HW Ch1 and Ch2

Identify whether the changes described in each of the cases below require recognition in the CPA's audit report as to consistency. (Assume that the amounts are material.)

(a) The company changed its inventory method to FIFO from weighted-average, which had been used in prior years. (YES) (b) The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years. (NO) (c) The estimated remaining useful life of plant property was reduced because of obsolescence. (NO)

Identify whether the following expenditures is recorded as an asset or an expense. Assume all items are material.

(a)Legal fees paid in connection with the purchase of land are $1,500. *ASSET* (b)Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000. *ASSET* (c)A meat market purchases a meat-grinding machine at a cost of $3,500. *ASSET* (d)On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months. *MAY BE EITHER* (e)Smith's Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business. *ASSET* (f)Alvarez's Florists pays wages of $2,100 for the month to an employee who serves as driver of their delivery truck. *EXPENSE*

Identify which basic principle of accounting is best described in each item below.

(a)Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected. *revenue recognition* (b)Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. *expense recognition* (c)Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. *full disclosure* (d)Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater. *measurement (historical cost)*

indicate to which category of elements of financial statements it belongs.

(a)Retained earnings - equity (b)Sales - revenues (c)Additional paid-in capital - equity (d)Inventory - assets (e)Depreciation - expenses (f)Loss on sale of equipment - losses (g)Interest payable - liabilities (h)Dividends - distributions to owners (i)Gain on sale of investment- gains (j) Issuance of common stock

predictive value

Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future.

relevance

Information that is capable of making a difference in the decisions of users in their capacity as capital providers.

Historical cost

The appropriate attribute for measuring plant assets is

neutrality

Absence of bias intended to attain a predetermined result or to induce a particular behavior.

Relevance and materiability

According to FASB Conceptual framework, which of the following correctly pairs a fundamental qualitative characteristics of useful financial information with a related but distinguishable concept

An asset provides future benefits

According to the FASB's conceptual framework, which of the following is an essential characteristic of an asset

timeliness

Watteau Inc. does not issue its first-quarter report until after the second quarter's results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

Identify which qualitative characteristic of accounting information is best described in each item

(a)The annual reports of Best Buy Co. are audited by certified public accountants. *verifiability* (b)Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption. *comparability* (c)Starbucks Corporation has used straight-line depreciation since it began operations. *comparability or consistency* (d)Motorola issues its quarterly reports immediately after each quarter ends. *timeliness*

Identify which basic assumption of accounting is best described in each item below.

(a)The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports. *periodicity* (b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. *monetary unit* (c)Walgreen Co. reports current and noncurrent classifications in its balance sheet. *going concern* (d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. *economic entity*

Customers receive merchandise

A department store ordinarily recognizes revenue when

Going Concern Assumption

A newly acquired plant asset is to be depreciated over its useful life, what is the basis for this accounting method

recongnition

According to FASB's conceptual framework the process of reporting an item in the financial statements of an entity is

Comparability

According to FASB's conceptual framework the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena is

Comparability

According to FASB's conceptual framework, recognition is the process of normal incorporating an element into the financial statements of an entity. Recognition criteria include all of the following except

Losses result from peripheral or incidental transactions, and expenses result from ongoing major or central operations of the entity

According to FASB's conceptual framework, which of the following best describes the distinction between expenses and losses

Liabilities are obligations resulting from previous transactions or events

According to FASB's conceptual framework, which of the following is an essential characteristic of a liability

Provide information useful for making business and investment decisions

According to the FASB's conceptual framework for financial reporting to be useful it must

Predictive value

According to the FASB's conceptual framework the quality of information that helps users increase the likelihood of correctly forcasting the outcome of past or present events is called

Relevance and faithful representation

According to the FASB's conceptual framework the two fundamental qualitative characteristics that make accounting information useful for decision making are

Decrease in a liability from primary operations

According to the FASB's conceptual framework, an entity's revenue may result from a

Estimating credit loss expense on the basis of net credit sales

According to the FASB's conceptual framework, the expense recognition principles of associating cause and effect is best exemplified by

Distributions to owners

According to the FASB's conceptual framework, which of the following decreases shareholder equity

Rational allocation procedures

According to the FASB's conceptual framework, which of the following is not an element describing transactions, events, and circumstances during intervals of time

false

Accounting standards are now less likely to require the recording or disclosure of fair value information.

Shareholders' Equity

All of the following are defined as elements of an income statement except

Not paid and currently matched with earnings.

An accrued expense can best be described as an amount

true

An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit.

Matching

Ande Co. Estimates credit loss expense on uncollectible accounts using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted or anticipated conditions. The practice follows the accounting concept

false

Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.

The accounting standards codification

Arpco, Inc., a for-profit provider of healthcare services, recently purchased two smaller companies and is researching accounting issues arising from the two business combinations. Which of the following accounting pronouncements are the most authoritative?

neutrality

Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

false

Because they are generally shorter, FASB interpretations are subject to less due process, compared to FASB standards.

