FAR SU-1
An accrued expense can best be described as an amount A. Not paid and currently matched with earnings. B. Paid and currently matched with earnings. C. Paid and not currently matched with earnings. D. Not paid and not currently matched with earnings.
A. Not paid and currently matched with earnings. Answer (A) is correct. An accrued expense is one that has been incurred but not paid. Thus, it should be charged (matched) against revenue in the current period and recorded as a liability.
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. A task force of experts defines specific problems. C. An exposure draft of a proposed statement of the board must have been released for public comment. D. A discussion memorandum is released prior to an exposure draft of a new pronouncement.
A. Official pronouncements require a unanimous vote for approval. Answer (A) is correct. The passage of official pronouncements of the FASB requires a simple majority of the Board members.
Regulation S-X disclosure requirements of the Securities and Exchange Commission (SEC) concern A. The requirements for filing interim financial statements and pro forma financial information. B. Information concerning recent sales of unregistered securities. C. Management's discussion and analysis of the financial condition and the results of operations. D. Summary information, risk factors, and the ratio of earnings to fixed charges.
A. The requirements for filing interim financial statements and pro forma financial information. Answer (A) is correct. Regulation S-X governs the reporting of financial statements, including notes and schedules. Both interim and annual statements are covered by Regulation S-X.
Which of the following statements best describes an operating procedure for issuing a new Accounting Standards Update? A. A new update is issued only after a majority vote by the members of the FASB. B. A new FASB statement can be rescinded by a majority vote of the AICPA membership. C. The Emerging Issues Task Force must approve a discussion memorandum before it is disseminated to the public. D. The exposure draft is modified per public opinion before issuing the discussion memorandum.
A. A new update is issued only after a majority vote by the members of the FASB. Answer (A) is correct. After a group of experts has defined specific problems and a range of solutions for an agenda item, the FASB's staff conducts research and analysis and drafts a discussion memorandum. The FASB then holds a public hearing. The next step is publication of an exposure draft. After consideration of public comments on the exposure draft, and possibly amendments, a new update is issued after a majority vote by the members of the FASB.
According to the FASB's conceptual framework, an entity's revenue may result from a(n) A. Decrease in a liability from primary operations. B. Increase in an asset from incidental transactions. C. Decrease in an asset from primary operations. D. Increase in a liability from incidental transactions.
A. Decrease in a liability from primary operations. Answer (A) is correct. 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.
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 to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the entity. C. To provide information about an entity's performance through measures of earnings and its components. D. To provide information about management's performance. Answer (D) is incorrect.
A. To provide sufficient information to determine the value of the entity. Answer (A) is correct. General-purpose financial reports are significantly based on estimates and do not suffice to determine the value of the entity.
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. Verifiability. B. Relevance. C. Comparability. D. Predictive value.
Answer (A) is correct. 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.
Which of the following is(are) a necessary element(s) of present value measurement? A. Liquidity or market imperfections. B. Estimates of future cash flows. C. The price of uncertainty inherent in an asset or liability. D. All of the answers are correct.
Answer (D) is correct. A measurement based on present value should reflect uncertainty so that variations in risks are incorporated. Accordingly, the following are the necessary elements of a present value measurement: - Estimates of future cash flows, - Expected variability of their amount and timing, - The time value of money (risk-free interest rate), -The price of uncertainty inherent in an asset or liability, and - Other factors, such as liquidity or market imperfections.
A Midwestern public utility reports noncurrent assets as the first item on its statement of financial position. This practice is an example of the A. Economic-entity assumption. B. Going-concern assumption. C. Conservatism constraint. D. Industry practice constraint.
Answer (D) is correct. Assets are normally listed in the order of their importance, with current assets typically being the most important. For a public utility, the physical plant is the most important asset. Thus, public utilities often report their noncurrent assets as the first item on the balance sheet. This departure from the customary presentation in accordance with GAAP is justified by the unique operating characteristics of the industry.
The appropriate attribute for measuring plant assets is A. Net realizable value. B. Present value of future cash flows. C. Current cost. D. Historical cost.
