FDIC Accounting Exam 1, Chapters 1-3
Chapter 2 Gains:
Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.
Chapter 2 Investments by Owners:
Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise.
Chapter 3 9. Transactions are initially recorded in the general journal. A. True B. False
A. True Transactions are initially recorded in the general journal.
Chapter 3 20. When a company makes reversing entries, it debits all cash payments of expenses to the related expense account. A. True B. False
A. True When a company makes reversing entries, it debits all cash payments of expenses to the related expense account.
Chapter 3 18. When a merchandiser prepares closing entries, Cost of Goods Sold is credited and Income Summary is debited. A. True B. False
A. True When a merchandiser prepares closing entries, Cost of Goods Sold is credited and Income Summary is debited.
Chapter 3 12. Adjustments are often prepared A. after the balance sheet date, but dated as of the balance sheet date. B. after the balance sheet date, and dated after the balance sheet date. C. before the balance sheet date, but dated as of the balance sheet date. D. before the balance sheet date, and dated after the balance sheet date.
A. after the balance sheet date, but dated as of the balance sheet date. Adjustments are often prepared after the balance sheet date but are dated as of the balance sheet date.
Chapter 3 10. The difference between the cost of a depreciable asset and its related contra account, Accumulated Depreciation is referred to as the asset's: A. book value. B. fair value. C. market value. D. real value.
A. book value. The depreciated cost of an asset is its book value.
Chapter 2 8. Enhancing qualities of accounting information include: A. comparability and verifiability. B. relevance and consistency. C. comparability and materiality. D. relevance and faithful representation.
A. comparability and verifiability. The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability.
Chapter 1 Notes What are the two sets of standards accepted for international use?
-U.S. GAAP, issued by the FASB. -International Financial Reporting Standards (IFRS), issued by the IASB.
Chapter 2 5. The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises? A. 7 B. 6 C. 5 D. 4
A. 7 The framework consists of 7 Statements of Financial Accounting Concepts. SFAC 1 -3 and 5 - 8. SFAC 4 deals with non-business enterprises.
Chapter 3 7. Which of the following is not a recordable event or item? A. Changes in managerial policy. B. Sales of the company's product in overseas markets. C. Declaration of dividends. D. Purchase of supplies.
A. Changes in managerial policy. All sales, the declaration of dividends, and the purchase of supplies are all recordable events. While changes in managerial policy may be important, the company does not record it in the accounts.
Chapter 1 6. Which group selects members of the FASB? A. FAF. B. SEC. C. AICPA. D. FASAC.
A. FAF. The Financial Accounting Foundation (FAF) is the group that selects members of the FASB.
Chapter 3 Deferred Accounts
-Deferred accounts always require adjusting entries at the end of each reporting period -The adjusting entries always involve balance sheet account and an income statement.
Chapter 1 Notes In terms of Accounting and Capital Allocation give the definition for: Users (Present and Potential)
These are investors and creditors who use financial reports to make their capital allocation decisions.
Chapter 1 Notes What are some major sources of GAAP?
-FASB Standards, Interpretations, and Staff Positions. -APB Opinions. -AICPA Accounting Research Bulletins.
Chapter 2 Matching Principle is a financial concept that:
-Indicates that an entity should match expenses in the same period that it recognizes corresponding revenues. -Forms the foundation for accrual-based accounting along with the Revenue Recognition Principle. -Is often used in connection with deferred accounts (i.e. unearned revenue, deferred expenses, etc.)
Chapter 2 Conservatism Principle (commonly referred to as Prudence). If in doubt as to the proper accounting treatment, select the treatment that would be least likely to:
-Overstate income or assets -Understate expenses or liabilities *Note: The Conservatism Principle is not one of the qualities of financial reporting in the accounting framework.
Chapter 3 Accrual-Basis Accounting
-Recognizes revenue when the performance operation is satisfied. -Recognize expenses when incurred, without regard to the time of receipt or payment of cash.
Chapter 3 Cash-Basis Accounting
-Record revenue only when cash is received. -Record expenses only when cash is dispersed.
Chapter 3 What are the two types of accounting and which is more broadly used?
1. Accrual-Basis accounting: Most companies use AB accounting. 2. Cash-Basis Accounting: CB financial statements are not in conformity with GAAP.
Chapter 3 What are the two types of Accruals?
1. Accrued Revenues 2. Accrued Expenses
Chapter 2 Under Level 2, list the Elements of accounting.
1. Assets 2. Liabilities 3. Equity 4. Investment by Owners 5. Distribution to Owners 6. Comprehensive Income 7. Revenues 8. Expenses 9. Gains 10. Losses
Chapter 2 Level Three: Recognition, Measurement, and Disclosure Concepts, list the three sup-topics that fall under this level:
1. Assumptions 2. Principles 3. Constraint
Chapter 3 What types of accounts are associated with a Corporation's equity section?
1. Common Stock 2. Paid-in Capital in Excess of par 3. Dividends 4. Retained Earnings
Chapter 2 Under Level 2, list the subtopics of Enhancing Qualities.
1. Comparability 2. Verifiability 3. Timeliness 4. Understandability
Chapter 2 What is the one point which falls under the Constraint topic in the Third Level of the Conceptual Framework?
1. Cost
Chapter 3 9. Depreciation and amortization allocate the cost of long-term assets to the periods which benefit from their use. A. True B. False
A. True Tangible assets are depreciated and intangible assets are amortized so that that the cost of the assets is allocated over their useful lives in a systematic and rational manner.
Chapter 3 What do the following acronyms stand for and how do they help us? DEAD CRRLC
1. DEAD: Debit: Expenses, Assets, Dividends -For this acronym, use the debit function on the elements mentioned to raise them in their respective T accounts. 2. CRRLC: Credit: Revenues, Retained Earnings, Liabilities, and Common Stock -For this acronym, use the credit function on the elements mentioned to raise them in their respective T accounts.
Chapter 3 What are the two types of Adjusting Entries?
1. Deferrals 2. Accruals
Chapter 2 Which four points fall under the Assumption topic in the Third Level of the Conceptual Framework?
1. Economic Entity 2. Going Concern 3. Monetary Unit 4. Periodicity
Chapter 3 Summarize the Accounting Cycle:
1. Enter the transactions of the period in appropriate journals. 2. Post the journals to the ledger (or ledgers). 3. Take an unadjusted trial balance (trial balance). 4. Prepare adjusting journal entries and post to the journal(s). 5. Take a trial balance after adjusting (adjusted trial balance.) 6. Prepare the financial statements from the second trial balance. 7. Prepare closing journal entries and post to ledger(s). 8. Take a post-closing trial balance (optional). 9. Prepare reversing entries (optional) and post to ledger(s).
