Chapter1

The necessary elements or present value measurement . A measurement based on present value should reflect uncertainties so that variations in risks are incorporated

1) estimates of future cash flows 2) expected variability of their amount and timing 3) the time value of money ( risk free interest rate) 4) the price of uncertainty inherent in an asset or lisbility 5) other factors such as liquidity or market imperfections

Enhancing qualitative characteristics-enhance the usefulness of relevant and faithfully represented information 1) comparability 2 verifiability 3) timeliness 4)understandability

Comparability-information should be comparable with similar info for a) other entities b) the same entity for another period or date. Allows users to understand similarities and differences. Verifiability- information is verifiable ( directly or indirectly) if knowledge and independent observers can reach a consensus that is faithfully represented Timelines-information is timely when it is available in time to influence decisions. Understandability-understandable information is clearly and concisely classified ,characterized, and presented

According to the fasbs conceptual framework ,comprehensive income includes which of the following: Gross margin Operating income

Comprehensive income is the periodic change in equity of a business from nonowner sources. Accordingly comprehensive income is a broad concept that includes not only revenues, gains, and losses recognized in net income but also other mono owner changes in equity, such as holdings gains and losses on available for sale securities and foreign currency translation adjustments. Further more intermediate components of net income such as gross margin ,income from continuing operations before taxes.

Fundamental qualitative character

Consists of fundamental characteristics relevance and faithful representation and comparability,verifiability,timeliness,and understandability

Enhancing qualitative characteristics

Consists of fundamental characteristics: relevance and faithful representation and enhancing characteristics: comparability,verifiability,timeliness, and understandability Consistency is a means of achieving comparability

Form 10-k

Annual report to sec Contains MD&A Contains audited financial statements

Not for profits

Assessing mgmt stewardship and performance Assessing services provided Factors that may affect a organizations liquidity

Economic entity 2)conservatism 3) revenue recognition 4) full disclosure 5)periodicity 6)industry practice 7)matching 8) going concern 9)monetary 10) historical

Assumption 2) constraints 3) principle 4) principle 5)assumption 6)constraints 7) principle 8) assumption 9) assumption 10) principle

According to the fasbs conceptual framework, asset valuations accounts are considered: A) assets B) neither assets nor liabilities C) part of equity D) liabilities

B) Asset valuation accounts are separate items sometimes found in the financial statements that reduce or increase the carrying amount of the asset. The conceptual framework considers asset valuation accounts to be part of the related asset account .they are not.considered to be assets or liabilities in their own right.

The MD&A section of an annual report: A) includes the company presidents letter B) covers three financial suspects of the firms business: liquidity capital resources and results of operations C) is a technical analysis of past results and a defense of those results by management D) covers marketing and product line issues

B) The MD&A section is included in sec filings. It addresses in a no quantified manner the prospects of a company

The fasb due process for setting accounting standards includes which of the following: A)the fasb delegates topics to the financial accounting foundation for research and reporting B) the fasb can seek information about accounting and reporting issues by holding forums, usually based on an exposure draft C) the fasb obtains approval from the international accounting standards board in setting its agenda D)the fasbs emerging task force ratifies amendments to the accounting standards codification

B) The fasb typically issues an exposure drat of the proposed accounting standards update and then requests that interested parties ( academic,businesses,accountants,regulators) provide feedback on the new standard. The fasb then reads the submissions and makes a final decision based on the feedback and its deliberations

The principal benefit of s single set of global financial reporting standards is A) the harmonization of world financial reporting B) increased capital flow C) simplified enforcement for local and national regulatory bodies D) minimization of the amount of professional judgement required to implement them

B) The principal advantage of s single set of global financial reporting standards is that multinational companies do not have to rewrite their financial statements in the local financial reporting framework to their trade their stock on the local exchange . Foreign investment is thereby made much easier and the cost of capital is lowered.

