Exam 1

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

Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States? a. AICPA b. FASB c. IASB d. SEC

c. IASB

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

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

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

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 purpose of the International Accounting Standards Board is to a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. c. promote uniform accounting standards among countries of the world. d.arbitrate accounting disputes between auditors and international companies

c. Promote uniform accounting standards among countries of the world

What is the objective of financial reporting? a. Provide information that is useful to management in making decisions. b. Provide information that clearly portrays nonfinancial transactions. c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors. d.Provide information that excludes claims to the resources

c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

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

The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the a. FASB. b. AICPA. c. SEC. d.APB.

c. SEC

Each of the following are true of the Securities and Exchange Commission except that a. it is a federal agency. b. the SEC's involvement in the development of accounting standards varies. c. the FASB relies on the SEC to develop accounting standards. d. the SEC requires registrants to adhere to GAAP.

c. The FASB relies on the SEC to develop accounting standards

What is the "expectations gap"? a. The difference between what the public thinks the accountant should not do and what the accountant knows they should do. b. The difference between what the public thinks the accountant should do and what Congress says the accountant should do. c. The difference between what the public thinks the accountant should do and what the accountants think they can do. d.The difference between what the accountant should do and what the Courts say the accountant should be doing

c. The difference between what the public thinks the accountant should do and what the accountants think they can do.

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 the activities that gave rise to the transactions involved

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

Which of the following is not a major challenge facing the accounting profession? a. Nonfinancial measurements. b. Timeliness. c. Accounting for hard assets. d.Forward-looking information

c. accounting for hard assets

Characteristics of generally accepted accounting principles include all of the following except a. authoritative accounting that the rule-making body has established as a principle of reporting. b. standards are considered useful by the profession. c. each principle is approved by the SEC. d.practice has become universally accepted over time

c. each principle is approved by the SEC

Financial statements in the early 2000s focused on financial information related to a. nonfinancial measurements. b. forward-looking data. c. hard assets (inventory and plant assets). d. soft assets.

c. hard assets (inventory and plant assets)

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.

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

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

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

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

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 organization is responsible for issuing Emerging Issues Task Force Statements? a. The FASB b. The CAP c. The APB d. The SEC

a. FASB

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

Which of the following is a general limitation of "general purpose financial statements"? a. General purpose financial statements may not be the most informative for a specific enterprise. b. General purpose financial statements are not comparable. c. General purpose financial statements do not fairly present a company's financial operations. d. General purpose financial statements provide financial reporting information to a wide variety of users.

a. General purpose financial statements may not be the most informative for a specific enterprise.

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

A characteristic of generally accepted accounting principles includes: a. a common set of standards and principles. b. standards and principles are based on federal statutes. c. acceptance requires an affirmative vote of Certified Public Accountants. d.practices that become accepted for at least a year by all industry members

a. a common set of standards and principles.

How does accounting help the capital allocation process attract investment capital? a. By providing timely, relevant information. b. By encouraging innovation. c. By promoting productivity. d. By providing timely, relevant information and by encouraging innovation.

a. by providing timely, relevant information

Financial accounting standard-setting in the United States a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. b. is based solely on research and empirical findings. c. is a legalistic process based on rules promulgated by governmental agencies. d.is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable

a. can be described as a social process which reflects political actions of various interested user groups as well as product of research and logic

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

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

General-Purpose financial statements are the product of a. financial accounting b. managerial accounting c. both financial and managerial accounting d. neither financial nor managerial accounting

a. financial accounting

The information provided by financial reporting pertains to a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries

a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers

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

The Financial Accounting Foundation a. oversees the operations of the FASB. b. oversees the operations of the AICPA. c. provides information to interested parties on financial reporting issues. d. works with the Financial Accounting Standards Advisory Council to provide information to interested parties on financial reporting issues.

a. oversees the operations of the FASB

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 is not a publication of the FASB? a. Statements of Financial Accounting Concepts b. Accounting Research Bulletins c. Interpretations d. Technical Bulletins

b. Accounting Research Bulletins

The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except a. developing and enforcing professional ethics. b.developing auditing standards for public companies c. providing professional education programs. d. grading the CPA exam.

b. Developing auditing standards for public companies

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

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 process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization's operations is called a. financial accounting. b. managerial accounting. c. tax accounting. d. auditing.

b. Managerial accounting

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

What is the purpose of Emerging Issues Task Force? a. Provide interpretation of existing standards. b. Provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis. c. Provide interpretive guidance. d. Provide timely guidance on select issues.

b. Provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis

Which of the following is a fundamental quality of useful accounting information? a. Comparability b. Relevance c. Neutrality d. Materiality

b. Relevance

Which organization was responsible for issuing Accounting Research Bulletins? a. The Accounting Principles Board. b. The Committee on Accounting Procedure. c. The SEC. d.The FASB.

b. The Committee on Accounting Procedure

Why did the AICPA create the Accounting Principles Board? a. The SEC disbanded the previous standard setting organization. b. The previous standard setting organization did not provide a structured set of accounting principles. c. No such organization existed in the past. d. The reason was to revert to the written expression of accounting principles.

b. The previous standard setting organization did not provide a structured set of accounting principles.

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

The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is a. the FASB issues exposure drafts of proposed standards. b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions. c. all members of the FASB possess extensive experience in financial reporting. d.a majority of the members of the FASB are CPAs who are drawn from public pr

b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions

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

A common set of accounting standards and procedures is called a. financial accounting standards. b. generally accepted accounting principles. c. objectives of financial reporting. d.statements of financial accounting concepts

b. generally accepted accounting principles.

