ACC 3300 - End of Chapter 2

Which of the following statements is true regarding the conceptual frameworks developed by FASB and IASB?

Both IASB and FASB have similar measurement principles based on historical cost and fair value.

The historical cost of a liability cannot be established, so companies use the present value of cash flows to value liabilities. True or False?

False. Companies issue liabilities such as bonds and accounts payable in exchange for assets or services for an agreed-upon price. The price established in the exchange transaction is the "cost" of a liability.

Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point GAAP has adopted it more broadly. True or False?

False. Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point IFRS has adopted it more broadly.

For information to be relevant, it must have both predictive value and confirmatory value. True or False?

False. For information to be relevant, it needs to have predictive value or confirmatory value or both.

In order to justify requiring a particular measurement or disclosure, the costs perceived to be associated with it must exceed the benefits perceived to be associated with it. True or False?

False. In order to justify requiring a particular measurement or disclosure, the benefits perceived to be associated with it must exceed the costs perceived to be associated with it.

The existing conceptual frameworks underlying IFRS and GAAP are strikingly different and the FASB and IASB will likely change many aspects of each of the frameworks in order to create a common conceptual framework. True or False?

False. The existing conceptual frameworks underlying IFRS and GAAP are very similar and there is no need to change many aspects of the existing frameworks other than to converge different ways of discussing essentially the same concepts.

The fundamental quality of faithful representation ensures that financial statements are totally free from error. True or False?

False. The fundamental quality of faithful representation does not ensure that financial statements are totally free from error because financial reporting involves various types of estimates that incorporate management's judgment.

The difficulty in cost-benefit analysis is that the benefits are usually evident and easily measurable, while the costs are not always evident or measurable. True or False?

False. The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.

An increase in equity (net assets) arising from peripheral or incidental transactions is called a(n)

Gain

Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the:

Going Concern Assumption

In 2010, the FASB and IASB agreed on

In 2010, the FASB and IASB agreed on the objective of financial reporting and a common set of desired qualitative characteristics.

Preparation of merged financial statements when a parent-subsidiary relationship exists does not violate the

Parent-subsidiary financials are an example of the economic entity assumption. The entity concept does not necessarily refer to a legal entity. A parent and its subsidiaries are separate legal entities, but merging their activities for accounting and reporting purposes does not violate the economic entity assumption.

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint.

1. Consistency 2. Neutrality 3. Neutrality 4. Relevance and Faithful Representation. 5. Timeliness 6. Cost 7. Relevance 8. Comparability 9. Confirmatory Value 10. Verifiability

TravelCo Company made three investments during 2017. Where will TravelCo report these investments in the fair value hierarchy? 1. It purchased 5,000 shares of Microsoft stock, which trades on the NASDAQ. 2. The company purchased 500 shares of Anthony Technical Company, a start-up company. TravelCo used an internally developed model to evaluate the amount of the investment. 3. It invested $10,000 in utility bonds of a small neighboring community utility company. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.

1. Level 1 2. Level 3 3. Level 2

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

1. Monetary Assumption 2. Economic Entity Assumption 3. Going Concern Assumption

Indicate whether the following statements about the conceptual framework are true or false. 1. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. 2. The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. 3. Verifiability is solely an enhancing characteristic for faithful representation. 4. Relevant information only has predictive value, confirmatory value, or both. 5. Comparability pertains to the reporting of information in a similar manner for different companies as well as a company reporting under the same accounting policies over time. 6. Information that is a faithful representation is characterized as having predictive or confirmatory value.

1. True 2. False 3. False 4. False 5. True 6. False

Presented below are three different transactions related to materiality. Do you classify these transactions as material? 1. Polley Co. has reported a positive trend in earnings over the last 4 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 2% of net income. 2. Linsmeier Co. expenses all capital equipment under $18,000 on the basis that it is immaterial. The company has followed this practice for a number of years. 3. Carnall Co. has a gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Carnall's income for the current year was $10 million.

1. Yes 2. No 3. Yes

A conceptual framework establishes the concepts that provide guidance on

All of the answers given are correct. A conceptual framework establishes the concepts that provide guidance on 1) identifying the boundaries of financial reporting; 2) selecting the transactions, other events, and circumstances to be represented; 3) how they should be recognized and measured and 4) how they should be summarized and reported.

Companies and their auditors generally have adopted a rule of thumb that anything under _____ of net income is considered not material.

Anything under 5% of net income is generally considered not material.

Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time?

Assets, Liabilities and Equity

The change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources is called

Comprehensive income is the change in equity (net assets) during a period from transactions and other events and circumstances from non-owner sources.

In developing accounting standards, the FASB attempts to determine that each proposed pronouncement will fill a significant need and that the costs imposed to meet the rule are justified in relation to overall benefits of the resulting information. What accounting assumption, principle, or constraint is being illustrated?

Cost Constraint

Which of the following statements about the fair value principle is true?

Fair value is a market-based measure. It is more relevant, more subjective, and FASB gives companies the option of using fair value for financial assets and financial liabilities.

