ACCT 3313 Chapter 1 Theory

On July 1, Year 1, a company paid $48,000 for 24 months of advance rent on its warehouse. Assuming the company has a December year end, what would be the amount of rent expense in Year 1 under cash basis versus accrual accounting?

Cash basis = $48,000; Accrual = $12,000.

Match the expense recognition approaches with the most appropriate accounting event, to satisfy proper matching of revenues with expenses.

Cause-and-effect relationship <-> Cost of goods sold Specific time period <-> Monthly salary payments to an office employee Without regard to related revenue in the period incurred <-> Advertising expenditures

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.

Who has the responsibility for preparing financial statements in accordance with generally accepted accounting principles?

Corporate management

Which of the following methods of measurement is allowed under U.S. GAAP?

Current cost Fair value Historical cost All of these methods are allowed

____ ____ bases measurements on the price that would be received in an orderly market transaction.

Fair value

Who has the responsibility to appropriately apply GAAP when preparing financial statements?

Management

The involvement of accounting professionals and management in accounting scandals resulted in Congress passing the Sarbanes-Oxley Act. What is the purpose of the Sarbanes-Oxley Act?

Provide penalties for violators. Require CEO accountability. Prevent conflicts of interests. Regulate auditors.

The FASB's conceptual framework's qualitative characteristics of accounting include:

Relevance

What was the purpose of the FASB Accounting Standards Codification project?

Reorganize all relevant accounting pronouncements in U.S. GAAP.

Recording depreciation on fixed assets is an example of which approach to expense recognition?

Systematic and rational allocation.

Which of the following qualities is not a requirement of representational faithfulness?

Timeliness

The primary focus of financial accounting information is to provide useful information for users to make: Investing Decisions | Credit Decisions

Yes | Yes

Expense recognition is implemented by which of the following ways?

cause-and-effect relationship. in the period incurred associating expenses and revenues in a specific period of time. systematic and rational allocation.

A code or moral system that provides criteria for evaluating right and wrong is referred to as

ethics.

What accounting principle states that an asset or liability should be recorded at the amount given or received in the exchange transaction?

historical cost

Measuring assets and liabilities based on their original transaction value is an example of

historical cost.

The four basic accounting assumptions

identify the frequency of reporting assume the entity will continue to exist identify the denomination in which reporting occurs identify the entity being reported on

Disclosure refers to the process of

including additional information in the financial statements and notes.

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 ____ ____.

market value / fair value

The process of associating numerical amounts to the elements in the financial statements is called

measurement.

The main focus of accounting information is to

provide useful information for decision making.

The primary purpose of financial reporting is to provide useful information for decision making to

providers of capital

Recognition refers to the process of

recording information in the basic financial statements.

According to SFAC 5, the four criteria that must be met for an item to be recognized in the basic financial statements are

the information about the item is reliable. the information about the item is relevant to decision making. the item has relevant attributes that are measurable. The item meets the definition of an element.

Notes to the company's financial statements are:

An integral part of the company's financial statements.

Which of the following describe the purpose of the Conceptual Framework?

It prescribes the nature, function, and limits of financial accounting and reporting. It provides structure and direction to financial accounting and reporting. It sets forth the underlying concepts of accounting that guide the selection of events to be accounted for, the measurement of those events, and the means of summarizing and communicating them to interested parties.

Select the four criteria used to determine if an item is recognized in the financial statements according to SFAC 5.

Measurability Reliability Relevance Definition

True or false: The FASB considers written comments from interested parties before issuing an Accounting Standards Update.

True

True or false: The conceptual framework does not prescribe GAAP.

True. The conceptual framework provides an underlying foundation for accounting standards.

The conceptual framework does not prescribe which of the following?

U.S. GAAP.

What information regarding an entity's future cash flows are investors and lenders interested in?

amount timing uncertainty

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

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

The "Accounting Constitution", a coherent system of interrelated objectives and fundamentals that lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting is referred to as the _____ framework.

conceptual

The Sarbanes-Oxley Act increases accountability of who?

corporate executives

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

Which of the following are among the basic assumptions underlying U.S. GAAP?

economic entity going concern periodicity monetary unit

Measurement is the process of associating numerical amounts to the ____ reported in financial statements.

elements

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.

The process of admitting or recording an item into the basic financial statements is referred to as

recognition.

The revenue/expense approach focuses on the income statement because it relies on which accounting principles?

revenue recognition matching

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

Expense recognition often matches ___ and ___ that arise from the same transaction.

revenues, expenses