Under sfac 8, the ability , through consensus among measures, to ensure that information represents what it purports to represent is an example of the concept of A) relevance B) verifiability C) comparability D) predictive value

B) Verifiability is qualitative characteristic that enhances relevance and faithful representation. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus that is faithfully represented

Under IFRS , all of the following are conditions that must be met for recognizing revunue from a sale of goods,except: A)Transaction costs can be reliably measured B) the entity has received the full consideration from the sale C) the amount of the transaction can be reliably measured D) the entity has transferred the significant risks and rewards of ownership

B) is not correct

Arpco inc, a for profit provider of healthcare services recently purchased two smaller companies and is researching accounting issues arising from the two business combinations. Which of the following accounting pronouncements are the most authoritative. A) fasb accounting standards updates B) fasb statements of financial accounting concepts C) fasb statements of financial accounting standards D) the accounting standards codification

D) The fasbs accounting standards codification and sec pronouncements are the only sources of authoritative financial accounting guidance for nongovernmental entities in the u.s. All other sources of guidance are nonauthoritative

Under sfac no 6 elements of Financial statements interrelated elements of financial statements include?

Distributions to owners- yes Notes to financial statements-no

Going concern ( business continuity) assumption

Unless stated otherwise ,nevertheless business is assumed to be s going concern that will continue operating indefinitely. It is assumed that the entity will not be liquidated in the near future.

Ande co estimate u collectible accounts expense using the ratio of past actual losses from u collectible accounts to last net credit sales,adjusted for anticipated conditions. The practice follows the accounting concept of

Matching - matching bad debt exp with related revenues is an application of the matching principal.

If the process of earning revenue extends across multiple fiscal years ,accrual accounting permits the recognition of revenue before the completion of the earning process.reasearch and cite the ASC section that describes the two bases on which the percentage of completion of a long term contract may be calculated

fASB ASC : 605-35-25-52 25-52 income recognized shall be that percentage of estimated total income,either: A) that incurred costs to date bear to estimate total costs after giving effect to estimates of costs to complete on most recent information B) that may be indicated by such other measure of progress toward completion as may be appropriate having due regard to work performed.

Fundamental qualitative characteristics - faithful representation- useful information faithfully represents economic events

A perfectly faithful representation has the following characteristic: 1) completeness - containing what is needed for user understanding 2) neutrality- unbiased in its selections and presentation 3) freedom from error B)a representation is free from error if it has not error Or. Omissions in the description of the phenomen and the selection and application of the reporting process 4)the concept if substance over form guides accountants to present the financial reality o a transaction over its legal for.

Amortization

Is a form of allocation.it decreases an amount By periodic payments or write downs .it involves reducing a liability recorded as a result of a cash receipt (payment) by recognizing revenues (exp) thus amortization is a allocation process for deferrals

Form 10-Q Quarterly report to the sec A) must be filed within 40 days of the last of the first three fiscal quarters by large accelerated filers (700 million or more) and accelerated filers ( 75 -700 million) B) 45 days by nonaccelerated filers (less than 75 million)

1) interim financial information must be viewed not audited by an independent accountant 2) an entity required to file form10k must file form 10q for each of the first 3 quarters 3) also required are changes during the quarter . Following are examples: A) legal proceedings B)increases decreases or changes in securities or indebtedness C) matters submitted to shareholders for a vote D) exhibits and reports on form 8k Other material events not reported on 8k Anticipated effects of new accounting standards

Recognition criteria- 4 criteria apply

1) item must meet the definition of an element of the financial statements 2) it must have a relevant attribute measurable with sufficient reliability 3) the information must be relevant. It must be capable of making a difference in user decisions 4) the information must be reliable. It must be representational faithful' verifiable, and neutral

Which of the following bodies has the original authority to set accounting standards for publicly traded companies in the u.ss: A) the securities and exchange commission B) the American institute of certified public accountants C) the financial standards board D) the international accounting standards board

A) The sec establishes rules for financial reporting by publicly traded companies in the u.s. The sec in turn delegated the authority for detailed rule making to the financial accounting standards board

What is the underlying concept governing the generally accepted accounting principles pertaining to recording gain contingencies? A) conservatism B) relevance C) consistency D) faithful representation

A) Under the conservatism constraint when alternative methods are appropriate,the. One having the less favorable effect in net income and total assets is preferable. However conservatism does not permit a deliberate understatement of tots assets and net income. Furthermore the response to uncertainty reflects a general tendency to emphasize purchase and sale transactions and to apply conservative procedures in accounting recognition.

