Accounting 321 Homework Chapter 2

Identify the appropriate qualitative characteristic(s) to be used given the information provided below. (a)Qualitative characteristic being employed when companies in the same industry are using the same accounting principles. (b)Quality of information that confirms users' earlier expectations. (c)Imperative for providing comparisons of a company from period to period. (d)Ignores the economic consequences of a standard or rule. (e)Requires a high degree of consensus among individuals on a given measurement.(f)Predictive value is an ingredient of this fundamental quality of information. (g)Four qualitative characteristics that are related to both relevance and faithful representation. (h)An item is not recorded because its effect on income would not change a decision.(i)Neutrality is an ingredient of this fundamental quality of accounting information. (j)Two fundamental qualities that make accounting information useful for decision-making purposes. (k)Issuance of interim reports is an example of what enhancing quality of both relevance and faithful representation?

(a) Comparability (b) Confirmatory Value (c) Comparability (Consistency) (d) Neutrality (e) Verifiability (f) Relevance (g) Comparability, Timeliness, Verifiability, Understandability (h) Materiality (i) Faithful Representation (j) Relevance and Faithful Representation (k) Timeliness

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (a)Sprull Inc. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed? (b)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.) (c)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.) (d)What are the two fundamental qualities that make accounting information useful for decision-making? (e)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.) (f)Identify the pervasive constraint developed in the conceptual framework. (g)Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes? (h)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? (i)What is the quality of information that enables users to confirm or correct prior expectations? (j)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.)

(a) Comparability (Consistency) (a) Neutrality (a) Neutrality (a) Relevance and Faithful Representation (a) Timeliness (a) Cost (a) Relevance (a) Comparability (a) Confirmatory Value (a) Verifiability

For each item below, indicate to which category of elements of financial statements it belongs. (a)Dividends (b)Interest receivable (c)Issuance of preferred stock (d)Prepaid insurance (e)Amortization (f)Cost of goods sold (g)Accounts payable (h)Cash (i)Equipment (j)Gain on sale of equipment

(a) Distribution to Owners (b) Assets (c) Investments by Owners (d) Assets (e) Expenses (f) Expenses (g) Liabilities (h) Assets (i) Assets (j) Gains

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (a)Intangible assets are capitalized and amortized over periods benefited. (b)Brokerage firms use fair value for purposes of valuing investments.(c)Each enterprise is kept as a unit distinct from its owner or owners.(d)All significant post-balance-sheet events are reported. (e)Fair value changes of fixed assets are not recognized in the accounting records. (f)Supplemental information is presented so that investors will not be misled. (g)Revenue is recorded at point of sale. (h)All important aspects of bond indentures are presented in financial statements. (i)Rationale for accrual accounting. (j)The use of consolidated statements is justified. (k)Reporting must be done at defined time intervals. (l)An allowance for doubtful accounts is established. (m)Goodwill is recorded only at time of purchase. (n)A company charges its sales commission costs to expense.

(a) Expense Recognition Principle (b) Measurement (fair value) Principle (c) Economic Entity Assumption (d) Full Disclosure Principle (e) Measurement (historical cost) Principle (f) Full Disclosure Principle (g) Revenue Recognition Principle (h) Full Disclosure Principle (i) Expense Recognition and Revenue Recognition Principles (j) Economic Entity Assumption (k) Periodicity Assumption (l) Measurement (fair value) Principle (m) Measurement (historical value) Principle (n) Expense Recognition Principle

Identify the accounting assumption, principle, or constraint that describes each situation. Do not use an answer more than once. (a)Allocates expenses to revenues in the proper period. (b)Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) (c)Ensures that all relevant financial information is reported. (d)Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) (e)Indicates that personal and business record keeping should be separately maintained. Cost ConstraintRevenue Recognition Principle (f)Separates financial information into time periods for reporting purposes. (g)Assumes that the dollar is the "measuring stick" used to report on financial performance.

