M1 Standards and Conceptual Framework (MCQs)

According to the FASB conceptual framework, an entity's revenue may result from: a. An increase in asset from incidental transactions. b. A decrease in a liability from primary operations. c. An increase in a liability from incidental transactions. d. A decrease in an asset from primary operations.

Answer: A decrease in a liability from primary operations. Revenues are inflows or other enhancements of assets and/or settlements (decreases) in a liabilities resulting from the entity's ongoing major operations, not from "incidental" operations.

The FASB amends the Accounting Standards Codification through the issuance of: a. Technical Bulletins. b. Accounting Standards Updates. c. Staff Accounting Bulletins. d. Statements of Financial Accounting Standards

Answer: Accounting Standards Updates The FASB updates the Accounting Standards Codification (ASC) for new U.S. GAAP issued by the FASB, and for any changes to existing GAPP, with Accounting Standards Updates. Why the other answers are wrong: Technical Bulletins, a pre-codification term, were used to provide FASB staff guidance on implementation and practice problems that would assist in the application of GAPP. This information is now included in ASC. Staff Accounting Bulletins are issued by the Securities and Exchange Commission (SEC) and are a summarization of the views of the SEC's staff regarding how GAAP are be applied. Statements of Financial Accounting Standards are a pre-codification term and were used to issue U.S. GAAP. All of the relevant rules issued through these standards are now included in ASC.

Changes to the existing authoritative GAAP for non-issuer, nongovernmental entities are communicated by the Financial Accounting Standards Board through the issuance of: a. Statements of Financial Accounting Standards. b. Exposure Drafts. c. Concept Statements. d. Accounting Standards Updates.

Answer: Accounting Standards Updates When the FASB announces a change to existing authoritative GAAP, it is done through an Accounting Standards Update, which details the specific changes/updates made to the Accounting Standards Codification. Why the other answers are wrong: Statements of Financial Accounting Standards. Prior to the creation of the Accounting Standards Codification, new accounting standards were issued as Statements of Financial Accounting Standards. However, this old terminology because any update to the Codification is now made with an Accounting Standards Update. Exposure Drafts are preliminary drafts of a proposed standard that the FASB uses during the due process system of standard setting. The exposure draft allows for feedback from interested user groups and is used in the creation of the Accounting Standards Update, but it is not the document that contains the final changes to authoritative GAAP. Concept Statements are issued by the FASB; however, Concept Statements are not GAAP and do not change existing authoritative GAAP. Instead, these statements provide the framework and basis upon which accounting standards are written.

Accrual accounting involves accruals and deferrals. Which of the following best describes accruals and deferrals? a. Both accruals and deferrals are concerned with expected future cash receipts and payments. b. Both accruals and deferrals are concerned with past cash receipts and payments. c. Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments. d. Accruals are concerned with past cash receipts and payments, while deferrals are concerned with expected future cash receipts and payments.

Answer: Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments. Accruals occur when revenue or expense was incurred for a given period but nothing has been booked in the financial statements; the cash receipt or payment will occur in the future, but revenue or expense needs to be booked prior to the cash event. Deferrals represent situations in which the cash receipt or payment already occurred, but the revenue or expense applies to a later period. Why the other answers are wrong: Only accruals (not deferrals) are related to future cash events. Only deferrals (not accruals) are related to past cash events. Accruals relate to expected future cash events, while deferrals relate to past cash events.

Which of the following statements best describes an operating procedure for issuing FASB Accounting Standards Update? a. The exposure draft is modified per public opinion before issuing the discussion memorandum. b. The emerging issues task force must approve a discussion memorandum before it is disseminated to the public. c. A new Accounting Standards Update can be rescinded by a majority vote of the AICPA membership. d. An Accounting Standards Update is issued only after a majority vote by the members of the FASB.

Answer: An Accounting Standards Update is issued only after a majority vote by the members of the FASB. An Accounting Standards Update is issued only after a majority vote of the members of the FASB. Why the other answers are wrong: There is no necessity for an exposure draft to be modified per public opinion before issuing the discussion memorandum (a question can be raised here as to "what" discussion memorandum" There is no necessity for the emerging issues task force (EITF) to approve a discussion memorandum before it is disseminated to the public. There is no way to rescind a new Accounting Standards Update, although, in reality, an ASU can be rescinded by the issuance of a new ASU on the same subject.