Chapter 2 Which four points fall under the Principles topic in the Third Level of the Conceptual Framework?
1. Measurement 2. Revenue Recognition 3. Expense Recognition 4. Full Disclosure
Chapter 3 What types of accounts are associated with a Proprietorship or Partnership's equity section?
1. Owners' Capital 2. Owners' Drawings
Chapter 3 What are the two types of Deferrals?
1. Prepaid Expenses 2. Unearned Revenues
Chapter 3 What are the two types of Ownership Structures?
1. Proprietorship or Partnership 2. Corporation
Chapter 2 Second Level: Fundamental Concepts, which two main categories fall below this level?
1. Qualitative Characteristics 2. The (Elements) of accounting.
Chapter 2 Under Level 2, list the subtopics of Fundamental Qualities and their sub-points.
1. Relevance a. Predictive Value b. Confirmatory Value c. Materiality 2. Faithful Representation a. Completeness b. Neutrality c. Free from error
Chapter 3 The purpose of Transaction Analysis is:
1. to identify the type of account involved, and 2. to determine whether a debit or a credit is required.
Chapter 3 19. The accounting cycle for a merchandiser is the same as the accounting cycle for a service firm. A. True B. False
A. True The accounting cycle is performed in the same fashion by both a service firm and a merchandiser.
Chapter 3 Event:
A happening of consequence. An event generally is the source or cause of changes in assets, liab, and equity. Events may be external or internal.
Chapter 3 Account:
A systematic arrangement that shows the effect of transactions and other events on a specific element (asset, liability and so on). Companies keep a separate account for each asset, liab., revenue and expense, and for capital (owners' equity). Because the format of an account often resembles the letter T, it is sometimes referred to a a T account.
Chapter 3 Every journal entry affects one or more of the following items: assets, liabilities, stockholders' equity, revenues, or expenses. A. True B. False
A. True
Chapter 3 Overstatement of income leads to overstatement of total assets. A. True B. False
A. True
Chapter 3 Understatement of Income leads to understatement of Total Assets. A. True B. False
A. True
Chapter 3 13. After journalizing and posting all adjusting entries, a company prepares an adjusted trial balance that is the primary basis for preparation of the financial statements. A. True B. False
A. True An adjusted trial balance is prepared after all adjusting entries have been posted and is the primary basis for preparing the financial statements.
Chapter 3 2. Companies may prepare a trial balance at any time. A. True B. False
A. True Companies may prepare a trial balance at any point in time, including after adjusting entries and after closing entries.
Chapter 3 16. Financial statements can be prepared directly from the adjusted trial balance. A. True B. False
A. True Financial statements can be prepared directly from the adjusted trial balance.
Chapter 3 4. Revenue, equity and liability accounts have normal credit balances. A. True B. False
A. True Revenue, equity and liability accounts all are increased by credits and have normal credit balances.
Chapter 2 13. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the A. economic entity assumption. B. relevance characteristic. C. comparability characteristic. D. neutrality characteristic.
A. economic entity assumption. Parent-subsidiary financials are an example of the economic entity assumption.
Chapter 2 14. The assumption that implies that the economic activities of an enterprise can be identified with a particular unit of accountability is the: A. economic entity assumption. B. going concern assumption. C. monetary unit assumption. D. periodicity assumption.
A. economic entity assumption. The economic entity assumption implies that the economic activities of an enterprise can be identified with a particular unit of accountability.
Chapter 3 7. A trial balance A. proves that debits and credits are equal in the ledger. B. chronologically lists transactions and other events. C. proves that a company recorded all transactions. D. All of these answer choices are correct.
A. proves that debits and credits are equal in the ledger. A trial balance proves that debits and credits are equal in the ledger.
Chapter 3 When converting to IFRS, a company must: A. recast previously issued financial statements in accordance with IFRS. B. use GAAP in the reporting period but subsequently use IFRS. C. prepare at least three years of comparative statements. D. use GAAP in the transition year but IFRS in the reporting year.
A. recast previously issued financial statements in accordance with IFRS.
Chapter 3 Transaction:
An external event involving a transfer or exchange between two or more entities.
Chapter 3 Balance Sheet
Assets = Liability + Equity
Chapter 3 2. Real accounts are periodically closed. A. True B False
B False Real or permanent accounts are not closed; only nominal (also called temporary) accounts are closed at the end of each accounting period.
Chapter 3 3. Which of the following is a nominal account? A. Interest Payable. B. Dividends. C. Cash. D. Retained earnings.
B. Dividends. Interest payable, cash, and retained earnings are all real (permanent) accounts. Dividends is a nominal (temporary) account.
Chapter 2 16. The historical cost of a liability cannot be established, so companies use the present value of cash flows to value liabilities. A. True B. False
B. 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.
Chapter 2 9. Information that has been measured and reported in a similar manner for different enterprises is considered consistent. A. True B. False
B. False Comparability is between firms, consistency is present when a company applies the same accounting treatment to similar events, from period to period.
Chapter 2 18. 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. A. True B. False
B. 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.
Chapter 3 17. Cost of goods sold appears on the income statement of a service firm but not a merchandising firm. A. True B. False
B. False Only merchandisers report cost of goods sold on their income statements, service firms do not report cost of goods sold.
Chapter 2 10. The fundamental quality of faithful representation ensures that financial statements are totally free from error. A. True B. False
B. 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.
Chapter 2 6. The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users. A. True B. False
B. 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.
Chapter 3 Overstatement of expenses leads to overstatement of Total Assets. A. True B. False
B. False Overstatement of Expenses leads to understatement of Total Assets.
Chapter 3 Understatement of Expenses leads to understatement of Total Assets. A. True B. False
B. False Understatement of Expenses leads to overstatement of Total Assets.
Chapter 3 17. In the closing process all of the revenue and expense account balances are transferred to the: A. Capital account. B. Income Summary account. C. Retained Earnings account. D. Dividends account.
B. Income Summary account. All revenue and expense account balances are transferred to the Income Summary account.
Chapter 3 1. _________ is the process of transferring the accounts and amounts from the book of original entry to the ledger accounts. A. Journalizing. B. Posting. C. Closing. D. Ledgerizing.
B. Posting. Posting is the process of transferring the accounts and amounts from the book of original entry to the ledger accounts.
