Exam 1 TopHat Questions
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.)
Neutrality
Four qualitative characteristics that are related to both relevance and faithful representation.
Comparability, Verifiability, Timeliness, and Understability
Increases in net assets in a period from nonowner sources.
Comprehensive income
What is the quality of information that enables users to confirm or correct prior expectations?
Confirmatory Value
Quality of information that confirms users' earlier expectations.
Confirmatory value
Identify the pervasive constraint developed in the conceptual framework.
Cost
Reporting must be done at defined time intervals.
Periodicity assumption
Why do you believe it is hard for the very best standards to be put into place?
Politics and self interest
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.
Predictive value
Assets and liabilities are measured at their value as of the original transaction date
Historical Cost
Issuance of common stock
Investments by owners
Increases ownership interest.
Investments by owners, comprehensive income
Interest payable
Liabilities
Obligation to transfer resources arising from a past transaction.
Liabilities
Loss on sale of equipment
Losses
An item is not recorded because its effect on income would not change a decision.
Materiality
Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.
Measurement - historical cost
Agricultural companies use fair value for purposes of valuing crops.
Measurement Principle - fair value
Fair value changes are not recognized in the accounting records.
Measurement Principle - historical cost
Goodwill is recorded only at time of purchase.
Measurement principle - historical cost
An allowance for doubtful accounts is established.
Measurement principle and expense recognition principle
Absence of bias intended to attain a predetermined result or to induce a particular behavior.
Neutrality
Information that is capable of making a difference in the decisions of users in their capacity as capital providers.
Relevance
Predictive value is an ingredient of this fundamental quality of information.
Relevance
Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?
Relevance
Two fundamental qualities that make accounting information useful for decision-making purposes.
Relevance and Faithful Representation
What are the two fundamental qualities that make accounting information useful for decision-making?
Relevance and Faithful Representation
Assets are valued at the cost to replace them. Also called entry value.
Replacement Cost
Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
Revenue recognition principle
Revenue is recorded when the product is delivered.
Revenue recognition principle
Sales
Revenues
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.)
Neutrality
Ignores the economic consequences of a standard or rule.
Neutrality
Having information available to users before it loses its capacity to influence decisions.
Timeliness
Issuance of interim reports is an example of what enhancing quality of relevance?
Timeliness
Motorola issues its quarterly reports immediately after each quarter ends.
Timeliness
Watteau 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.)
Timeliness
Requires a high degree of consensus among individuals on a given measurement.
Verifiability
Roddick 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.)
Verifiability
The annual reports of Best Buy Co. are audited by certified public accountants.
Verifiability
Items characterized by service potential or future economic benefit.
Assets
Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?
Comparability (Consistency)
Financial information is presented so that investors will not be misled.
Full Disclosure Principle
Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
Full disclosure
All important aspects of bond indentures are presented in financial statements.
Full disclosure principle
All significant post-balance-sheet events are disclosed.
Full disclosure principle
Gain on sale of investment
Gains
Arises from peripheral or incidental transactions.
Gains, losses
Except for monetary assets and liabilities accounts are restated in terms of the general purchasing power of the dollar as of a given date
General price level adjustment
Starbucks Corporation has used straight-line depreciation since it began operations.
Comparability
Imperative for providing comparisons of a company from period to period.
Comparability (Consistency)
Inventory
Assets
Which of the following statements is true? A GAAP is the term used to indicate the whole body of FASB authoritative literature. B Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements. C The primary governmental body that has influence over the FASB is the AICPA. D The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.
A GAAP is the term used to indicate the whole body of FASB authoritative literature.
The authoritative status of the conceptual framework is as follows: A It is used when there is no standard or interpretation related to the reporting issues under consideration B It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue C It takes precedence over all other authoritative literature D It has no authoritative status
A It is used when there is no standard or interpretation related to the reporting issues under consideration
Which of the following statements is NOT true of Luca Pacioli? A Luca Pacioli is the Father of Accounting because he developed double-entry bookkeeping B Luca was a true Renaissance man, with a knowledge of literature, art, mathematics, business & the sciences. C Luca, a Franciscan monk, was friends with Leonardo da Vinci. D The name of Luca's treatise translates into "Everything About Arithmetic, Geometry, and Proportion".