(a) Expense recognition principle (b) Measurement (historical cost principle) (c) Full disclosure principle (d) Going concern assumption (e) Economic entity assumption (f) Periodicity assumption (g) Monetary unit assumption

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (a)Fair value changes are not recognized in the accounting records.(b)Financial information is presented so that investors will not be misled. (c)Intangible assets are amortized over periods benefited. (d)Agricultural companies use fair value for purposes of valuing crops. (e)Each enterprise is kept as a unit distinct from its owner or owners. (f)All significant post-balance-sheet events are disclosed. (g)Revenue is recorded when the product is delivered. (h)All important aspects of bond indentures are presented in financial statements. (i)Rationale for accrual accounting. (j)The use of consolidated statements is justified. (k)Reporting must be done at defined time intervals. (l)An allowance for doubtful accounts is established. (m)Goodwill is recorded only at time of purchase. (n)A company charges its sales commission costs to expense.

(a) Measurement Principle (historical Cost) (b) Full Disclosure Principle (c) Expense Recognition Principle (d) Measurement Principle (fair Value) (e) Economic Entity Assumption (f) Full Disclosure Principle (g) Revenue recognition Principle (h) Full Disclosure principle (i) Expense Recognition and Revenue Recognition Principle (j) Economic Entity Assumption (k) Periodicity Assumption (l) Measurement Principle and Expense Recognition Principle (m) Measurement principle (Historical cost) (n) Expense Recognition Principle

Identify which basic accounting assumption is best described in each item below. (a)Target Corporation prepares its financial statements in U.S. dollars. (b)The financial statements of General Motors combine all of the activities of its subsidiaries. (c)Office Depot records depreciation on its equipment over their estimated useful lifes.

(a) Monetary Unit (b) Economic Entity (c) Going Concern

Indicate whether the following statements about the conceptual framework are true or false. (a)In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. select an option True or False (b)The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. select an option True or False (c)Verifiability is solely an enhancing characteristic for faithful representation. select an option True or False (d)Relevant information only has predictive value, confirmatory value, or both. select an option True or False (e)Comparability pertains to the reporting of information in a similar manner for different companies as well as a company reporting under the same accounting policies over time. select an option True or False (f)Information that is a faithful representation is characterized as having predictive or confirmatory value. select an option True or False

(a) True (b) False (c) False (d) False (e) True (f) False

Which level of the conceptual framework is devoted to elements of financial statements and the qualitative characteristics? 4th 3rd 2nd 1st

2nd

The conceptual framework for financial reporting consists of how many levels? 1 2 3 4

3

Companies and their auditors generally have adopted a rule of thumb that anything under _____ of net income is considered not material. 10% 15% 5% 2%

5%

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. * It increases financial statement users' understanding of and confidence in financial reporting. * All of these answer choices are correct.

All of these answer choices are correct.

Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time? Investments by owners. Revenues. Assets, Liabilities, and Equity. Comprehensive income.

Assets, Liabilities, and Equity.

In developing accounting standards, the FASB attempts to determine that each proposed pronouncement will fill a significant need and that the costs imposed to meet the rule are justified in relation to overall benefits of the resulting information. What accounting assumption, principle, or constraint is being illustrated?

Cost Constraint

Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point GAAP has adopted it more broadly. (T/F)

False

For information to be relevant, it must have both predictive value and confirmatory value. (T/F)

False

Information that has been measured and reported in a similar manner for different enterprises is considered consistent. (T/F)

False

The difficulty in cost-benefit analysis is that the benefits are usually evident and easily measurable, while the costs are not always evident or measurable. (T/F)

False

The fundamental quality of faithful representation ensures that financial statements are totally free from error. (T/F)

False

The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users. (T/F)

False

The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly. (T/F)

False

In order to justify requiring a particular measurement or disclosure, the costs perceived to be associated with it must exceed the benefits perceived to be associated with it. (T/F)

Faslse

Which level of the conceptual framework is devoted to the "why" - the purpose of accounting? First. Second. Third. All three levels.