Fundamental qualitative characteristics Relevance- information is relevant if it can make a. Difference in user decisions. Must have : predictive value Confirmatory value Materiality

A) information has predictive value if it can be used as an input in a predictive process B) information has confirmatory value with respect to prior evaluations if it provides feedback that confirms or changes (corrects ) them C) predictive value and confirmatory value are interrelated . Current revenue may confirm a prior prediction and also. Be. Used to predict the next periods revenue. D) information is material if it's omission of misstatement can influence user decisions based on s specific entity's financial information . Thus it is an entity specific aspect of relevance.

Form 10-k -annual report to the sec A) 60 days of the last day of the fiscal year by large accelerated filers( 700 million or more) B) 75 days by accelerated filers (75-700) C) 90 days by nonaccelerated filers( less than 75)

A) it is certified by an independent accountant and signed by the following: 1) principal executive ,financial ,and accounting officers 2) majority of the board of directors B) presented with the basic info package

Monetary unit ( unit of money) assumption

Accounting records are kept in terms of money. The changing purchasing power of the monetary unit is assumed not to be significant

Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to?

Accrual accounting A basic feature of financial accounting is that it is an accrual system under which the determination of periodic earnings and financial position is dependent upon the measurement of all economic resources and obligations

Which of the following objectives of financial reporting is applicable to governmental entities? Provide information: A) about economic resources,obligations,net resources,and changes in them B)useful in making resource allocation decisions C) useful in assessing management stewardship and performance D) for assessing service efforts and accomplishments

D) Pro ding info for assessing service efforts and accomplishments is one of the objectives that serves to assist in evaluating the operating results of the government

Current assets

Cash and cash equivalents Certain indiv trading,available for sale and held to

The fasb conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income:

Currently reported net income- finance capital Comprehensive income- financial capital

A company has beginning net assets of $100,000 and ending net assets of $95,000. During the year, additional capital stock was sold for $8000, and dividends of $3000 were declared. Using the capital maintenance approach, the net income (loss) for the year is calculated as A) $0 B) $(5000) C) $5000 D)$(10,000)

D Change in assets -5000 Capital stock sold -8000 Dividends declared 3000 =-10000

Which of the following is a true statement about the objective of general purpose financial reporting: A) fin reporting is ordinarily focused on industries rather than individual entities B) the obj applies only to information that is useful for investment professionals C) financial reporting directly measures mgmt performance D) the information provided relates to the entity's economic resources and claims

D is correct The info reported relates to the entity's economic resources and claims to them and to changes in those resources and claims

All of the following support the objective of financial reporting except providing information that A) concerns enterprises resources and claims to those resources B)is useful for making investment and credit decisions C) helps investors and creditors predict future cash flows D) helps management evaluate alternative projects

D)

During the lifetime of an entity, accountants produce financial statements at arbitrary moments in time in accordance with which basic accounting concept: A)verifiability B) conservatism C) matching D) periodicity

D) A basic feature of the financial accounting process is that information about the economic activities of the business should be issued at regular intervals .these time periods should be of equal length to facilitate comparability.they should also be of short relatively short duration.

Which of the following obj of financial reporting is applicable to business entities not to governmentL entities. Provide information to A) assist in public accountability B) assist in evaluating operating results C) assist in assessing services provided D)assist in assessing cash flow prospects

D) Current and potential investors and creditors of a business entity want to assess their likelihood of receiving cash from dividends or interest or from the proceeds from the sale,redemption , or maturity of securities or loans

Periodicity ( time period) assumption

Economic activity can be divided into district time periods.1 this assumption requires reporting estimates in the financial statements. It sacrifices Some degree of faithful representation of information for increased relevance.

General purpose financial reporting

Entity resources,claims to resources,and changes in them Investment and credit decisions The objective is to report financial information that is useful making decisons about providing economic resources to the reporting entity. Primary users are current and prospective investors and creditors

A major objection to the adoption of the IFrs is that small businesses must expend resources complying with burdensome regulations designed for large corporations?

False In response to the objections that smaller firms lack the resources to implement a large,complex basis of accounting like Ifrs ,the iASBhas issued the 230 page IFRS for small and medium sized entities

True or false: the sec establishes GAaP for u.s. Issuers?

False The fasb establishes GAaP. The sec enforces those principles by ensuring that issuers meet certain periodic reporting requirements

Biological industries inc an issuer purchased manufacturing equipment I exchange for a 15 year note receivable .biological expects the installation and setup of the equipment to require 6 months . However,payments on the note begin immediately. Which section of the accounting standards codification best describes the treatment of interest cost capitalized as part of the historical cost of a long lived tangible asset?

