ACCT 301 End-of-Chapter 2 Practice

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

False. The fundamental quality of faithful representation does not ensure that financial statements are totally free from error because financial reporting involves various types of estimates that incorporate management's judgment.

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

False. Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency is present when a company applies the same accounting treatment to similar events, from period to period.

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

Confirmatory or predictive value. Relevant information has predictive value or confirmatory value (or both), and is material.

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 a. revenues. b. comprehensive income. c. gains. d. net income.

Comprehensive income. Comprehensive income is the change in equity (net assets) during a period from transactions and other events and circumstances from non-owner sources.

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

Decision Usefulness. The objective of general-purpose financial reporting is to provide financial information about the entity that is useful in making decisions about providing resources to the entity.

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

False. The objective of the conceptual framework is to provide financial information about the reporting entity primarily to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

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

Materiality. The ingredients of faithful representation include completeness, neutrality, and free from error. The ingredients of the fundamental quality of faithful representation do not include materiality.

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

2nd. The second level (the bridge) is devoted to the elements of financial statements and the qualitative characteristics.

The conceptual framework for financial reporting consists of how many levels? a. 3 b. 2 c. 4 d. 1

3 levels. There are 3 levels: Level 1, the "Why"; Level 2, the Bridge between levels 1 & 3; and Level 3, the "How".

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

5%. Anything under 5% of net income is generally considered not material.

The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises? a. 6 b. 5 c. 7 d. 4

7. The framework consists of 7 Statements of Financial Accounting Concepts.

A conceptual framework establishes the concepts that provide guidance on a. how transactions, events and circumstances should be recognized and measured. b. all of these answer choices are correct. c. selecting the transactions, other events, and circumstances to be represented, d. identifying the boundaries of financial reporting.

All of the answers given are correct. A conceptual framework establishes the concepts that provide guidance on 1) identifying the boundaries of financial reporting; 2) selecting the transactions, other events, and circumstances to be represented; 3) how they should be recognized and measured and 4) how they should be summarized and reported.

A conceptual framework is necessary for which of the following reasons? a. It increases financial statement users' understanding of and confidence in financial reporting. b. It enables standard setters to issue more useful and consistent pronouncements over time. c. All of these answer choices are correct. d. It allows the profession to quickly solve new and emerging issues.

All of these answer choices are correct. The conceptual framework allows the profession to quickly solve new and emerging issues and to issue more useful consistent standards. It also increases financial statement users' understanding of and confidence in financial reporting.

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

First. The first level addresses the "why" or purpose of accounting.

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting? a. Objective of financial reporting. b. Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints. c. Elements of financial statements. d. Qualitative characteristics of accounting information.

Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints. The "how" or the implementation of accounting is provided through the recognition, measurement, and disclosure concepts such as assumptions, principles and constraints.

All of the following are ingredients of relevance except: a. confirmatory value. b. predictive value. c. materiality. d. neutrality.

Neutrality. Neutrality is an ingredient of faithful representation, not relevance.

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

Neutrality. The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability. Neutrality is not an enhancing quality of accounting information. It is an ingredient of the fundamental quality of faithful representation.

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

a. False. b. False. c. False. d. False. e. False. f. True.

Indicate whether the following statements about the conceptual framework are true or false. a. Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements. b. General-purpose financial reports are most useful to company insiders in making strategic business decisions. c. Accounting standards based on personal conceptual frameworks generally will result in consistent and comparable accounting reports. d. Capital providers are the only users who benefit from general-purpose financial reporting. e. Accounting reports should be developed so that users without knowledge of economics and business can become informed about the financial results of a company. f. The objective of financial reporting is the foundation from which the other aspects of the framework logically result.

a. True. b. False. c. False. d. False. e. False. f. True.