ACC 310 Exam 1 Review

c Recognition is the process of formally recording or incorporating an item in the financial statements as an asset, liability, revenue, expense, gain, or loss.

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

d Comparability is an enhancing qualitative characteristic. Information should be comparable with similar information for (1) other entities and (2) the same entity for another period or date. Thus, comparability allows users to understand similarities and differences.

According to the FASB's conceptual framework, the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena is a. Conservatism. b. Matching. c. Neutrality. d. Comparability.

c Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Financial information has predictive value if it can be used as an input in a predictive process.

According to the FASB's conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called a. Confirmatory value. b. Comparability. c. Predictive value. d. Representational faithfulness.

a Relevance and faithful representation are the fundamental qualities that make accounting information useful for decision making. Relevance is the capacity of information to make a difference in the user's decision. A representation is perfectly faithful if it is complete, neutral, and free from error.

According to the FASB's conceptual framework, the two fundamental qualitative characteristics that make accounting information useful for decision making are a. Relevance and faithful representation. b. Neutrality and completeness. c. Consistency and comparability. d. Fairness and precision.

b Cost is a pervasive constraint on the information provided by financial reporting. The benefits of financial information should exceed the costs of reporting.

According to the FASB's conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of a. Representational faithfulness. b. Cost. c. Relevance. d. Consistency.

c Faithful representation and relevance are the fundamental qualitative characteristics of accounting information. A perfectly faithful representation is complete, neutral, and free from error. Faithfully represented information is neutral if it is unbiased in its selection or presentation of information.

According to the FASB's conceptual framework, what does the concept of faithful representation in financial reporting include? a. Predictive value. b. Certainty. c. Neutrality. d. Perfect accuracy.

b Equity of a business entity (or the net assets of a nonbusiness organization) is a residual amount that reflects the basic accounting equation: assets minus liabilities equals equity (or net assets). It is reported on the statement of financial position.

All of the following are defined as elements of an income statement except a. Gains and losses. b. Shareholders' equity. c. Revenues. d. Expenses.

a The role of general purpose external financial reporting is to provide information that is useful to current and potential investors and creditors, not merely to management.

All of the following support the objective of financial reporting except providing information that a. Helps management evaluate alternative projects. b. Is useful for making investment and credit decisions. c. Concerns enterprise resources and claims to those resources. d. Helps investors and creditors predict future cash flows.

b An accrued expense has been incurred but not paid. Thus, it should be charged (matched) against revenue in the current period and recorded as a liability.

An accrued expense can best be described as an amount a. Paid and not currently matched with earnings. b. Not paid and currently matched with earnings. c. Not paid and not currently matched with earnings. d. Paid and currently matched with earnings.

b The FASB's Accounting Standards Codification and SEC pronouncements are the only sources of authoritative financial accounting guidance for nongovernmental entities in the U.S. All other sources of guidance are nonauthoritative.

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? a. FASB Accounting Standards Updates. b. The Accounting Standards Codification. c. FASB Statements of Financial Accounting Standards. d. FASB Statements of Financial Accounting Concepts.

c A basic feature of financial accounting is that it is an accrual system under which the determination of periodic earnings and financial position is dependent upon the measurement of all economic resources and obligations (e.g., receivables and payables) and changes in them as the changes occur.

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 a. Disclosure. b. Materiality. c. Accrual accounting. d. The matching concept.

c The FASB's Accounting Standards Codification and SEC pronouncements are the only sources of authoritative guidance for nongovernmental entities in the U.S. Accounting Research Bulletins, APB Opinions, Statements of Financial Accounting Standards, etc., are no longer authoritative.

Which of the following statements about the development of U.S. accounting standards is false? a. The Financial Accounting Foundation oversees the FASB. b. The FASB exercises rulemaking authority delegated by the SEC. c. Pronouncements of the FASB's predecessor bodies remain in force until amended or superseded by the FASB. d. The Financial Accounting Standards Advisory Council (FASAC) evaluates the FASB's performance.

d Relevance is a fundamental qualitative characteristic. Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Something has confirmatory value with respect to prior evaluations if it provides feedback that confirms or changes (corrects) them.

To be relevant, financial information should have which of the following? a. Neutrality. b. Understandability. c. Costs and benefits. d. Confirmatory value.

c Verifiability is a qualitative characteristic that enhances relevance and faithful representation. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (not necessarily unanimity) that it is faithfully represented.

Under SFAC 8, the ability, through consensus among measurers, to ensure that information represents what it purports to represent is an example of the concept of a. Predictive value. b. Comparability. c. Verifiability. d. Relevance.

b Relevance is a fundamental qualitative characteristic of useful accounting information. Relevant information is able to make a difference in user decisions. It must have predictive value, confirmatory value, or both. Something has predictive value if it can be used as an input in a predictive process.