Chapter 3 18. If the entry to close Income Summary to Retained Earnings includes a debit to Income Summary: A. The company has incurred a net loss. B. Retained Earnings will be increased by the current period's net income. C. Dividends paid exceed the net income earned for the period. D. Expenses exceed revenues.
B. Retained Earnings will be increased by the current period's net income. If the Income Summary has a credit balance, the company has net income because revenues exceeded expenses. To close the account, Income Summary is debited and the current period's net income is transferred to Retained Earnings.
Chapter 3 16. The proper sequence of financial statement preparation is: A. The Retained Earnings Statement, the Balance Sheet, the Income Statement, and then the Statement of Cash Flows. B. The Income Statement, the Retained Earnings Statement, the Balance Sheet, and then the Statement of Cash Flows. C. The Balance Sheet, the Retained Earnings Statement, the Income Statement, and then the Statement of Cash Flows. D. The Statement of Cash Flows, the Income Statement, the Retained Earnings Statement, and then the Balance Sheet.
B. The Income Statement, the Retained Earnings Statement, the Balance Sheet, and then the Statement of Cash Flows. The proper sequence of financial statement preparation is the Income Statement, the Retained Earnings Statement, the Balance Sheet, and then the Statement of Cash Flows.
Chapter 3 6. Which of the following is an internal event? A. A transaction with another entity. B. Using machinery in operations. C. A change in the price of a good that an entity buys or sells. D. A flood.
B. Using machinery in operations. Using machinery in operations is an internal event; all the other events listed are external events.
Chapter 3 14. An accrued expense is A. an expense which is recorded with the passage of time. B. an expense that has been incurred but for which payment has not yet been made. C. an expense for which cash is paid before the expense is incurred. D. initially recorded as an asset.
B. an expense that has been incurred but for which payment has not yet been made. An accrued expense is an expense that has been incurred but for which payment has not yet been made.
Chapter 3 6. When a dividend is declared: A. assets decrease. B. liabilities increase. C. stockholders' equity increases. D. All of these answer choices are correct.
B. liabilities increase. When a dividend is paid assets decrease and liabilities decrease. When a dividend is declared, liabilities increase and stockholders' equity decreases.
Chapter 3 12. Unearned revenues are: A. revenues. B. liabilities. C. accruals. D. All of these answer choices are correct.
B. liabilities. Unearned revenues are liabilities because the firm owes the customer goods or services.
Chapter 3 14. Adjusting entries can be classified as either: A. accruals or reversals B. prepayments or accruals. C. real or nominal. D. internal or external.
B. prepayments or accruals. The two types of adjustments are prepayments and accruals.
Chapter 2 19. In 2010, the FASB and IASB completed the first phase of a jointly created conceptual framework and in this phase they agreed on A. the elements of financial statements. B. the objective of financial reporting. C. the constraints of financial reporting. D. All of these answer choices are correct.
B. the objective of financial reporting. In 2010, the FASB and IASB completed the first phase of a jointly created conceptual framework and in this phase they agreed on the objective of financial reporting and a common set of desired qualitative characteristics.
Chapter 2 11. Companies and their auditors have adopted a general rule of thumb that anything under _____ of net income is considered not material. A. 10%. B. 15%. C. 5%. D. 2%.
C. 5%. Anything under 5% of net income is generally considered not material.
Chapter 3 21. Which one of the following guidelines regarding reversing entries is incorrect? A. All accruals should be reversed. B. All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed. C. Adjusting entries for bad debts are reversed. D. None of these answer choices are correct.
C. Adjusting entries for bad debts are reversed. Adjusting entries for bad debts are not reversed.
Chapter 3 11. If an adjusting entry is not made for a deferred revenue which was initially credited to an unearned revenue account, which of the following results? A. Liabilities are understated. B. Revenues are overstated. C. Assets are unaffected. D. All of these answer choices are correct.
C. Assets are unaffected. If an adjusting entry is not made for a deferred revenue which was initially credited to an unearned revenue account, liabilities are overstated, revenues are understated, and assets are unaffected.
Chapter 3 3. Which of the following is not transferred to Retained Earnings at the end of the period? A. Revenues. B. Dividends. C. Common stock. D. Expenses.
C. Common stock. A company transfers dividends, revenues and expenses to retained earnings at the end of the period. Common stock is a stockholders' equity account, and is not closed to retained earnings at the end of the period.
Chapter 3 15. All of the following statements about contra asset accounts are true except: A. Contra asset accounts have normal credit balances. B. Contra asset accounts are permanent accounts. C. Contra asset accounts are not reported in the financial statements. D. Contra asset accounts are increased with credits.
C. Contra asset accounts are not reported in the financial statements. Contra asset accounts are reported on the balance sheet as deductions from the associated asset account.
Chapter 2 12. Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time? A. Investments by owners. B. Revenues. C. Equity. D. Comprehensive income.
C. Equity. The elements that describe resources and claims to resources at a moment in time include 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.
Chapter 3 21. Which of the following columns is generally found on a worksheet? A. Chart of accounts. B. Statement of cash flows. C. Income statement. D. All of these answer choices are correct.
C. Income statement. The columns generally found on a worksheet include the trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.
Chapter 2 17. With regard to fair value, which of the following measurements is considered the least subjective? A. Unobservable inputs. B. Inputs that are observable either directly or through corroboration with observable data. C. Observable inputs that reflect quoted prices for identical assets or liabilities. D. For purposes of fair value, all of the measures are considered equally subjective.
C. Observable inputs that reflect quoted prices for identical assets or liabilities. Observable inputs that reflect quoted prices for identical assets or liabilities are considered the least subjective measurements.
Chapter 3 19. If the balances in both accounts receivable and accounts payable decrease during the year A. the decrease in both the accounts receivable and accounts payable balances will result in a decrease in cash for the period. B. the decrease in both the accounts receivable and accounts payable balances will result in a increase in cash for the period. C. the decrease in the accounts receivable balance would result in an increase in cash for the period. D. the decrease in the accounts payable balance would result in a increase in cash for the period.
C. the decrease in the accounts receivable balance would result in an increase in cash for the period. If the balances in both accounts receivable and accounts payable have decreased during the year the decrease in the accounts receivable balance would result in an increase in cash for the period while the decrease in the accounts payable balance would result in a decrease in cash for the period.
Chapter 3 5. The double-entry accounting system means A. each transaction is recorded with two journal entries. B. each item is recorded in a journal entry, then in a general ledger account. C. the dual effect of each transaction is recorded with a debit and a credit. D. each journal entry must have one debit and one credit, or two debits and two credits.