According to the FASB conceptual framework, which of the following is an essential characteristic of an asset? a. An asset is obtained at a cost. b. An asset is tangible. c. An asset provides future benefits. d. The claims to an asset's benefits are legally enforceable.

Answer: An asset provides future benefits Rule: According to the FASB conceptual framework, assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Interim financial reporting should be viewed primarily in which of the following ways? a. As reporting for an integral part of an annual period. b. As if the interim period were an annual accounting period. c. As reporting under a comprehensive basis of accounting other than GAAP/IFRS. d. As useful only if activity is spread evenly throughout the year.

Answer: As reporting for an integral part of an annual period. Interim financial reporting should be viewed as reporting for an integral part of an annual period.

How are amendments incorporated into the FASB Accounting Standards Codification? a. By releasing an Accounting Standards Update. b. By producing a discussion paper. c. By issuing an exposure draft. d. By publishing a statement of financial accounting standards.

Answer: By releasing an Accounting Standards Update. Any change to the Codification must be made through the issuance of an Accounting Standards Update. This is required when a new accounting standard is established or if there is a change to an existing accounting standard. Why the other answers are wrong: By producing a discussion paper. The FASB may issue discussion papers to solicit feedback on particular accounting and reporting issues. An exposure draft is a document used during the due process system and presents the proposed accounting standard to the public for review. An Accounting Standards update is required to amend the Codification. By publishing a statement of financial accounting standards. Prior to the Codification, FASB issued new accounting pronouncements through statements of financial accounting standards. After the Codification was created, all updates are made through the issuance of Accounting Standards Updates.

A U.S. public company needs guidance in accounting for and reporting a complex derivative transaction that it entered into with a European subsidiary. This company is most likely to find the appropriate guidance in the: a. FASB Statements of Financial Accounting Concepts. b. International Financial Reporting Standards. c. FASB Statements of Financial Accounting Standards. d. FASB Accounting Standards Codification.

Answer: FASB Accounting Standards Codification. The FASB Accounting Standards Codification is the single source of U.S. GAAP. U.S. public companies are required to follow U.S. GAAP. Why the other answers are wrong: The FASB Statements of Financial Accounting Concepts are not GAAP. FASB Statements of Financial Accounting Standards are included in the FASB Accounting Standards Codification, which is the single source of U.S. GAAP. The International Financial Reporting Standards cannot be used by a U.S. public company as a source of U.S. GAAP.

Which of the following is the most authoritative source of U.S. GAAP? a. FASB Statements of Financial Accounting Standards. b. International Financial Reporting Standards. c. FASB Accounting Standards Codification. d. FASB Statements of Financial Accounting Concepts.

Answer: FASB Accounting Standards Codification. The FASB Accounting Standards Codification is the single source of authoritative nongovernmental U.S. GAAP. Why the other answers are wrong: FASB Statements of Financial Accounting Standards. FASB Statements of Financial Accounting Standards are included in the Accounting Standards Codification. International Financial Reporting Standards. The International Financial Reporting Standards are not an authoritative source of U.S. GAAP. FASB Statements of Financial Accounting Concepts. Per the FASB, the Statements of Financial Accounting Concepts are not GAAP.

According to the FASB Conceptual Framework, neutrality is an ingredient of: a. Faithful Representation b. Timeliness c. Comparability d. Relevance

Answer: Faithful Representation. Timeliness is a characteristic that enhances the usefulness of information that is BOTH relevant and faithfully represented. It is not an ingredient of relevance or faithful representation. Comparability is a characteristic of that enhances the usefulness of information that is both relevant and faithfully represented. It is not an ingredient of relevance or faithful representation. Relevance is a fundamental qualitative characteristic along with faithful representation, and not an ingredient.

Which of the following characteristics means that information is reasonably free from error and bias? a. Relevance b. Consistency c. Faithful Representation d. Predictive Value

Answer: Faithful Representation. Faithful representation requires the financial information to be complete, neutral and free from error. Why the other answers are wrong: Relevance. For financial information to be relevant, it must have predictive value and/or confirming value, and must be material. Consistency is the use of the same method among periods or among entities, and helps achieve comparability, which an enhancing qualitative characteristic. Predictive value is a component of relevant information. Information has predictive value if it can used to predict future outcomes.