Fasb sac 835-20-05-01 This subtopic establishes standards of financial accounting and reporting for capitalizing interest cost as a part of the historical cost of acquiring certain assets. The historical cost acquiring certain assets includes thecosts necessarily incurred to bring it to the condition and location necessary for its intended use. If an asset requires a period of tie in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset

Relevance

Fundamental qualitative characteristics. Include relevance and faithful representation, relevant info has predictive value ,conformity value or both. Material is a entity specific

Regulation s-k

Governs disclosures for annual reports Including many that are nonfinancial

Regulation s-x

Governs reporting of Financial statement Including notes and schedules

Constraints

Include : cost pervasive,industry practices, and conservatism

Principal

Include historical cost, revenue recognition matching or full disclosure

Assumption

Includes economic entity's,going concern,monetary unit,and periodically

Governmental entities

Public accounting A reporting objective of governmental entity is to assist in public accountability

Revenue recognition

Revenues and gains are measured by the exchange prices of the assets or liabilities involved. According to the revenue recognition principle revenues and gains are recognized when 1) realized or realizable and 2) earned

Some costs can't be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is?

Sales persons monthly salaries - expenses should be recognized when's benefit has been consumed. The consumption of benefit may occur when 1) the expenses are matched with the revenues 2) they are allocated on a systematic and rational basis to the periods in which the related assets are expected to provide benefits 3) the cash is Spent or liabilities are incurred for goods and services that are used up either simultaneously with the acquisition or soon after

Comprehensive income

The change in equity during s period from transactions and other events and circumstances from nonowner sources It includes changes inequit duringa period except those resulting from investments by owners and distribution to owners

Conservatism constraint

The conservatism constraint is a response to uncertainty. When alternative accounting methods are appropriate, the one having the less favorable effect on net income and total assets is preferable. - however conservatism doesn't permit understatement of total assets and net Income 2 furthermore sfac 5 describes " a general tendency to emphasize purchase and sale transitions and to apply conservative procedures in accounting recognition 3)the application of the lower cost of market rule to inventories is an example of conservatism

Dividends

The decreases in equity resulting from transfers by the entity to owners

What are the statements of financial accounting concepts intended to establish?

The objectives and concepts for use in developing standards of financial accounting and reporting. The sfac do not establish accounting and reporting requirements.they are nonauthoritative guidance for nongovernmental entities. Sfacs describe the objectives,qualitative characteristics,and other fundamental concepts that guide the fasb in developing sound accounting principles

Replacement cost

The relevant attribute defines as the cash or equivalent that would be paid for a current acquisition of the same or an equivalent asset It's used to measure certain inventories, Measured at market when it is lower than historical cost

Historical cost

The relevant attribute for plant assets and most inventories It is the cash or equivalent actually paid for an asset and it is ordinarily adjusted subsequently for amortization or allocation

Present value

The relevant attribute that incorporates time value of money concepts The most relevant method of measurement Used for long term receivables and payables

Current market value

The relevant attribute used to measure assets expected to be sold at below their carrying amount Is used to measure marketable securities Those held by investment companies or assets expected to be sold at below their carrying cost

Net realizable value

The relevant attribute used to measure short term receivables and inventories It its the cash or equivalent expected to be received for asset in the due course of business's minus the costs of completion and sale

Economic entity assumption

The reporting entity is separately identified for the purpose of economic and financial accountability.the the economic affairs of owners and managers are kept separate from those of the reporting entity. Also,the legal entity and the economic entity are not necessarily the same e.g a parent and its subsidiary .

Equity

The residual interest in assets of an entity after subtracting liabilities.in a business entity equity is the ownership interest.

Expenses

The use of assets or incurrence of liabilities by an entity's major or central operations Outflows or other uses of assets or incurrences of la Liabilities from either delivering or producing changes in equity goods b) providing services c) other activities that qualify as ongoing or central operations

Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?

To Match the costs of production with revenues as earned - if costs benefit more than one accounting period ,they should be systematically and rationally allocated to all periods benefited.tbis is done by.capitalizing the costs and depreciating or amortizing them over the periods in which the asset helps generate revenue.the term matching is most narrowly defined as the expense recognition principle of associating cause and effect ,but it is sometimes used more broadly to apply to the entire process of expense recog. Or even of income determination