C. the dual effect of each transaction is recorded with a debit and a credit. The double-entry accounting system means the dual effect of each transaction is recorded with a debit and a credit.
Chapter 2 20. Under IFRS A. companies may apply fair value to natural resources. B. 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. C. the existing conceptual framework is very similar to the conceptual framework under GAAP. D. All of these answer choices are correct.
C. the existing conceptual framework is very similar to the conceptual framework under GAAP. 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.
Chapter 3 Unearned Revenues
Cash received before services are performed.
Chapter 2 Comprehensive Income:
Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Chapter 3 1. Factors that shape an accounting information system include the A. transactions in which the business engages. B. informational demands of management. C. volume of data to be handled. D. All of these answer choices are correct.
D. All of these answer choices are correct. The transactions in which the business engages, the informational demands of management, and the volume of data to be handled are all factors that shape the accounting information system.
Chapter 3 10. Which of the following is a reason the trial balance may not contain up-to-date and complete data? A. Some items may be unrecorded. B. Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. C. Some events are not recorded daily because it's not efficient to do so. D. All of these answer choices are correct.
D. All of these answer choices are correct. The trial balance may not be up-to-date because some items may be unrecorded, some events are not recorded daily because it's not efficient to do so, or some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions.
Chapter 2 15. To be recognized in the main body of financial statements, an item should A. meet the definition of a basic element. B. be relevant and reliable. C. be measurable with sufficient certainty. D. All of these answer choices are correct.
D. All of these answer choices are correct. This answer is correct, but there's a better answer. 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.
Chapter 3 20. To convert cash receipts from customers to revenue on an accrual basis, which of the following adjustments is necessary? A. Add ending Accounts Receivable. B. Subtract ending Unearned Service Revenue. C. Subtract beginning Accounts Receivable. D. All of these answer choices are correct.
D. All of these answer choices are correct. To convert cash receipts from customers to revenue on an accrual basis, the following adjustments are made: -Cash receipts from customers -Subtract beginning A/R -Add ending A/R -Add beginning Unearned Service Revenue -Subtract ending Unearned Service Revenue
Chapter 3 Information in a company's first IFRS statements must: A. have a cost that does not exceed the benefits. B. be transparent. C. provide a suitable starting point. D. All the above.
D. All the above.
Chapter 3 4. Which of the following is an incorrect depiction of the accounting equation? A. Assets = Liabilities + Stockholders' Equity. B. Assets - Stockholders' Equity = Liabilities. C. Assets - Liabilities = Stockholders' Equity. D. Assets + Stockholder's Equity = Liabilities.
D. Assets + Stockholder's Equity = Liabilities. The accounting equation is A = L + SE. It can be rearranged as A - SE = L or A - L = SE. An incorrect depiction of the accounting equation is A + SE = L.
Chapter 3 8. Each general journal entry consists of how many parts? A. One. B. Two. C. Three. D. Four.
D. Four. Each journal entry consists of four parts: (1) the accounts and amounts to be debited; (2) the accounts and amounts to be credited; (3) a date; and (4) an explanation.
Chapter 3 8. Which of the following statements about a trial balance is incorrect? A. Its primary purpose is to prove the mathematical equality of debits and credits after posting. B. It uncovers errors in journalizing and posting. C. It is useful in the preparation of financial statements. D. It proves that all transactions have been recorded.
D. It proves that all transactions have been recorded. A trial balance does not prove that all transactions have been recorded.
Chapter 3 22. The worksheet: A. replaces the financial statements. B. is prepared at the beginning of the period to ready the permanent accounts for the activity that will occur during the period. C. must be prepared on columnar paper. D. None of these answer choices are correct.
D. None of these answer choices are correct. None of the answer choices are correct.
Chapter 3 11. The adjusting entry to record an accrued expense includes a debit to: A. a liability account and a credit to an expense account. B. a liability account and a credit to a revenue account. C. an expense account and a credit to a revenue account. D. an expense account and a credit to a liability account.
D. an expense account and a credit to a liability account. The adjusting entry for accrued expenses includes a debit to an expense account and a credit to a liability account.
Chapter 2 7. When a company's financial statements lack ____________, the auditor generally refers to it in an explanatory paragraph of the audit report. A. confirmatory value. B. predictive value. C. faithful representation. D. consistency.
D. 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 auditor refers to the change in principle in an explanatory paragraph of the audit report.
Chapter 3 15. An adjusting entry would never include a: A. debit to an expense account and a credit to an asset account. B. debit to an expense account and a credit to a liability account. C. debit to a liability account and a credit to a revenue account. D. debit to an asset account and a credit to a liability account.
D. debit to an asset account and a credit to a liability account. An adjusting entry including a debit to an asset account and a credit to a liability account would never occur because income statement amounts would not be adjusted.
Chapter 3 13. If the adjusting entry for an accrued revenue is not made: A. assets will be overstated. B. revenues will be overstated. C. liabilities will be understated. D. equity will be understated.
D. equity will be understated. An accrued revenue relates to services performed but not yet received in cash or recorded. When an adjusting entry is not made to record the accrued revenue, assets are understated, revenues are understated, and equity will be understated. There is no impact on liabilities for accrued revenues.
Chapter 2 8. All of the following are ingredients of relevance except: A. feedback value. B. predictive value. C. materiality. D. neutrality.
D. neutrality. Neutrality is an ingredient of faithful representation, not relevance.
Chapter 3 5. When a corporation purchases a computer for cash, A. liabilities increase. B. stockholders' equity decreases. C. assets increase. D. the account Cash will be credited.
D. the account Cash will be credited. When a corporation purchases a computer for cash, total assets are unchanged (because one asset is exchanged for another) and there are no changes to liabilities or stockholders' equity. When a purchase is made for cash, the cash account is credited.
Chapter 2 Losses:
Decreases in equity, (net assets), from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.
Chapter 2 Distributions to Owners:
Decreases of net assets of a particular enterprise resulting from transferring assets, rendering services or incurring liabilities by the enterprise to owners. Distribution to owners decrease owners decrease ownership interests (or equity) in an enterprise.
Chapter 3 Adjusting Entries
Entries made at the end of an accounting period to bring all accounts up to date on accrual basis, so that the company can prepare correct financial statements.
Chapter 3 Accrued Expenses
Expenses incurred but not yet paid in cash or recorded.
Chapter 3 Prepaid Expenses
Expenses paid in cash before they are used or consumed.
Chapter 2 Revenues:
Inflows or other enhancements of assets of any entity or settlement of its liabilities (or combo of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
Chapter 2 Expenses:
Outflows or other using up of assets or incurrences of liabilities (or a combo of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entities ongoing major or central operations.
