Chapter 2 quiz

Which of the following statements is true regarding the conceptual frameworks developed by FASB and IASB?

Both have similar measurement principles based on historical cost and fair value.

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.

Which of the following is not a basic assumption underlying the financial accounting structure? Going concern assumption Periodicity assumption Historical cost assumption Economic entity assumption Monetary unit assumption

Historical cost assumption

Which of the following is a characteristic describing the fundamental quality of relevance?

Predictive value.

Which of the following does not relate to relevance? Materiality. Predictive value. Confirmatory value. All of these answer choices relate to relevance.

All of these answer choices relate to relevance.

Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time?

Assets, Liabilities, and Equity. The other elements (investments by owners, revenues, comprehensive income) describe transactions, events and circumstances that affect a company during a period of time.

A company issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information?

Timeliness

In order to be relevant, financial information must be/have

confirmatory or predictive value.

Under IFRS 1 - all of these answer choices are correct. 2 - companies may apply fair value to natural resources. 3 - the existing conceptual framework is very similar to the conceptual framework under GAAP. 4 - 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.

1 - all of these answer choices are correct. under IFRS companies may apply fair value to natural resources and the monetary unit assumption is still used (although the unit of measure will vary depending on the currency used in the country in which the company is incorporated). The existing conceptual frameworks under IFRS and GAAP are very similar.

A conceptual framework establishes the concepts that provide guidance on 1- selecting the transactions, other events, and circumstances to be represented, 2- all of these answer choices are correct. 3- how transactions, events and circumstances should be recognized and measured. 4 - identifying the boundaries of financial reporting.

2 - all of these answer choices are correct. A conceptual framework establishes the concepts that provide guidance on 1) identifying the boundaries of financial reporting; 2) selecting the transactions, other events, and circumstances to be represented; 3) how they should be recognized and measured and 4) how they should be summarized and reported.

Which level of the conceptual framework is devoted to elements of financial statements and the qualitative characteristics?

2nd

A conceptual framework is necessary for which of the following reasons? 1 - It allows the profession to quickly solve new and emerging issues. 2 - It increases financial statement users' understanding of and confidence in financial reporting. 3 - All of these answer choices are correct. 4 - It enables standard setters to issue more useful and consistent pronouncements over time.

3 - All of these answer choices are correct.

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

3 levels Level 1, the "Why"; Level 2, the Bridge between levels 1 & 3; and Level 3, the "How".

To be recognized in the main body of financial statements, an item should 1 - meet the definition of a basic element. 2 - be relevant and reliable. 3 - be measurable with sufficient certainty. 4 - all of these answer choices are correct.

4 - all of these answer choices are correct. to be recognized in the main body of the financial statements, an item should meet the definition of a basic element, be measurable with sufficient certainty, and be relevant and reliable.

Companies and their auditors generally have adopted a rule of thumb that anything under _____ of net income is considered not material.

5%

The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises?

7

Information about different companies and about different periods of the same company can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives?

Comparability COMPANIES, Consistency PERIODS

According to the FASB conceptual framework, which of the following elements describes transactions or events that affect a company during a period of time?

Expenses

Which of the following statements about the fair value principle is true?

Fair value is a market-based measure. fair value is a market-based measure. It is more relevant, more subjective, and FASB gives companies the option of using fair value for financial assets and financial liabilities.

Neutrality is an ingredient of which fundamental quality of information?

Faithful representation

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.

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.

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.

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.

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.

Which level of the conceptual framework is devoted to the "why" - the purpose of accounting?

First

What accounting concept justifies the usage of depreciation and amortization policies?

Going concern assumption

Which basic assumption may not be followed when a firm in bankruptcy reports financial results? Monetary unit assumption Going concern assumption Economic entity assumption Periodicity assumption

Going concern assumption

Which of the following is not among the ingredients of the fundamental quality of faithful representation?

Materiality The ingredients of faithful representation include completeness, neutrality, and free from error.

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting?

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

In the United States, inflation/deflation is ignored in accounting under which of the following assumptions?

Monetary unit assumption.

In the conceptual framework for financial reporting, what provides "the why"--the purpose of accounting?

Objective of financial reporting.

With regard to fair value, which of the following measurements is considered the least subjective?

Observable inputs that reflect quoted prices for identical assets or liabilities. Unobservable inputs are the most subjective measurements.

According to Statement of Financial Accounting Concepts No. 8, neutrality is an ingredient of the fundamental quality(ies) of:

Relevance NO , Faithful Representation YES

During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of

Relevance NO, Periodicity YES

What is a purpose of having a conceptual framework?

To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards.

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

comprehensive income. Comprehensive income is the change in equity (net assets) during a period from transactions and other events and circumstances from non-owner sources.

When a company changes accounting principles, it financial statements lack ______________.

consistency When a company changes accounting principles its financial statements lack consistency since the same accounting treatment is not being applied to similar events from period to period.

The objective of general-purpose financial reporting in the conceptual framework is

decision usefulness.

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

economic entity assumption. Parent-subsidiary financials are an example of the economic entity assumption. The entity concept does not necessarily refer to a legal entity. A parent and its subsidiaries are separate legal entities, but merging their activities for accounting and reporting purposes does not violate the 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:

economic entity assumption. the economic entity assumption implies that the economic activities of an enterprise can be identified with a particular unit of accountability.

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.

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.

false The existing conceptual frameworks underlying IFRS and GAAP are very similar and there is no need to change many aspects of the existing frameworks other than to converge different ways of discussing essentially the same concepts

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

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

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

An increase in equity (net assets) arising from peripheral or incidental transactions is called a(n)

gain

Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the:

going concern assumption. the going concern assumption is the justification for depreciation and amortization policies.

A decrease in net assets arising from peripheral or incidental transactions is called a(n)

loss

All of the following are ingredients of relevance except: 1- materiality. 2- neutrality. 3- predictive value. 4- confirmatory value

neutrality

Enhancing qualities of accounting information include all of the following except:

neutrality The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability. Neutrality is not an enhancing quality of accounting information. It is an ingredient of the fundamental quality of faithful representation.

Financial information demonstrates consistency when firms in the same industry use different accounting methods to account for the same type of transaction. a company changes its estimate of the salvage value of a fixed asset. a company fails to adjust its financial statements for changes in the value of the measuring unit. none of these answer choices are correct.

none of these answer choices are correct.

Generally, revenues are recognized when the:

performance obligation is satisfied. When a company satisfies the performance obligation to perform services or sell a product, revenue is recognized.

In 2010, the FASB and IASB agreed on

the objective of financial reporting and a common set of desired qualitative characteristics.

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

true