Intermediate Accounting Test 1

Explain the objective of financial reporting.

According to the Conceptual​ Framework, "The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential​ investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve​ buying, selling, or holding equity and debt​ instruments, and providing or settling loans and other forms of​ credit."

How can management create an impediment to the exercise of good​ judgment?

An impediment to the exercise of good judgment is the existence of certain factors that may influence management to intentionally bias their estimates. Areas of financial reporting that require significant judgment are particularly susceptible to management manipulation.

Identify whether the items below are characteristics of information that is relevant​ (REL) or a faithful representation​ (FR): ___: Information that is neutral ___: Information has​ decision-making implications because of its predictive value ___: Information that is complete ___: Information that is free from error ___: Information has​ decision-making implications because of its confirmatory value

FR: Information that is neutral REL: Information has​ decision-making implications because of its predictive value FR: Information that is complete FR: Information that is free from error REL: Information has​ decision-making implications because of its confirmatory value

Describe when financial information is a faithful representation.

Financial reporting information is a faithful representation when it is complete, neutral, and free from error.

Describe the fundamental characteristics of financial information. Explain the enhancing characteristics of financial reporting information.

Fundamental characteristics are those basic characteristics that distinguish useful financial reporting information from information that is not useful. Enhancing characteristics distinguish more useful information from less useful information.

Explain the historical cost concept.

Historical cost is the amount of cash​ (or equivalent) that was paid to acquire the asset. In the case of a​ liability, historical cost is the amount of cash​ (or equivalent) that was received when the obligation was incurred. The historical cost may change over the life of the​ asset/liability if it is adjusted for depreciation or amortization.

Does IFRS require that companies disclose information about the assumptions and estimates they make in their financial​ statements? Explain.

IFRS requires a disclosure about the assumptions and estimates made in the financial statements. IFRS also requires that companies disclose the judgments that management has made in determining appropriate accounting treatment for amounts reported on the financial statements.

Does IFRS require that companies disclose their accounting​ policies? Explain.

IFRS requires companies to disclose their significant accounting policies. The accounting policies​ footnote, which outlines the portfolio of accounting​ choices, is typically one of the first notes to the financial statements.

What is judgment and when is it used by​ accountants?

Judgment is the process by which a manager reaches a decision in situations in which there are multiple alternatives. Accountants use judgment in several aspects of accounting and financial​ reporting, including researching and interpreting standards

What types of biases are individual decision makers subject to when exercising judgment in addressing accounting​ issues?

One type is the availability​ bias, which may be when deciding on which computer to​ buy, you might rely on your​ friend's advice instead of taking the time to look up the rankings. Individuals also exhibit the confirmatory​ bias, which is when a decision maker​ under-weights information that is not consistent with their initial beliefs

How does the Accounting Standards Codification make the body of GAAP easier to​ use?

The Accounting Standards Codification accumulates in one place numerous types of different documents and accounting standards issued over the years.

Does U.S. GAAP require that companies disclose information about the assumptions and estimates they make in their financial​ statements? Explain.

The FASB does not explicitly require companies a disclose information about the assumptions and estimates made in the financial statements.

What is the Basis for Conclusions and where can they be​ found?

The FASB includes a section in most of their pronouncements referred to as the Basis for Conclusions ​(BC), which are discussions of the​ Board's reasoning and thought processes as they created the standard. The BCs are not considered​ authoritative, but they are very useful in understanding the thought processes of the boards and thus the substance of the standard. The BCs are not included in the​ Codification, but can be found in the Accounting Standards Updates or the Statements of Financial Accounting Standards themselves.​ Conversely, the BCs are included directly in the International Accounting Standards and International Financial Reporting Standards.

What is the difference between the availability and confirmatory​ biases?

The availability bias occurs when individuals use the data that is most readily available or most easily recalled to make a​ decision, as opposed to considering all relevant data. The confirmatory bias occurs when a decision maker​ under-weights information that is not consistent with their initial beliefs.

What is the conceptual framework for financial​ reporting?

The conceptual framework sets forth the​ theory, concepts, and principles that underlie financial reporting standards. It is designed to ensure that a set of accounting standards is coherent and uniform. The conceptual framework includes the objectives of financial​ reporting, the characteristics associated with high quality accounting​ standards, provides the elements of the financial reporting system and specifies the recognition and measurement criteria to be used.

What is the purpose of a literature​ hierarchy?

The literature hierarchy makes it easier to conduct accounting research. The hierarchy establishes the authority of different sources of accounting literature under U.S. GAAP and IFRS.

Describe the primary users of financial statements according to the conceptual framework.

The primary users of financial statements are investors, lenders, and other creditors who are not in a position to demand information from the entity. They rely on the financial statements to help them assess the amount, timing, and uncertainty of future cash flows of the reporting​ entity, so that they can form an opinion about future returns that will accrue to them by holding a stake in the entity. This view applies to both U.S. GAAP and IFRS.

Does U.S. GAAP require that companies disclose their accounting​ policies? Explain.

U.S. GAAP requires companies to disclose their significant accounting policies. The accounting policies​ footnote, which outlines the portfolio of accounting​ choices, is typically one of the first notes to the financial statements.

What is the definition of an​ asset?

Under U.S.​ GAAP, an asset is defined as a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events

When are expenses recognized under​ IFRS?

Under​ IFRS, expenses are recognized in the income statement when the two criteria are​ met: (1) a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen and​ (2) they can be measured reliably.