Accounting Fundamentals Chapter 2

Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point GAAP has adopted it more broadly. A. True B. False

False

An increase in net assets arising from peripheral or incidental transactions is called a(n) A. asset. B. revenue. C. gain. D. investment by owners.

gain

Which level of the conceptual framework is devoted to elements of financial statements and the qualitative characteristics? A. 4th B. 3rd C. 2nd D. 1st

2nd

The conceptual framework for financial reporting consists of how many levels? A. 1 B. 2 C. 3 D. 4

3

Companies and their auditors have adopted a general rule of thumb that anything under _____ of net income is considered not material. A. 10%. B. 15%. C. 5%. D. 2%.

5%

The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises? A. 7 B. 6 C. 5 D. 4

7

A conceptual framework is necessary for which of the following reasons? A. It allows the profession to quickly solve new and emerging issues. B. It enables standard setters to issue more useful and consistent pronouncements over time. C. It increases financial statement users' understanding of and confidence in financial reporting. D. All of these answer choices are correct.

All of these answer choices are correct

To be recognized in the main body of financial statements, an item should A. meet the definition of a basic element. B. be relevant and reliable. C. be measurable with sufficient certainty. D. All of these answer choices are correct.

All of these answer choices are correct.

Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time? A. Investments by owners. B. Revenues. C. Equity. D. Comprehensive income.

Equity

Which of the following statements about the fair value principle is true? A. Fair value is a market-based measure. B. Fair value is generally less relevant than historical cost. C. Measurements based on fair value increase the objectivity in financial reporting. D. GAAP requires the use of fair value for financial assets and financial liabilities.

Fair value is a market-based measure.

In order to justify requiring a particular measurement or disclosure, the costs perceived to be associated with it must exceed the benefits perceived to be associated with it. A. True B. False

False

Information that has been measured and reported in a similar manner for different enterprises is considered consistent. A. True B. False

False

The difficulty in cost-benefit analysis is that the benefits are usually evident and easily measurable, while the costs are not always evident or measurable. A. True B. False

False

The existing conceptual frameworks underlying IFRS and GAAP are strikingly different and the FASB and IASB will likely change many aspects of each of the frameworks in order to create a common conceptual framework. A. True B. False

False

The fundamental quality of faithful representation ensures that financial statements are totally free from error. A. True B. False

False

The historical cost of a liability cannot be established, so companies use the present value of cash flows to value liabilities. A. True B. False

False

The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users. A. True B. False

False

The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly. A. True B. False

False

Which level of the conceptual framework is devoted to the "why" - the purpose of accounting? A. First. B. Second. C. Third. D. All three levels.

First

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting? A. Measurement and recognition concepts such as assumptions, principles, and constraints. B. Qualitative characteristics of accounting information. C. Elements of financial statements. D. Objective of financial reporting.

Measurement and recognition concepts such as assumptions, principles, and constraints.

With regard to fair value, which of the following measurements is considered the least subjective? A. Unobservable inputs. B. Inputs that are observable either directly or through corroboration with observable data. C. Observable inputs that reflect quoted prices for identical assets or liabilities. D. For purposes of fair value, all of the measures are considered equally subjective.

Observable inputs that reflect quoted prices for identical assets or liabilities

Which of the following statements is true regarding the convergence project by the FASB and IASB? A. The converged framework will be a series of documents, similar to the two conceptual frameworks that presently exist. B. The existing conceptual frameworks underlying U.S. GAAP and IFRS are quite dissimilar, but once they are converged there will be unanimity. C. The IASB framework makes two assumptions. D. The FASB framework discusses accrual accounting and identifies it as an assumption.

The IASB framework makes two assumptions.

A contract is an agreement between two parties that creates enforceable rights or obligations. A. True B. False

True

For information to be relevant, it must have both predictive value and confirmatory value. A. True B. False

True

Enhancing qualities of accounting information include: A. comparability and verifiability. B. relevance and consistency. C. comparability and materiality. D. relevance and faithful representation.

comparability and verifiability

The change in net assets during a period from transactions and other events and circumstances from non-owner sources is called A. net income. B. gains. C. comprehensive income. D. revenues.

comprehensive income

In order to be relevant, financial information must have A. freedom from error. B. neutrality. C. comparability. D. confirmatory or predictive value

confirmatory or predictive value

When a company's financial statements lack ____________, the auditor generally refers to it in an explanatory paragraph of the audit report. A. confirmatory value. B. predictive value. C. faithful representation. D. consistency

consistency

The underlying theme of the conceptual framework is A. decision usefulness. B. understandability. C. reliability. D. comparability.

decision usefulness

Generally accepted accounting principles A. are fundamental truths or axioms that can be derived from laws of nature. B. derive their authority from legal court proceedings. C. derive their credibility and authority from general recognition and acceptance by the accounting profession. D. have been specified in detail in the FASB conceptual framework.

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 A. economic entity assumption. B. relevance characteristic. C. comparability characteristic. D. neutrality characteristic.

economic entity assumption

The assumption that implies that the economic activities of an enterprise can be identified with a particular unit of accountability is the: A. economic entity assumption. B. going concern assumption. C. monetary unit assumption. D. periodicity assumption.

economic entity assumption.

Depreciation and amortization policies are justifiable and appropriate because of the: A. economic entity assumption. B. going concern assumption. C. monetary unit assumption. D. periodicity assumption.

going concern assumption

Which of the following is not among the ingredients of the fundamental quality of faithful representation? A. freedom from error. B. neutrality. C. materiality. D. completeness.

materiality

All of the following are ingredients of relevance except: A. feedback value. B. predictive value. C. materiality. D. neutrality.

neutrality

Enhancing qualities of accounting information include all of the following except: A. comparability. B. understandability. C. neutrality. D. timeliness.

neutrality

Generally, revenues are recognized when the: A. cash is received. B. performance obligation is satisfied. C. product is produced. D. All of these answer choices are correct.

performance obligation is satisfied

Under IFRS A. companies may apply fair value to natural resources. B. the monetary unit assumption is used, however since every country has its own currency the unit of measure will vary depending on the country in which the company is incorporated. C. the existing conceptual framework is very similar to the conceptual framework under GAAP. D. All of these answer choices are correct.

the existing conceptual framework is very similar to the conceptual framework under GAAP.

Under current GAAP, inflation is ignored in accounting due to A. materiality. B. the going concern assumption. C. the monetary unit assumption. D. consistency

the monetary unit assumption.

In 2010, the FASB and IASB completed the first phase of a jointly created conceptual framework and in this phase they agreed on A. the elements of financial statements. B. the objective of financial reporting. C. the constraints of financial reporting. D. All of these answer choices are correct.

the objective of financial reporting.