Chapter 2- ACCT 3311

According to the FASB's conceptual framework, the calculation of comprehensive income includes which of the following? -Income from Continuing Operations -Distributions to Owners

-Yes -No

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

Companies and their auditors generally have adopted a 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

Which of the following is not considered a cost of providing financial information? a-Access to capital at a lower cost. b-Potential litigation. c-Auditing. d-Disclosure to competitors.

Access to capital at a lower cost. [Costs of providing financial information include the costs associated with auditing the information, exposure to potential litigation, and with disclosing information to competitors. Access to capital at a lower cost is a benefit, not a cost, to a preparer.]

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.

According to the FASB's conceptual framework, which of the following is an essential characteristic of an asset? a-An asset provides future benefits. b-An asset is tangible. c-The claims to an asset's benefits are legally enforceable. d-An asset is obtained at a cost.

An asset provides future benefits.

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Assets

Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time? a-Revenues. b-Assets, Liabilities, and Equity. c-Comprehensive income. d-Investments by owners.

Assets, Liabilities, and Equity.

Which of the following is not a basic element of financial statements? a-Losses b-Revenue c-Balance sheet d-Assets

Balance sheet

all the information that is necessary for faithful representation is provided.

Completeness

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources.

Comprehensive Income

Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners.

Distributions to Owners

- company keeps its activity separate from its owners and other businesses.

Economic Entity

Residual interest in the assets of an entity that remains after deducting its liabilities.

Equity

"Let the expense follow the revenues."

Expense Recognition

Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations

Expenses

information may be more useful

Fair value

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.

the numbers and descriptions match what really existed or happened.

Faithful representation

T/F The historical cost of a liability cannot be established, so companies use the present value of cash flows to value liabilities.

False (Companies issue liabilities such as bonds and accounts payable in exchange for assets or services for an agreed-upon price. The price established in the exchange transaction is the "cost" of a liability.)

T/F For information to be relevant, it must have both predictive value and confirmatory value.

False (For information to be relevant, it needs to have predictive value or confirmatory value or both.)

T/F 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.

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

T/F Information that has been measured and reported in a similar manner for different enterprises is considered consistent.

False (Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency is present when a company applies the same accounting treatment to similar events, from period to period.)

T/F 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.

False (The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.)

T/F The fundamental quality of faithful representation ensures that financial statements are totally free from error.

False (The fundamental quality of faithful representation does not ensure that financial statements are totally free from error because financial reporting involves various types of estimates that incorporate management's judgment.)

T/F The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users.

False (The objective of the conceptual framework is to provide financial information about the reporting entity primarily to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.)

T/F The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly.

False (The periodicity assumption suggests that the economic life of a business can be divided into artificial time periods such as a month, quarter or year.)

Objective of Financial Reporting

First Level

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.

providing information that is of sufficient importance to influence the judgment and decisions of an informed user

Full Disclosure

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Gains

company to last long enough to fulfill objectives and commitments.

Going Concern

provides a reliable benchmark for measuring historical trends

Historical cost

Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it.

Investments by Owners

Which of the following statements is correct concerning a conceptual framework in accounting? a-Standard setting is based on personal conceptual frameworks which lead to different conclusions about similar issues. b-It should allow practical problems to be solved more quickly by reference to it. c-It should be based on fundamental truths that are derived from the laws of nature. d-All of these answer choices are correct.

It should allow practical problems to be solved more quickly by reference to it.

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Liabilities

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

Losses

Commonly used measurements are based on historical cost and fair value.

Measurement Principle

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting? a-Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints. b-Qualitative characteristics of accounting information. c-Elements of financial statements. d-Objective of financial reporting

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

money is the common denominator.

Monetary Unit

In the United States, inflation/deflation is ignored in accounting under which of the following assumptions? a-Periodicity assumption. b-Going concern assumption. c-Monetary unit assumption. d-Time period assumption.

Monetary unit assumption.

a company cannot select information to favor one set of interested parties over another.

Neutrality

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.

company can divide its economic activities into time periods.

Periodicity

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Revenue Recognition

Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Revenues

Qualitative Characteristics and Elements

Second Level

What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises. b. The meaning of "Present fairly in accordance with generally accepted accounting principles." c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles.