Chapter 2 Assets:
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Chapter 2 Liabilities:
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Chapter 2 First Level: Basic Objective:
Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers.
Chapter 3 Real and Nominal Accounts
Real (or permanent) accounts are asset liability and equity accounts; they appear on the balance sheet. Nominal (or temporary) accounts are revenue, expenses and dividend accounts; except for dividends they appear on the income statement. Companies periodically close nominal accounts; they do not close real accounts.
Chapter 3 Explain Chart of Accounts:
Refers to an entity's complete list of account names and numbers. -It is a way of organizing transactions -It can be used with any accounting system, (manual/automated) -Accounts are generally numbered in a manner that allows a user to determine the account type by account number.
Chapter 2 Equity:
Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.
Chapter 3 Income Statement
Revenue - Expenses
Chapter 3 Accrued Revenues
Revenues for services performed but not yet received in cash or recorded.
Chapter 3 Financial Statements
Statements that reflect the collection tabulation and final summarization of the accounting data. Four statements involved: 1. Income Statement measures results of operations during the period. 2. Statement of Retained Earnings reconciles the balance of the retained earnings account from the beginning to the end of the period. 3. Balance Sheet shows the financial condition at the end of a period. 4. Statement of Cash Flows reports the cash provided and used by operating, investing, and financing activities during the period.
Chapter 3 Journal:
The "book of journal entry" where the company initially records transactions and selected other events. Various amounts are transferred from the book of original entry, the journal to the ledger. Entering transaction data in the journal is known as "journalizing".
Chapter 2 The Third Level of the Conceptual Framework for Financial Reporting is generally known as:
The "how" - implementation.
Chapter 2 The First Level of the Conceptual Framework for Financial Reporting is generally known as:
The "why" - purpose of accounting.
Chapter 3 Ledger:
The book (or computer printouts) containing the accounts. A general ledger is a collection of all the asset liability, and owners' equity, revenue and expense accounts. A subsidiary ledger contains the details related to a given general ledger account.
Chapter 2 The Second Level of the Conceptual Framework for Financial Reporting is generally known as:
The bridge between levels 1 and 3.
Chapter 3 Closing Entries
The formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income or net loss to an owners' equity account. Also known as "closing the ledger", "closing the books", or merely "closing".
Chapter 3 Trial Balance:
The list of all open accounts in the ledger and their balances. The trial balance taken immediately after all adjustments have been posted is called and adjusted trial balance. A trial balance taken immediately after closing entries have been posted is called a post-closing (of after-closing) trial balance.
Chapter 3 Posting:
The process of transferring the essential facts and figures from the book of original entry to the ledger accounts.
Chapter 2 18. Which of the following statements about the fair value principle is true? A. Fair value is a market-based measure. B. Fair value is generally less relevant than historical cost. C. Measurements based on fair value increase the objectivity in financial reporting. D. GAAP requires the use of fair value for financial assets and financial liabilities.
A. Fair value is a market-based measure. Fair value is more relevant, more subjective, and GAAP gives companies the option of using fair value for financial assets and financial liabilities.
Chapter 2 4. Which level of the conceptual framework is devoted to the "why" - the purpose of accounting? A. First. B. Second. C. Third. D. All three levels.
A. First. The first level addresses the "why" or purpose of accounting.
Chapter 1 16. All of the following are true regarding IFRS except: A. IFRS includes standards referred to as International Auditing Standards (IAS). B. The adoption of IFRS by U.S. Companies would make it easier to compare them with foreign companies. C. IFRS is more "principle-based than U.S. GAAP. D. IFRS are developed by the IASB.
A. IFRS includes standards referred to as International Auditing Standards (IAS). All of the options are true except that IFRS includes standard referred to as International Financial Reporting Standards, rather than International Auditing Standards.
Chapter 1 Notes What does AICPA stand for?
American Institute of Certified Public Accountants
Chapter 1 11. Politics play no role in establishing GAAP. A. True B. False
B. False Politics is everywhere. GAAP is part of the real world, and it cannot escape politics and political pressures.
Chapter 1 Notes Examples of Financial Statements are:
Balance Sheet Income Statement Statement of Cash flows Statement of Owners' or Stockholders' Equity Note Disclosures
Chapter 2 3. Which level of the conceptual framework is devoted to elements of financial statements and the qualitative characteristics? A. 4th B. 3rd C. 2nd D. 1st
C. 2nd The second level (the bridge) is devoted to the elements of financial statements and the qualitative characteristics.
Chapter 2 2. The conceptual framework for financial reporting consists of how many levels? A. 1 B. 2 C. 3 D. 4
C. 3 There are 3 levels, the "Why", the Bridge between levels 1 & 3, and the "How".
Chapter 1 Notes IFRS stands for: A. International Federation of Reporting Services. B. Independent Financial Reporting Standards. C. International Financial Reporting Standards. D. Integrated Financial Reporting Services.
C. International Financial Reporting Standards.
Chapter 1 Notes An Economic Entity:
Identifies, measures and communicates financial information.
Chapter 1 2. Capital allocation is the process of determining how and at what cost money is allocated among competing interests. A. True B. False
True. Capital allocation is the process of determining how and at what cost money is allocated among competing interests.
Chapter 1 Notes What are the two types of Pronouncements?
1. Accounting Standard Updates 2. Financial Accounting Concepts
Chapter 1 Notes List a few characteristics of the Securities and Exchange Commission (SEC).
1. Established by federal government. 2. Accounting and reporting for public companies. 3. Encouraged private standard-setting body. 4. SEC requires public companies to adhere to GAAP. 5. SEC Oversight. 6. Enforcement Authority.
Chapter 1 Notes What are two truths we must accept when encountering ethical dilemmas in Accounting?
1. GAAP does not always provide an answer. 2. Doing the right thing is not always easy or obvious.
Chapter 1 Notes List the characteristics of International Accounting Standards Board (IASB) and the process in which they distribute information.
1. Issues International Financial Reporting Standards (IFRS). 2. Sets standards used on most foreign exchanges. 3. Sets standards used by foreign companies listing on U.S. securities exchanges. 4. IFRS used in over 115 countries.
Chapter 1 Notes What are the main Financial Reporting Challenges?
1. Non-financial measurements. 2. Forward-looking information. 3. Soft assets. 4. Timeliness 5. Understandability
Chapter 1 Notes What two things are General-Purpose Financial Statements used for?
1. Providing financial reporting information to a wide variety of users. 2. Providing the most useful information possible at the least cost.