Answer (D) is correct. Plant assets should be measured at historical cost. Property, plant, and equipment and most inventories are reported at historical cost.
A company has beginning net assets of $100,000 and ending net assets of $95,000. During the year, additional capital stock was sold for $8,000, and dividends of $3,000 were declared. Using the capital maintenance approach, the net income (loss) for the year is calculated as A. $0 B. $(5,000) C. $5,000 D. $(10,000)
Answer (D) is correct. The capital maintenance approach requires that income be determined by finding the change in equity (net assets) after adjusting for investments by, and distributions to, owners. However, this approach does not provide the detail of the transaction approach to income determination under which each component of income is measured and reported. Change in net assets $ (5,000) Capital stock sold (8,000) Dividends declared 3,000 Total $(10,000)
The objective of present value when used to determine an accounting measurement for initial recognition purposes is to A. Estimate value in use. B. Calculate the effective-settlement amount of assets. C. Capture the value of an asset or liability in the context of a given entity. D. Estimate fair value.
Answer (D) is correct. The objective of present value measurements is to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty. A present value measurement includes five elements: (1) estimates of cash flows, (2) expectations about their variability, (3) the time value of money, (4) the price of uncertainty inherent in an asset or liability, and (5) other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.
A preliminary prospectus, permitted under SEC Regulations, is known as the A. Qualified prospectus. B. "Red-herring" prospectus. C. Unaudited prospectus. D. "Blue-sky" prospectus.
B. "Red-herring" prospectus. Answer (B) is correct. To comply with the 1933 act, an issuer of securities must prepare a registration statement and a prospectus. A preliminary prospectus is called a red-herring prospectus because of the required red legend identifying it as preliminary. It contains most of the information to be included in the final prospectus. It can be distributed to potential purchasers during the 20-day waiting period.
To be relevant, financial information should have which of the following? A. Understandability. B. Confirmatory value. C. Neutrality. D. Costs and benefits.
B. Confirmatory value. Answer (B) is correct. 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.
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.
B. Decision usefulness. Answer (B) is correct. 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 a user-specific quality of accounting information.
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. Prior-period error correction. B. Dividends paid to shareholders. C. Unrealized loss on available-for-sale securities. D. Loss from discontinued operations.
B. Dividends paid to shareholders. Answer (B) is correct. 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.
U.S. Securities and Exchange Commission (SEC) regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in A. Regulation S-B. B. Regulation S-X. C. Regulation S-K. D. Regulation S-T.
B. Regulation S-X. Answer (B) is correct. Regulation S-X applies to the reporting of financial statements, including notes and schedules.
The FASB's due process for setting accounting standards includes which of the following procedures? A. The FASB's Emerging Issues Task Force ratifies amendments to the Accounting Standards Codification. B. The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft. C. The FASB obtains approval from the International Accounting Standards Board in setting its agenda. D. The FASB delegates topics to the Financial Accounting Foundation for research and reporting.
B. The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft. Answer (B) is correct. 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. The FASB then reads the submissions and makes a final decision based on the feedback and its deliberations.
Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles? A. To adhere to the accounting concept of conservatism. B. To match the costs of production with revenues as earned. C. To aid management in the decision-making process. D. To reduce the federal income tax liability.
B. To match the costs of production with revenues as earned. Answer (B) is correct. If costs benefit more than one accounting period, they should be systematically and rationally allocated to all periods benefited. This is done by capitalizing the costs and depreciating or amortizing them over the periods in which the asset helps generate revenue. The term "matching" is most narrowly defined as the expense recognition principle of associating cause and effect, but it is sometimes used more broadly (as here) to apply to the entire process of expense recognition or even of income determination.
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. Periodicity. B. Verifiability. C. Stable monetary unit. D. Matching.
B. Verifiability. Answer (B) is correct. 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 objectives of financial reporting is applicable to governmental entities? Provide information A. Useful in making resource allocation decisions. B. For assessing service efforts and accomplishments. C. Useful in assessing management stewardship and performance. D. About economic resources, obligations, net resources, and changes in them.