According to the FASB conceptual frameworks, neutrality is an ingredient of: a. Comparability. b. Faithful representation. c. Timeliness. d. Relevance.

Answer: Faithful representation Neutrality, which is freedom from bias in selection or presentation, is an ingredient of faithful representation. Why the other answers are wrong: Timeliness is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented. It is not an ingredient of relevance or faithful representation. Comparability is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented. It is not in ingredient of relevance or faithful representation. Relevance is a fundamental qualitative characteristic along with faithful representation, and not an ingredient.

According to the FASB conceptual frameworks, useful information must exhibit the fundamental qualitative characteristics of: a. Comparability. b. Neutrality and verifiability. c. Understandability and timeliness. d. Faithful representation and relevance.

Answer: Faithful representation and relevance The fundamental qualitative characteristic of useful financial information are relevance and faithful representation. Why the other answers are wrong: Comparability is an enhancing qualitative characteristic. Materiality is a component of relevance, in addition to predictive value and confirming value. Neutrality and verifiability. Verifiability is an enhancing qualitative characteristic. Neutrality is a component of faithful representation. Understandability and timeliness are enhancing qualitative characteristic of useful information.

Financial information provided in general purpose financial reports does not include information about: a. The claims against the entity. b. How effectively and efficiently the entity's governing board has discharged its responsibility to use the entity's resources. c. The resources against the entity. d. How effectively and efficiently the entity's shareholders' have discharged its responsibility to use the entity's resources.

Answer: How effectively and efficiently the entity's shareholders' have discharged its responsibility to use the entity's resources. Shareholders do not have a responsibility (or a right) to use the entity's resources. Why the other answers are wrong: Financial information provided in general purpose financial reports should include information about the resources of the entity's, the claims against the entity, and how effectively and efficiently the entity's management and governing board have discharged their responsibilities to use the entity's resources.

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as an expense: a. At the date the royalty agreement expired. b. In the period paid. c. In the period inccurred. d. At the date the royalty agreement began.

Answer: In the period incurred Royalties paid should be reported as expense in the period incurred. Why the other answers are wrong: In the period paid. Reporting the royalties paid in the period in which they are paid would be the correct treatment under the cash basis of accounting, not accrual. At the date answers. Both of these answers do not necessarily match the expense with the related revenue over an appropriate period.

Each of the following statements is correct regarding the Financial Accounting Standards Boards, except: a. It is recognized as authoritative by the United States Securities and Exchange Commission and the American Institute of Certified Public Accountants. b. It provides a conceptual framework that helps to increase understanding of, and confidence in, financial information on the part of users of financial reports. c. It develops principles and attributes that allow organizations to understand the necessary elements to ensure a robust system of internal control. d. It establishes accounting concepts and standards for financial accounting and reporting, and provides guidance on implementation of standards.

Answer: It develops principles and attributes that allow organizations to understand the necessary elements to ensure a robust system of internal control. The FASB has the authority to set accounting standards and is responsible for issuing Accounting Standards Updates (ASUs) and Statements of Financial Accounting Concepts (SFACs). The conceptual framework is a product of the Statements of Financial Accounting Concepts. The FASB is not responsible for prescribing standards related to internal control.

Which of the following is true regarding the comparison of managerial to financial accounting? a. Managerial accounting has a past focus and financial accounting has a future focus. b. Managerial accounting is generally more precise. c. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them. d. The emphasis on managerial accounting is relevance and the emphasis on financial accounting timeliness.

Answer: Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them. Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes. Why the other answers are wrong: Managerial accounting has a past focus and financial accounting has a future focus. Managerial accounting has a future focus, while financial accounting focuses on reporting past results. Managerial accounting is generally more precise. Financial accounting is generally more precise. The emphasis on managerial accounting is relevance and the emphasis on financial accounting timeliness. The emphasis of financial accounting is providing useful information to financial statement users (including the characteristic of relevance), while the emphasis of managerial accounting is providing timely information to management decision makers.

Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis? a. Going concern. b. Periodicity. c. Economic entity. d. Monetary unit.