First.

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. * Qualitative characteristics of accounting information. * Elements of financial statements. * Objective of financial reporting.

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

In the United States, inflation/deflation is ignored in accounting under which of the following assumptions? Periodicity assumption. Going concern assumption. Monetary unit assumption. Time period assumption.

Monetary unit assumption.

With regard to fair value, which of the following measurements is considered the least subjective? Unobservable inputs. Inputs that are observable either directly or through corroboration with observable data. Observable inputs that reflect quoted prices for identical assets or liabilities. For purposes of fair value, all of the measures are considered equally subjective.

Observable inputs that reflect quoted prices for identical assets or liabilities.

Identify the element or elements associated with these items. Items: (a)Arises from peripheral or incidental transactions. (b)Obligation to transfer resources arising from a past transaction. (c)Increases ownership interest. (d)Declares and pays cash dividends to owners. (e)Increases in net assets in a period from nonowner sources. (f)Items characterized by service potential or future economic benefit (g)Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. (h)Arises from income statement activities that constitute the entity's ongoing major or central operations. (i)Residual interest in the assets of the enterprise after deducting its liabilities. (j)Increases assets during a period through sale of product. (k)Decreases assets during the period by purchasing the company's own stock. (l)Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

The element: (a) Gaines, losses (b) Liabilities (c) Investments by ownerscomprehensive income (also possible would be revenues and gains) (d) Distribution to owners (e) Comprehensive income (also possible would be revenue and gains) (f) Assets (g) Comprehensive Income (h) Revenues, expenses (i) Equity (j) Revenues (k) Distribution to owners (l) Comprehensive Income

A contract is an agreement between two parties that creates enforceable rights or obligations. (T/F)

True

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, * how transactions, events and circumstances should be recognized and measured. * all of these answer choices are correct.

all of these answer choices are correct.

To be recognized in the main body of financial statements, an item should meet the definition of a basic element. be relevant and reliable. be measurable with sufficient certainty. all of these answer choices are correct.

all of these answer choices are correct.

Enhancing qualities of accounting information include: comparability and verifiability. relevance and consistency. comparability and materiality. relevance and faithful representation.

comparability and verifiability.

The change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources is called net income. gains. comprehensive income. revenues.

comprehensive income.

In order to be relevant, financial information must be/have free from error. neutrality. comparability. confirmatory or predictive value.

confirmatory or predictive value.

When a company changes accounting principles, it financial statements lack ______________. confirmatory value predictive value faithful representation consistency

consistency

The objective of general-purpose financial reporting in the conceptual framework is decision usefulness. understandability. reliability. comparability.

decision usefulness.

Preparation of merged financial statements when a parent-subsidiary relationship exists does not violate the economic entity assumption. relevance characteristic. comparability characteristic. neutrality characteristic.

economic entity assumption.

The assumption that implies that the economic activities of an enterprise can be identified with a particular unit of accountability is the: economic entity assumption. going concern assumption. monetary unit assumption. periodicity assumption.

economic entity assumption.

An increase in equity (net assets) arising from peripheral or incidental transactions is called a(n) asset. revenue. gain. investment by owners.

gain.

Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the: economic entity assumption. going concern assumption. monetary unit assumption. periodicity assumption.

going concern assumption.

Which of the following is not among the ingredients of the fundamental quality of faithful representation? free from error. neutrality. materiality. completeness.

materiality.

All of the following are ingredients of relevance except: confirmatory value. predictive value. materiality. neutrality.

neutrality.

Enhancing qualities of accounting information include all of the following except: comparability. understandability. neutrality. timeliness.

neutrality.

Generally, revenues are recognized when the: cash is received. performance obligation is satisfied. product is produced. All of these answer choices are correct.

performance obligation is satisfied.