Ch 1 smartbook
Expense recognition often matches _____ and ______ that arise from the same transaction.
expense/revenue
A company purchases a building by signing a $200,000 10% interest-bearing note due at the end of five years. At what amount should the building be recorded?
$200,000
Hernandez Corporation purchases a building for $300,000 cash. The building was appraised at $310,000. The tax assessment on the building was $280,000. Three months after purchasing the building, Company Z offers Hernandez $320,000 for the building. At what amount should the building be reported in Hernandez's financial statements according to the historical cost principle?
$300,000
An essential assumption underlying GAAP is that all economic events can be identified with what?
An economic entity
If a company elects the fair value option for a financial asset or financial liability, how are the changes in fair value reported in the financial statements?
As gains or losses on the income statement.
Matching cost of goods sold with the revenues generated during the period is an example of which approach to expense recognition?
Cause-and-effect relationship.
______ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Comprehensive income
Which of the following would be a likely advantage of a single set of accounting standards?
Enhanced financial statement comparability
The acronym GASB refers to the
Government Accounting Standards Board
What level of the fair value hierarchy includes unobservable inputs that reflect the entity's own assumptions?
Level 3
Which of the following are steps the FASB takes before issuing an Accounting Standards Update?
Receives requests from stakeholders The Board holds a public meeting
Recognition refers to the process of
admitting information in the basic financial statements.
The change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources is called
comprehensive income.
The ______ approach determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition.
cost
Which approach to measuring fair value determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition?
cost approach
The full-disclosure principle requires that financial reports should include any information that could affect the decisions made by external users, within the constraint that the benefits of that information should exceed the ______ of providing the information.
costs
Schoene Company reports its inventory at replacement cost. This is an application of the measurement attribute of
current cost
The cost that would be incurred to purchase or reproduce an asset is referred to as
current cost.
Decreases in equity of a particular enterprise resulting from transfers to owners is called
distributions to owners.
The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date is the ____ _____.
fair value
Financial assets and liabilities can be reported
fair value or historical cost
The principle stating that asset and liability measurements should be based on the amount given or received in the original transaction is referred to as the _____ ______ principle.
historical cost
Measuring assets and liabilities based on their original transaction value is an example of
historical cost.
The four basic accounting assumptions
identify the entity being reported on identify the frequency of reporting assume the entity will continue to exist identify the denomination in which reporting occurs
The revenue/expense approach focuses on the income statement because it relies on which accounting principles?
matching revenue recognition
Another term for equity is
net assets
The main focus of accounting information is to
provide useful information for decision making.
The primary purpose of financial reporting is to provide useful information for decision making to
providers of capital
Expenses are matched to _____ from the same transaction.
revenue
According to SFAC 5, the four criteria that must be met for an item to be recognized in the basic financial statements are
the information about the item is relevant to decision making. The item meets the definition of an element. the information about the item is reliable. the item has relevant attributes that are measurable.
The periodicity assumption relates to which qualitative characteristic?
timeliness
The 1933 and 1934 Acts were designed to restore investor ______ in the stock market.
trust
Which of the following models is best in helping predict future cash flows?
Accrual accounting
The involvement of accounting professionals and management in accounting scandals resulted in Congress passing the Sarbanes-Oxley Act. What is the purpose of the Sarbanes-Oxley Act?
Addresses conflicts of interests. Regulate auditors. Provide penalties for violators. Require accountability of corporate executives.
The first body to set accounting standards in the U.S. was the ______.
CAP
1934 Securities and Exchange Act
Choice Mandates reporting requirements for companies whose stock is publicly traded.
The private sector organization that is currently responsible for setting accounting standards in the United States is the
Financial Accounting Standards Board.
The organization that is responsible for the accounting standard setting process for states and cities in the United States is the
Governmental Accounting Standards Board.
