Chapter 2 - Conceptual Framework for Financial Reporting

A particular legal entity can be used to identify an economic entity, according to the economic entity assumption.

False.

There are ________ elements of financial statements discussing events, circumstances, and transactions, which all impact a company during a period of time.

7

Which of the following demonstrates the primary distinction between revenues and gains?

The nature of the activities that gave rise to the transactions involved.

Maurice is discussing a number of investments made by the owners of his company. Danielle is talking about the distributions made to the owners of her company. What is implied here?

The net assets at Maurice's company are increasing, while the net assets at Danielle's company are decreasing.

Which of the following enhancing qualities of accounting information is practiced if Company A issues its annual financial reports within one month of the end of the fiscal year?

Timeliness

Which of the following increase an entity's net assets? ---> All of these answer choices are correct.

- Owners rendering services to the entity - Owners satisfaction of liabilities of the entity - Owners transfer of assets to the entity

Who needs to decide whether to buy, sell, or hold equity and debt instruments based on the reporting entity's financial statements? (select all that apply)

- investors - lenders Not: - competitors - supervisors - employees - community members

________ means that figures from one financial statement directly correspond to balances in another.

Articulation

It would be inaccurate to state that _________ are a basic element of financial statements.

Balance sheets

Which of the following accurately describes the objective of financial reporting?

It is the foundation for the conceptual framework.

__________ is a required ingredient of relevance.

Materiality

The calculation of comprehensive income includes ______.

Operating Income.

In the conceptual framework, what is the primary objective of financial reporting?

Providing information that is useful to those making investing and credit granting decisions.

Tom is trying to decide which stocks to purchase, so he is looking at the general-purpose financial statements of several companies. However, he does not understand a lot of the abbreviations and symbols used in the report. Which assumption of financial reporting users does Tom violate?

The assumption that the user has reasonable knowledge of business and financial accounting.

When is accounting information considered to be relevant?

When it is capable of making a difference in a decision.

Which of the following is a benefit to preparers of providing accounting information?

access to capital at a lower cost

Accountants producing financial statements for artificial periods of time over the lifetime of an entity is an example of the ______.

the periodicity assumption.

General-purpose financial reporting is always about

the reporting entity.

A user must have some reasonable knowledge of business and financial accounting in order for general-purpose financial statements to be

understandable

In terms of cost-benefit analysis, rate regulation is a benefit to _______.

users

When a high degree of consensus is reached among independent measurers using the same measurement method, __________ has been demonstrated.

verifiability

When should revenue be recognized?

when the performance obligation is satisfied

To comply with the concept of materiality, ---> All of these answer choices are correct.

- an item must make a difference or it need not be disclosed. - materiality should be determined based on relative size or importance - an item should be included if it would influence or change the judgment of a reasonable person.

Based on the objective of financial reporting, financial information should be provided to ______

- lenders - present and potential equity investors.

According to the objective of general-purpose financial reporting, financial information about a reporting entity should be provided to which of the following? ---> All of these answer choices are correct.

- potential lenders - present creditors - potential equity investors

It would be inaccurate to say that __________ relates to relevance.

Completeness

Which of the enhancing qualities of accounting information requires that changing the method of inventory valuation be reported in the financial statements?

Consistency

The objective of financial reporting is to

provide useful financial information.

Which of the following explains when the elements-assets, liabilities, and equity-describe amounts of resources and claims to resources?

During a moment of time.

__________ assumption means that economic activity can be identified with a particular unit of accountability. The __________ assumption states that owners keep their financial activities separate from the financial activities of the company.

Economic entity

________ is/are associated more with the balance sheet than with the income statement.

Equity

_________ arise from peripheral or incidental transactions

Gains

Which of the following relates to the objective of financial reporting in the conceptual framework? What do companies prepare in order to provide information to financial decision-makers? Companies are normally required to submit _______ in order to obtain loans and other types of credit.

General-purpose financial statements

__________ is/are included in comprehensive income according to the FASB's conceptual framework.

Gross Margin and Operating Income

What is the definition of neutrality?

Information that does not favor one set of interested parties over another.

What is the difference between investments made by owners and distributions made to owners?

Investments made by owners increase net assets, whereas distributions made to the owners decrease net assets.

Based on the conceptual framework for financial reporting, how does knowledge of the qualitative characteristics of accounting information and the elements of financial statements help accountants?

They help bridge the gap between the "why" and the "how" of financial reporting.

What is one objective of financial reporting?

To provide information that is useful.

What is the main reason companies prepare general-purpose financial statements?

To provide information to financial decision-makers.

Supplementary information could include amounts or details that are different from other perspectives adopted in the financial statements.

True

Which of the following is an assumption behind general purpose financial statements?

Users have reasonable knowledge of business and accounting matters.

Who are general-purpose financial statements primarily prepared for?

Users that lack the ability to demand the financial information they need

Materiality is characterized by _______

being company specific.

The concept(s) of __________ relate(s) to both relevance and faithful representation in the FASB's conceptual framework.

comparability

As part of its rule-making, the FASB uses

cost-benefit analysis.

What is the most important criterion by which accounting information should be judged?

decision usefulness

A basic assumption of accounting is _____.

economic entity. going concern.

Outflows from delivering goods during a period are _____

expenses

Which of the following qualities is used to imply that numbers and descriptions match what really existed or happened? Which of the following fundamental qualities includes the quality of freedom from error? Which of the following fundamental qualities includes the ingredient completeness? ______ requires the following ingredient: neutrality.

faithful representation

Companies are normally required to submit ______ in order to obtain loans and other types of credit.

general-purpose

Paul's company would like to approach a bank for a small business loan. In this situation, Paul should prepare

general-purpose financial statements for his company.

The _________ assumption of accounting is based on the idea that the company will have a long life. The accounting concept that justifies the usage of the amortization and depreciation policies is the _____. The _________ assumption gives the historical cost principle more usefulness.

going concern

When a firm in bankruptcy reports financial results they cannot follow the _____.

going concern assumption.

When discussing financial accounting information, the term comparability means that

information is measured and reported in a similar fashion across companies.

When discussing financial accounting information, the term consistency means that

information is measured and reported in a similar fashion from period to period.

Which of the following increases equity in a business?

investments by owners

Which of the following describes a decrease in net assets arising from peripheral or incidental transactions?

loss

The _______ _______ assumption defines money as the basis for accounting analysis and measurement.

monetary unit

The seven elements of financial statements discuss transactions, events, and circumstances generally impact a company during a _____ of time.

period

When a firm reports financial results on an annual basis, it is an example of the ______.

periodicity assumption.

The fundamental quality of relevance is characterized by

predictive value.

The aspects of the conceptual framework that help ensure that the financial reporting objective is met include ______.

qualitative characteristics, elements, and recognition, measurement, and disclosure.