Module 2.1 - 2.3 Questions

Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?

Relevance

What are the two fundamental qualities that make accounting information useful for decision-making?

Relevance and Faithful Representation

Which level of the conceptual framework is devoted to elements of the financial statements and the qualitative characteristics?

2nd

The conceptual framework for financial reporting consists of how many levels?

3

Companies and their auditors generally have adopted a rule of thumb that anything under _____ of net income is considered not material

5%

The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to the financial reporting for business enterprises?

7

Rubin Company is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

Comparability

What is the quality of information that enables users to confirm or correct prior expectations?

Confirmatory

In order to be relevant, financial information must be/have

Confirmatory or predictive value

Sprull Inc. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

Consistency

Identify the pervasive constraint developed in the conceptual framework.

Cost

Information that is a faithful representation is characterized as having predictive or confirmatory value

False

Relevant information only has predictive value, confirmatory value, or both

False

The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability

False

Verifiability is solely an enhancing characteristic for faithful representation

False

The fundamental quality of faithful representation ensures that financial statements are total free from error

False - does not ensure totally free from error

For information to be relevant, it must have both predictive value and confirmatory value.

False - for informative to be relevant, it needs to have predictive value or confirmatory value or both

Information that has been measured and reported in a similar manner for different enterprises is considered consistent.

False - it has to be same enterprises

The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users

False - its for outside users

Which level of the conceptual framework is devoted to the why - the purpose of accounting?

First

A conceptual framework is necessary for which of the following reasons?

It allows the profession to quickly solve new and emerging issues, it enables standard setters to issue more useful and consistent pronouncements over time, and increases financial statement users' understanding of and confidence in financial reporting

Which of the following is not among the ingredients of the fundamental quality of faithful representation

Materiality

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting?

Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints

Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

Neutrality

The chairman of the SEC at one time noted, "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

Neutrality

Linsmeier Co. expenses all capital equipment under $18,000 on the basis that it is immaterial. The company has followed this practice for a number of years.

No

Davidson Inc. does not issue its first-quarter report until after the second quarter's results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

Timeliness

Comparability pertains only to the reporting of information in a similar manner for different companies.

True

In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities

True

Murray Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

Verifiability

Carnall Co. has a gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Carnall's income for the current year was $10 million.

Yes

Polley Co. has reported a positive trend in earnings over the last 4 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 2% of net income.

Yes

Enhancing qualities of accounting information include:

comparability and verifiability

When a company changes accounting principles, its financial statements lack

consistency

The objective of general-purpose financial reporting in the conceptual framework is

decision usefulness

A conceptual framework establishes the concepts that provide guidance on

identifying the boundaries of financial reporting, selecting the transactions, other events, and circumstances to be represented, and how transactions, events and circumstances should be recognized and measured.

All of the following are ingredients or relevance except:

neutrality

Enhancing qualities of accounting information include all of the following except:

neutrality