Chapter 1 Notes What were the key differences between FASB and APB?
1. Smaller Membership. 2. Full-time, Remunerated Membership. 3. Greater Autonomy. 4. Increased Independence. 5. Broader Representation.
Chapter 1 Notes Decision-Usefulness states that investors are interested in assessing the company through it's:
1. ability to generate net cash inflows and 2. management's ability to protect and enhance the capital providers' investments.
Chapter 1 Notes Objectives of Financial Reporting Provide financial information about the reporting entity that is useful to 1. ___________________________________________________ 2. ________________ 3. ________________ in making decisions in their capacity as capital providers.
1. present and potential equity investors, 2. lenders, and 3. other creditors
Chapter 1 Notes Essential characteristics of accounting are:
1.the identification, measurement, and communication of financial information about 2. economic entities to 3. interested parties.
Chapter 1 13. From the four statements that follow, which are true? 1. Technical competence is not enough when encountering ethical decisions. 2. The pressures "to bend the rules," "to play the game," "to just ignore it" can be considerable. 3. Time, job, client, personal, and peer pressures do not complicate the process of ethical sensitivity and selection among alternatives. 4. The decision may be easier because there is no comprehensive ethical system to provide guidelines. A. 1, 2, 3, and 4 are all true. B. 1, 2, and 4 are all true. C. 2 and 4 are all true. D. 1 and 2 are all true.
D. 1 and 2 are all true. 1 and 2 are true, 3 and 4 are false, pressures complicate ethics as does the lack of guidelines.
Chapter 1 3. Which of the following generally provides a better indication of an enterprise's present and continuing ability to generate favorable cash flows? A. Cash basis accounting. B. Accrual basis accounting. C. Managerial basis accounting. D. Financial basis accounting.
B. Accrual basis accounting. Accrual basis accounting better indicates present and continuing favorable cash flows for a company.
Chapter 2 1. Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point GAAP has adopted it more broadly. A. True B. False
B. 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.
Chapter 1 13. Financial reports generally focus on soft assets such as Apple's brand image or Wal-Mart's supply chain management system. A. True B. False
B. False Financial reports focus on hard assets such as inventory and plant assets.
Chapter 2 6. For information to be relevant, it must have both predictive value and confirmatory value. A. True B. False
B. False For information to be relevant, it needs to have predictive value or confirmatory value or both.
Chapter 1 12. Foreign companies that trade shares in U.S. markets are required to issue statements that comply with U.S. GAAP. A. True B. False
B. False Foreign companies listed on U.S. exchanges are permitted to use IFRS and U.S. companies that list overseas are still permitted to use GAAP.
Chapter 1 11. GAAP is established strictly through the application of careful logic and empirical findings. A. True B. False
B. False GAAP is a product of political action as it is of careful logic or empirical findings.
Chapter 1 15. IFRS is more "rule-based" in its approach to standards than U.S. GAAP. A. True B. False
B. False IFRS is more "principle-based" in its approach to standards than is U.S. GAAP.
Chapter 2 19. 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. A. True B. False
B. False The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.
Chapter 2 20. 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. A. True B. False
B. 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.
Chapter 2 14. The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly. A. True B. False
B. 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.
Chapter 1 14. International Financial Reporting Standards (IFRS) are issued by the: A. FASB. B. IASB. C. IASF. D. SEC.
B. IASB. The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).
Chapter 1 7. Which of the following is not a significant difference between the FASB and its predecessor, the APB? A. Greater autonomy. B. Larger membership. C. Increased independence. D. Broader representation.
B. Larger membership. Board membership decreased from 18 to 7 members.
Chapter 1 Notes ___________ are/is limited. Efficient use of _____________ often determines whether a business thrives. A. Revenue B. Resources C. Financial Institution Specialists D. Capital
B. Resources
Chapter 2 15. Depreciation and amortization policies are justifiable and appropriate because of the: A. economic entity assumption. B. going concern assumption. C. monetary unit assumption. D. periodicity assumption.
B. going concern assumption. The going concern assumption is the justification for depreciation and amortization.
Chapter 2 17. Generally, revenues are recognized when the: A. cash is received. B. performance obligation is satisfied. C. product is produced. D. All of these answer choices are correct.
B. performance obligation is satisfied. When a company satisfies the performance obligation to perform services or sell a product, revenue is recognized.
Chapter 1 9. All of the following are true regarding the FASB Codification except: A. the goal of the Codification was to provide one place where all authoritative literature about financial statement preparation could be found. B. the purpose of the Codification is to create new GAAP. C. the Codification was created to simplify user access. D. the Codification changes the way GAAP is documented, presented, and updated.
B. the purpose of the Codification is to create new GAAP. The Codification's purpose is to integrate and synthesize existing GAAP—not to create new GAAP.
Chapter 1 Notes What types of financial statements were created for general accounting use, and are widely accepted?
Balance Sheet Income Statement Statement of Stockholders' Equity Statement of Cash Flows Note Disclosure
Chapter 1 9. Which of the following publications is not considered a GAAP document? A. Statements of financial standards issued by the FASB B. Accounting interpretations issued by the FASB C. APB Opinions D. Accounting research studies issued by the AICPA
D. Accounting research studies issued by the AICPA The accounting research studies issued by the AICPA are not considered GAAP documents.
Chapter 1 Notes An effective process of capital allocation is critical to a healthy economy, which: A. promotes productivity. B. encourages innovation. C. provides an efficient and liquid market for buying and selling securities. D. All of the above.
D. All of the above.
Chapter 1 10. Generally accepted accounting principles A. include detailed practices and procedures as well as broad guidelines of general application. B. are influenced by pronouncements of the SEC and IRS. C. change over time as the nature of the business environment changes. D. All of these answer choices are correct.
D. All of these answer choices are correct. Generally accepted accounting principles include all items listed.
Chapter 1 Notes What two major entities did American Institute of CPAs establish?
Committee on Accounting Procedures: -1939 to 1959 -Issued 51 Accounting Research Bulletins (ARBs) -Problem-by-problem approach failed Accounting Principles Board: -1959 to 1973 -Issued 31 Accounting Principle Board Opinions (APBOs) -Wheat Committee recommendations adopted in 1973
Chapter 1 Notes Entity Perspective means:
Companies are viewed as separate and distinct from their owners.
Chapter 1 Notes List a few GAAP documents.