A Luca Pacioli is the Father of Accounting because he developed double-entry bookkeeping
In attempting to increase the importance of financial reporting the Jenkins Committee has placed the most emphasis on which of the following areas? A Predictive uses B Accountability C Comparability D Consistency
A Predictive uses
What is meant by "political factors influencing accounting policy making"? A Those who are affected by the rules will usually try to influence what those rules will be. B Republicans prefer deregulating the markets. C Democrats prefer taxing the wealthy.
A Those who are affected by the rules will usually try to influence what those rules will be.
Accounting theory is never a finished product. A True B False
A True
Most theory used in accounting research is borrowed from economics and social sciences - especially psychology. A True B False
A True
The objective of financial reporting places most emphasis on: A reporting to capital providers B reporting on stewardship C providing specific guidance related to specific needs D providing information to individuals who are experts in the field
A reporting to capital providers
Which party is the primary producer of accounting theory and research? A Practitioners B Academic accountants C SEC D state legislative bodies
B Academic accountants
Accounting practitioners have criticized some proposed accounting standards on the grounds that they would be difficult to implement because of measurement problems. They therefore conclude that the underlying theory is inappropriate. Do you agree? A Yes. If we can't measure it then we must not be thinking clearly about the concept. B No. We may just need more time to make the measurements operational.
B No. We may just need more time to make the measurements operational.
General purpose financial statements are prepared primarily for: A internal users B external users C auditors D government regulators
B external users
The means by the Jenkins Committee intended to improve financial reporting is largely by: A educating financial statement users B improved and additional disclosures C changing the format of the financial statements D accountability of auditors
B improved and additional disclosures
"Disclosure" pertains to: A presentation of information in the financial statements B presentation of information by means other than recognition in the financial statements C recognition of information in the financial statements of footnotes D presentation of information in any source available
B presentation of information by means other than recognition in the financial statements
The 10-K report filed annually with the SEC is basically aimed toward which of the following groups? A Shareholders B professional financial analysts C Management D All of the above
B professional financial analysts
The expectations gap is: A what financial information management provides and what users want B what the public thinks accountants should do and what accountants think they can do C what the governmental agencies want from standard-setting and what the standard setters provide D what the users of financial statements want from the government and what is provided
B what the public thinks accountants should do and what accountants think they can do
Which of the following is NOT true regarding the concept of comparability? A Comparability refers to accounting for similar transactions similarly and different circumstances differently. B Comparability refers to comparing alternatives in order to make a decision. C Comparability is an inherent quality of accounting numbers in the same sense that relevance and reliability are. D Uniformity influences comparability.
C Comparability is an inherent quality of accounting numbers in the same sense that relevance and reliability are.
Under which of the following circumstances should finite uniformity be used? A If the event is a simple event. B If the event is a complex event in which relevant circumstances cannot be measured and implemented in a cost-effective manner C If the event is a complex event in which relevant circumstances can be measured and implemented in a cost-effective manner D Both a and b
C If the event is a complex event in which relevant circumstances can be measured and implemented in a cost-effective manner
What was the topic discussed on the Rosetta Stone? A A prayer to the Eqyptian gods B Praise for the Egyptian pharoh C Notice to Pharoh's tax collectors of the temple's status as tax exempt D A listing of the Egyptian god and goddesses
C Notice to Pharoh's tax collectors of the temple's status as tax exempt
Flexibility applies to which of the following situations? A Situations in which there are relevant circumstances and more than one possible accounting method exists B Situations in which there are relevant circumstances but only one possible accounting method exists C Situations in which there are no observable relevant circumstances and more than one possible accounting method exists D All of the above
C Situations in which there are no observable relevant circumstances and more than one possible accounting method exists
Where rigid uniformity is in effect, the underlying reasons may be attributable to all but which one of the following factors? A a desire for conservatism B an inability of the standard-setting organization to determine meaningful relevant circumstances C an attempt to increase representational faithfulness of the measurement D recognition of the fact that an allocation is involved
C an attempt to increase representational faithfulness of the measurement
The system of disclosure largely in effect today is called: A selective disclosure B conventional disclosure C differential disclosure D standard disclosure
C differential disclosure
Which of the following three inputs to the accounting policy-making function is most important? A accounting theory B political factors C economic conditions
C economic conditions
Users questioned by the Jenkins Committee indicated that the single most important purpose the committee could accomplish was increasing the usefulness of: A Pension disclosures B income tax disclosures C segmental disclosures D comprehensive income disclosures
C segmental disclosures
Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption.
