Ch 1: Environment and Theoretical Structure of Financial Accounting PART 2
A company purchases a building by signing a $200,000 10% interest-bearing note due at the end of five years. At what amount should the building be recorded?
$200,000
Hernandez Corporation purchases a building for $300,000 cash. The building was appraised at $310,000. The tax assessment on the building was $280,000. Three months after purchasing the building, Company Z offers Hernandez $320,000 for the building. At what amount should the building be reported in Hernandez's financial statements according to the historical cost principle?
$300,000
The conceptual framework includes what types of information?
A system of objectives and fundamentals intended to lead to consistent accounting standards.
What information regarding an entity's future cash flows are investors and lenders interested in?
Amount Timing Uncertainty
Expense recognition is implemented by which of the following ways?
Associating expenses and revenues in a specific period of time. In the period incurred. Systematic and rational allocation. Cause-and-effect relationship.
The FASB recently issued a standard that requires companies recognize revenue
At a point in time or over a period of time For the amount the company expects to be entitled to receive When goods or services are transferred to customers
Matching cost of goods sold with the revenues generated during the period is an example of which approach to expense recognition?
Cause-and-effect relationship
__________ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners
Comprehensive income
Which of the following are among the basic assumptions underlying U.S. GAAP?
Economic entity assumption Going concern assumption Periodicity assumption Monetary unit assumption
To be useful for decision making, information should possess the fundamental decision-specific qualities of
Faithful representation Relevance
Notes to the financial statements are an example of the application of which accounting principle?
Full-disclosure principle
Which of the following are acceptable measurement attributes for certain financial statement items?
Historical Cost Net realizable value Current cost Present (or discounted) value of future cash flows Fair value
A liability has which of the following characteristics?
It is due to a past transaction or event. It is a probable future sacrifice of an economic benefit. It is a present obligation.
What level of the fair value hierarchy includes inputs other than quoted prices that are observable for the asset or liability?
Level 2
Select the four criteria used to determine if an item is recognized in the financial statements according to SFAC 5.
Measurability Definition Reliability Relevance
What concepts are contained in the FASB conceptual framework?
Measurement concepts Underlying concepts of accounting Concepts regarding types of events to be accounted for
What are the costs of providing financial information?
Processing information Disseminating information Gathering information
If there is accounting information not included in the primary financial statements that would benefit users, that information should be disclosed in
Supplemental schedules and tables Notes to the financial statements Parenthetical comments on the face of the statements
What does it mean if information is cost effective?
The benefits of providing financial information exceed the costs of doing so.
Revenue recognition previously was based on the "realization principle." What were the two general criteria required by the realization principle that had to be satisfied before a company could record revenue?
The earnings process is complete or virtually complete. There is reasonable certainty as to collectibility of the asset to be received.
Revenue should be recognized when the seller satisfies its performance obligation(s) to its customers. What is the accounting issue if the revenue recognition rule is not followed?
The income statement would not report the accomplishments of the period. Net income may be overstated or understated for the period.
According to SFAC 5, the four criteria that must be met for an item to be recognized in the basic financial statements are
The item has relevant attributes that are measurable. The information about the item is relevant to decision making. The information about the item is reliable. The item meets the definition of an element
True or false: The conceptual framework does not prescribe GAAP.
True
The conceptual framework does not prescribe which of the following?
U.S. GAAP
The concept of understandability assumes that the users of financial statements should have
a reasonable understanding of business and economic activities.
Accounting information meets the qualitative characteristic of consistency if it is measured and reported the same way
across different reporting periods.
Recognition refers to the process of
admitting information in the basic financial statements
The historical cost of an asset is the
amount of consideration given for the asset at initial acquisition
A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events is a(n)
asset
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as
asset
Recent standard-setting for revenue, investments, and income taxes has followed the ______ approach.
asset/liability
Which approach to accounting measures balance sheet accounts and then recognizes revenues, expenses, gains, and losses by accounting for changes in balance sheet accounts?
asset/liability
Which approach to accounting uses the measurement of balance sheet accounts to drive revenue and expense recognition?
asset/liability
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as ______________.
assets
What element of the financial statements is described by the following definition? "Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions."
assets
Financial assets and liabilities can be reported
at fair value or historical cost
Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ______ operations.
central
Consistent with the realization principle, historically, revenue was recognized if two conditions were satisfied. These were:
collectibility of related assets was reasonably assured the earnings process was virtually complete
If the same accounting principles and methods are used for similar events by two different firms, this enhances what accounting qualitative characteristic?