Emerging Issues Task Force (EITF)
Group dealing with emerging issues - U.S. GAAP
The International Accounting Standards Committee provides oversight, appoints members, and raises funds to support the:
IASB
The organization that develops global accounting standards is the
International Accounting Standards Board.
The International Accounting Standards Committee (IASC) reorganized in 2001 to create a new standard-setting body called the International Accounting Standards Board (IASB). The IASB issues global accounting standards called
International Financial Reporting Standards
The legal authority to set accounting and reporting standards for companies whose securities are publicly traded lies with the
SEC
IASB
Standard-setting board - IFRS
Accounting information meets the qualitative characteristic of consistency if it is measured and reported the same way
across different reporting periods.
A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events is a(n)
asset.
If the same accounting principles and methods are used for similar events by two different firms, this enhances what accounting qualitative characteristic?
comparability
The "Accounting Constitution", a coherent system of interrelated objectives and fundamentals that lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting is referred to as the ______ framework.
conceptual
The Sarbanes-Oxley Act increases accountability of who?
corporate executives
The FASB and IASB will continue to work together to converge where possible, but _______ between IFRS and U.S. GAAP will likely remain.
differences
The FASB and IASB will continue to work together to converge where possible, but _______ between IFRS and U.S. GAAP will likely remain.
differences
Decreases in equity of a particular enterprise resulting from transfers to owners are called _____ to owners.
distribution
In addition to issuing accounting standards, the FASB has formulated a conceptual _______ to provide an underlying theoretical and conceptual structure for accounting standards.
framework
The accrual accounting model is best able to achieve the goal of predicting ____ cash flows
future
Securities and Exchange Commission (SEC)
regulatory oversight - U.S GAAP
Predictive value and confirmatory value are components of which primary qualitative characteristic?
relevance
Risk refers to the ______ of an investment. Multiple choice question.
uncertainty
Recent events suggest that full convergence ______ be achieved in the foreseeable future.
will not
The primary role of financial accounting is to provide useful financial information to users who are ______ to the business enterprise.
external
When there is agreement between a measure or description of an item and the phenomenon it purports to represent, the item possesses the fundamental characteristic of
faithful representation.
The objective in valuing an asset or liability using _____ value is to approximate its fair value.
present
Ethics deals with the ability to distinguish ____ from _____.
right; wrong
The uncertainty regarding an investment is also referred to as ______.
risk
List the private accounting standard setting bodies in chronological order beginning with the oldest organization.
Committee on Accounting Procedure Accounting Principles Board Financial Accounting Standards Board
The residual interest in the assets of an entity that remains after deducting its liabilities is referred to as what?
Equity
What are the advantages of one global accounting framework?
Facilitate access to capital. Improve comparability.
True or false: The FASB Codification project revised and updated U.S. accounting standards with international accounting standards.
False
Which accounting standard setting body replaced the Accounting Principles Board in 1973?
Financial Accounting Standards Board
The International Accounting Standards Committee issued International Accounting Standards (IAS), whereas the International Accounting Standards Board currently issues
International Financial Reporting Standards.
A liability has which of the following characteristics?
It is a present obligation. It is a probable future sacrifice of an economic benefit. It is due to a past transaction or event.
What level of the fair value hierarchy includes quoted market prices in active markets for identical assets and liabilities?
Level 1 Quoted market prices in active markets for identical assets or liabilities.
Who has the responsibility to appropriately apply GAAP when preparing financial statements?
Management
Which approach to standard setting emphasizes the use of professional judgment when choosing how to account for a transaction?
Objectives-oriented
International organization of securities commissions
Regulatory oversight - IFRS
The ______ has the authority to set accounting standards for companies, but has delegated the task to the private sector.
SEC
1933 Securities Act
Sets forth accounting and disclosure requirements for initial public offerings of securities.
Which organization is currently the national professional organization for certified professional public accountants?
The AICPA
The FASB's standard setting process begins when the board adds a project to its technical agenda. Identify the final step in this process.
The Board issues an Accounting Standards Update.
What does it mean if information is cost effective?