Information that has been measured and reported in a similar manner for different enterprises is considered consistent. True or False?

Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency is present when a company applies the same accounting treatment to similar events, from period to period.

In the United States, inflation/deflation is ignored in accounting under which of the following assumptions?

Monetary Unit Assumption

All of the following are ingredients of relevance except:

Neutrality is an ingredient of faithful representation, not relevance.

With regard to fair value, which of the following measurements is considered the least subjective?

Observable inputs that reflect quoted prices for identical assets or liabilities are considered the least subjective measurements.

In order to be relevant, financial information must be/have

Relevant information has predictive value or confirmatory value (or both), and is material.

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting?

The "how" or the implementation of accounting is provided through the recognition, measurement, and disclosure concepts such as assumptions, principles and constraints.

A conceptual framework is necessary for which of the following reasons?

The conceptual framework allows the profession to quickly solve new and emerging issues and to issue more useful consistent standards. It also increases financial statement users' understanding of and confidence in financial reporting.

The assumption that implies that the economic activities of an enterprise can be identified with a particular unit of accountability is the:

The economic entity assumption implies that the economic activities of an enterprise can be identified with a particular unit of accountability.

Enhancing qualities of accounting information include:

The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability.

Enhancing qualities of accounting information include all of the following except:

The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability. Neutrality is not an enhancing quality of accounting information. It is an ingredient of the fundamental quality of faithful representation.

Which level of the conceptual framework is devoted to the "why" - the purpose of accounting?

The first level addresses the "why" or purpose of accounting.

The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises?

The framework consists of 7 Statements of Financial Accounting Concepts.

Which of the following is not among the ingredients of the fundamental quality of faithful representation?

The ingredients of faithful representation include completeness, neutrality, and free from error. The ingredients of the fundamental quality of faithful representation do not include materiality.

The objective of general-purpose financial reporting in the conceptual framework is

The objective of general-purpose financial reporting is to provide financial information about the entity that is useful in making decisions about providing resources to the entity.

The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users. True or False?

The objective of the conceptual framework is to provide financial information about the reporting entity primarily to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly. True or False?

The periodicity assumption suggests that the economic life of a business can be divided into artificial time periods such as a month, quarter or year.

Which level of the conceptual framework is devoted to elements of financial statements and the qualitative characteristics?

The second level (the bridge) is devoted to the elements of financial statements and the qualitative characteristics.

The conceptual framework for financial reporting consists of how many levels?

There are 3 levels: Level 1, the "Why"; Level 2, the Bridge between levels 1 & 3; and Level 3, the "How".

To be recognized in the main body of financial statements, an item should

To be recognized in the main body of the financial statements, an item should meet the definition of a basic element, be measurable with sufficient certainty, and be relevant and reliable.

A contract is an agreement between two parties that creates enforceable rights or obligations. True or False?

True

Under IFRS

Under IFRS companies may apply fair value to natural resources and the monetary unit assumption is still used (although the unit of measure will vary depending on the currency used in the country in which the company is incorporated). The existing conceptual frameworks under IFRS and GAAP are very similar.

When a company changes accounting principles, it financial statements lack ______________.

When a company changes accounting principles its financial statements lack consistency since the same accounting treatment is not being applied to similar events from period to period.

Generally, revenues are recognized when the:

When a company satisfies the performance obligation to perform services or sell a product, revenue is recognized.

For each item below, indicate to which category of elements of financial statements it belongs. a. Dividends b. Interest Receivable c. Issuance of Preferred Stock d. Prepaid Insurance e. Amortization f. COGS g. Accounts Payable h. Cash i. Equipment j. Gain on Sale of Equipment

a. Distributions to owners b. Assets c. Investments by Owners d. Assets e. Expenses f. Expenses g. Liabilities h. Assets i. Assets j. Gains

Presented below are a number of operational guidelines and practices that have developed over time. a. Intangible assets are capitalized and amortized over periods benefited. b. Brokerage firms use fair value for purposes of valuing investments. c. Each enterprise is kept as a unit distinct from its owner or owners. d. All significant post-balance-sheet events are reported. e. Fair value changes of fixed assets are not recognized in the accounting records. f. Supplemental information is presented so that investors will not be misled. g. Revenue is recorded at point of sale. h. All important aspects of bond indentures are presented in financial statements. i. Rationale for accrual accounting. j. The use of consolidated statements is justified. k. Reporting must be done at defined time intervals. l. An allowance for doubtful accounts is established. m. Goodwill is recorded only at time of purchase. n. A company charges its sales commission costs to expense.

a. Expense Recognition Principle b. Industry Practices/Fair Value Principle c. Economic Entity Assumption d. Full Disclosure Principle e. Measurement Principle (historical cost) f. Full Disclosure Principle g. Revenue Recognition Principle h. Full Disclosure Principle i. Revenue/Expense Recognition Principles j. Economic Entity Assumption k. Periodicity Assumption l. Measurement Principle (Fair Value) m. Measurement Principle (historical cost) n. Expense Recognition Principle (Period Costs)