B. For assessing service efforts and accomplishments. Answer (B) is correct. Providing information for assessing service efforts and accomplishments is one of the objectives that serves to assist in evaluating the operating results of a governmental entity.
An external auditor's involvement with Form 10-Q that is being prepared for filing with the SEC most likely will consist of a(n) A. Audit of the financial statements included in Form 10-Q. B. Review of the interim financial statements included in Form 10-Q. C. Compilation report on the financial statements included in Form 10-Q. D. Comfort letter that covers stub-period financial data.
B. Review of the interim financial statements included in Form 10-Q. Answer (B) is correct. Form 10-Q is the quarterly report to the SEC. It need not contain audited financial statements, but it should be prepared in accordance with GAAP. Thus, an SEC registrant must obtain a review by an independent auditor of its interim financial information that is to be included in a quarterly report to the SEC.
Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is A. Prepaid insurance. B. Salespersons' monthly salaries. C. Transportation to customers' places of business. D. Salespersons' commissions.
B. Salespersons' monthly salaries. Answer (B) is correct. Expenses should be recognized when a benefit has been consumed. The consumption of benefit may occur when (1) the expenses are matched with the revenues, (2) they are allocated on a systematic and rational basis to the periods in which the related assets are expected to provide benefits, or (3) the cash is spent or liabilities are incurred for goods and services that are used up either simultaneously with the acquisition or soon after. An example of a cost that (1) cannot be directly related to particular revenues but (2) is incurred to obtain benefits that are exhausted in the same period in which the cost is incurred is salespersons' monthly salaries.
What are the Statements of Financial Accounting Concepts intended to establish? A. Generally accepted accounting principles in financial reporting by business enterprises. B. The objectives and concepts for use in developing standards of financial accounting and reporting. C. The hierarchy of sources of generally accepted accounting principles. D. The meaning of "present fairly in accordance with generally accepted accounting principles."
B. The objectives and concepts for use in developing standards of financial accounting and reporting. Answer (B) is correct. SFACs do not establish accounting and reporting requirements. They are nonauthoritative guidance for nongovernmental entities. SFACs describe the objectives, qualitative characteristics, and other fundamental concepts that guide the FASB in developing sound accounting principles.
Which of the following is not a characteristic of the governmental reporting environment? A. Legally binding budget. B. Accountability. C. Balance sheet equity. D. Interperiod equity.
C. Balance sheet equity. Answer (C) is correct. State and local governments report net position or fund balances, not equity.
Which of the following is a characteristic of not-for-profit, nongovernmental entities? A. Business and not-for-profit entities usually obtain resources in the same way. B. The operating environment of not-for-profit entities ordinarily differs from that of business entities. C. Both not-for-profit and business entities use scarce resources in the production and distribution of goods and services. D. Noneconomic reasons seldom underlie the decision to provide resources to not-for-profit entities.
C. Both not-for-profit and business entities use scarce resources in the production and distribution of goods and services. Answer (C) is correct. The operating environments of not-for-profit and business entities are similar in many ways. Both produce and distribute goods and services using scarce resources.
According to the FASB's conceptual framework, which of the following enhances information that is relevant and faithfully represented? A. Confirmatory value. B. Materiality. C. Comparability. D. Neutrality.
C. Comparability. Answer (C) is correct. 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.
The objective of present value when used to determine an accounting measurement for initial recognition purposes is to A. Capture the value of an asset or liability in the context of a given entity. B. Calculate the effective-settlement amount of assets. C. Estimate fair value. D. Estimate value in use.
C. Estimate fair value. Answer (C) is correct. The objective of present value measurements is to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty. A present value measurement includes five elements: (1) estimates of cash flows, (2) expectations about their variability, (3) the time value of money, (4) the price of uncertainty inherent in an asset or liability, and (5) other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.
The content of the Management's Discussion and Analysis (MD&A) section of an annual report is A. Reviewed by independent auditors. B. Mandated by pronouncements of the Financial Accounting Standards Board. C. Mandated by regulations of the Securities and Exchange Commission. D. Mandated by regulations of the Internal Revenue Service.
