Chapter 2 Conceptual Framework

How are financial statements related to the objective of financial reporting?

Companies use financial statements to provide financial information to potential capital providers, and providing information to capital providers is the objective of financial reporting.

How much information is enough for an accountant to comply with the full disclosure principle?

Information that is of sufficient importance to influence the judgment and decisions of an informed user.

Despite objections, why is the historical cost principle still widely supported for financial reporting?

It is an objectively determinable amount.

What is needed in order to move from understanding the purpose of accounting to knowing how to implement accounting practices?

Knowing the qualitative characteristics of accounting information and the elements of financial statements.

Madeline is recording revenues and expenses in her company's general ledger. When doing this, she is following the guidance set forth in which of the following Statements of Financial Accounting Concepts?

SFAC #6

accounting information that is complete, free from error, and neutral is

a faithful representation.

Assets, liabilities, and equity describe the amount of resources and claims to resources that a company has...

at a moment in time

Identify which qualitative characteristic of accounting information is best describes Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption

comparability

Identify which qualitative characteristic of accounting information is best describes Starbucks Corporation has used straight-line depreciation since it began operations

comparability

what Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent

completeness

Mark was recording accounting transactions when he came across a non-standard transaction type. However, based on his knowledge of accounting practices, he was able to come up with a reasonable solution for recording the transaction. This is an example of using a(n)

conceptual framework to solve new problems.

what is Information about an economic phenomenon that changes past or present expectations based on previous evaluations.

confirmatory value

Which of the following constraints requires the benefits of the information to outweigh the sacrifices to provide the information? Cost. Prudence. Consistency. Conservatism.

cost

Which of the following is a constraint recognized by the Conceptual Framework? Materiality. Cost. Periodicity. Timeliness.

cost

Identify which basic assumption of accounting is best describes: The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

economic entity

what is Quality of information that assures users that information represents the economic phenomena that it purports to represent.

faithful representation

true or false Equity is the same thing as comprehensive income. You got it correct :

false

true or false Changes in cash flow resulting from investments by or distribution to owners would be included in comprehensive income?

false

true or false Comparability pertains only to the reporting of information in a similar manner for different companies.

false

true or false Equity is the net revenues and expenses for a period of time.

false

true or false IFRS does not allow use of fair value as a measurement basis.

false

true or false Information that is a faithful representation is characterized as having predictive or confirmatory value.

false

true or false Relevant information only has predictive value, confirmatory value, or both.

false

true or false The fundamental quality of faithful representation is violated by the following statement: Financial statements were issued one year late.

false

true or false The fundamental quality of faithful representation is violated by the following statement: The management report refers to new discoveries and inventions made, but the financial statements never report the results.

false

true or false Verifiability is solely an enhancing characteristic for faithful representation.

false

true or false Equity is the net gains less the net losses for a period of time.

false

true or false The FASB Conceptual Framework Project does NOT provide the following benefits: A coherent set of accounting standards and rules should result.

false

true or false The FASB Conceptual Framework Project does NOT provide the following benefits: A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.

false

true or false The FASB Conceptual Framework Project does NOT provide the following benefits: Practical problems should be more quickly solvable by reference to an existing conceptual framework.

false

true or false The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.

false

true or false Under IFRS, there are the same number of financial statement elements as in GAAP.

false

true or false The first level of the conceptual framework is the recognition, measurement, and disclosure concepts.

false The first level of the conceptual framework is the objective of financial reporting.

The extent to which information is accurate in representing the economic substance of a transaction is

free from error

Identify which basic assumption of accounting is best describes: Walgreen Co. reports current and noncurrent classifications in its balance sheet.

going concern

Which assumption makes the current - noncurrent classification of assets and liabilities on the balance sheet useful?

going concern assumption

what is represented by a continuation of an accounting entity in the absence of evidence to the contrary?

going concern assumption

Enhancing qualities include all of the following except timeliness. comparability. verifiability. materiality.

materiality

The primary quality of relevance includes which of the following characteristics? sustainability Materiality verifiability understandability

materiality

Michelle is preparing her company's income statement and balance sheet. This information will be used by a bank to determine if they want to provide a loan to the company. By preparing these documents, Michelle is...

meeting the objective of financial reporting.

Identify which basic assumption of accounting is best describes: Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.

monetary unit

The issues that the FASB and IASB must address in developing a common conceptual framework includes: should the role of financial reporting focus on internal decision-making as well as providing information to assist users in decision-making?

no

Identify which basic assumption of accounting is best describes: The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.

periodicity

Young Textiles is preparing their first public stock offering. In order to do so, they must file an application and financial paperwork with the SEC. Although the out-of-pocket costs of the application are $5.6 million, they know that they will gain $70 million from the sale of their stock. This is an example of

the cost-benefit relationship.

Identify which qualitative characteristic of accounting information is best describes Motorola issues its quarterly reports immediately after each quarter ends.

timliness

The issues that the FASB and IASB must address in developing a common conceptual framework includes: should the characteristic of relevance be traded-off in favor of information that is verifiable?

true

true of false Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.

true

true of false A business enterprise is an economic entity

true

true of false Companies that use IFRS may report property, plant, and equipment and natural resources at fair value.

true

true of false a business enterprise is a division within a business enterprise

true

true or false Changes in cash flow resulting from sale of assets other than inventory would be included in comprehensive income?

true

true or false Changes in cash flow resulting from sales to a particular entity where ultimate payment by the entity is doubtful would be included in comprehensive income?

true

true or false In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

true

true or false The FASB and IASB are working on a joint conceptual framework project.

true

true or false The IASB conceptual framework does not identify the element comprehensive income

true

true or false The fundamental quality of faithful representation is violated by the following statement: Financial statements included buildings with a carrying amount estimated by management.

true

true or false Under IFRS, companies may use fair value for property, plant, and equipment.

true

true or false Changes in cash flow resulting from revenue generated by a totally owned subsidiary would be included in comprehensive income?

true

true or false The FASB Conceptual Framework Project does NOT provide the following benefits: Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

true

true or false The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.

true

true or false The expense recognition principle is accurately represented by: Costs can be charged to the current period as an expense simply because no connection with revenue can be determined.

true

true or false The expense recognition principle is accurately represented by: Expenses are recognized when they make a contribution to revenue.

true

true or false The expense recognition principle is accurately represented by: In recognizing expenses, accountants attempt to follow the approach of let the expense follow the revenue.

true

true or false The monetary unit assumption is used under IFRS.

true

true or false a business enterprise is An individual

true

Quality of information that allows users to comprehend its meaning defines

understandibility

Identify which qualitative characteristic of accounting information is best describes The annual reports of Best Buy Co. are audited by certified public accountants.

verifiability

The issues that the FASB and IASB must address in developing a common conceptual framework includes: should the common framework lead to standards that are principles-based or rules-based?

yes

The issues that the FASB and IASB must address in developing a common conceptual framework includes: should a single measurement method such as historical cost be used?

yes

is it true that An implicit assumption of financial reporting is that users need reasonable knowledge of business and financial accounting matters

yes