The benefits of providing financial information exceed the costs of doing so.
Revenue recognition previously was based on the "realization principle." What were the two general criteria required by the realization principle that had to be satisfied before a company could record revenue?
There is reasonable certainty as to collectibility of the asset to be received. The earnings process is complete or virtually complete.
Which of the following represents the IASB's primary objective?
To develop high quality global standards used to make economic decisions
True or false: Financial accounting is primarily concerned with providing financial information to external users.
True
In developing standards, the FASB considers the:
Views of key constituents Economic transactions that standards will address
The AICPA is the national professional organization for certified professional public ______.
accountants
The financial reporting model used by the majority of profit oriented companies is _____ accounting
accrual
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as _____.
assets
Simply put, _____ are the economic resources of a company.
assets
The application of conservatism leads to:
assets tending to be biased downwards and losses being recognized quicker than gains
What accounting model produces a measure called net operating cash flow?
cash basis
What basis of accounting measures the difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period?
cash basis
Accounting information is ______ if similar items are treated the same way among various companies highlighting similarities and differences between events and conditions.
comarable
What component of financial information helps investors analyze their prior assessments regarding a company's cash flow generating ability?
confirmatory value
Before they can be recognized, favorable items tend to require more verification than unfavorable items. Accountants refer to this as
conservatism
The qualitative characteristic of using the same accounting method each period over time refers to the concept of _____.
consistency
Cost effectiveness is a(n) _____ on the accounting choices a company makes.
constraint
The overriding objective in the hierarchy of qualitative characteristics of financial reporting information is
decision usefulness.
The requirement that the economic activities of a business owner should be separated from the activities of the business is an example of which accounting assumption?
economic entity
An essential assumption in accounting is that all economic events can be identified specifically with an individual economic ____.
entity
A code or moral system that provides criteria for evaluating right and wrong is referred to as
ethics
Financial accounting is chiefly concerned with providing information to various _____ users.
external
____ ______ bases measurements on the price that would be received in an orderly market transaction.
fair value
Any information useful to decision makers should be provided in the financial statements, subject to the cost effectiveness constraint. This describes which accounting principle?
full-disclosure principle
Reporting assets at net realizable value helps predict:
future cash flows
Assets are probable ______ economic benefits as a result of ______ transactions or events.
future; past
The assumption that a business entity will continue to operate indefinitely in the future refers to what assumption?
going concern
The IASB's main objective is to develop a single set of standards that have what characteristics?
high-quality enforceable understandable
The Emerging Issues Task Force (EITF) was formed to
identify potential problem areas and provide a timely response to issues.
What approach to measuring fair value estimates future amounts of earnings or cash flows and then mathematically converts these amounts to a single present value?
income approach
In 2007, the SEC eliminated the requirement for ______ companies that issue stock in the United States to include in their financial statements a reconciliation of IFRS to U.S. GAAP.
international
The IASB is dedicated to developing a set of high-quality, understandable, and enforceable ______ accounting standards.
international
Increases in equity of a particular business enterprise resulting from transfers to it from other entities or individuals of something of value to obtain or increase ownership interests in it are called
investments by owners.
Simply put, ______ are the obligations of a company.
liability
Which of the following is a probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events?
liability
The going concern assumption is critical to the measurement of assets because if a business were going to cease operations, its assets would be measured at their
liquidation values.
It is the responsibility of ______ to apply Generally Accepted Accounting Principles in preparation of the company's financial statements.
managers
The fair value approach that uses current information from recent transactions or exchanges in active trading on stock exchanges is the _____ approach.
market
Which approach to measuring fair value uses information from actively traded stock on the New York Stock Exchange?
market approach
The assumption that financial statement elements should be measured in terms of the United States dollar for U.S. financial reporting is referred to as the _____ unit assumption.
monetary
Which accounting assumption states that financial statement elements should be measured in terms of the United States dollar for U.S financial reporting?
monetary unit
Which of the following are among the basic assumptions underlying U.S. GAAP?
monetary unit going concern economic entity periodicity
The Emerging Issues Task Force (EITF) was formed to resolve Blank______ financial accounting issues within the framework of existing GAAP.
narrowly-defined
Measuring assets at what value helps financial statement users predict a company's future cash flows?
net realizable value
The amount of cash into which an asset is expected to be converted in the normal course of business is the asset's
net realizable value.
