Chapter 2 Intermediate Accounting : Review - Conceptual Framework for Financial Reporting
Q 2.38: How many basic assumptions underlie the financial accounting structure? A : four B : six C : five D : three
A
17. (L.O. 6) If Company A wishes to acquire an asset owned by Company B, the cost principle would require Company A to record the asset at the original cost to Company B.
17. (F) The cost principle requires that assets be accounted for on the basis of acquisition cost. Whatever it costs a particular entity to acquire an asset is that entity's acquisition cost.
18. (L.O. 6) Generally, confirmation of a sale to independent interests is used to indicate the point at which revenue is recognized.
18. (T)
19. (L.O. 6) Recognition of revenue when cash is collected is appropriate only when it is impossible to establish the revenue figure at the time of sale because of the uncertainty of collection.
19. (T)
Q 2.15: Which of the following describes an economic entity in accounting? A A business enterprise B A division within a business enterprise C All of these answer choices are correct D An individual
C
Q 2.2: Mark was recording accounting transactions when he came across a non-standard transaction type. However, based on his knowledge of accounting practices, he was able to come up with a reasonable solution for recording the transaction. This is an example of using a(n) A individual framework to follow standard procedures. B conceptual framework to follow standard procedures. C conceptual framework to solve new problems. D individual framework to solve new problems.
C
Q 2.40: Which of the following enhancing qualities of accounting information is practiced if Company A issues its annual financial reports within one month of the end of the fiscal year? A : Comparability B : Verifiability C : Timeliness D : Understandability
C
Q 2.11: Which of the following defines equity according to the FASB conceptual framework? A Equity is the same thing as comprehensive income. B Equity is the net revenues and expenses for a period of time. C Equity is the net gains less the net losses for a period of time. D Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.
D
Q 2.50: Which of the following fundamental qualities includes the quality of freedom from error? A : Relevance B : Both Faithful Representation and Relevance C : Neither Faithful Representation nor Relevance D : Faithful Representation
D
Q 2.8: The primary quality of relevance includes which of the following characteristics? A verifiability B understandability C sustainability D Materiality
D
Q 2.1: Which of the following statements is inaccurate regarding the FASB Conceptual Framework Project? A Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply. B Practical problems should be more quickly solvable by reference to an existing conceptual framework. C A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. D A coherent set of accounting standards and rules should result.
A
Q 2.43: Melissa is an accountant at a Fortune 500 company, and in her free time she volunteers to do the accounting at a not-for-profit organization. Which Statement(s) of Financial Accounting Concepts would be most beneficial for Melissa during her volunteer time? A : SFAC No. 3 and 5 B : SFAC No. 7 C : SFAC No. 8 D : SFAC No. 6
D The two main SFACs that provide guidelines for nonbusiness or not-for-profit organizations are SFAC No. 6. SFAC No. 6 provides definitions for items in financial statements for not-for-profit organizations.
1. (L.O. 1) A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.
1. (T)
10. (L.O. 3) The basis for determining whether an item is material is based on both quantitative and qualitative factors. T or F?
10. (T)
11. (L.O. 4) The fact that equity represents an ownership interest and a residual claim against the net assets of an enterprise means that in the event of liquidation, creditors have a priority over owners in the distribution of assets.
11. (T)
12. (L.O. 4) The three elements—assets, liabilities, and equity—describe transactions, events, and circumstances that affect an enterprise during a period of time.
12. (F) The three elements—assets, liabilities, and equity—describe amounts of resources and claims to resources at a moment of time.
13. (L.O. 5) The economic entity assumption is useful only when the entity referred to is a profitseeking business enterprise.
13. (F) The economic entity assumption holds that the activity of a business entity can be kept separate and distinct from its owners and any other business unit. This assumption has nothing to do with the nature of the business organization.
14. (L.O. 5) The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent.
14. (T)
15. (L.O. 5) The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
15. (T)
16. (L.O. 5) The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information.
16. (T)
2. (L.O. 1) A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.
2. (F) Development of a conceptual framework will not provide a solution to all future accounting problems, nor will it eliminate the need for a formal standardsetting body. However, a soundly developed conceptual framework should enable the FASB to issue more useful and consistent standards resulting in easier solutions to emerging practical problems.
20. (L.O. 6) Under the expense recognition principle, it is possible to have an expense reported on the income statement in one period and the cash payment for that expense reported in another period. T or F?
20. (T)
21. (L.O. 6) Period costs such as officer salaries and administrative expenses attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods.
21. (F) Product costs such as material, labor, and overhead attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods. Period costs such as officers' salaries and other administrative expenses are charged off immediately, even though benefits associated with these costs occur in the future, because no direct relationship between cost and revenue can be determined.
22. (L.O. 6) The full disclosure principle states that information should be provided when it is of sufficient importance to influence the judgment and decisions of an informed user.