The objectives and concepts for use in developing standards of financial accounting and reporting.

means having information available to decision-makers before it loses its capacity to influence decisions.

Timeliness

T/f A contract is an agreement between two parties that creates enforceable rights or obligations.

True

is the quality of information that lets reasonably informed users see its significance.

Understandability

occurs when independent measurers, using the same methods, obtain similar results.

Verifiability

Identify which basic accounting assumption is best described in each item below. (a)Target Corporation prepares its financial statements in U.S. dollars. (b)The financial statements of General Motors combine all of the activities of its subsidiaries. (c)Office Depot records depreciation on its equipment over their estimated useful lifes.

a-Monetary unit b-economic entity c-going concern

Indicate whether the following statements about the conceptual framework are true or false. a-In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. b-The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. c-Verifiability is solely an enhancing characteristic for faithful representation. d-Relevant information only has predictive value, confirmatory value, or both. e-Comparability pertains to the reporting of information in a similar manner for different companies as well as a company reporting under the same accounting policies over time f-Information that is a faithful representation is characterized as having predictive or confirmatory value.

a-T b-F c-F d-F e-T f-F

Presented below are three different transactions related to materiality. Do you classify these transactions as material? a-Polley Co. has reported a positive trend in earnings over the last 4 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 2% of net income. b-Linsmeier Co. expenses all capital equipment under $18,000 on the basis that it is immaterial. The company has followed this practice for a number of years. c-Carnall Co. has a gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Carnall's income for the current year was $10 million.

a-Y b-N c-Y

Identify the appropriate qualitative characteristic(s) to be used given the information provided below. (a)-Qualitative characteristic being employed when companies in the same industry are using the same accounting principles. (b)-Quality of information that confirms users' earlier expectations. (c)-Imperative for providing comparisons of a company from period to period. (d)-Ignores the economic consequences of a standard or rule. (e)-Requires a high degree of consensus among individuals on a given measurement. (f)-Predictive value is an ingredient of this fundamental quality of information. (g)-Four qualitative characteristics that are related to both relevance and faithful representation. (h)-An item is not recorded because its effect on income would not change a decision. (i)-Neutrality is an ingredient of this fundamental quality of accounting information. (j)-Two fundamental qualities that make accounting information useful for decision-making purposes. (k)-Issuance of interim reports is an example of what enhancing quality of both relevance and faithful representation?

a-comparability b-confirmatory value c-comparability (consistency) d-neutrality e-verifiability f-relevance g-comparability, verifiability, timeliness, and understability h-materiality i-faithful representation j-relevance and faithful representation k-timeliness

Select the qualitative characteristics for the following statements. (a)- Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b)-Having information available to users before it loses its capacity to influence decisions. (c)-Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d)-Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e)-Absence of bias intended to attain a predetermined result or to induce a particular behavior.

a-comparability b-timeliness c-predictive Value d-relevance e-neutrality

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. a-Sprull Inc. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed? b-Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.) c-The chairman of the SEC at one time noted, "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.) d-What are the two fundamental qualities that make accounting information useful for decision-making? e-Davidson Inc. does not issue its first-quarter report until after the second quarter's results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.) f-Identify the pervasive constraint developed in the conceptual framework. g-Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes? h-Rubin Company is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed? i-What is the quality of information that enables users to confirm or correct prior expectations? j-Murray Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

a-comparability (consistency) b-neutrality c-neutrality d-relevance and faithful representation e-timeliness f-cost g-relevance h-comparability i-confirmatory value j-verifiability

For each item below, indicate to which category of elements of financial statements it belongs. a-Dividends b-Interest receivable c-Issuance of preferred stock d-Prepaid insurance e-Amortization f-Cost of goods sold g-Accounts payable h-Cash i-Equipment j-Gain on sale of equipment

a-distributions to owners b-assets c-investments by owners d-assets e-expenses f-expenses g-liabilities h-assets i-assets j-gains