Faithful representation requires that information be
neutral complete free from error
Before issuing an Accounting Standards Update, the FASB undertakes a series of information-gathering steps including
open hearings deliberations written comments
The primary forms of business organization in the United States are the sole proprietorship, the and _____ the corporation.
partnership
What are the three primary forms of business organizations?
partnership sole proprietorship corporation
Allowing the life of a company to be divided into artificial time periods in order to provide timely information is referred to as the ______ assumption.
periodicity
According to the conceptual framework, for accounting information to be relevant, what qualities must it possess?
predictive value confirmatory value
The income approach for measuring fair value estimates future amounts of earnings or cash flows first and then mathematically converts these amounts to a single _____ value.
present
The measurement attribute based on future cash flows and the objective of approximating fair value in valuing an asset or liability is
present value
Criticisms of the objectives-oriented approach for accounting standards are
professional judgment may result in different treatments of similar transactions. an absence of rules may lead to intentional misuse of a standard.
Revenue recognition was previously based on the ________ principle, which required that two criteria be satisfied before revenue can be recognized: The earnings process is complete or virtually complete and there is reasonable certainty as to collectibility.
realization
The process of admitting information into the financial statements is referred to as ______.
recognition
An emphasis is placed on proper income statement item recognition under what approach under US GAAP?
revenue/expense approach
What information regarding an entity's future cash flows are investors and lenders interested in?
timing amount uncertainty
The first private accounting standard setting body in the United States was the
Committee on Accounting Procedure.
The acronym for the private sector organization that sets accounting standards in the United States is the
FASB
True or false: Cash basis accounting is the method used by most profit-oriented companies.
False Accrual basis accounting is the accounting method used by most profit-oriented and not-for-profit entities.
True or false: The primary function of financial accounting is to provide useful financial information to users who are internal to the business.
False The primary function of financial accounting is to provide useful information to external users.
What is the primary function of financial accounting?
Provide useful information to users external to the business.
Select the four criteria used to determine if an item is recognized in the financial statements according to SFAC 5.
Reliability Relevance Definition Measurability
What was the purpose of the FASB Accounting Standards Codification project?
Reorganize all relevant accounting pronouncements in U.S. GAAP.
Why is accounting standard setting a political process?
Standards can have significant effects on companies, investors, and creditors. Changes in standards can result in a substantial redistribution of wealth within our economy.
Which of the following provides an underlying structure for the development of accounting standards?
The Conceptual Framework
The FASB's standard setting process begins when the board adds a project to its technical agenda. Organize the remaining steps in the FASB's accounting standard setting process in correct order.
The board deliberates at one or more public meetings The board issues an Exposure Draft of Discussion Paper The staff analyzes comment letters The board issues an Accounting Standards Update
True or false: The FASB considers written comments from interested parties before issuing an Accounting Standards Update.
True
True or false: In 2007, the SEC eliminated the requirement of foreign companies issuing stock in the United States to include a reconciliation of IFRS to U.S. GAAP in their financial statements.
True Foreign companies have access to U.S. capital markets with IFRS based financial statements and are not required to include a reconciliation to U.S. GAAP
True or false: Political pressure has deterred the FASB from issuing particular standard changes.
True The FASB deals with intense political pressure over controversial accounting standards, and has changed standards in response.
True or false: The conceptual framework does not prescribe GAAP.
True The conceptual framework provides an underlying foundation for accounting standards.
True or false: The uncertainty of the return on an investment is also referred to as risk.
True Uncertainty and risk are synonyms related to investment decisions