Going concern

Continuation of an accounting entity in the absence of evidence to the contrary is an example of the basic concept of

Accrual accounting

Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to

comparability

Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

Periodicity

During the lifetime of an entity, accountants produce financial statements at arbitrary moments in Time in accordance with which basis accounting concept

Involves an arm's length transaction between two independent parties

Financial Information is most likely to be verifiable when an accounting transaction occurs that

false

Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control a company's operations.

true

Financial statements are the principal means through which a company communicates its financial information to those outside it.

true

GAAP is the term used to indicate the whole body of FASB authoritative literature.

Investors and creditors and their advisors

General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users

timeliness

Having information available to users before it loses its capacity to influence decisions

cost

Identify the pervasive constraint developed in the conceptual framework.

completeness

Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.

confirmatory value

Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.

The authoritative status of the conceptual framework is as follows.

It is used when there is no standard or interpretation related to the reporting issues under consideration.

What influences or makes a difference to a decision maker

Materiality and relevance are both defined by

comparability (consistency)

Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

relevance

Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?

understandably

Quality of information that allows users to comprehend its meaning.

faithful representation

Quality of information that assures users that information represents the economic phenomena that it purports to represent.

comparability

Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena.

Make rules and regulations pertaining more to disclose of financial information than to the establishment of accounting recognition and measurement principles

Regarding financial accounting for public companies, the role fo the securities and exchange commission (SEC) as currently practiced is to

Accounting standard-setters use the following process in establishing accounting standards:

Research, discussion paper, exposure draft, standard.

verifiability

Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

true

Statements of Financial Accounting Concepts set forth fundamental objectives and concepts that are used by the FASB in developing future standards of financial accounting and reporting.

Confirmatory value

TO be relevant financial information should have which of the following

true

The AICPA's Code of Professional Conduct requires that members prepare financial statements in accordance with generally accepted accounting principles.

Is the single authoritative source of US GAAP

The FASB Accounting standards codification

false

The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.

Accounting standards updates

The FASB makes changes to the Accounting Standards Codification by issuing

false

The FASB's Codification creates a new set of GAAP.

true

The Public Company Accounting Oversight Board has oversight and enforcement authority and establishes auditing and independence standards and rules.

The FASB

The SEC has affirmed that it will recognize which of the following entities as an accounting standard setter for filings under the securities laws

neutrality

The chairman of the SEC at one time noted, "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

free from error

The extent to which information is accurate in representing the economic substance of a transaction.

true

The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

false

The objective of financial statements emphasizes a stewardship approach for reporting financial information.

The needs of external users of the information

The objectives of financial reporting stem from which of the following sources

true

The primary governmental body that has influence over the FASB is the SEC.

false

The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners' or stockholders' equity.

false

U.S. companies that list overseas are required to use International Financial Reporting Standards, issued by the International Accounting Standards Board.

true

Users of financial reports of a company use the information provided by these reports to make their capital allocation decisions.

The objectives and concepts for use in developing standards of financial accounting and reporting

What are the statements of financial accounting concepts intended to establish

relevance and faithful representation

What are the two fundamental qualities that make accounting information useful for decision-making?

To provide information that is useful for economic decision making

What is the primary objective of financial reporting

To provide disclosures required by generally accepted accounting principles

What is the purpose of information presented in notes to the financial statements

confirmatory value

What is the quality of information that enables users to confirm or correct prior expectations?

Accrual Basis Accounting

Which basis of accounting is most likely to provide the best assessment of an entity's past and future ability to generate net cash inflows

Verifiability

Which of the following accounting concepts that an accounting transaction be supported by sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures and conclusions

Monetary Unit

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

SEC The securities and exchange commission

Which of the following bodies has the original authority to set accounting standards for publicly traded companies in the US

Faithful Representation

Which of the following characteristic means that information is reasonable free from error and bias

Relevance

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization

Verifiability, Timeliness, comparability

Which of the following characteristics relate to both accounting relevance and faithful representation

The information provided relates to the entity's economic resources and claims

Which of the following is a true statement about the objective of general-purpose financial reporting

profit maximization

Which of the following is not a theoretical basis for allocation of expenses

Managerial accounting need not follow generally accepted accounting principles while financial accounting must follow them.

Which of the following is true regarding the comparison of managerial and financial accounting

Official pronouncements require a unanimous vote for approval

Which of the following statements about FASB procedures for for promulgation of accounting pronouncements is false

To match the costs of production with revenues as earned

Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles

Relevance

Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic

Economic consequences of accounting standard-setting means:

accounting standards can have detrimental impacts on the wealth levels of the providers of financial information

Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments

accrual accounting involves accruals and deferrals. Which of the following best describes accruals and deferrals?

GAAP is comprised of:

any accounting guidance included in the FASB Codification

General-purpose financial statements are prepared primarily for:

external users.

GAAP stands for

generally accepted accounting principles.

The objective of financial reporting places most emphasis on:

reporting to capital providers.

The expectations gap is:

what the public thinks accountants should do and what accountants think they can do.