Comparability
Duggan, Inc. 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?
Comparability
Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.
Comparability
Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena.
Comparability
Accounting tokens and envelopes.... A were civilization's first technology for storing memory. B were the exclusive domain of account keepers until about 2000 BC when writing was used for funerary rituals C were maintained by the Mesopotamian equivalent of today's accountant, the scribe, whose duties included "writing" up commercial agreements and ensuring the transaction complied with legal codes. D All of the above are correct statements.
D All of the above are correct statements.
All of the following are TRUE statements EXCEPT: A Writing was invented by accountants. B The earliest accounting tokens date to around 7,000 B.C. C Early accountants stored accounting tokens in hollow clay balls. D Clay tokens were covered in ink and pressed onto clay tablets.
D Clay tokens were covered in ink and pressed onto clay tablets.
All of the following are examples of measurements which possess social reality EXCEPT: A Income numbers used to evaluate managers and which affect their salaries and bonuses B Income numbers and balance sheet ratios impacting dividend payments C Income numbers and balance sheet ratios impacting a firm's credit standing and thus its cost of capital D Corporate allocations for which a division manager is not held accountable
D Corporate allocations for which a division manager is not held accountable
The major key players on the international side are the: A IASB and FASB B IOSCO and the SEC C SEC and FASB D IASB and IOSCO
D IASB and IOSCO
Accounting standard setters use the following process in establishing accounting standards. A Research, exposure draft, discussion paper, standard B Discussion paper, research, exposure draft, standard C Research, preliminary views, discussion paper, standard D Research, discussion paper, exposure draft, standard
D Research, discussion paper, exposure draft, standard
Which of the following is TRUE? A The objective of financial statements emphasizes a stewardship approach for reporting financial information. B The objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and statement of owners' or stockholders' equity. C Because they are generally shorter, FASB interpretations are subject to less due process compared to FASB standards. D The objective of financial reporting uses an entity (A = L + OE) rather than a proprietary approach ( A - L = OE)in determining what information to report.
D The objective of financial reporting uses an entity (A = L + OE) rather than a proprietary approach ( A - L = OE)in determining what information to report.
GAAP is comprised of: A Financial standards, interpretations, and concept statements B FASB financial standards C FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations D any authoritative guidance included in the FASB codification
D any authoritative guidance included in the FASB codification
Valuation of assets is a function of discounted cash flows and income is measured by the change in PV of cash flows arising from operations during the period
Discounted cash flows
Declares and pays cash dividends to owners.
Distributions to owners
Dividends
Distributions to owners
Each enterprise is kept as a unit distinct from its owner or owners.
Economic entity assumption
The use of consolidated statements is justified.
Economic entity assumption
Additional paid in capital
Equity
Retained earnings
Equity
Assets are valued at the net realizable amount that the enterprise could expect to obtain for them in an orderly liquidation
Exit value
Intangible assets are amortized over periods benefited.
Expense Recognition Principle
Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
Expense recognition
Rationale for accrual accounting.
Expense recognition and revenue recognition principle
A company charges its sales commission costs to expense.
Expense recognition principle
Depreciation
Expenses
Neutrality is an ingredient of this fundamental quality of accounting information.
Faithful Representation