Answer: Monetary Unit The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis. Why the other answers are wrong: Going concern. The going concern assumption has nothing to do with money per se. The going concern assumption presumes that an entity will continue to operate in the foreseeable future. Periodicity. The periodicity has nothing to do with money per se. The periodicity assumption is that economic activity can be divided into meaningful time periods. Economic entity. The economic entity has nothing to do with money per se. The economic entity assumption is that economic activity can be accounted for when considering as identifiable set of activities.

On December 31, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in Brooks' December 31 balance sheet? a. Current reproduction cost. b. Historical cost. c. Current replacement cost. d. Net realizable value.

Answer: Net realizable value. Net realizable value is the appropriate measurements basis for equipment included in Brooks' Dec. 31 balance sheet, because of the decision to end operations and quickly (3 months) dispose of its assets. Why the other answers are wrong: Current reproduction cost (producing new and substantially identical assets, at current prices, adjusted for depreciation to date) is appropriate in optional supplemental price level financial statements. Historical Cost is appropriate if operations were continuing. Current replacement cost (acquiring new and substantially equivalent property at current prices, adjusted for estimated depreciation since acquisition) is appropriate in optional supplemental price level financial statements.

According to the FASB conceptual frameworks, what does the concept of faithful representation include? a. Effectiveness b. Materiality c. Neutrality d. Certainty

Answer: Neutrality The concept of faithful representation includes neutrality, completeness, and freedom from error. Why the other answers are wrong: Effectiveness, Certainty, and Materiality are not included in the concept of faithful representation, which includes neutrality, completeness, and freedom from error.

According to the FASB conceptual frameworks, completeness is an ingredient of Relevance Faithful Representation a. No Yes b. Yes Yes c. Yes No d. No No

Answer: No Yes Completeness is an ingredient of faithful representation. Other ingredients of faithful representation include neutrality and freedom from error. Why the other answers are wrong: Completeness is an ingredient of faithful representation. Other ingredients of faithful representation include neutrality and freedom from error. The ingredients of relevance are predictive value, confirming value, and materiality.

According to the FASB conceptual frameworks, to be relevant, information should have which of the following? a. Predictive value. b. Neutrality. c. Completeness. d. Verifiability.

Answer: Predictive Value To be relevant, information should have predictive value and/or confirming value, and must be material. Why the other answers are wrong: Neutrality is a component of faithful representation Completeness is a component of faithful representation Verifiability is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented.

According to the FASB and IASB conceptual frameworks, the quality of information that helps users forecast future outcomes is: a. Neutrality. b. Confirming value. c. Predictive value. d. Representational faithfulness.

Answer: Predictive value The quality of information that helps users forecast future outcomes is predictive value. Forecasting is predicting. Why the other answers are wrong: Neutrality. The quality of information that helps users forecast future outcomes is called predictive value, not neutrality. Neutrality is the depiction of financial information that is free from bias in the selection or presentation. Confirming value. The quality of information that helps users forecast future outcomes is called predictive value, not confirming value. Confirming value provides feedback about evaluations previously made by users. Representational faithfulness. The quality of information that helps users forecast future outcomes is called predictive value, not representational faithfulness. Representational faithfulness means that financial information faithfully represents the reported economic phenomena. Revenues less expenses. Revenues less expenses contribute to the retained earnings portion of equity, but equity also includes contributed capital (contributions by owners)

According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is: a. Allocation. b. Matching. c. Recognition. d. Realization.

Answer: Recognition Recognition is the process of recording an item in the financial statements of an entity. SFAC 5 para. 6. Why the other answers are wrong: Allocation is the accounting process of assigning or distributing an amount according to a plan or a formula. SFAC 6 para. 142. Matching of costs and revenues is simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. SFAC 6 para. 146. Realization is the process of converting noncash resources and rights into money. SFAC 6 para. 143.

According to the FASB conceptual frameworks, the primary users of financial reports include all of the following, except: a. Regulators b. Lenders. c. Creditors. d. Investors.

Answer: Regulators The FASB and IASB conceptual frameworks indicates that regulators are not considered to be primary users. Why the other answers are wrong: Lenders, Creditors and Investors are all primary users.

1. Conceptually, interim financial statements can be described as emphasizing which of the following enhancing qualitative characteristics? a. Verifiability b. Faithful Representation c. Relevance d. Timeliness

Answer: Timeliness Interim financial statements emphasize timeliness by providing financial information based on actual performance to date and estimates prior to year end. Why the other answers are wrong: Verifiability. Interim financial statements do not emphasize verifiability. The extensive use of estimates in interim financial statements means that they are less verifiable. Interim financial statements emphasize timeliness over verifiability. Faithful Representation and Relevance are primary qualitative characteristics, not enhancing qualitative characteristics.