-AICPA Accounting Interpretations -Widely recognized and prevalent industry practices -FASB Technical Bulletins -FASB Standards, Interpretations, and Staff Positions -FASB Implementation Guides (Q and A) -FASB Emerging Issues Task Force -AICPA Industry Audit and Accounting Guidelines -APB Options -AICPA AcSEC Practice Bulletins -AICPA Statements of Position -AICPA Accounting Research Bulletins
Chapter 2 2. A conceptual framework is necessary for which of the following reasons? A. It allows the profession to quickly solve new and emerging issues. B. It enables standard setters to issue more useful and consistent pronouncements over time. C. It increases financial statement users' understanding of and confidence in financial reporting. D. All of these answer choices are correct.
D. All of these answer choices are correct. While this is correct, there is a better answer. The conceptual framework allows the profession to quickly solve new and emerging issues and to issue more useful consistent standards. It also increases financial statement users' understanding of and confidence in financial reporting.
Chapter 1 3. Which of the following would result if there was not set of generally accepted and universally practiced accounting standards? A. It would be almost impossible to prepare statements that could be compared. B. Each company would have to develop its own standards. C. Readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. D. All of these answer choices are correct.
D. All of these answer choices are correct. While this option is correct, there is a better answer.
Chapter 1 1. An effective capital allocation process A. promotes productivity. B. encourages innovation. C. provides an efficient market for buying and selling securities. D. All of these choices are correct.
D. All of these choices are correct. An effective capital allocation process also includes encouraging innovation and providing an efficient market for buying and selling securities.
Chapter 1 16. Financial information that is better provided, or can only be provided, by means of financial reporting other than formal financial statements include all of the following except: A. News releases. B. Management's forecasts. C. President's letter. D. Cash flow information.
D. Cash flow information. Financial information that is better provided, or can only be provided, by means of financial reporting other than formal financial statements includes the president's letter, news releases, and management's forecasts. Cash flow information is provided in the statement of cash flows.
Chapter 1 6. Which of the following was established by the federal government to help develop and standardize financial information presented to stockholders? A. AICPA. B. FASB. C. GASB. D. SEC.
D. SEC. As a result of the call for greater regulation after the stock market crash of 1929, the federal government established the SEC to help develop and standardize financial information for stockholders.
Chapter 1 Notes The first step taken in the establishment of a typical FASB statement is A. The board conducts research and analysis and a discussion memorandum is issued. B. A public hearing on the proposed standard is held. C. The board evaluates the research and public response and issues an exposure draft. D. Topics are identified and placed on the board's agenda.
D. Topics are identified and placed on the board's agenda.
Chapter 2 10. In order to be relevant, financial information must have A. freedom from error. B. neutrality. C. comparability. D. confirmatory or predictive value.
D. confirmatory or predictive value. Relevant information has predictive value or confirmatory value (or both), and is material.
Chapter 1 7. The first step taken in the establishment of a typical FASB statement is: A. the board conducts research and analysis and a discussion memorandum is issued. B. a public hearing on the proposed standard is held. C. the board evaluates the research and public response and issues an exposure draft. D. topics are identified and placed on the board's agenda.
D. topics are identified and placed on the board's agenda. The first step taken in establishing financial accounting standards is a topic is identified and placed on the board's agenda.
Chapter 1 Notes What were the three responsibilities of the Financial Accounting Foundation (FAF)? 1. Selects members of the FASB. 2. Funds their activities. 3._______________
Exercises general oversight
Chapter 1 1. The statement of retained earnings is one of the financial statements most frequently provided by public companies. A. True B. False
False The financial statements most frequently provided by public companies include the balance sheet, the statement of cash flows, and the statement of stockholder's equity.
Chapter 1 Notes What does FASB stand for?
Financial Accounting Standards Board
Chapter 1 Notes What did the Wheat Committee recommendation result in the creation of?
Financial Accounting Standards Board (FASB): Their mission was to establish and improve standards of financial accounting and reporting.
Chapter 1 Notes The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Which financial institute is this referring to?
Generally Accepted Accounting Principles (GAAP)
Chapter 1 Notes From your text we are told that investors must trust the "accounting numbers", why is this pertinent?
If the investor has no trust in the accounting numbers they will abandon the market and put their resources elsewhere. With investor uncertainty, the cost of capital increases for companies who need additional resources. In short, relevant and reliable financial information is necessary for markets to be efficient.
Chapter 1 Notes Examples of additional sources of financial information:
President's Letter Prospectuses Reports filed with governmental agencies News Releases Forecasts Environmental Impact statements
Chapter 1 Notes What does SEC stand for?
Securities and Exchange Commission
Chapter 1 Notes In terms of Accounting and Capital Allocation give the definition for: Financial Reporting
The financial information a company provides to help users with capital allocation decisions about the company.
Chapter 1 Notes In terms of Accounting and Capital Allocation give the definition for: Capital Allocation
The process of determining how, and at what cost, money is allocated among competing interests.
Chapter 1 8. Financial Accounting Concepts are a major type of pronouncement issued by the FASB. A. True B. False
True Financial Accounting Concepts are one of the two major types of pronouncements issued by the FASB.
Chapter 2 5. The underlying theme of the conceptual framework is A. decision usefulness. B. understandability. C. reliability. D. comparability.
A. decision usefulness. Decision usefulness is the underlying theme of the conceptual framework.
Chapter 2 4. In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting? A. Measurement and recognition concepts such as assumptions, principles, and constraints. B. Qualitative characteristics of accounting information. C. Elements of financial statements. D. Objective of financial reporting.
A. Measurement and recognition concepts such as assumptions, principles, and constraints. The "how" or the implementation of accounting is provided through the recognition, measurement, and disclosure concepts.
Chapter 1 Notes The second step in the Due Process System of the FASB is A. The board conducts research and analysis and a discussion memorandum is issued. B. A public hearing on the proposed standard is held. C. The board evaluates the research and public response and issues an exposure draft. D. Topics are identified and placed on the board's agenda.
A. The board conducts research and analysis and a discussion memorandum is issued.
Chapter 1 Notes During the fourth step in the Due Process System of the FASB A. The board evaluates the research and public response and issues an exposure draft. B. Topics are identified and placed on the board's agenda. C. A public hearing on the proposed standard is held. D. The board conducts research and analysis and a discussion memorandum is issued.
A. The board evaluates the research and public response and issues an exposure draft.
Chapter 1 Notes What is the purpose of information presented in notes to the financial statements? A. To provide disclosure required by generally accepted accounting principles. B. To correct improper presentation in the financial statements. C. To provide recognition of amounts not included in the totals of the financial statements. D. To present management's responses to auditor comments.
