Ch 2
List the assumption, principle, quality, or modifying convention that is violated: Because the company's income is low this year, a switch from accelerated depreciation to straight-line depreciation is made this year
Consistency
Which assumption, principle or constraint fits best: The company employs the same inventory valuation method from period to period
Consistency Quality
Match following characteristics with acct principle: Application of the same accounting principles as in the preceding year
Consistency characteristic
List the assumption, principle, quality, or modifying convention that is violated: An officer of Ramirez Corp. purchased a new home computer for personal use with company money, charging miscellaneous expense.
Economic entity
Match following characteristics with acct principle: Affairs of the business distinguished from those of its owners
Economic entity assumption
Personal transactions of the proprietor are distinguished from business transactions
Economic entity assumption
List the assumption, principle, quality, or modifying convention that is violated: Ramirez Corp. decides to establish a large loss and related liability this year because of the possibility that it may lose a pending patent infringement lawsuit. The possibility of loss is considered remote by its attorneys
Expense recognition (also, conservatism)
Match following characteristics with acct principle: Accruals and deferrals in adjusting and closing process. (Do not use going concern)
Expense recognition principle
Which assumption, principle or constraint fits best: Rent paid in advance is recorded as prepaid rent
Expense recognition principle or going concern assumption
Which assumption, principle or constraint fits best: A patent is capitalized and amortized over the periods benefited
Expense recognition principle or going concern assumption
Match following characteristics with acct principle: Numbers and descriptions match what really existed or happened
Faithful representation characteristic
T/F: Revenues, gains, and distributions to owners all increase equity
False
T/F: The expense recognition principle states that debits must equal credits in each transaction.
False
All significant post-balance sheet events are reported
Full disclosure principle
Match following characteristics with acct principle: Notes as part of necessary information to a fair presentation
Full disclosure principle
Match following characteristics with acct principle: Summarizing significant accounting policies
Full disclosure principle
Match following characteristics with acct principle: Company assumed to have a long life
Going concern assumption
List the assumption, principle, quality, or modifying convention that is violated: A machine, that cost $40,000, is reported at its current market value of $45,000.
Historical cost (also revenue recognition) Reporting the asset at FV of 45000 imples the following entry: Equip 5000 Gain 5000
Match following characteristics with acct principle: Valuing assets as amounts originally paid for them
Historical cost Principle
Which assumption, principle or constraint fits best: All payments less than $25 are expensed as incurred
Materiality Quality
Match following characteristics with acct principle: Stable-dollar assumption (do not use historical cost principle)
Monetary unit assumption
Match following characteristics with acct principle: Useful standard measuring unit for business
Monetary unit assumption
Which assumption, principle or constraint fits best: Assuming that dollars today will buy as much as ten years ago
Monetary unit assumption
List the assumption, principle, quality, or modifying convention that is violated: The president of Ramirez Corp. believes it is foolish to report financial information on a yearly basis. Instead, the president believes that financial information should be disclosed only when significant new information is available related to the company's operations.
Periodicity
Financial statements are prepared each year
Periodicity Assumption
Match following characteristics with acct principle: Yearly financial reports
Periodicity assumption
Match following characteristics with acct principle: Presentation of timely information with predictive and confirmatory value
Relevance characteristic
Match following characteristics with acct principle: The performance obligation is satisfied
Revenue Recognition Principle
T/F: A conceptual framework is a coherent system of concepts that flow from an objective.
True
T/F: A soundly developed conceptual framework enables the FASB to issue more useful and consistent pronouncements over time.
True
T/F: Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners
True
T/F: Relevance and faithful representation are the two fundamental qualities that make accounting information useful for decision making.
True
T/F: Revenues are recognized in the accounting period in which the performance obligation is satisfied.
True
T/F: Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements
True
T/F: The idea of consistency does not mean that companies cannot switch from one accounting method to another
True
T/F: The objective of financial reporting is the foundation of the conceptual framework
True
If the LIFO inventory method was used last period, it should be used for the current and following periods because of a. consistency. b. materiality. c. timeliness. d. verifiability.
a. consistency
Which of the following is a constraint in presenting financial information? a. Cost b. Full disclosure c. Relevance d. Consistency
a. cost
The cost constraint is also referred to as the a. cost-benefit relationship. b. materiality quality. c. monetary unit assumption. d. measurement principle.
a. cost-benefit relationship
The pervasive criterion by which accounting information can be judged is that of a. decision usefulness. b. freedom from bias. c. timeliness. d.comparability
a. decision usefulness
The underlying theme of the conceptual framework is a. decision usefulness. b. understandability. c. faithful representation. d. comparability.
