? a. Securities markets are efficient. b. Prices of securities rapidly reflect all publicly available information. c. The strong form of the efficient-markets hypothesis is true. d. Under-priced shares can be found in the securities market by means of financial statement analysis.

ANSWER: D Under-priced shares can be found in the securities market by means of financial statement analysis.

The qualitative characteristics of accounting on which the conceptual framework is centered come under the general heading of: a. relevance. b. materiality. c. representational faithfulness. d. decision usefulness.

ANSWER: D decision usefulness.

The requirement by SFAS No. 2 that research and development costs be immediately expensed is an example of: a. elastic uniformity. b. finite uniformity. c. flexible uniformity. d. rigid uniformity.

ANSWER: D rigid uniformity.

The Private Company Council (PCC): a. sets accounting standards for private companies in the United States. b. sets accounting standards for IASB private companies. c. is funded by the SEC. d. serves an advisory role to the FASB.

ANSWER: D serves an advisory role to the FASB.