Users of financial statements frequently rely upon the data displayed in the financial statements to predict future financial outcomes. Financial accounting concepts refer to the characteristic of accounting information that provides predictive value to users as the quality of: a. Understandability. b. Comparability. c. Faithful representation. d. Relevance.

Answer: Relevance The fundamental qualitative characteristic of useful accounting information described by the term "relevance" contemplates predictive value, confirming value, and materiality. Why the other answers are wrong: Comparability is an enhancing qualitative characteristic that relates to comparability of information about other entities and from other time periods. Understandability is an enhancing qualitative characteristic. Information is understandable if it is classified, characterized, and presented clearly and concisely. Faithful representation. The fundamental qualitative characteristic of useful accounting information described by the term "faithful representation" contemplates completeness, freedom from error, and neutrality.

According to the FASB conceptual frameworks, which of the following correctly pairs a fundamental qualitative characteristic of useful information with one of its components? a. Faithful representation and predictive value. b. Faithful representation and verifiability c. Relevance and materiality d. Relevance and timeliness

Answer: Relevance and materiality Under the FASB and IASB conceptual frameworks, relevance is a fundamental qualitative characteristic, and materiality is a component of relevance. Why the other answers are wrong: Faithful representation is a fundamental qualitative characteristic, but predictive value is not a component of faithful representation. Predictive value is a component of relevance. Relevance and timeliness is a fundamental qualitative characteristic, but timeliness is not a component of relevance. Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented. Faithful representation is a fundamental qualitative characteristic, but verifiability is not a component of relevance. Verifiability is a characteristic that enhances the usefulness of information that is relevant and faithfully represented.

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept. a. Current market value. b. Net realizable value. c. Replacement cost. d. Historical cost.

Answer: Replacement cost. Replacement cost is defined as the amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost. Why the other answers are wrong: Current market value, or fair value, is the price to sell (not acquire) an asset. Net realizable value is the selling price of an asset less any disposal costs. Historical cost is the amount paid by a company to acquire an asset.

The primary purpose of a not-for-profit organization's statement of activities is to provide relevant information to its: a. Managers. b. Resource providers. c. Beneficiaries. d. State regulatory body

Answer: Resource providers. Regardless of whether an entity is a for-profit or a not-for-profit, the objective of financial reporting (and the associated financial statements) is to provide information about the entity that is useful to primary users in making decisions about resources to provide to the entity. Why the other answers are wrong: Although managers will see value in reviewing an entity's financial statements, they are not considered primary users of these statements. Although beneficiaries may be interested in a not-for-profit organization's financial statements, the primary purpose of the statement of activities is to provide information to resource providers. Although the state regulatory body does review the financial statements for not-for-profits, that is not the primary reason why the statements are produced.

Which of the following is NOT defined in FASB Statement of Financial Accounting Concepts Number 7 as one of the five elements of present value (or economic value) measurement used to establish that value of assets or liabilities using cash flow information? a. Time Value of Money. b. Timing Variations of Future Cash Flows. c. Risk Tolerance of Management. d. Estimate of Future Cash Flow.

Answer: Risk Tolerance of Management The risk tolerance of management is not defined by SFAC # 7 as an element of present value measurement used to establish the value of assets or liabilities using cash flows. SFAC defines the following elements of present value of measurement: · The Price for Bearing Uncertainty · Expectations about Timing Variations of Future Cash Flows. · Other Factors (ex. Liquidity Issues and Market Imperfections). · Time Value of Money (The Risk-free Rate of Interest). · Estimate of Future Cash Flow Why the other answers are wrong: All three choices are names as elements of present value measurement in SFAC No. 7.

The Statements of Financial Accounting Concepts (SFAC) that requires a statement of comprehensive income is: a. SFAC 5, dealing with recognition and measurement. b. Chapter 3 (Qualitative Characteristics of Useful Financial Information) of SFAC No. 8 - Conceptual Framework for Financial Reporting. c. SFAC 6, dealing with elements of financial statements. d. SFAC 4, dealing with objective of financial reporting.