a. decision usefulness
Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d.neutrality characteristic
a. economic entity assumption
Which of the following basic elements of financial statements is more associated with the balance sheet than the income statement? a. Equity b. Revenue c. Gains d. Expenses
a. equity
Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company's stock price? a. Full disclosure. b. Going concern. c. Historical cost. d.Expense recognition
a. full disclosure
What accounting concept justifies the usage of depreciation and amortization policies? a. Going concern assumption b. Fair value principle c. Full disclosure principle d. Monetary unit assumption
a. going concern assumption
Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? a. Monetary unit assumption b. Periodicity assumption c. Going-concern assumption d. Economic entity assumption
a. monetary unit assumption
Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles? a. President's letter to shareholders. b. Balance sheet. c. Income statement. d.Notes to financial statements
a. president's letter to shareholders
The objective of general-purpose financial reporting is? a. to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers b. to provide companies with the option to select information that favors one set of interested parties over another c. to provide users with financial information that implies total freedom from error. d. to provide a metric for financial information used to determine when the boundary between two or more entities should be disregarded and the entities considered to be a licensing arrangement.
a. to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers
Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more a. verifiable. b. relevant. c. indicative of the entity's purchasing power. d. conservative.
a. verifiable
Which of the following elements of financial statements is not a component of comprehensive income? a. Revenues b. Distributions to owners c. Losses d. Expenses
b. distributions to owners
The quality of information that means the numbers and descriptions match what really existed or happened is a. relevance. b. faithful representation. c. completeness. d. neutrality.
b. faithful representation
Which basic assumption may not be followed when a firm in bankruptcy reports financial results? a. Economic entity assumption b. Going concern assumption c. Periodicity assumption d. Monetary unit assumption
b. going concern assumption
Accounting information is considered to be relevant when it a. can be depended on to represent the economic conditions and events that it is intended to represent. b. is capable of making a difference in a decision. c. is understandable by reasonably informed users of accounting information. d. is verifiable and neutral.
b. is capable of making a difference in a decision
The accounting principle of expense recognition is best demonstrated by a. not recognizing any expense unless some revenue is realized. b. matching effort (expense) with accomplishment (revenue). c. recognizing prepaid rent received as revenue. d.establishing
b. matching effort (expense) with accomplishment (revenue)
Product costs include each of the following except a. overhead. b. officer's salaries. c. material. d.labor
b. officer's salaries
Which accounting assumption or principle is being violated if a company provides financial reports only when it introduces a new product? a. Economic entity b. Periodicity c. Revenue recognition d.Full disclosure
b. periodicity
During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? a. Cost constraint b. Periodicity assumption c. Conservatism d. Expense recognition principle
b. periodicity assumption
Which of the following is a fundamental quality of useful accounting information? a. Comparability b. Relevance c. Neutrality d. Materiality
b. relevance
A company issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information? a. Comparability b. Timeliness c. Understandability d.Verifiability
b. timeliness
Which of the following is a fundamental quality of useful accounting information? a. Conservatism b. Comparability c. Faithful representation d. Consistency
c. faithful representation
Which of these basic elements of financial statements arises from peripheral or incidental transactions? a. Assets b. Liabilities c. Gains d. Expenses
c. gains
A company has a factory building that originally cost the company $250,000. The current fair value of the factory building is $3 million. The president would like to report the difference as a gain. The write-up would represent a violation of which accounting assumption or principle? a. Revenue recognition b. Going concern c. Historical cost d. Monetary unit
c. historical cost
Which accounting assumption or principle is being violated if a company reports its corporate headquarter building at its fair value on the balance sheet? a. Going concern b. Monetary unit c. Historical cost d. Full disclosure
c. historical cost
What is meant by comparability when discussing financial accounting information? a. Information has predictive or confirmatory value. b. Information is reasonably free from error. c. Information is measured and reported in a similar fashion across companies. d. Information is timely.
c. information is measured and reported in a similar fashion across companies
Application of the full disclosure principle a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits. b. is violated when important financial information is buried in the notes to the financial statements. c. is demonstrated by the use of supplementary information explaining the effects of financing arrangements. d. requires that the financial statements be consistent and comparable.
c. is demonstrated by the use of supplementary information explaining the effects of financing arrangements
Which of the following is not true concerning a conceptual framework in accounting? a. It should be a basis for standard-setting. b. It should allow practical problems to be solved more quickly by reference to it. c. It should be based on fundamental truths that are derived from the laws of nature. d. All of these answer choices are true.