For each item below, indicate to which category of elements of financial statements it belongs. a-Retained earnings b-Sales c-Additional paid-in capital d-Inventory e-Depreciation f-Loss on sale of equipment g-Interest payable h-Dividends i-Gain on sale of investment j-Issuance of common stock

a-equity b-revenues c-equity d-assets e-expenses f-losses g-liabilities h-distributions to owners i-gains j-investments by owners

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. a-Intangible assets are capitalized and amortized over periods benefited. b-Brokerage firms use fair value for purposes of valuing investments. c-Each enterprise is kept as a unit distinct from its owner or owners. d-All significant post-balance-sheet events are reported. e-Fair value changes of fixed assets are not recognized in the accounting records. f-Supplemental information is presented so that investors will not be misled. g-Revenue is recorded at point of sale. h-All important aspects of bond indentures are presented in financial statements. i-Rationale for accrual accounting. j-The use of consolidated statements is justified. k-Reporting must be done at defined time intervals. l-An allowance for doubtful accounts is established. m-Goodwill is recorded only at time of purchase. n-A company charges its sales commission costs to expense.

a-expense recognition principle b-measurement (fair value) principle c-economic entity assumption d-full disclosure principle e-measurement (historical cost) principle f-full disclosure principle g-revenue recognition principle h-full disclosure principle i-expense recognition and revenue recognition principles j-economic entity assumption k-periodicity assumption l-measurement (fair value) principle m-measurement (historical cost) principle n-expense recognition principle

Identify the accounting assumption, principle, or constraint that describes each situation. Do not use an answer more than once. a-Allocates expenses to revenues in the proper period. b-Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) c-Ensures that all relevant financial information is reported. d-Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) e-Indicates that personal and business record keeping should be separately maintained. f-Separates financial information into time periods for reporting purposes. g-Assumes that the dollar is the "measuring stick" used to report on financial performance.

a-expense recognition principle b-measurement principle (historical cost) c-full disclosure principle d-going concern assumption e-economic entity assumption f-periodicity assumption g-monetary unit assumption

Select the qualitative characteristics for the following statements. (a)-Quality of information that assures users that information represents the economic phenomena that it purports to represent. (b)-Information about an economic phenomenon that corrects past or present expectations based on previous evaluations. (c)-The extent to which information is accurate in representing the economic substance of a transaction. (d)-Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent. (e)-Quality of information that allows users to comprehend its meaning.

a-faithful representation b-confirmatory value c-free from error d-completeness e-understandability

What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below? a-Target was involved in litigation over the last year. This litigation is disclosed in the financial statements. b-Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets. c-Target records the purchase of a new Dell PC at its cash equivalent price.

a-full disclosure b-expense recognition c-historical cost

Identify the element or elements associated with these items. a-Arises from peripheral or incidental transactions. b-Obligation to transfer resources arising from a past transaction. c-Increases ownership interest. d-Declares and pays cash dividends to owners. e-Increases in net assets in a period from nonowner sources. f-Items characterized by service potential or future economic benefit. g-Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. h-Arises from income statement activities that constitute the entity's ongoing major or central operations. i-Residual interest in the assets of the enterprise after deducting its liabilities. j-Increases assets during a period through sale of product. k-Decreases assets during the period by purchasing the company's own stock. l-Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

a-gains, losses b-liabilities c-investments by owners, comprehensive income d-distributions to owners e-comprehensive income f-assets g-comprehensive income h-revenues, expense i-equity j-revenues k-distributions to owners l-comprehensive income

Where will TravelCo report these investments in the fair value hierarchy? (1)-It purchased 5,000 shares of Microsoft stock, which trades on the NASDAQ. (2)-The company purchased 500 shares of Anthony Technical Company, a start-up company. TravelCo used an internally developed model to evaluate the amount of the investment. (3)-It invested $10,000 in utility bonds of a small neighboring community utility company. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.

a-level 1 b-level 2 c-level 3

Vande Velde Company made three investments during 2020. Where will Vande Velde report these investments in the fair value hierarchy? (1)-It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model. (2)-It purchased 2,000 shares of GE stock, which trades on the NYSE. (3)-It invested $10,000 in local development authority bonds. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.