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization? a. Reliability. b. Relevance. c. Neutrality. d. Timeliness.

d Verifiability, timeliness, comparability, and understandability are qualitative characteristics that enhance the relevance and faithful representation of accounting information.

Which of the following characteristics relates to both accounting relevance and faithful representation? a. Verifiability. b. Comparability. c. Timeliness. d. All of the answers are correct.

c The FASB follows a due-process procedure before issuing final pronouncements: After discussing the issues and considering input from interested parties (e.g., business, academia, and the accounting profession), the FASB votes on a final draft proposal. If a majority of the board members approves, an Accounting Standard Update (ASU) is issued. Once an ASU has been incorporated into the FASB's Accounting Standards Codification, it has the status of U.S. GAAP.

Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification? A proposed accounting research bulletin. A proposed statement of position. A proposed accounting standards update. A proposed staff accounting bulletin.

a The information reported relates to the entity's economic resources and claims to them (financial position) and to changes in those resources and claims.

Which of the following is a true statement about the objective of general-purpose financial reporting? a. The information provided relates to the entity's economic resources and claims. b. The objective applies only to information that is useful for investment professionals. c. Financial reporting directly measures management performance. d. Financial reporting is ordinarily focused on industries rather than individual entities.

d Cost is a pervasive constraint on the information provided by financial reporting. The benefits of financial information should exceed the costs of reporting.

Which of the following is considered a pervasive constraint by the FASB's conceptual framework? a. Timeliness. b. Verifiability. c. Conservatism. d. Cost.

b The Codification is the authoritative source of U.S. GAAP applicable to nongovernmental entities. It does not change existing U.S. GAAP. Instead, it restructures accounting and reporting standards to simplify access to all authoritative U.S. GAAP.

Which of the following is included in the FASB Accounting Standards Codification? a. All SEC guidance. b. U.S. GAAP for nongovernmental entities. c. Governmental accounting standards. d. Guidance for special purpose frameworks.

a General-purpose financial reports are significantly based on estimates and do not suffice to determine the value of the entity.

Which of the following is least likely to be accomplished by providing general-purpose financial information useful for making decisions about providing resources to an entity? a. To provide sufficient information to determine the value of the entity. b. To provide information about changes in an entity's economic resources and claims to them. c. To provide information about management's performance. d. To provide information to help investors and creditors assess the amount, timing, and uncertainty of prospective net cash inflows to the entity.

b Managerial accounting assists management decision making, planning, and control. Financial accounting addresses accounting for an entity's assets, liabilities, revenues, expenses, and other elements of financial statements. Financial statements are the primary method of communicating to external parties information about the entity's results of operations, financial position, and cash flows. For general-purpose financial statements to be useful to external parties, they must be prepared in conformity with accounting principles that are generally accepted in the United States. However, managerial accounting information is primarily directed to specific internal users. Thus, it ordinarily need not follow such guidance.

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

a The issuance of official pronouncements of the FASB requires a simple majority of the members.

Which of the following statements about FASB procedures for promulgation of accounting pronouncements is false? a. Official pronouncements require a unanimous vote for approval. b. An exposure draft of a proposed pronouncement of the board must have been released for public comment. c. The FASB must hold public meetings. d. A task force of experts defines specific problems.

b Relevance is a fundamental qualitative characteristic of useful financial information. It is the capacity of information to make a difference in a decision. It must have (1) predictive value, (2) confirmatory value, or both. Moreover, materiality is an entity-specific aspect of relevance. Something has predictive value if it can be used in a predictive process. Something has confirmatory value with respect to prior evaluations if it provides feedback that confirms or changes (corrects) them.

According to Statements of Financial Accounting Concepts, predictive value relates to Faithful Relevance Representation a. No Yes b. Yes No c. No No d. Yes Yes

b Relevance is a fundamental qualitative characteristic, and materiality is an entity-specific aspect of relevance. Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Information is material if its omission or misstatement can influence user decisions based on a specific entity's financial information.

According to the FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of useful financial information with one of its aspects? a Relevance and neutrality. b Relevance and materiality. c Faithful representation and confirmatory value. d Faithful representation and predictive value.

b Revenues should be recognized when they are realized or realizable and earned. Revenues are realized when products, merchandise, or other assets are exchanged for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, such as receipt of merchandise by the customers.

According to the FASB's conceptual framework, a department store ordinarily recognizes revenue when a. Preparation of merchandise for resale has been completed. b. Customers receive merchandise. c. Merchandise to be held for resale is received from suppliers. d. Payment is received from customers.

d Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing major or central operations. Thus, a revenue may result from a decrease in a liability from primary operations, for example, by delivering goods that were paid for in advance.

According to the FASB's conceptual framework, an entity's revenue may result from a(n) a. Decrease in an asset from primary operations. b. Increase in a liability from incidental transactions. c. Increase in an asset from incidental transactions. d. Decrease in a liability from primary operations.

c The objective of general-purpose financial reporting is to report financial information that is useful in making decisions about providing resources to the reporting entity. This information must have the fundamental qualitative characteristics of relevance and faithful representation.