C. Mandated by regulations of the Securities and Exchange Commission. Answer (C) is correct. The content of the MD&A section is determined by regulations of the SEC. The MD&A, standard financial statements, summarized financial data for at least 5 years, and other matters must be included in annual reports to shareholders and in Form 10-K filed with the SEC. Forward-looking information in the form of forecasts is encouraged in the MD&A but not required.
According to the FASB's conceptual framework, noncurrent payables are usually measured and reported at A. Settlement value. B. Current market value. C. Present value of future cash flows. D. Historical proceeds.
C. Present value of future cash flows. Answer (C) is correct. Present value is in theory the most relevant method of measurement because it incorporates time value of money concepts. In practice, it is used only for noncurrent receivables and payables. Determination of the present value of an asset or liability requires discounting at an appropriate interest rate the related future cash flows expected to occur in the due course of business.
Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization? A. Neutrality. B. Reliability. C. Relevance. D. Timeliness.
C. Relevance. Answer (C) is correct. 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.
According to the FASB's conceptual framework, which of the following items would cause earnings to differ from comprehensive income? A. Unrealized holding gain on a financial asset accounted for under the fair value option. B. Gain on a nonmonetary exchange accounted for at the carrying amount of the assets given up if boot is not involved. C. Unrealized holding loss on available-for-sale securities. D. Unrealized holding loss on trading securities.
C. Unrealized holding loss on available-for-sale securities. Answer (C) is correct. Comprehensive income includes earnings (net income) but also such other nonowner changes in equity as holding gains and losses on available-for-sale securities and foreign currency translation adjustments.
Costs that can be reasonably associated with specific revenues but not with specific products should be A. Charged to expense in the period incurred. B. Capitalized and then amortized over a period not to exceed 60 months. C. Expensed in the period in which the related revenue is recognized. D. Allocated to specific products based on the best estimate of the production processing time.
C. Expensed in the period in which the related revenue is recognized. Answer (C) is correct. The expense recognition principle of associating cause and effect (matching) applies when a direct cause-and-effect relationship can be demonstrated between costs and particular revenues. A typical example of expenses recognized by the association of cause and effect is cost of goods sold that is recognized in the periods in which the related revenue is recognized. Association of costs with revenues also can be applied to services. Association of costs with specific products is not necessary. INCORRECT: A. Charged to expense in the period incurred. Answer (A) is incorrect, because immediate recognition is permitted only if no cause-and-effect relationship can be demonstrated, and no other basis exists on which to expense the costs.
According to the FASB's conceptual framework, limitations of the statement of financial position include all of the following except A. Exclusion of some economic resources and obligations. B. The use of historical cost for measuring assets and liabilities. C. Inclusion of information on capital maintenance. D. The use of estimates in the determination of certain items.`
C. Inclusion of information on capital maintenance. Answer (C) is correct. The basic financial statements are prepared using the concept of financial capital maintenance. A return on financial capital results only if the financial (money) amount of net assets at the end of the period exceeds the amount at the beginning. Thus, inclusion of information on capital maintenance is a fundamental approach to financial reporting, not a limitation.
The financial statements included in the annual report to the shareholders are least useful to which one of the following? A. Stockbrokers. B. Bankers preparing to lend money. C. Managers in charge of operating activities. D. Competing businesses.
C. Managers in charge of operating activities. Answer (C) is correct. 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.
According to the FASB's conceptual framework, which of the following attributes should not be used to measure inventory? A. Net realizable value. B. Replacement cost. C. Historical cost. D. Present value of future cash flows.
D. Present value of future cash flows. Answer (D) is correct. The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.
Which of the following is an example of the expense recognition principle of associating cause and effect? A. Officers' salaries. B. Allocation of insurance cost. C. Depreciation of fixed assets. D. Sales commissions.
D. Sales commissions. Answer (D) is correct. If a direct cause-and-effect relationship can be established between costs and revenues, the costs should be recognized as expenses when the related revenue is recognized. Costs of products sold or services provided and sales commissions are examples of costs that can be associated with specific revenues.
