Connect: the Conceptual Framework

Recognition refers to the process of

recording information in the basic financial statements

A company purchases a building by signing a $200,000 10% interest-bearing note due at the end of five years. At what amount should the building be recorded?

$200,000

Hernandez Corporation purchases a building for $300,000 cash. The building was appraised at $310,000. The tax assessment on the building was $280,000. Three months after purchasing the building, Company Z offers Hernandez $320,000 for the building. At what amount should the building be reported in Hernandez's financial statements according to the historical cost principle?

$300,000

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

Definition Measurability relevance reliability

The _____ approach for measuring fair value estimates value by estimating future amounts of earnings or cash flows and then mathematically converting these amounts to a single present value.

Income

Accounting information meets the qualitative characteristic of consistency if it is measured and reported the same way

across different reporting periods

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as _____

assets

What element of the financial statements is described by the following definition? "Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions."

assets

Using the same accounting methods in each period refers to the qualitative characteristic of

consistency

The _____ approach determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition.

cost

Which approach to measuring fair value determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition?

cost approach

The full-disclosure principle requires that financial reports should include any information that could affect the decisions made by external users, within the constraint that the benefits of that information should exceed the _____ of providing the information

costs

Schoene Company reports its inventory at replacement cost. This is an application of the measurement attribute of

current cost

The cost that would be incurred to purchase or reproduce an asset is referred to as

current cost

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

decision usefulness

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

definition reliability measurability relevance

The process of including additional pertinent information in the financial statements and accompanying notes is referred to as _____

disclosure

The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date is the _____ _____

fair value

_____ _____ bases measurements on the price that would be received in an orderly market transaction.

fair value

When there is agreement between a measure or description of an item and the phenomenon it purports to represent, the item possesses the fundamental characteristic of

faithful representation

Disclosure is the process of including additional pertinent information in

financial statements notes to the financial statements

The FASB recently issued a standard that requires companies recognize revenue

for the amount the company expects to be entitled to receive when goods or services are transferred to customers at a point in time or over a period of time

Faithful representation requires information to have which of the following characteristics?

free from material error neutrality completeness

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

full-disclosure

Measuring assets and liabilities based on their original transaction value is an example of

historical cost

The principle stating that asset and liability measurements should be based on the amount given or received in the original transaction is referred to as the _____ _____ principle

historical cost

A transfer of something of value to obtain or increase ownerships interests in a business is called

investments by owners

What level of the fair value hierarchy includes inputs other than quoted prices that are observable for the asset or liability?

level 2

Simply put, _____ are the obligations of a company

liability

The fair value approach that uses current information from recent transactions or exchanges in active trading on stock exchanges is the _____ approach

market

Which approach to measuring fair value uses information from actively traded stock on the New York Stock Exchange?

market approach

Predictive value, confirmatory value, and _____ all relate to the fundamental characteristic of relevance in financial information.

material

The process of associating numerical amounts to the elements of the financial statements is referred to as

measurements

Another term for equity is

net assets

The amount of cash into which an asset is expected to be converted in the normal course of business is the asset's

net realizable value

Reporting assets at net realizable value helps predict:

predict future cash flows

The income approach for measuring fair value estimates future amounts of earnings or cash flows first and then mathematically converts these amounts to a single _____ value

present

The measurement method based on future cash flows discounted for the time value of money is referred to as _____ value

present

The measurement attribute that is based on future cash flows discounted for the time value of money is

present value

The main focus of accounting information is to

provide useful information for decision making

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

providers of capital

Predictive value and confirmatory value are components of which primary qualitative characteristic?

relevance

The two fundamental characteristics of financial information are

relevance and faithful representation

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

relevant

Expense recognition is implemented by which of the following ways?

systematic and rational allocation associating expenses and revenues in a specific period of time in the period incurred cause-and-effect relationship

A recently issued FASB standard requires that companies recognize revenue when goods or services are _____ to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

transferred

Matching cost of goods sold with the revenues generated during the period is an example of which approach to expense recognition?

cause-and-effect relationship

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

Which of the following are enhancing characteristics of financial information?

comparability verifiability timeliness Understandability

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?

confirmatory value predictive value

Before they can be recognized, favorable items tend to require more verification than unfavorable items. Accountants refer to this as

conservatism

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

economic entity going concern monetary unit periodicity

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

economic entity assumption going concern assumption periodicity assumption monetary unit assumption

Measurement is the process of associating numerical amounts to the _____ reported in financial statements.

elements

Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests is a(n) _____ by owners

investments

A liability has which of the following characteristics?

it is a present obligation it is due to a past transaction or event it is a probably future sacrifice of an economic benefit

What level of the fair value hierarchy includes quoted market prices in active markets for identical assets and liabilities?

level 1: quoted market prices in active markets for identical assets or liabilities

Conservatism is inconsistent with which characteristic of accounting information?

neutrality

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

recognition

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

true

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

uncertainty amount timing

When the cost of an item can be traced to objective evidence of a transaction, such as a sales receipt, canceled check, and bank statement, the information has the quality of

verifiability

Information is _____ if different independent measures would reach consensus about whether it is representationally faithful.

verifiable