Accounting Ch. 2

Which of the following does not relate to relevance

*Materiality *Predictive value *Confirmatory value(all correct)

Which of the following is an implication of the going concern assumption

*The historical cost principle is credible. *Depreciation and amortization policies are justifiable and appropriate. *The current-noncurrent classification of assets and liabilities is justifiable and significant(all correct)

The assumption that a company will not be sold or liquidated in the near future is known as the

*economic entity assumption. *monetary unit assumption. *periodicity assumption(all incorrect)

Financial information demonstrates consistency when

*firms in the same industry use different accounting methods to account for the same type of transaction. *a company changes its estimate of the salvage value of a fixed asset. *a company fails to adjust its financial statements for changes in the value of the measuring unit(all incorrect)

A soundly developed conceptual framework of concepts and objectives should

*increase financial statement users' understanding of and confidence in financial reporting. *enhance comparability among companies' financial statements. *allow new and emerging practical problems to be more quickly solved(all correct)

Generally, revenue from sales should be recognized at a point when

*management decides it is appropriate to do so. *the product is available for sale to the ultimate consumer. *the entire amount receivable has been collected from the customer and there remains no further warranty liability(all incorrect)

The objective of general-purpose financial reporting is to provide financial information about a reporting entity to each of the following except

*potential equity investors. *potential lenders. *present investors(all correct)

When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of

*relevance. *faithful representation. *consistency(all incorrect)

One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to

*revenues minus expenses plus gains minus losses. *revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners. *revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities(all incorrect)

The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners'

*transfers of assets to the entity. *rendering services to the entity. *satisfaction of liabilities of the entity(all correct)

Which of the following elements of financial statements is not a component of comprehensive income

Distributions to owners

Issuance of common stock for cash affects which basic element of financial statements

Equity

Which of the following basic elements of financial statements is more associated with the balance sheet than the income statement

Equity

Which of the following is commonly referred to as the matching principle

Expense recognition principle

According to the FASB conceptual framework, which of the following elements describes transactions or events that affect a company during a period of time

Expenses

Which of the following is an argument against using historical cost in accounting

Fair values are more relevant

Under Statement of Financial Accounting Concepts No. 2, free from error is an ingredient of the fundamental quality of

Faithful Representation-Yes Relevance-No

Neutrality is an ingredient of which fundamental quality of information

Faithful representation

Which of the following is a primary quality of useful accounting information

Faithful representation

Although the FASB has developed a conceptual framework, no Statements of Financial Accounting Concepts have been issued to da

False

In order to justify requiring a particular measurement or disclosure, the benefits to be derived from it must equal the costs associated with it

False

Prudence or conservatism means when in doubt, choose the solution that will be least likely to overstate liabilities or expenses

False

Revenues, gains, and distributions to owners all increase equity

False

The economic entity assumption means that economic activity can be identified with a particular legal entity

False

The expense recognition principle states that debits must equal credits in each transaction

False

The first level of the conceptual framework identifies the recognition, measurement, and disclosure concepts used in establishing accounting standards

False

Timeliness and neutrality are two ingredients of relevance

False

Users of financial statements are assumed to need no knowledge of business and financial accounting matters to understand information contained in financial statements

False

Verifiability and predictive value are two ingredients of faithful representation

False

Which of the following is an ingredient of relevance

Materiality

According to the FASB Conceptual Framework, the elementsassets, liabilities, and equitydescribe amounts of resources and claims to resources at/during a

Moment in Time-Yes Period of Time-No

Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy

Monetary unit assumption

What is the quality of information that is capable of making a difference in a decision

Relevance

Which of the following is a fundamental quality of useful accounting information

Relevance

According to Statement of Financial Accounting Concepts No. 2, completeness is an ingredient of the fundamental quality of

Relevance-No Faithful Representation-Yes

According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the fundamental quality of

Relevance-No Faithful Representation-Yes

During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of

Relevance-No Periodicity-Yes

According to Statement of Financial Accounting Concepts No. 2, materiality is an ingredient of the fundamental quality of

Relevance-Yes Faithful Representation-No

According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of the fundamental quality of

Relevance-Yes Faithful Representation-No

What is a purpose of having a conceptual framework

To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards

A conceptual framework is a coherent system of concepts that flow from an objective