a-level 3 b-level 1 c-level 2

Identify which basic assumption of accounting is best described in each item below. a-The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports. b-Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. c-Walgreen Co. reports current and noncurrent classifications in its balance sheet. d-The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

a-periodicity b-monetary unit c-going concern d-economic entity

Identify which basic principle of accounting is best described in each item below. a-Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected. b-Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. c-Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. d-Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

a-revenue recognition b-expense recognition c-full disclosure d-measurement (historical cost)

A conceptual framework establishes the concepts that provide guidance on a-identifying the boundaries of financial reporting. b-selecting the transactions, other events, and circumstances to be represented, c-how transactions, events and circumstances should be recognized and measured. d-all of these answer choices are correct.

all of these answer choices are correct.

The objective of general-purpose financial reporting is to provide financial information about the reporting entity to a-investors. b-creditors. c-potential equity investors. 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.

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

Information that is measured and reported in a similar manner for different companies is considered

comparable

The change in equity (net assets) of an entity 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 be/have a-free from error. b-neutrality. c-comparability. d-confirmatory or predictive value.

confirmatory or predictive value

Relevant information also helps users confirm or correct prior expectations.

confirmatory value

When a company changes accounting principles, it financial statements lack ______________. a-confirmatory value b-predictive value c-faithful representation d-consistency

consistency

In developing accounting standards, the FASB attempts to determine that each proposed pronouncement will fill a significant need and that the costs imposed to meet the rule are justified in relation to overall benefits of the resulting information. What accounting assumption, principle, or constraint is being illustrated?

cost constraint

The objective of general-purpose financial reporting in the conceptual framework is a-decision usefulness. b-understandability. c-reliability. d-comparability.

decision usefulness.

The assumption that allows the merging of a parent company and its subsidiaries for financial reporting purposes is the: a-going concern assumption. b-economic entity assumption. c-monetary unit assumption. d-periodicity assumption.

economic entity assumption

Preparation of merged financial statements when a parent-subsidiary relationship exists does not violate 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.

The residual interest in the assets of a company that remains after deducting its liabilities is called a-distributions to owners. b-equity. c-investments by owners. d-comprehensive income.

equity

will be a more accurate (faithful) representation of a financial item.

free from error

An increase in equity (net assets) arising from peripheral or incidental transactions is called a(n) a-asset. b-revenue. c-gain. d-investment by owners.

gain

Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the: a-economic entity assumption. b-going concern assumption. c-monetary unit assumption. d-periodicity assumption.

going concern assumption.

Under IFRS, the monetary unit assumption a-is part of the conceptual framework. b-requires all companies to use the same unit of measure for currency, currently the Euro. c-requires companies to use fair value to report property, plant, and equipment; natural resources; and in some cases intangible assets. d-All of these answer choices are correct.

is part of the conceptual framework

The conceptual framework for financial reporting consists of how many levels?

level 3

if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

material

Faithful representation includes all of the following ingredients except a-materiality b-neutrality. c-free from error. d-completeness.

materiality

Which of the following is not among the ingredients of the fundamental quality of faithful representation? a-free from error. b-neutrality. c-materiality. d-completeness.

materiality

The four basic principles of accounting used to record and report transactions include all of the following except a-measurement. b-expense recognition. c-monetary unit. d-full disclosure.

monetary unit

Enhancing qualities of accounting information include all of the following except: a-comparability. b-understandability. c-neutrality. d-timeliness.

neutrality

All of the following are ingredients of relevance except: a-confirmatory value. b-predictive value. c-materiality. d-neutrality.

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

if it has value as an input to predictive processes used by investors to form their own expectations about the future.

predictive value

The third level of the conceptual framework includes the: a-elements of financial statements. b-objective of financial reporting. c-qualitative characteristics of accounting information. d-recognition, measurement, and disclosure concepts.

recognition, measurement, and disclosure concepts.

accounting information must be capable of making a difference in a decision.

relevance

In classifying the elements of financial statements, the primary distinction between revenues and gains is a-the likelihood that the transactions involved will recur in the future. b-the nature of the activities that gave rise to the transactions involved. c-the materiality of the amounts involved. d-the costs versus the benefits of the alternative methods of disclosing the transactions involved.

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