Chapter 1

In analyzing a company's financial statements, which financial statement would a potential investor use primarily to assess the company's liquidity and financial flexibility? a. Balance Sheet. b. Income Statement. c. Statement of Retained Earnings. d. Statement of Cash Flows.

a. Balance Sheet. The Balance Sheet discloses the assets and liabilities, usually classified by proximity to realization (assets) or payment (liabilities). The balance shows the relative magnitude of assets and liabilities and, therefore, the ability to pay obligations in the near and longer term. It also shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change. Much of the potential of the firm is disclosed in the Balance Sheet. It is a statement of the wealth position of the firm and allows an assessment of the relative risk of the enterprise.

What would be an advantage of having all countries adopt and follow the same accounting standards? a. Comparability and lower preparation costs. b. Lower preparation costs. c. Agreement. d. Comparability.

a. Comparability and lower preparation costs.

The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except a. developing auditing standards for public companies. b. developing and enforcing professional ethics. c. providing professional education programs. d. grading the CPA exam.

a. developing auditing standards for public companies.

Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB Accounting Standards Codification. a) The Codification includes only FASB Statements. b) The Codification is the sole source of U.S. GAAP, for nongovernmental entities. c) The Codification significantly modified the content of GAAP when it became effective. d) An accountant can be sure that all SEC rules are included in the Codification.

b) The Codification is the sole source of U.S. GAAP, for nongovernmental entities.

What group currently writes the Generally Accepted Accounting Principles? a. Internal Revenue Service. b. Financial Accounting Standards Board. c. Securities and Exchange Commission. d. Financial Accounting Foundation.

b. Financial Accounting Standards Board. FASB is correct.The FASB is currently the rule-making body for GAAP. The Board has codified well over one hundred Statements of Financial Accounting Standards, and Interpretations of those standards. The FASB is a private-sector body, the third such body serving as the entity which creates GAAP for U.S. businesses. The FASB has no authority to enforce GAAP, however.

Which of the following is not true of generally accepted accounting principles? a. GAAP changes over time as the nature of the business environment changes. b. GAAP does not have substantial authoritative support. c. GAAP includes detailed practices and procedures as well as broad guidelines of general application. d. GAAP is influenced by pronouncements of the SEC and IRS.

b. GAAP does not have substantial authoritative support.

The purpose of financial accounting is to provide information primarily for which of the following groups? a. Financial Accounting Standards Board. b. Investors and creditors. c. Government. d. Internal Revenue Service.

b. Investors and creditors.

What is not due process in the context of standard setting at the FASB? a. Public hearings are held on proposed accounting standards. b. No public hearings are held on proposed accounting standards. c. Interested parties can make their views known. d. The FASB operates in full view of the public.

b. No public hearings are held on proposed accounting standards.

The FASB is a(n): a. Governmental unit. b. Private sector body. c. Group of accounting firms. d. International organization.

b. Private sector body. Private sector body is correct. The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.

Financial accounting standard-setting in the United States a. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable. b. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. c. is a legalistic process based on rules promulgated by governmental agencies. d. is based solely on research and empirical findings.

b. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic.

Each of the following are true of the Securities and Exchange Commission except that a. the SEC requires registrants to adhere to GAAP. b. the FASB relies on the SEC to develop accounting standards. c. it is a federal agency. d. the SEC's involvement in the development of accounting standards varies.

b. the FASB relies on the SEC to develop accounting standards.

Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification? a. A proposed staff accounting bulletin. b. A proposed statement of position. c. A proposed accounting standards update. d. A proposed accounting research bulletin.

c. A proposed accounting standards update.

What is a possible danger if politics plays too big a role in accounting standard setting? a. User groups become active. b. The FASB delegates its authority to elected officials. c. Accounting standards that are not truly generally accepted. d. Individuals may influence the standards.

c. Accounting standards that are not truly generally accepted.

What is the primary protection for investors against fraudulent financial reporting by corporations? a. The integrity of management. b. Criminal statutes. c. The requirement that financial statements be audited. d. The fact that all firms must report the same way.

c. The requirement that financial statements be audited.

Characteristics of generally accepted accounting principles include all of the following except a. authoritative accounting that the rule-making body has established as a principle of reporting. b. standards are considered useful by the profession. c. each principle is approved by the SEC. d. practice has become universally accepted over time.

c. each principle is approved by the SEC.

.Which of the following is a requirement for an accounting principle to be called "generally accepted"? a. An authoritative accounting rule-making body has established it in an official pronouncement. b. Each company develops its own standards. c. The principle has been accepted as appropriate because of its universal application. d. An authoritative accounting rule-making body has established it or it has been accepted because of its universal application.

d. An authoritative accounting rule-making body has established it or it has been accepted because of its universal application.

The information provided by financial reporting pertains to a. Individual business enterprises and industries, rather than to an economy as a whole or to members of society as consumers. b. Individual business enterprises and an economy as a whole, rather than to industries or to members of society as consumers. c. Individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers. d. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

d. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

It is a violation of SEC regulations for publicly traded companies to depart from GAAP. Choose the correct statement about GAAP. a. Firms may not restate financial statements previously issued. b. GAAP are laws. c. Only publicly traded companies must comply with GAAP. d. It is a violation of SEC regulations for publicly traded companies to depart from GAAP

d. It is a violation of SEC regulations for publicly traded companies to depart from GAAP

Which of the following accounting pronouncements is the most authoritative? a. AICPA Statement of Position. b. FASB Statement of Financial Accounting Concepts. c. FASB Technical Bulletin. d. The FASB Accounting Standards Codification.

d. The FASB Accounting Standards Codification.

The purpose of the International Accounting Standards Board is to a. arbitrate accounting disputes between auditors and international companies. b. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. c. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. d. promote uniform accounting standards among countries of the world.

d. promote uniform accounting standards among countries of the world.