When bad debt expense is estimated on the basis of the percentage of past actual losses from bad debts to past net credit sales, and this percentage is adjusted for anticipated conditions, the accounting concept of A. Matching is not applied. B. Going concern is not applied. C. Substance over form is applied. D. Matching is applied.
D. Matching is applied. Answer (D) is correct. When bad debt expense is estimated on the basis of net credit sales, a cost (bad debt expense) is directly associated with a revenue of the period (net credit sales). This practice applies the expense recognition principle of associating cause and effect, also known as matching.
Which of the following circumstances will most likely require application of the effective interest method of allocation? A. A method other than the interest method is customarily applied to assets or liabilities similar to those being accounted for. B. An asset or liability does not have reasonably estimable cash flows. C. The initial measurement of an asset is at a carryover basis. D. The transaction giving rise to an asset or liability is a borrowing and a lending.
D. The transaction giving rise to an asset or liability is a borrowing and a lending. Answer (D) is correct. The interest method is mostly likely to be applied when (1) the transaction is a borrowing and a lending; (2) assets or liabilities similar to those being accounted for are allocated using the interest method; (3) the asset or liability has closely related, reasonably estimable cash flows; or (4) the initial measurement was at present value. A typical example of the interest method is the amortization of the discount or premium on bonds.
The FASB's conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income? Currently reported net income- Financial capital or physical capital? Comprehensive income - Financial capital or physical capital?
For BOTH, it's financial capital. BECAUSE, the financial capital maintenance concept is the basis of (1) traditional financial statements (including net income) and (2) the full set of financial statements (including comprehensive income), discussed in the conceptual framework. Under this concept, a return on investment (defined in terms of financial capital) results only if the financial amount of net assets at the end of the period exceeds the amount at the beginning after excluding the effects of transactions with owners. Under a physical capital concept, a return on investment (in terms of physical capital) results only if the physical productive capacity (or the resources needed to achieve that capacity) at the end of the period exceeds the capacity at the beginning after excluding the effects of transactions with owners. The physical capital concept requires many assets to be measured at current (replacement) cost.
The objective of present value is to estimate fair value when used to determine accounting measurements for Initial-Recognition Purposes? Fresh-Start Purposes?
Yes Yes Answer (B) is correct. The objective of present value in initial-recognition or fresh-start measurements is to estimate fair value. A present value measurement includes five elements: (1) estimates of cash flows, (2) expectations about their variability, (3) the time value of money (the risk-free interest rate), (4) the price of uncertainty inherent in an asset or liability, and (5) other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.
Under SFAC No. 6, Elements of Financial Statements, interrelated elements of financial statements include.... Distributions to Owners? Notes to Financial Statements?
Yes & No The elements of financial statements directly related to measuring the performance and status of business enterprises and nonbusiness organizations are assets, liabilities, equity of a business or net assets of a nonbusiness organization, revenues, expenses, gains, and losses. The elements of investments by owners, distributions to owners, and 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.
According to the FASB's conceptual framework, comprehensive income includes which of the following? Gross Margin? Operating Income? (EBIT)
Yes & yes. Comprehensive income is the periodic change in equity of a business from nonowner sources. Accordingly, comprehensive income is a broad concept that includes not only revenues, expenses, gains, and losses recognized in net income but also other nonowner changes in equity, such as holding gains and losses on available-for-sale securities and foreign currency translation adjustments. Furthermore, intermediate components of net income such as gross margin, income from continuing operations before taxes, income from continuing operations, and operating income are included.
Which of the following are not separate elements of financial statements prepared in accordance with IFRS? A. Assets and liabilities. B. Equity. C. Income and expenses. D. Gains and losses.
vD. Gains and losses. Answer (D) is correct. Financial statement elements relate to measuring the performance and financial status of a business entity. They are the items used to create the financial statements. U.S. GAAP contain ten elements, and IFRS contain five. These five elements are assets, liabilities, equity, income, and expenses. Gains and losses are not treated as separate elements under IFRS.