Accrual accounting is used because a. cash flows are considered less important. b. it provides a better indication of a company's ability to generate cash flows over time than the cash basis. c. it recognizes revenues when cash is received and expenses when cash is paid. d.it provides past ability to generate negative cash flows

b. it provides a better indication of a company's ability to generate cash flows over time than the cash basis.

What is not a reason that accounting standards may differ across countries? a. Governments b. Language c. Culture d. Past practice

b. language

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 an Appropriation for Contingencies account.

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 salaires

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

Which of the following represents a form of communication through financial reporting but not through financial statements? a. Balance sheet. b. President's letter. c. Income statement. d.Notes to financial statements

b. president's letter

Which of the following is true of the Financial Accounting Standards Board? a. It has issued a series of pronouncements entitled Auditing Standards Updates. b. It was the forerunner of the current Accounting Principles Board. c. It is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards. d.The members of the FASB are appointed by the Financial Accounting Foundation

d. The members of the FASB are appointed by the Financial Accounting Foundation

Which of the following organizations has been responsible for setting U.S. accounting standards? a. The Accounting Principles Board. b. The Committee on Accounting Procedure. c. The Financial Accounting Standards Board. d. All of the answer choices are correct.

d. all of the 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 is a source of pressure that may influence the accounting standard setting process? a. Congress b. Lobbyists c. CPA firms d.All of these answers are correct.

d. all of these answers are correct

What would be an advantage of having all countries adopt and follow the same accounting standards? a. Agreement. b. Comparability. c. Lower preparation costs. d.Comparability and lower preparation costs

d. comparability and lower preparation costs

Primary users for general-purpose financial statements include each of the following except a. creditors. b. suppliers. c. investors. d. employees.

d. employees

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

All the following are ways in which accounting information is used by financial accounting users except to a. buy, sell, hold equity and debt instruments. b. decide whether to invest in the company. c. evaluate borrowing capacity to determine the extent of a loan to grant. d. plan and control company's operations.

d. plan and control company's operations

The financial statements most frequently provided include all of the following except the a. balance sheet b. income statement c. statement of cash flows d. statement of retained earnings

d. statement of retained earnings

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

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

The most significant current source of generally accepted accounting principles is the a. AICPA. b. SEC. c. APB. d. FASB.

d. FASB

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

Which of the following is not true of generally accepted accounting principles? a. GAAP includes detailed practices and procedures as well as broad guidelines of general application. b. GAAP is influenced by pronouncements of the SEC. c. GAAP changes over time as the nature of the business environment changes. d.GAAP does not have substantial authoritative support

d. GAAP does not have substantial authoritative support

What is not due process in the context of standard setting at the FASB? a. The FASB operates in full view of the public. b. Public hearings are held on proposed accounting standards. c. Interested parties can make their views known. d. No public hearings are held on proposed accounting standards.

d. No public hearings are held on proposed accounting standards.

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

The purpose of the Emerging Issues Task Force is to a. develop a conceptual framework as a frame of reference for the solution of future problems. b. lobby the FASB on issues that affect a particular industry. c. do research on issues that relate to long-term accounting problems. d.provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis

d. Provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis

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

Companies that are listed on a stock exchange are required to submit their financial statements to the a. AICPA. b. APB c. FASB. d.SEC.

d. SEC

The Financial Accounting Standards Board (FASB) was proposed by the a. American Institute of Certified Public Accountants. b. Accounting Principles Board. c. Study Group on the Objectives of Financial Statements. d.Study Group on establishment of Accounting Principles (Wheat Committee

d. Study Group on establishment of Accounting Principles (Wheat Committe)

Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight than standards previously issued? a. The FASB board had a smaller membership. b. The FASB board members were well-paid. c. The FASB board members were CPAs. d. The FASB follows due process.

d. The FASB follows due process

Which of the following is not considered a component of generally accepted accounting principles? a. FASB Implementation Guides. b. Widely recognized industry practices. c. Articles published in CPA journals. d.AICPA Accounting Interpretations

c. Articles published in CPA journals

Which of the following is of interest to investors in decision-making? a. Assessing the company's ability to generate net cash inflows. b. Assessing management's ability to protect and enhance the capital providers' investments. c. Both assessing the company's ability to generate net cash inflows and assessing management's ability to protect and enhance the capital provider's investments. d. Assessing the company's ability to collect debts.

c. Both assessing the company's ability to generate net cash inflows and assessing management's ability to protect and enhance the capital provider's investments.

Which of the following is a fundamental quality of useful accounting information? a. Conservatism b. Comparability c. Faithful representation d. Consistency

c. Faithful Representation

The purpose of Statements of Financial Accounting Concepts is to a. establish GAAP. b. modify or extend an existing FASB Accounting Standards Update. c. form a conceptual framework for solving existing and emerging problems. d. determine the need for FASB involvement in an emerging issue.

c. Form a conceptual framework for solving existing and emerging problems

The passage of a new FASB Accounting Standards Update requires the support of a. seven Board members. b. three Board members. c. four Board members. d.five Board members.

c. Four Board Members

Which of these basic elements of financial statements arises from peripheral or incidental transactions? a. Assets b. Liabilities c. Gains d. Expenses

c. Gains

Which of the following is not a part of generally accepted accounting principles? a. FASB Interpretations b. CAP Accounting Research Bulletins c. APB Opinions d. AICPA Research Analysis.

d. AICPA Research Analysis

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

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.

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