c. it should be based on fundamental truths that are derived from the laws of nature
A decrease in net assets arising from peripheral or incidental transactions is called a(n) a. capital expenditure. b. cost. c. loss. d. expense.
c. loss
Expensing the cost of a wastebasket with an estimated useful life of 10 years when purchased is an example of the application of the a. consistency characteristic. b. expense recognition principle. c. materiality ingredient. d.historical cost principle
c. materiality ingredient
Not adjusting the amounts reported in the financial statements for inflation is an example of which basic assumption or principle of accounting? a. Economic entity b. Going concern c. Monetary unit d.Full disclosure
c. monetary unit
Under current GAAP, inflation is ignored in accounting due to the a. economic entity assumption. b. going concern assumption. c. monetary unit assumption. d.periodicity assumption
c. monetary unit assumption
Which of the following is an ingredient of faithful representation? a. Predictive value b. Materiality c. Neutrality d. Confirmatory value
c. neutrality
Which basic assumption is illustrated when a firm reports financial results on an annual basis? a. Economic entity assumption b. Going concern assumption c. Periodicity assumption d. Monetary unit assumption
c. periodicity assumption
The two fundamental qualities that make accounting information useful for decision making are a. comparability and timeliness. b. materiality and neutrality. c. relevance and faithful representation. d.faithful representation and comparability
c. relevance and faithful representation
Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the a. consistency characteristic. b. expense recognition principle. c. revenue recognition principle. d. relevance characteristic.
c. revenue recognition principle
In classifying the elements of financial statements, the primary distinction between revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions involved.
c. the nature of these activities that gave rise to the transactions involved
Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between a. verifiability and faithful representation. b. faithful representation and comparability. c. timeliness and verifiability. d.neutrality and consistency
c. timeliness and verifiability
The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is a. relevance. b. faithful representation. c. verifiability. d. neutrality.
c. verifiability
Cost as a basis of accounting for assets has been severely criticized. What defense can you build for cost as the basis for financial accounting?
cost is: -definite and verifiable (not opinion based) -fixed once established as long as asset remains property of the party that incurred the cost -based on fact (result of transaction) -measurable and determinable -most practical basis for acct record keeping -gives a common, understandable basis on financial statements for all ppl to understand
A soundly developed conceptual framework of concepts and objectives should a. increase financial statement users' understanding of and confidence in financial reporting. b. enhance comparability among companies' financial statements. c. allow new and emerging practical problems to be more quickly solved. d.All of these answer choices are correct
d. All of these answer choices are correct
59. The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners' a. transfers of assets to the entity. b. rendering services to the entity. c. satisfaction of liabilities of the entity. d.All of these answer choices are correct
d. all of these answer choices are correct
The objective of general-purpose financial reporting is to provide financial information about a reporting entity to each of the following except a. potential equity investors. b. potential lenders. c. present investors. d.All of these answers are correct
d. all of these answers are correct
Which of the following statements about materiality is correct? a. An item must make a difference or it need not be disclosed. b. Materiality is a matter of relative size or importance. c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person. d. All of these answers are correct.
d. all of these answers are correct
Which of the following is not a benefit associated with the FASB Conceptual Framework Project? a. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. b. Practical problems should be more quickly solvable by reference to an existing conceptual framework. c. A coherent set of accounting standards and rules should result. d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
d. business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply
Neutrality means that information a. provides benefits which are at least equal to the costs of its preparation. b. can be compared with similar information about an enterprise at other points in time. c. would have no impact on a decision maker. d. cannot favor one set of interested parties over another.
d. cannot favor one set of interested parties over another
Issuance of common stock for cash affects which basic element of financial statements? a. Revenues b. Losses c. Liabilities d. Equity
d. equity
Which assumption or principle requires that all information significant enough to affect decisions of reasonably informed users should be reported in the financial statements? a. Matching. b. Going concern. c. Historical cost. d.Full disclosure
d. full disclosure
The measurement principle includes the a. fair value principle only. b. historical cost principle only. c. revenue recognition principle and expense recognition principle. d. historical cost principle and the fair value principle.
d. historical cost principle and the fair value principle
One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to a. revenues minus expenses plus gains minus losses. b. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners. c. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities. d. None of these answer choices are correct.
d. none of these answer choices are correct
When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of a. relevance. b. faithful representation. c. consistency. d.None of these answer choices are correct
d. none of these answer choices are correct
What is the quality of information that is capable of making a difference in a decision? a. Understandability b. Materiality c. Timeliness d. Relevance
d. relevance
When should an expenditure be recorded as an asset rather than an expense? a. Never b. Always c. If the amount is material d. When future benefit exists
d. when future benefit exists