comparability
The qualitative characteristic of using the same accounting method each period over time refers to the concept of
comparability
Which of the following are enhancing characteristics of financial information?
comparability timeliness
Accounting information is ____________ if similar items are treated the same way among various companies highlighting similarities and differences between events and conditions.
comparable
An enhancing qualitative characteristic of accounting information that allows users to better understand similarities and differences in the financial reports across different companies is called
comparaility
The change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources is called
comprehensive income
What component of financial information helps investors analyze their prior assessments regarding a company's cash flow generating ability?
confirmatory value
The tendency to recognize unfavorable items more quickly than favorable items is referred to as
conservatism
Using the same accounting methods in each period refers to the qualitative characteristic of
consistency
Cost effectiveness is a(n) ______________ on the accounting choices a company makes.
constraint
The _________ approach determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition
cost
Which approach to measuring fair value determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition?
cost approach
The full-disclosure principle requires that financial reports should include any information that could affect the decisions made by external users, within the constraint that the benefits of that information should exceed the of ______________ providing the information
costs
Schoene Company reports its inventory at replacement cost. This is an application of the measurement attribute of
current cost
The cost that would be incurred to purchase or reproduce an asset is referred to as
current cost
The overriding objective in the hierarchy of qualitative characteristics of financial reporting information is
decision usefulness
The primary focus of the qualitative characteristics of accounting information is:
decision usefulness
The process of including additional pertinent information in the financial statements and accompanying notes is referred to as ____________.
disclosure
Decreases in equity of a particular enterprise resulting from transfers to owners are called ____________ to owners.
distributions
Decreases in equity of a particular enterprise resulting from transfers to owners is called
distributions to owners
The requirement that the economic activities of a business owner should be separated from the activities of the business is an example of which accounting assumption?
economic entity
Measurement is the process of associating numerical amounts to the ________ reported in financial statements.
elements
An essential assumption in accounting is that all economic events can be identified specifically with an individual economic
entity
The residual interest in the assets of an entity that remains after deducting its liabilities is referred to as what?
equity
The purpose of the FASB's conceptual framework in accounting is to
establish objectives and fundamental concepts on which to base standards.
For information to be cost effective, the perceived benefit of increased decision usefulness must
exceed the anticipated costs of providing that information.
Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations are referred to as
expenses
A standard setting focus on the asset/liability approach supports measurement of assets and liabilities at:
fair value
The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date is the
fair value
When there is agreement between a measure or description of an item and the phenomenon it purports to represent, the item possesses the fundamental characteristic of
faithful representation
Faithful representation requires information to have which of the following characteristics?
free from material error completeness neutrality
The ___________ ___________ principle requires that any information useful to decision makers be provided in the financial statements, subject to the cost effectiveness constraint.
full disclosure
Assets are probable ______ economic benefits as a result of ______ transactions or events.
future past
Reporting assets at net realizable value helps predict:
future cash flows
An increase in equity from peripheral or incidental transactions of an entity is referred to as a(n)
gain
Increases in equity from peripheral or incidental transactions of an entity are called
gains
Assuming that a business will operate indefinitely is referred to as the _________ _________ assumption
going concern
The assumption that a business entity will continue to operate indefinitely in the future refers to what assumption?
going concern
Under IFRS, the primary purpose of the conceptual framework is to provide
guidance to both standard setters and practitioners
The key difference between the role of the conceptual framework in US GAAP and IFRS is that under IFRS, the conceptual framework ______.
guides standard setting and provides a basis for practitioners to make judgments
Measuring assets and liabilities based on their original transaction value is an example of
historical cost
The principle stating that asset and liability measurements should be based on the amount given or received in the original transaction is referred to as the _______ _______ principle.
historical cost
What accounting principle states that an asset or liability should be recorded at the amount given or received in the exchange transaction?
historical cost
Disclosure refers to the process of
including additional information in the financial statements and notes.