According to the FASB's conceptual framework, for financial reporting to be useful, it must a. Directly measure the value of the entity being reported on. b. Be understandable to those who have a limited knowledge of business activities. c. Provide information useful for making business and investment decisions. d. Be in accordance with generally accepted accounting principles.

c A representation is perfectly faithful if it is (1) complete (containing what is needed for user understanding), (2) neutral (unbiased in its selection or presentation), and (3) free from error (but not necessarily perfectly accurate). Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both.

According to the FASB's conceptual framework, neutrality relates to Faithful Representation Relevance a. No No b. Yes Yes c. Yes No d. No Yes

b An item and information about the item should be recognized when the following four fundamental recognition criteria are met: (1) The item meets the definition of an element of financial statements; (2) it has a relevant attribute measurable with sufficient reliability; (3) the information about the item is capable of making a difference in user decisions; and (4) the information is representationally faithful, verifiable, and neutral. Decision usefulness is the objective of general-purpose financial reporting.

According to the FASB's conceptual framework, recognition is the process of formally incorporating an element into the financial statements of an entity. Recognition criteria include all of the following except a. Definitions of elements of financial statements. b. Decision usefulness. c. Relevance. d. Measurability with sufficient reliability.

c The objective of general-purpose financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

According to the FASB's conceptual framework, the objective of general-purpose financial reporting is most likely based on a. Generally accepted accounting principles. b. Reporting on how well management has discharged its responsibilities. c. The needs of the users of the information. d. The need for conservatism.

c According to the FASB's conceptual framework, expenses are outflows or other uses of assets or incurrences of liabilities (or both) from (1) delivering or producing goods, (2) providing services, or (3) other activities that qualify as ongoing major or central operations. Losses are decreases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners.

According to the FASB's conceptual framework, which of the following best describes the distinction between expenses and losses? a. Losses are reported net of related tax effect, and expenses are not. b. Losses are decreases in net assets, and expenses are not. c. Losses result from peripheral or incidental transactions, and expenses result from ongoing major or central operations of the entity. d. Losses are material, and expenses are immaterial.

c. Equity equals assets minus liabilities. Accordingly, transactions that decrease assets without affecting liabilities also decrease equity. Distributions to owners, such as payments of dividends (debit retained earnings and credit dividends payable, then debit dividends payable and credit cash), are such transactions.

According to the FASB's conceptual framework, which of the following decreases shareholder equity? a. Issuance of stock. b. Investments by owners. c. Distributions to owners. d. Acquisition of assets in a cash transaction.

a Comparability is a qualitative characteristic that enhances the usefulness of relevant and faithfully represented information. It enables users to identify similarities in and differences among items.

According to the FASB's conceptual framework, which of the following enhances information that is relevant and faithfully represented? a. Comparability. b. Confirmatory value. c. Materiality. d. Neutrality.

a A liability has three essential characteristics: (1) It represents an obligation that requires settlement by a probable future transfer or use of assets, (2) the entity has little or no discretion to avoid the obligation, and (3) the transaction or other event resulting in the obligation has already occurred.

According to the FASB's conceptual framework, which of the following is an essential characteristic of a liability? a. Liabilities are obligations resulting from previous transactions or events. b. The identity of the recipient entity must be known to the obligated entity before the time of settlement. c. Liabilities must require the obligated entity to pay cash to a recipient entity. d. Liabilities must be legally enforceable.

a One of the three essential characteristics of an asset is that the transaction or event giving rise to the entity's right to or control of its assets has already occurred. It is not expected to occur in the future. A second essential characteristic of an asset is that an entity can obtain the benefits of and control others' access to the asset. The third essential characteristic is that an asset must embody a probable future benefit that involves a capacity to contribute to future net cash inflows.

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

d Several elements describe transactions, events, and circumstances during intervals of time, including investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses. Rational allocation procedures are used in accrual accounting.

According to the FASB's conceptual framework, which of the following is not an element describing transactions, events, and circumstances during intervals of time? a. Distributions to owners. b. Investments by owners. c. Comprehensive income. d. Rational allocation procedures.

a A representation is perfectly faithful if it is (1) complete (containing what is needed for user understanding), (2) neutral (unbiased in its selection or presentation), and (3) free from error. The faithful representation of any given information is logically unrelated to whether the segments have the same expected risks and growth rates (assuming freedom from error) or the identity of the users.

According to the FASB's conceptual framework, which of the following most likely does not violate the concept of faithful representation? a. Report data on segments having the same expected risks and growth rates to analysts estimating future profits. b. Financial statements included property with a carrying amount increased to management's estimate of market value. c. Management reports to shareholders regularly refer to new projects undertaken, but the financial statements never report project results. d. Financial statements were issued 9 months late.

c Financial reporting should provide information that is useful to current and potential investors and creditors and other users in making rational investment, credit, and other similar decisions. This objective has the broadest focus.