22. (T)
23. (L.O. 6) The notes to financial statements generally summarize the items presented in the main body of the statements. T or F?
23. (F) The notes to financial statements generally amplify or explain the items presented in the main body of the statements.
24. (L.O. 7) The difficulty in applying the cost constraint is that the costs and especially the benefits are not always evident or measurable.
24. (T)
3. (L.O. 1) Use of a sound conceptual framework in the development of accounting principles will make financial statements of all entities comparable because alternative accounting methods for similar transactions will be eliminated. T or F?
3. (F) Use of a sound conceptual framework will not eliminate alternative accounting methods for similar transactions. However, a sound conceptual framework should allow practitioners to dismiss certain alternatives quickly and focus on a logical and acceptable treatment.
4. (L.O. 1) Accounting theory is developed without consideration of the environment within which it exists.
4. (F) The environment within which any discipline exists plays an integral role in shaping the theory of that discipline. The purpose of accounting is to serve the business environment through the issuance of timely and relevant financial information. To present such information, accounting theory must be developed with consideration being given to the business environment.
5. (L.O. 1) Relevance and reliability are the two primary qualities that make accounting information useful for decision making.
5. (T)
6. (L.O. 1) To be relevant, accounting information must be capable of making a difference in a decision.
6. (T)
7. (L.O. 3) Information that has been measured and reported in a similar manner for different enterprises is considered comparable.
7. (T)
8. (L.O. 3) Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted.
8. (F) Consistency means that a company applies the same methods to similar accounting transactions from period to period. It does not mean that companies cannot switch from one method to another. Companies can change to a new method that is considered preferable to the old method as long as financial statement users are made aware of the change.
9. (L.O. 3) When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements.
9. (F) Because an item is deemed to be immaterial does not justify its deletion from financial statements. If an amount is so small that it is quite unimportant when compared with other items, application of a particular standard may be considered of less importance.
Q 2.14: Which of the following is described as a continuation of an accounting entity in the absence of evidence to the contrary? A Consistency and going concern B Neither consistency nor going concern C Going concern D Consistency
C
Q 2.4: What is needed in order to move from understanding the purpose of accounting to knowing how to implement accounting practices? A Knowing the qualitative characteristics of accounting information and the elements of financial statements. B Knowing the assumptions needed to recognize, measure, and disclose accounting information. C Knowing the principles behind accounting practices and the cost constraints that relate to reporting practices. D Knowing a company's specific conceptual framework for recognizing, recording, and reporting accounting information.
A
Q 2.51: An implication of the going concern assumption is that A : all of these answer choices are correct. B : depreciation and amortization policies are justifiable and appropriate. C : the historical cost principle is credible. D : the current-noncurrent classification of assets and liabilities is justifiable and significant.
A
Q 2.52: The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is A : verifiability. B : neutrality. C : relevance. D : faithful representation.
A
Q 2.45: How are assets and liabilities related to equity? A : Equity is equal to the difference between assets and liabilities. B : Equity is equal to the total assets and liabilities. C : Equity is equal to the division of assets by liabilities. D : Equity is equal to the product of assets multiplied by liabilities.
A Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.
Q 2.53: Taylor and his boss are discussing the new internal-control standards arising from the Sarbanes-Oxley Act. Taylor thinks there could be some benefits to them, but his boss is more worried about the costs. Which of the following best explains the difference in the topic they are discussing? A : Determining the costs of the Act is possible, but determining the benefits is not fully possible. B : Determining the benefits of the Act is possible, but determining the costs is not fully possible. C : The Act has a lot of costs, but so far they do not seem to have any actual benefits. D : The Act has a number of benefits, but the costs seem to be rather low.
A The costs of complying with the internal-control standards of the Sarbanes-Oxley Act can be extremely high, with the average costs estimated at $7.8 million per company. One study concluded that it is not fully possible to assess the benefits of the new standards.
Q 2.10: It is inaccurate to say that one of the following would be included in comprehensive income. Which is it? A Changes in cash flow resulting from revenue generated by a totally owned subsidiary. B Changes in cash flow resulting from investments by or distribution to owners. C Changes in cash flow resulting from sale of assets other than inventory. D Changes in cash flow resulting from sales to a particular entity where ultimate payment by the entity is doubtful.
B
Q 2.13: Which of the following statements BEST reflects the economic entity assumption in accounting? A The best way to truly measure the results of enterprise activity is to measure them at the time the enterprise is liquidated. B The financial activity of a business enterprise must be kept separate and distinct from its owners and any other business unit. C A business enterprise is in business to enhance the economic well being of its owners. D When a parent and subsidiary company are merged for accounting and reporting purposes, the economic entity assumption is violated.