What approach to measuring fair value estimates future amounts of earnings or cash flows and then mathematically converts these amounts to a single present value?
income approach
Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests is a(n) __________ by owners.
investment
Increases in equity of a particular business enterprise resulting from transfers to it from other entities or individuals of something of value to obtain or increase ownership interests in it are called
investments by owners
What level of the fair value hierarchy includes quoted market prices in active markets for identical assets and liabilities?
level 1
What level of the fair value hierarchy includes unobservable inputs that reflect the entity's own assumptions?
level 3
Simply put, __________ are the obligations of a company.
liabilities
Which of the following is a probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events?
liability
The going concern assumption is critical to the measurement of assets because if a business were going to cease operations, its assets would be measured at their
liquidation values
A decrease in equity from peripheral or incidental transactions of an entity is referred to as a(n)
loss
The application of conservatism leads to:
losses being recognized quicker than gains assets tending to be biased downwards
The fair value approach that uses current information from recent transactions or exchanges in active trading on stock exchanges is the __________ approach.
market
Which approach to measuring fair value uses information from actively traded stock on the New York Stock Exchange?
market approach
The revenue/expense approach focuses on the income statement because it relies on which accounting principles?
matching revenue recognition
Predictive value, confirmatory value, and ___________ all relate to the fundamental characteristic of relevance in financial information.
materiality
The process of associating numerical amounts to the elements in the financial statements is called
measurement
What type of measurement model does U.S. GAAP currently employ?
mixed attribute
The assumption that financial statement elements should be measured in terms of the United States dollar for U.S. financial reporting is referred to as the __________ unit assumption.
monetary
Which accounting assumption states that financial statement elements should be measured in terms of the United States dollar for U.S financial reporting?
monetary unit
Another term for equity is
net assets
Measuring assets at what value helps financial statement users predict a company's future cash flows?
net realizable value
The characteristic that a new accounting standard should not favor one group of companies over others or achieve a particular social outcome is an example of
neutrality
Which qualitative characteristic requires that financial information should not influence decision making to achieve a predetermined result?
neutrality
Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from what type of sources?
nonowner
An advantage of historical cost measurement is that it is
objective and verifiable
Revenue recognition criteria are designed to prevent companies from ________________ revenue and net income in one period and, consequently, ______________ revenue and net income in another period.
overstating understating
Allowing the life of a company to be divided into artificial time periods in order to provide timely information is referred to as the ___________ assumption.
periodicity
Which assumption allows the life of the company to be divided into artificial time periods to provide timely information?
periodicity
According to the conceptual framework, for accounting information to be relevant, what qualities must it possess?
predictive value confirmatory value
The income approach for measuring fair value estimates future amounts of earnings or cash flows first and then mathematically converts these amounts to a single ___________ value.
present
The objective in valuing an asset or liability using __________ value is to approximate its fair value
present
The measurement attribute based on future cash flows and the objective of approximating fair value in valuing an asset or liability is
present value
The method for determining if an item is material and requires separate disclosure relies on
professional judgement
The primary purpose of financial reporting is to provide useful information for decision making to
providers of capital
To enhance timeliness, the SEC requires its registrants to submit financial information how frequently?
quarterly annually
Revenue recognition was previously based on the ________________ principle, which required that two criteria be satisfied before revenue can be recognized: The earnings process is complete or virtually complete and there is reasonable certainty as to collectibility
realization
The previous requirement for revenue recognition, which dictated that the earnings process must be virtually complete and the collectiblity of the related assets reasonably assured was referred to as the
realization principle
The process of admitting information into the financial statements is referred to as
recognition
Proponents of fair value accounting point out that it will enhance the __________ of the information provided.
relevance
The two fundamental characteristics of financial information are
relevance faithful representation
For accounting information to be , __________ it must possess predictive value and/or confirmatory value.
relevant
Criticisms of fair value accounting are that fair value estimates may not be ______.
representationally faithful verifiable
An emphasis is placed on proper income statement item recognition under what approach under US GAAP?
revenue/expense approach
Expenses are matched to _______ from the same transaction.
revenues
Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations are referred to as
revenues
Expense recognition often matches __________ and __________ that arise from the same transaction.
revenues expenses
In practice, determining whether an item is material and requires separate disclosure or recognition is based on
the relative amount of the item.
The SEC requires companies to file quarterly reports to provide information to investors. This is an example of the concept of
timeliness
_____________ refers to information being available to users early enough to allow them to use it in the decision process
timeliness
A recently issued FASB standard requires that companies recognize revenue when goods or services are ________________ to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.
transferred
The accounting characteristic that requires a user to comprehend the information within the context of the decision being made is referred to as
understandability.
When the cost of an item can be traced to objective evidence of a transaction, such as a sales receipt, canceled check, and bank statement, the information has the quality of
verifiability
Information is ________________ if different independent measures would reach consensus about whether it is representationally faithful
verifiable