Answer: SFAC 5, dealing with recognition and measurement. SFAC 5 requires a statement of comprehensive income as a part of a full set of financial statements.

The objectives of financial reporting stem from which of the following sources? a. Reporting on management's consistency. b. The need for conservatism. c. The needs of the external users of the information. d. Reporting on management's stewardship.

Answer: The needs of the external users of the information. Per SFAC No. 8 (Conceptual Framework for Financial Reporting), Chapter 1 (The Objective of General Purpose Financial Reporting), the objective of financial reporting is to provide financial information that is useful to the primary users, such as creditors, lenders, and investors. Why the other answers are wrong: Management's consistency does not drive the objectives of financial reporting. Conservatism. Although conservatism is an underlying principle in financial reporting, it does not speak to the objectives of financial reporting. Management's stewardship, although reflected in the financial statements, does not drive the objectives of financial reporting.

Which of the following characteristics enhances faithful representation? a. Neutrality. b. Predictive value. c. Timeliness. d. Materiality.

Answer: Timeliness Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented. Why the other answers are wrong: Neutrality is a component of faithful representation. Predictive value is a component of relevance. Materiality is a component of relevance.

What is the primary objective of financial reporting? a. To provide information that is useful for economic decision making. b. To provide management with an accurate evaluation of their financial performance. c. To provide economic information that is comprehensible to all users. d. To provide forecasts for future cash flows and financial performance.

Answer: To provide information that is useful for economic decision making. The objective of financial reporting is to provide financial information about the reporting entity that is useful to primary users of general-purpose financial reports. This information will help the users make decisions about providing resources to the reporting entity. Why the other answers are wrong: To provide management with an accurate evaluation of their financial performance. The focus of financial reporting is on external users, not internal users such as management. Managerial accounting focuses on internal users. To provide economic information that is comprehensible to all users. Financial reporting users are considered to have a reasonable understanding of business and include those using the reports to make decisions. Primary users include investors and Creditors. To provide forecasts for future cash flows and financial performance. Financial reporting information should be relevant and allow for predictive value (an attribute of the fundamental qualitative characteristics relevance), but this is not the primary objective of financial reporting.

Which of the following defines equity as it relates to a business entity? a. Total assets LESS total liabilities. b. Total assets and liabilities. c. Net revenues. d. Total revenues LESS total expenses.

Answer: Total assets LESS total liabilities The basic accounting equation states that Assets = Liabilities + Stockholders; Equity. This equation can be rearranged such that Stockholders' Equity = Assets - Liabilities. By definition, equity is the residual interest in the assets of a company that remains after deducting its liabilities. Why the other answers are wrong: Total assets and liabilities. Liabilities are deducted from assets to calculate equity, not added to assets. Net Revenues. Equity consists of contributed capital and earned capital (retained earnings). Revenues are a component of the retained earnings of a company but do not represent the full value of equity. Revenues less expenses. Revenues less expenses contribute to the retained earnings portion of equity, but equity also includes contributed capital (contributions by owners)

Materiality and relevance are both defined by: a. What influences or makes a difference to a decision maker. b. The perceived benefits to be denied that exceed the perceived costs associated with it. c. Quantitative criteria set by the Financial Accounting Standards Board. d. The consistency in the application of methods over time.

Answer: What influences or makes a difference to a decision maker. The accountant's determination of materiality and relevance is based on professional judgement and is affected by the needs of those who will be using the financial statements to make decisions. Why the other answers are wrong: Quantitative criteria set by the Financial Accounting Standards Board. The Financial Accounting Standards Board does not establish quantitative criteria that define materiality and relevance. The perceived benefits to be denied that exceed the perceived costs associated with it does not define materiality and relevance. The perceived benefits achieved that exceed the costs associated with them better describes the cost constraint, which holds that the benefits of financial reporting must be greater than the cost of obtaining and presenting the information. The consistency in the application of methods over time. Materiality and relevance are not defined by consistency in the application of methods over time. Consistency in the application of methods over time is a quality needed for the overall accounting process.

According to the FASB and IASB conceptual frameworks, predictive value is an ingredient of Relevance Faithful Representation a. No Yes b. No No c. Yes No d. Yes Yes

Answer: Yes No Predictive value is an ingredient of relevance BUT NOT of faithful representation.