A. To provide disclosure required by generally accepted accounting principles.
Chapter 1 Notes During the fifth and final step of the Due Process System of the FASB, the Board evaluates responses and changes the exposure draft, if necessary. Final standard issued. A. True B. False
A. True
Chapter 1 Notes During the third step in the Due Process System of the FASB a public hearing on the proposed standard is held. A. True B. False
A. True
Chapter 1 Notes Expectation GAAP refers to what the public thinks accountants should do vs. what accountants think they can do. A. True B. False
A. True
Chapter 1 Notes GAAP is as much a product of political action as they are of careful logic or empirical findings. A. True B. False
A. True
Chapter 1 Notes Generally Accepted Accounting Principles are principles that have substantial authoritative support. A. True B. False
A. True
Chapter 1 Notes In addition to providing decision-useful information about future cash flows, management also is accountable to investors for the custody and safekeeping of the company's economic resources and for their efficient and profitable use. A. True B. False
A. True
Chapter 1 Notes The main job of the Financial Accounting Standards Advisory Council was to be consulted on major policy issues encountered by FASB. A. True B. False
A. True
Chapter 2 16. A contract is an agreement between two parties that creates enforceable rights or obligations. A. True B. False
A. True A contract is an agreement between two parties that creates enforceable rights or obligations.
Chapter 1 12. All listed companies in the European Union use IFRS. A. True B. False
A. True Over 115 countries including those in the European Union use IFRS.
Chapter 1 5. The AICPA's Practice Bulletins provide the Accounting Standards Executive Committee's views on narrow financial reporting issues that have not been addressed by the FASB. A. True B. False
A. True Practice Bulletins focus on narrow financial reporting issues that have not been addressed by the FASB
Chapter 1 14. Adherence to GAAP and technical competence are not enough when encountering ethical decisions. A. True B. False
A. True Simple adherence to GAAP or following the rules of the profession cannot always provide the answers to ethical dilemmas. Technical competence is not enough when encountering ethical decisions.
Chapter 1 10. The Codification creates one level of GAAP which is considered authoritative. A. True B. False
A. True The Codification creates one level of GAAP which is considered authoritative.
Chapter 1 4. The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of four of the seven Board members. A. True B. False
A. True The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of four of the seven Board members.
Chapter 1 Notes Which of the following accounting pronouncements is the most authoritative? A. FASB Statement of Financial Accounting Concepts. B. FASB Technical Bulletins. C. AICPA Accounting Principles Board Opinion. D. AICPA Statement of Position.
C. AICPA Accounting Principles Board Opinion.
Chapter 1 8. The organization whose purpose is to reach consensus on how to account for new and unusual financial transactions that have potential for creating differing financial reporting practices is the: A. FASB. B. FASAC. C. EITF. D. AICPA.
C. EITF. The Emerging Issues Task Force has this responsibility.
Chapter 1 4. Accounting principles are "generally accepted" only when I. an authoritative accounting rule-making body has established it in an official pronouncement. II. it has been accepted as appropriate because of its universal application. A. I only. B. II only. C. I or II. D. Neither I nor II.
C. I or II. Accounting principles are "generally accepted" only when an authoritative accounting rule-making body has established it in an official pronouncement or over time it has been accepted as appropriate because of its universal application.
Chapter 2 3. Which of the following statements is true regarding the convergence project by the FASB and IASB? A. The converged framework will be a series of documents, similar to the two conceptual frameworks that presently exist. B. The existing conceptual frameworks underlying U.S. GAAP and IFRS are quite dissimilar, but once they are converged there will be unanimity. C. The IASB framework makes two assumptions. D. The FASB framework discusses accrual accounting and identifies it as an assumption.
C. The IASB framework makes two assumptions. The IASB framework makes two assumptions - accrual basis and going concern. The converged framework will be a single document, the existing frameworks are very similar, and while the FASB framework discusses accrual accounting, it does not identify it as an assumption.
Chapter 1 2. The objective of general purpose financial reporting adopts an entity perspective, which means that A. financial reporting should be focused an assessing the company's stewardship. B. financial reporting should be focused solely on the needs of the owners. C. companies are viewed as separate and distinct from their owners. D. None of these answer choices are correct.
C. companies are viewed as separate and distinct from their owners. The entity perspective views companies as separate and distinct from their owners.
Chapter 2 11. The change in net assets during a period from transactions and other events and circumstances from non-owner sources is called A. net income. B. gains. C. comprehensive income. D. revenues.
C. comprehensive income. Comprehensive income is the change in net assets during a period from transactions and other events and circumstances from non-owner sources.
Chapter 2 1. Generally accepted accounting principles A. are fundamental truths or axioms that can be derived from laws of nature. B. derive their authority from legal court proceedings. C. derive their credibility and authority from general recognition and acceptance by the accounting profession. D. have been specified in detail in the FASB conceptual framework.
C. derive their credibility and authority from general recognition and acceptance by the accounting profession. GAAP derives its credibility and authority from general recognition and acceptance by the accounting profession.
Chapter 1 15. The mission of the International Accounting Standards Board is to A. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. B. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. C. develop a single set of high-quality and understandable IFRS for general-purpose financial statements. D. arbitrate accounting disputes between auditors and international companies.
C. develop a single set of high-quality and understandable IFRS for general-purpose financial statements. The mission of the IASB is to develop, in the public interest, a single set of high-quality and understandable IFRS for general-purpose financial statements..
Chapter 2 12. An increase in net assets arising from peripheral or incidental transactions is called a(n) A. asset. B. revenue. C. gain. D. investment by owners.
C. gain. An increase in net assets from peripheral or incidental transactions is called a gain.
Chapter 2 7. Which of the following is not among the ingredients of the fundamental qualities of faithful representation? A. freedom from error. B. neutrality. C. materiality. D. completeness.
C. materiality. The ingredients of faithful representation include completeness, neutrality, and freedom from error.
Chapter 2 9. Enhancing qualities of accounting information include all of the following except: A. comparability. B. understandability. C. neutrality. D. timeliness.
C. neutrality. The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability.
Chapter 1 5. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as A. consistently primary. B. consistently secondary. C. sometimes primary and sometimes secondary. D. non-existent.
C. sometimes primary and sometimes secondary. The Securities and Exchange Commission has sometimes primary and sometimes secondary roles in the formulation of accounting principles.
Chapter 2 13. Under current GAAP, inflation is ignored in accounting due to A. materiality. B. the going concern assumption. C. the monetary unit assumption. D. consistency.
C. the monetary unit assumption. Inflation is ignored under the monetary unit assumption.