According to the conceptual framework, the most basic objective of financial reporting is to convey information a. About the future cash flows of a company. b. About the liquidity and solvency of a company. c. That enables users to make decisions about a company. d. About the economic resources and obligations of a company.

a To calculate the present value of an amount to be received 6 years from today when present value factors for only 5 periods are available, multiply $4,000 by the present value of $1 factor for 5 periods. This discounts the $4,000 back 5 years. This result should then be discounted back 1 additional year, i.e., multiplied by the present value factor for one period.

Based on 8% interest compounded annually from day of deposit to day of withdrawal, what is the present value today of $4,000 to be received 6 years from today? Present Value of $1 Periods Discounted at 8% per Period 1 .926 2 .857 3 .794 4 .735 5 .681 a. $4,000 × 0.681 × 0.926. b. Cannot be determined from the information given. c. $4,000 × 0.926 × 6. d. $4,000 × 0.794 × 2.

a The sale of the first machine for $3,000 and the purchase of the new machine for $8,000 on 3/5/Year 2 results in an incremental cost to the company of $5,000. If the present value of the future savings from the second machine (present value of an annuity of $250) exceeds $5,000, the company should purchase the new machine. Note that the remaining estimated useful life of the first machine is the same as that of the second. Note also that the cost of Machine 1 should be ignored because it is a sunk cost.

Chambers Company bought Machine 1 on March 5, Year 1, for $5,000 cash. The estimated salvage was $200 and the estimated life was 11 years. On March 5, Year 2, the company learned that it could purchase a different machine for $8,000 cash. It would save the company an estimated $250 per year. The new machine would have no estimated salvage and an estimated life of 10 years. The company could sell Machine 1 for $3,000 on March 5, Year 2. Ignoring income taxes, which of the following calculations would best assist the company in deciding whether to purchase the new machine? a. (Present value of an annuity of $250) + $3,000 - $8,000. b. (Present value of an annuity of $250) - $8,000. c. (Present value of an annuity of $250) + $3,000 - $8,000 - $4,800. d. (Present value of an annuity of $250) + $3,000 - $8,000 - $5,000.

c Comprehensive income includes all changes in equity of a business entity except those changes resulting from investments by owners and distributions to owners. The components of comprehensive income are net income and other comprehensive income (OCI). Net income includes the results of operations classified as income from continuing operations and discontinued operations. Components of comprehensive income not included in the determination of net income are included in OCI, for example, unrealized gains and losses on available-for-sale debt securities.

Comprehensive income is best defined as a. Total revenues minus total expenses. b. The change in net assets for the period including contributions by owners and distributions to owners. c. The change in net assets for the period excluding owner transactions. d. Net income excluding discontinued operations.

c The FASB establishes authoritative U.S. GAAP for nongovernmental entities. Other entities develop nonauthoritative guidance for effective internal control. An example is the internal control framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. It is incorporated in U.S. GAAS.

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

d Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm's-length transaction between independent interests suggests that the transaction is verifiable.

Financial information is most likely to be verifiable when an accounting transaction occurs that a. Is promptly recorded in a fixed amount of monetary units. b. Furthers the objectives of the entity. c. Allocates revenues or expense items in a rational and systematic manner. d. Involves an arm's-length transaction between two independent parties.

d. The objective is to report financial information that is useful in making decisions about providing resources to the reporting entity. Primary users of financial information are current and potential investors and creditors who cannot obtain it directly.

General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users? a. The board of directors of the corporation. b. Regulatory and taxing authorities. c. The management of the corporation. d. Investors and creditors and their advisors

a The question requires a present value rather than a future value, i.e., today's equivalent of $10,000 at the end of each of the next 5 years. The table used is for the present value of an ordinary annuity. The interest factor corresponding to 6% for 5 periods is multiplied by $10,000 to provide the answer.

Harry Rawlings wants to withdraw $10,000 (including principal) from an investment fund at the end of each year for 5 years. How should he compute his required initial investment at the beginning of the first year if the fund earns 6% compounded annually? a. $10,000 times the present value of an annuity of $1 at 6% at the end of each year for 5 years. b. $10,000 times the amount of an annuity of $1 at 6% at the end of each year for 5 years. c. $10,000 divided by the amount of an annuity of $1 at 6% at the end of each year for 5 years. d. $10,000 divided by the present value of an annuity of $1 at 6% at the end of each year for 5 years.

b The FASB follows a due process procedure before issuing final pronouncements. This procedure includes (1) identifying issues, (2) adding a project to the technical agenda, (3) public meetings, (4) publication of an exposure draft (and possibly a Discussion Paper), (5) another public meeting if needed, (6) staff analysis and FASB redeliberation with stakeholder input, and (7) a FASB vote on a final draft proposal. If a majority of the seven board members approves, an Accounting Standards Update is issued to amend the ASC.

