Ch 1 smartbook

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

(1) the economic entity assumption, (2) the going concern assumption, (3) the periodicity assumption, and (4) the monetary unit assumption.

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?

- Regulate auditors. - Require accountability of corporate executives. - Provide penalties for violators. - Addresses conflicts of interests.

Which of the following models is best in helping predict future cash flows?

Accrual accounting

True or false: Cash basis accounting is the method used by most profit-oriented companies.

False

True or false: The primary function of financial accounting is to provide useful financial information to users who are internal to the business.

False

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

Management

Which approach to standard setting emphasizes the use of professional judgment when choosing how to account for a transaction?

Objectives-oriented

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

Reliability Relevance Definition Measurability

The Blank______ has the authority to set accounting standards for companies, but has delegated the task to the private sector.

SEC

What does it mean if information is cost effective?

The benefits of providing financial information exceed the costs of doing so.

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

The conceptual framework provides an underlying foundation for accounting standards.

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

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

True or false: A weakness of the monetary unit assumption is that the dollar is presumed to be stable over time and no adjustment is made for inflation.

True

True or false: The uncertainty of the return on an investment is also referred to as risk.

True

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

True The FASB has an extensive due process including open hearings, deliberations, and written comments.

True or false: In the United States, sole proprietorships and partnerships outnumber corporations.

True There are more proprietorships and partnerships than corporations in the United States. However, corporations are usually larger in term of ownership of productive resources.

What financial reporting model is used by most profit-oriented businesses and not-for-profit entities?

accrual accounting

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 or asset

An enhancing qualitative characteristic of accounting information that allows users to better understand similarities and differences in the financial reports across different companies is called

comparability

Accounting information is ___ if similar items are treated the same way among various companies highlighting similarities and differences between events and conditions.

comparable

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

What component of financial information helps investors analyze their prior assessments regarding a company's cash flow generating ability?

confirmatory value

According to the conceptual framework, for accounting information to be relevant, what qualities must it possess? free from error confirmatory value consistency predictive value

confirmatory value predictive value

Cost effectiveness is a(n) ___ on the accounting choices a company makes.

constraint

The Sarbanes-Oxley Act increases accountability of who? corporate executives FASB members securities analysts

corporate executives

The primary focus of the qualitative characteristics of accounting information is:

decision usefulness

The overriding objective in the hierarchy of qualitative characteristics of financial reporting information is

decision usefulness.

Before issuing an Accounting Standards Update, the FASB undertakes a series of information-gathering steps including (Select all that apply.)

deliberations open hearings written comments

The requirement that the economic activities of a business owner should be separated from the activities of the business is an example of which accounting assumption?

economic entity

An essential assumption in accounting is that all economic events can be identified specifically with an individual economic ___

entity

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

ethics

The primary role of financial accounting is to provide useful financial information to users who are Blank______ to the business enterprise.

external

Financial accounting is chiefly concerned with providing information to various ___ users

external or outside

If the SEC does not agree with a standard issued by the private sector, it can

force a change in the standard.

The principle ___ ___ requires that any information useful to decision makers be provided in the financial statements, subject to the cost effectiveness constraint.

full disclosure

Any information useful to decision makers should be provided in the financial statements, subject to the cost effectiveness constraint. This describes which accounting principle?

full-disclosure principle

The accrual accounting model is best able to achieve the goal of predicting ___cash flows

future

The assumption that a business entity will continue to operate indefinitely in the future refers to what assumption?

going concern

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 entity being reported on identify the denomination in which reporting occurs

The going concern assumption is critical to the measurement of assets because if a business were going to cease operations, its assets would be measured at their

liquidation values.

It is the responsibility of ___ to apply Generally Accepted Accounting Principles in preparation of the company's financial statements.

management or managers

Which accounting assumption states that financial statement elements should be measured in terms of the United States dollar for U.S financial reporting?

monetary unit

The primary forms of business organization in the United States are the sole proprietorship, the ___ and the corporation.

partnership

Which assumption allows the life of the company to be divided into artificial time periods to provide timely information?

periodicity

Proponents of objectives-based standards assert that

professional judgment minimizes sidestepping of rules

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

providers of capital

The process of admitting information into the financial statements is referred to as

recognition, recognize, or recognizing

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

recognition.

For accounting information to be ___ , it must possess predictive value and/or confirmatory value.

relevant or relevance

The revenue/expense approach focuses on the income statement because it relies on which accounting principles? (Select all that apply.)

revenue recognition matching

An emphasis is placed on proper income statement item recognition under what approach under US GAAP?

revenue/expense approach

Ethics deals with the ability to distinguish ___ from ___

right, wrong

The uncertainty regarding an investment is also referred to as

risk

The periodicity assumption relates to which qualitative characteristic?

timeliness

True or false: Financial accounting is primarily concerned with providing financial information to external users.

true

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

uncertainty timing amount