B
Q 2.39: The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the? A : consistency characteristic B : expense recognition principle C : revenue recognition principle D : materiality quality
B
Q 2.3: Madeline is recording revenues and expenses. When doing this, she is following the guidance set forth in which of the following Statements of Financial Accounting Concepts? A SFAC No. 8 B SFAC No. 6 C SFAC No. 3 You got it wrong : D SFAC No. 1
B
Q 2.41: Which of the following correctly demonstrates how to determine comprehensive income, as described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements"? A : revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners B : None of these answer choices are correct. C : revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities D : revenues minus expenses plus gains minus losses
B
Q 2.55: Which of the following is a benefit to preparers of providing accounting information? A : improved resource allocation B : access to capital at a lower cost C : better information for investing decisions D : better information of tax assessment
B
Q 2.6: How are financial statements related to the objective of financial reporting? A Companies use financial statements to determine selling prices of products, and determining selling prices of products is the objective of financial reporting. B Companies use financial statements to provide financial information to potential capital providers, and providing information to capital providers is the objective of financial reporting. C Companies use financial statements to determine which new projects to pursue, and deciding which projects to pursue is the objective of financial reporting. D Companies use financial statements to document their cash flow, and documenting cash flow is the objective of financial reporting.
B
Q 2.7: The fundamental quality of faithful representation is violated in which of the following situations? A The management report refers to new discoveries and inventions made, but the financial statements never report the results. This is correct answer : B Financial statements included buildings with a carrying amount estimated by management. C Financial statements were issued one year late. D All of these answer choices violate faithful representation.
B
Q 2.42: Joe owns an auto body shop in one location. He is looking at the financial statements of five auto body shops that have between 2 and 10 locations each. If Joe is not a capital provider, why might he be looking at these financial statements? A : Because he is thinking about selling his business to one of the other auto body shop chains. B : Because he is interested in expanding his business to new locations. C : Because he wants to purchase one of the other auto body shops. D : Because he is planning to move his auto body shop to a new city.
B Entrepreneurs often look at financial statements of companies in the same industry to develop their own business plan and budget. If Joe is hoping to expand his business to new locations, he would want to look at financial statements of businesses that are a similar size to what he is planning for his expansion.
Q 2.47: A major assumption of financial reporting is that the user of the financial reports has a reasonable knowledge of business and financial accounting matters. Which of the following individuals would have the most trouble understanding financial reports based on this assumption? A : Patty does not understand the difference between financial accounting and managerial accounting. B : Meredith does not understand the difference between assets, liabilities, and owners' equity. C : Jack does not understand the difference between pricing and costing. D : Blaine does not understand the difference between managers and supervisors.
B While all of the individuals have difficulty understanding some business concepts, the one that is most relevant to understanding financial statements is knowledge of the differences between assets, liabilities, and owners' equity.
Q 2.12: Assets, liabilities, and equity describe the amount of resources and claims to resources that a company has A at a moment in time and during a period of time. B neither at a moment in time nor during a period of time. C at a moment in time. D during a period of time.
C
Q 2.46: One of the following statements about the cost-benefit relationship is false. Which is it? A : Management should not be required to report information that would significantly harm the company's competitive position. B : Business reporting should exclude information outside of management's expertise. C : If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use. D : Management should not be required to provide forecasted financial information.
C
Q 2.49: Which of the following is generally true at initial acquisition? A : Historical cost and fair value diverge often. B : Historical cost is more than fair value C : Historical cost is equal to fair value. D : Historical cost is less than fair value.
C
Q 2.54: Based on the conceptual framework for financial reporting, how does knowledge of the qualitative characteristics of accounting information and the elements of financial statements help accountants? A : They help describe the methods of implementation for financial reporting standards. B : They help describe the goals and purpose of accounting. C : They help bridge the gap between the "why" and the "how" of financial reporting. D : They help identify the reporting environment.
C
Q 2.5: Michelle is preparing her company's income statement and balance sheet. This information will be used by a bank to determine if they want to provide a loan to the company. By preparing these documents, Michelle is A identifying qualitative characteristics of accounting information. B defining the basic elements of financial statements. C meeting the objective of financial reporting. D describing the basic assumptions of accounting.
C
Q 2.9: Accounting information that is complete, free from error, and neutral is A timely. B relevant. C a faithful representation. D comparable.
C
Q 2.44: Katie is looking over some of the product histories for the company. She has noticed that many more products have been rendered obsolete when compared to products 10 years ago. What impact does this have on companies? A It makes it easier for the company to define the appropriate time period. B It makes it easier to track the liabilities for the company. This is correct answer : C It makes it more difficult for the company to define an appropriate time period. D It makes it easier to determine the net income for the company.
C Defining the time period becomes more difficult as products become obsolete more quickly.
Q 2.48: SFAC No. 5 is associated with which level of the conceptual framework for financial accounting? A : the second level (qualitative characteristics) B : the second level (elements of financial statements) C : the third level D : the first level
C SFAC No. 5 sets forth fundamental recognition and measurement criteria, which is a major contributor to the third level of the conceptual framework that discusses the implementation of recognition, measurement, and disclosure accounting concepts.