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

d. This answer is correct. The question involves future value because it requires computation of the periodic amount of an annuity that must be invested to produce a given future amount. Accordingly, the appropriate factor reflecting the compound interest effect will be derived from the formula for the future value of an ordinary annuity of $1. This factor multiplied by the periodic payment is equal to the desired future amount. If the payment is unknown, it may be calculated by dividing the known future amount ($10,000) by the appropriate factor derived from the future value of an ordinary annuity formula. If the payments are to be made semiannually for 20 years, 40 compounding periods are involved. If the interest rate is 6% per annum, the semiannual interest rate is 3%.

Jarvis wants to invest equal semiannual payments in order to have $10,000 at the end of 20 years. Assuming that Jarvis will earn interest at an annual rate of 6% compounded semi-annually, how would the periodic payment be calculated? a. $10,000 divided by the present value of an ordinary annuity of 40 payments of $1 each at an interest rate of 3% per period. b. The future amount of an ordinary annuity of 20 payments of $1 each at an interest rate of 6% per period divided into $10,000. c. The present value of an ordinary annuity of 40 payments of $1 each at an interest rate of 3% per period divided by $10,000. d. $10,000 divided by the future amount of an ordinary annuity of 40 payments of $1 each at an interest rate of 3% per period.

a Both materiality and relevance are characteristics defined by their ability to influence or make a difference to a decision maker. Materiality is an entity-specific aspect of relevance based on the nature, magnitude, or both of the items to which the information relates in the context of an individual entity's financial report.

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.

d. Financial reporting based on a set of global standards eliminates the need for multinational companies to revise their statements or reconcile them to the local financial reporting framework. Trading their securities on local exchanges is facilitated. Foreign investment is thereby made much easier, and the cost of capital is lowered.

The principal benefit of a single set of global financial reporting standards is a. The convergence of global financial reporting standards. b. Minimization of the amount of professional judgment required to implement them. c. Simplified enforcement for local and national regulatory bodies. d. Increased ease of capital flow.

b If the cash inflow, net of taxes, at the end of each of 7 years is $5,000, and if the discount rate is 12%, the present value of this series of cash flows will be equal to the present value of an ordinary annuity of $5,000 for 7 years at 12%. The interest factor for the present value of an ordinary annuity is equal to the sum of the interest factors for the present value of $1 for the same period. The interest factor for an ordinary annuity of $5,000 for 7 periods is 4.564. The present value is $22,820 ($5,000 × 4.564). The alternative is to calculate the present value of each $5,000 cash flow using the interest factor for the present value of $1 at 12% for each of the periods 1 through 7. The sum of these products is equal to the present value of an ordinary annuity of $5,000 for 7 periods at 12%. $5,000 × .893 = $ 4,465 5,000 × .797 = 3,985 5,000 × .712 = 3,560 5,000 × .636 = 3,180 5,000 × .567 = 2,835 5,000 × .507 = 2,535 5,000 × .452 = 2,260 5,000 × 4.564 = $22,820

Murray is planning a project that will cost $22,000. The annual cash inflow, net of income taxes, will be $5,000 a year for 7 years. The present value of $1 at 12% is as follows: Period Present Value of $1 at 12% 1 .893 2 .797 3 .712 4 .636 5 .567 6 .507 7 .452 Using a rate of return of 12%, what is the present value of the cash flow generated by this project? a. $35,000 b. $22,820 c. $34,180 d. $22,600

a The payment terms of this purchase agreement provide for a $20,000 initial payment and seven equal payments of $20,000 to be received at the end of each of the next 7 years. The note payable, however, should reflect only the present value of the 7 future payments. The present value factor to be used is the present value of an ordinary annuity for 7 periods at 11%, or 4.712. The note payable should be recorded at $94,240 ($20,000 × 4.712).

On December 30 of the current year, Azrael, Inc., purchased a machine from Abiss Corp. in exchange for a noninterest-bearing note requiring 8 payments of $20,000. The first payment was made on December 30, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Present Value of Present Value of Ordinary Annuity Annuity in Advance Period of $1 at 11% of $1 at 11% 7 4.712 5.231 8 5.146 5.712 On Azrael's current year December 31 balance sheet, the note payable to Abiss was a. $94,240 b. $114,240 c. $102,920 d. $104,620

d The present value (PV) of an amount is the value today of some future payment. It equals the future payment times the present value of $1 (a factor found in a standard table) for the given number of periods and interest rate. The future payment (the future value of an amount) can therefore be determined by dividing the PV of an amount by the relevant interest factor. Consequently, the cash accumulated in 2 years will be $12,107 ($10,000 PV of an amount ÷ .826 PV of $1 for 2 years at 10%).