True

A soundly developed conceptual framework enables the FASB to issue more useful and consistent pronouncements over time

True

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

True

Relevance and faithful representation are the two primary qualities that make accounting information useful for decision making

True

Revenues are recognized in the accounting period in which the performance obligation is satisfied

True

Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements

True

The IASB has issued a conceptual framework and has agreed to develop a common conceptual framework with the FASB

True

The historical cost principle would be of limited usefulness if not for the going concern assumption

True

The idea of consistency does not mean that companies cannot switch from one accounting method to another

True

The objective of financial reporting is the foundation of the conceptual framework

True

When is revenue generally recognized

When the company satisfies the performance obligation

Financial information exhibits the characteristic of consistency when

a company applies the same accounting treatment to similar events, from period to period

If the LIFO inventory method was used last period, it should be used for the current and following periods because of

comparability

If the FIFO inventory method was used last period, it should be used for the current and following periods because of

consistency

Application of the full disclosure principle

is demonstrated by the use of supplementary information explaining the effects of financing arrangements

A decrease in net assets arising from peripheral or incidental transactions is called a(n)

loss

Under current GAAP, inflation is ignored in accounting due to the

monetary unit assumption

Product costs include each of the following except

officer's salaries

A company has a performance obligation when it agrees to

perform a service or sell a product to a customer

The two fundamental qualities that make accounting information useful for decision making are

relevance and faithful representation

Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the

revenue recognition principle

In classifying the elements of financial statements, the primary distinction between revenues and gains is

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

The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is

verifiability

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more

verifiable

Revenue generally should be recognized

when the performance obligation is satisfied

Which of the following is not a basic element of financial statements

Balance sheet

Which of the following is not a benefit associated with the FASB Conceptual Framework Project

Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply

Information about different companies and about different periods of the same company can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives

Comparability-Companies Consistency-Periods

Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic of accounting information

Consistency

Which basic element of financial statements arises from peripheral or incidental transactions

Gains

What accounting concept justifies the usage of depreciation and amortization policies

Going concern assumption

Which basic assumption may not be followed when a firm in bankruptcy reports financial results

Going concern assumption

Which of the following is not a basic assumption underlying the financial accounting structure

Historical cost assumption

What is meant by comparability when discussing financial accounting information

Information that is measured and reported in a similar fashion across companies

What is meant by consistency when discussing financial accounting information

Information that is measured and reported in a similar fashion across points in time

Which of the following is not true concerning a conceptual framework in accounting

It should be based on fundamental truths that are derived from the laws of nature

Which of the following is an ingredient of faithful representation

Neutrality

In the conceptual framework for financial reporting, what provides "the why"--the purpose of accounting

Objective of financial reporting

The calculation of comprehensive income includes which of the following

Operating Income-Yes Distributions to Owners-No

Which accounting assumption or principle is being violated if a company provides financial reports only when it introduces a new product

Periodicity

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept

Periodicity assumption

Which basic assumption is illustrated when a firm reports financial results on an annual basis

Periodicity assumption

What is the following is a characteristic describing the primary quality of relevance

Predictive value

Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles

President's letter to shareholders

What is the primary objective of financial reporting as indicated in the conceptual framework

Provide information that is useful to those making investing and credit decisions

Which of the following is a component of the revenue recognition principle

Recognition occurs when the performance obligation is satisfied

Which of the following serves as the justification for the periodic recording of depreciation expense

Systematic and rational allocation of cost over the periods benefited

Company A issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information

Timeliness

The accounting principle of expense recognition is best demonstrated by

associating effort (expense) with accomplishment (revenue)

Neutrality means that information

cannot favor one set of interested parties over another

The pervasive criterion by which accounting information can be judged is that of

decision usefulness

The underlying theme of the conceptual framework is

decision usefulness

Generally accepted accounting principles

derive their credibility and authority from general recognition and acceptance by the accounting profession

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the

economic entity assumption

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the

expense recognition principle

The quality of information that means the numbers and descriptions match what really existed or happened is

faithful representation

Valuing assets at their liquidation values rather than their cost is inconsistent with the

historical cost principle

The measurement principle includes the

historical cost principle and the fair value principle

The economic entity assumption

is applicable to all forms of business organizations

Accounting information is considered to be relevant when it

is capable of making a difference in a decision