On January 1 of the current year, Lean Co. made an investment of $10,000. The following is the present value of $1.00 discounted at a 10% interest rate: Present value of $1.00 Periods discounted at 10% 1 .909 2 .826 3 .751 What amount of cash will Lean accumulate in 2 years? a. $12,000 b. $16,250 c. $27,002 d. $12,107

c Carr Corp. wishes to have $2 million at the end of a 4-year period (July 1, Year 5 through June 30, Year 9). The amount will be generated from 4 equal annual payments (an annuity) to be made starting at the beginning of the 4-year period. The annual payment for this annuity in advance is obtained by dividing the desired future amount of $2 million by the interest factor for the future value of an annuity in advance of $1 at 10% for 4 years. Each annual deposit should therefore equal $391,400 ($2,000,000 ÷ 5.11).

On January 15, Year 5, Carr Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, Year 9, at an estimated cost of $2 million. Carr plans to make 4 equal annual deposits in a fund that will earn interest at 10% compounded annually. The first deposit was made on July 1, Year 5. Future value factors are as follows: Future value of 1 at 10% for 5 periods 1.61 Future value of ordinary annuity of 1 at 10% for 4 periods 4.64 Future value of annuity in advance of 1 at 10% for 4 periods 5.11 Carr should make 4 annual deposits (rounded) of a. $320,000 b. $500,000 c. $391,400 d. $431,000

c The contract calls for 5 equal annual payments with the first due immediately. Ordinary annuity tables assume the first payment occurs at the end of the first time period. An annuity in which the first payment occurs at the beginning of the first period is called an "annuity due" or an "annuity in advance." The number of payments earning interest in an annuity due is one less than the number earning interest in an ordinary annuity because there is no interest on the first payment. Accordingly, the present value of an annuity due of $1 for 5 periods can be calculated by taking the present value of an ordinary annuity of $1 for 4 periods and adding $1. Hence, either a special table for an annuity due or the method described above can be used in this situation.

On July 1, Goblette Company sold some machinery to another company. The two companies entered into an installment sales contract at a predetermined interest rate. The contract required 5 equal annual payments with the first payment due on July 1, the date of sale. What present value concept is appropriate for this situation? a. Present value of an ordinary annuity of $1 for 5 periods. b. Future amount of $1 for 5 periods. c. Present value of an annuity due of $1 for 5 periods. d. Future amount of an annuity due of $1 for 5 periods.

c The acquisition cost would have been recorded at $240,000 if this amount of cash had been paid immediately. Given that the $240,000 is to be paid in installments, the acquisition cost is equal to the down payment of $80,000 plus the present value of the series of 4 annuity payments beginning 1 year after the date of purchase. The proper interest factor to be employed is the present value of an ordinary annuity of $1 at 14% for 4 periods, or 2.91.

On July 1, Year 4, Ahmed signed an agreement to operate as a franchisee of Teacake Pastries, Inc., for an initial franchise fee of $240,000. On the same date, Ahmed paid $80,000 and agreed to pay the balance in four equal annual payments of $40,000 beginning July 1, Year 5. The down payment is not refundable, and no future services are required of the franchisor. Ahmed can borrow at 14% for a loan of this type. Present value of $1 at 14% for 4 periods 0.59 Future amount of $1 at 14% for 4 periods 1.69 Present value of an ordinary annuity of $1 at 14% for 4 periods 2.91 Ahmed should record the acquisition cost of the franchise on July 1, Year 4, at a. $174,400 b. $240,000 c. $196,400 d. $270,400

b The depositor wishes to have $1,000,000 at the end of a 4-year period (from 9/1/Year 1 to 9/1/Year 5). The amount will be generated from 4 equal annual payments (an annuity) to be made starting at the beginning of the 4-year period. The annual payment needed to reach this goal can be calculated by dividing the desired future amount of $1,000,000 by the factor for the future amount of an annuity in advance of $1 at 10% for 4 periods. Each annual deposit should therefore equal $195,700 ($1,000,000 ÷ 5.11).

On March 15, Year 1, Kathleen Corp. adopted a plan to accumulate $1,000,000 by September 1, Year 5. Kathleen plans to make 4 equal annual deposits to a fund that will earn interest at 10% compounded annually. Kathleen made the first deposit on September 1, Year 1. Future value and future amount factors are as follows: Future value of $1 at 10% for 4 periods 1.46 Future amount of ordinary annuity of $1 at 10% for 4 periods 4.64 Future amount of annuity in advance of $1 at 10% for 4 periods 5.11 Kathleen should make 4 annual deposits (rounded) of a. $684,930 b. $195,700 c. $250,000 d. $215,500

c The cost of the machine on 9/1/Year 1 is the present value of the payment to be made on 9/1/Year 3. To obtain the present value, i.e., today's price, the future payment is multiplied by the present value of $1 for two periods at 10%.

On September 1, Year 1, an entity purchased a new machine that it does not have to pay for until September 1, Year 3. The total payment on September 1, Year 3, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine will be the total payment multiplied by what time value of money factor? a. Present value of annuity of $1. b. Future amount of annuity of $1. c. Present value of $1. d. Future amount of $1.

d According to the FASB's conceptual framework, comprehensive income of a business entity is the periodic change in equity of a business from nonowner sources. Thus, dividends paid (distributions to owners) are excluded from comprehensive income.

One of the elements of financial statements is comprehensive income. Comprehensive income for a period excludes changes in equity resulting from which of the following? a. Unrealized loss on available-for-sale debt securities. b. Prior-period error correction. c. Loss from discontinued operations. d. Dividends paid to shareholders.

b Other than SEC pronouncements, which apply only to SEC registrants, the Codification is the only source of authoritative accounting guidance recognized by the FASB that applies to nongovernmental entities.

Other than SEC pronouncements, which of the following accounting pronouncements applicable to nongovernmental entities is recognized by the FASB as the most authoritative? a. FASB Technical Bulletins. b. The FASB's Accounting Standards Codification. c. FASB Statement of Financial Accounting Concepts. d. AICPA Statements of Position.

a The SEC has authority to regulate external financial reporting. It has chosen to allow the accounting profession (through the FASB) to establish principles.

Regarding financial accounting for public companies, the role of the Securities and Exchange Commission (SEC) as currently practiced is to a. Make rules and regulations pertaining more to disclosure of financial information than to the establishment of accounting recognition and measurement principles. b. Regulate financial disclosures for corporate, state, and municipal reporting. c. Develop and promulgate most generally accepted accounting principles. d. Make rules and regulations regarding filings with the SEC but not to regulate annual or quarterly reports to shareholders.

d The Codification is the single authoritative source of GAAP in the U.S. for nongovernmental entities other than SEC pronouncements, which apply only to SEC registrants. It supersedes all previous U.S. accounting and reporting standards for nongovernmental entities. All other accounting literature, other than SEC pronouncements, not included in the Codification is nonauthoritative.

The FASB Accounting Standards Codification a. Includes guidance on state and local governmental accounting. b. Increases the risk of noncompliance with GAAP. c. Expanded the GAAP hierarchy. d. Is the single authoritative source of U.S. GAAP other than SEC pronouncements.

b. An Accounting Standards Update (ASU) is issued when the FASB approves an amendment to the Accounting Standards Codification (ASC). However, an ASU is not authoritative until it has been incorporated into the ASC. SEC pronouncements and the ASC are the only sources of authoritative financial accounting guidelines for nongovernmental entities in the U.S.

The FASB makes changes to the Accounting Standards Codification by issuing a. Emerging Issues Task Force Releases. b. Accounting Standards Updates. c. Staff Technical Bulletins. d. Statements of Financial Accounting Standards.

a The FASB typically issues an exposure draft of the proposed Accounting Standards Update and then requests that interested parties (academics, businesses, accountants, regulators, etc.) provide feedback on the new standard either in writing or in public meetings at various stages of its due process activities. The FASB then makes a final decision based on the feedback and its deliberations.

The FASB's due process for setting accounting standards includes which of the following procedures? The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft. The FASB obtains approval from the International Accounting Standards Board in setting its agenda. The FASB's Emerging Issues Task Force ratifies amendments to the Accounting Standards Codification. The FASB delegates topics to the Financial Accounting Foundation for research and reporting.

c The Sarbanes-Oxley Act of 2002 empowered the SEC to establish generally accepted accounting principles. The SEC delegated this authority to the FASB as the accounting standard-setter for filings by issuers (public companies) under the securities laws.

The SEC has affirmed that it will recognize which of the following entities as an accounting standard-setter for filings under the securities laws? a. The AICPA. b. The IASB. c. The FASB. d. The GASB.

a The results of operations for a period of time are reported in the income statement (statement of earnings) on the accrual basis using an approach oriented to historical transactions.

The financial statement that provides a summary of the firm's operations for a period of time is the a. Income statement. b. Statement of financial position. c. Statement of retained earnings. d. Statement of shareholders' equity.

b Accrual-basis amounts used in financial reporting are not useful to managers making day-to-day operating decisions. The practice of management accounting fulfills the needs of these users.

The financial statements included in the annual report to the shareholders are least useful to which one of the following? a. Bankers preparing to lend money. b. Managers in charge of operating activities. c. Stockbrokers. d. Competing businesses.

c The elements of financial statements directly related to measuring the performance and status of business enterprises and nonbusiness organizations are (1) assets, (2) liabilities, (3) equity of a business or net assets of a nonbusiness organization, (4) revenues, (5) expenses, (6) gains, and (7) losses. The elements of (1) investments by owners, (2) distributions to owners, and (3) comprehensive income relate only to business enterprises. Information disclosed in notes or parenthetically on the face of financial statements amplifies or explains information recognized in the financial statements.

Under SFAC No. 6, Elements of Financial Statements, interrelated elements of financial statements include Distributions to Owners Notes to Financial Statements a. No No b. No Yes c. Yes No d. Yes Yes

c The FASB issues Accounting Standards Updates (ASUs) as part of the process of amending the Codification. ASUs are not authoritative until they are included in the Codification. However, ASUs include materials (e.g., background information and basis for conclusions) not included in the Codification. Prior to issuing updates, the FASB follows due process procedures.

Under the FASB Accounting Standards Codification, updates to GAAP are made as a. Exposure Drafts. b. Accounting Statements of Position. c. Accounting Standard Updates. d. Statements of Financial Accounting Standards.

c SFACs do not establish accounting and reporting requirements. They are nonauthoritative guidance for nongovernmental entities. SFACs describe the objectives, qualitative characteristics, elements, and other fundamental concepts that guide the FASB in developing sound accounting principles.

What are the Statements of Financial Accounting Concepts intended to establish? a. The hierarchy of sources of generally accepted accounting principles. b. Generally accepted accounting principles in financial reporting by business enterprises. c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The meaning of "present fairly in accordance with generally accepted accounting principles."

c The overall objective is to report financial information that is useful to current and potential investors and creditors in making decisions about providing resources to an individual reporting entity.

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

a Notes are an integral part of the basic financial statements. Notes provide information essential to understanding the financial statements, including disclosures required by GAAP.

What is the purpose of information presented in notes to the financial statements? a. To provide disclosures required by generally accepted accounting principles. b. To present management's responses to auditor comments. c. To provide recognition of amounts not included in the totals of the financial statements. d. To correct improper presentation in the financial statements.

a Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of (1) net income and (2) other comprehensive income (OCI).

What is the purpose of reporting comprehensive income? a.To summarize all changes in equity from nonowner sources. b. To provide information for each segment of the business. c. To reconcile the difference between net income and cash flows provided from operating activities. d. To provide a consolidation of the income of the firm's segments.

b Accrual accounting reports the effects of transactions and other events and circumstances even if the resulting cash flows occur in a different period. The advantage of accrual accounting is that information about an entity's economic resources and claims and changes in them during a period provides a better basis for assessing past and future performance than information solely about cash flows.

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? a. Cash basis of accounting. b. Accrual basis of accounting. c. Modified cash basis of accounting. d. Tax basis of accounting.

b Verifiability is a qualitative characteristic that enhances relevance and faithful representation. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented.

Which of the following accounting concepts states that an accounting transaction should be supported by sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures and conclusions? a. Stable monetary unit. b. Verifiability. c. Periodicity. d. Matching.

d Comprehensive income includes all components of net income and other comprehensive income. Sales revenue is a component of net income and thus is considered a component of comprehensive income.

Which of the following assets or transactions is an element of comprehensive income? a. Investments by owners. b. Distributions to owners. c. Deferred revenue. d. Sales revenue.

a The SEC establishes rules for financial reporting by publicly traded companies (called issuers) in the United States. But the SEC has delegated the authority for detailed rule making to the Financial Accounting Standards Board (FASB).

Which of the following bodies has the original authority to set accounting standards for publicly traded companies in the U.S.? a. The Securities and Exchange Commission (SEC). b. The Financial Accounting Standards Board (FASB). c. The International Accounting Standards Board (IASB). d. The American Institute of Certified Public Accountants (AICPA).

c Among other things, useful information faithfully represents economic events. A perfectly faithful representation has the following characteristics: (1) completeness (containing what is needed for user understanding), (2) neutrality (unbiased in its selection and presentation), and (3) freedom from error. A representation is free from error if it has no errors or omissions in (1) the descriptions of the phenomena and (2) the selection and application of the reporting process.

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

b The first step in the FASB's standards-setting process is identification of financial reporting issues based on communications with stakeholders, research, and other activities. After analysis by the FASB's staff, the decision is made whether to add the project to the technical agenda. If it is added, the issues are deliberated at a public meeting(s). The next step is to publish an Exposure Draft to solicit stakeholder responses. In some projects, a Discussion Paper also may be issued at an early stage. A public meeting regarding the Exposure Draft may be held if needed. The staff analyzes the information obtained in the previous steps. The FASB then redeliberates the proposals with stakeholder input at a public meeting(s). The final step is a vote by the FASB on the final proposal. If a majority of the 7 board members approves, an Accounting Standards Update is issued that contains amendments to the Accounting Standards Codification.

Which of the following statements best describes an operating procedure for issuing a new Accounting Standards Update? a. The Exposure Draft is modified per public opinion before issuing a Discussion Paper. b. A new update is issued only after a majority vote by the members of the FASB. c. The Emerging Issues Task Force must approve a discussion paper before it is disseminated to the public. d. A new FASB statement can be rescinded by a majority vote of the AICPA membership.

d Relevance is a fundamental qualitative characteristic. Information is relevant if it can make a difference in user decisions.

Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic? a. Feedback value. b. Comparability. c. Timeliness. d. Relevance.