CH 1: Environment and Theoretical Structure of Financial Accounting PART 1

List the private accounting standard setting bodies in chronological order beginning with the oldest organization.

1. Committee on Accounting Procedure (CAP) (1938-1959) 2. Accounting Principles Board (APB) (1959-1973) 3. Financial Accounting Standards Board (FASB) (1973 - Now)

Rank the following steps applied in ethical decision making in the proper order, beginning with the first step.

1. Determine the facts of the situation 2. Identify the ethical issue and stakeholders 3. Identify the values related to the situation 4. Specify the alternative courses of action 5. Evaluate the courses of action in terms of their consistency

On January 1, an investor purchases shares of stock in a company for $10,000 cash. At the end of the year, the investor receives $400 in dividends and sells their ownership for $10,600. What is the return on investment?

10%

Sets forth accounting and disclosure requirements for initial public offerings of securities.

1933 Securities Act

Mandates reporting requirements for companies whose stock is publicly traded.

1934 Securities and Exchange Act

On January 1, Jennifer purchases common stock of Gamma Corporation for $100,000. During the year, Gamma Corporation stock pays a dividend of $3,000. At the end of the year, Jennifer sells the Gamma stock for $104,000. What is the return on investment of the Gamma stock?

7%

Which of the following instances indicate net operating cash flow may not be a good predictor of long-run cash-generating ability?

A company pays cash to purchase a 2 year insurance policy A customer pays for services provided in a prior period

The acronym for the Accounting Standards Codification is

ASC

What financial reporting model is used by most profit-oriented businesses and not-for-profit entities?

Accrual accounting

Which accounting model best meets the primary goal of users of financial reporting?

Accrual basis

The involvement of accounting professionals and management in accounting scandals resulted in Congress passing the Sarbanes-Oxley Act. What is the purpose of the Sarbanes-Oxley Act?

Addresses conflicts of interests. Provide penalties for violators. Require accountability of corporate executives. Regulate auditors.

Which are the financial statements most frequently provided to external users? (Select all that apply.)

Balance sheet Statement of shareholders' equity Statement of cash flows Income statement

The first body to set accounting standards in the U.S. was the

CAP

The first body to set accounting standards in the U.S. was the ______

CAP

_______ basis accounting measures the difference between cash receipts and payments during a reporting period.

Cash

_________ basis accounting measures the difference between cash receipts and payments during a reporting period.

Cash

The AICPA has its own Code of Professional Conduct that prescribes ethical conduct specific to what members?

Certified public accountants

Why is accounting standard setting a political process?

Changes in standards can result in a substantial redistribution of wealth within our economy. Standards can have significant effects on companies, investors, and creditors.

Which organizations provide financial information to external users? (Select all that apply.)

Charitable organizations Profit-oriented businesses

The first private accounting standard setting body in the United States was the

Committee on Accounting Principles

The Sarbanes-Oxley Act increases accountability of who?

Corporate executives

Which of the following forms of business provide shares of stock as an ownership interest?

Corporation

______________ and _____________ are willing to provide capital to a corporation only if they expect to receive more cash in return at some time in the future.

Creditors and Investors

Which of the following would be a likely advantage of a single set of accounting standards?

Enhanced financial statement comparability Easier access to capital

The Financial Accounting Foundation provides oversight, appoints members, and raises funds to support the:

FASB

The acronym for the private sector organization that sets accounting standards in the United States is the

FASB

The purpose of the Private Company Council (PCC) is to advise the ______ about its current projects that affect private companies.

FASB

The citation used to reference generally accepted accounting principles is

FASB ASC

True or false: Cash basis accounting is the method used by most profit-oriented companies.

False

True or false: The primary function of financial accounting is to provide useful financial information to users who are internal to the business.

False

Which accounting standard setting body replaced the Accounting Principles Board in 1973?

Financial Accounting Standards Board

The private sector organization that is currently responsible for setting accounting standards in the United States is the

Financial Accounting Standards Board (FASB)

Which of the following types of companies may currently utilize IFRS for financial reporting in the U.S.?

Foreign companies that issue stock in the U.S.

The majority of productive resources are privately owned in a _________ enterprise economy. (Enter one word per blank)

Free

The acronym GASB refers to the

Governmental Accounting Standards Board

The organization that is responsible for the accounting standard setting process for states and cities in the United States is the

Governmental Accounting Standards Board

The International Accounting Standards Committee provides oversight, appoints members, and raises funds to support the:

IASB

Which of the following are steps in making an ethical decision?

Identify the stakeholders Take action Determine the facts

Which of the following are common arguments against the creation of a single set of global accounting standards?

Implementation and enforcement of IFRS varies among nations Accounting under IFRS will appear more uniform than it actually is Maintaining competition between accounting standard-setting bodies improves quality

The organization responsible for the Code of Professional Conduct for accountants providing auditing services to their own organizations is the

Institute of Internal Auditors

The organization responsible for the code of ethics for accountants working in government and industry is the

Institute of Management Accountants

The organization that develops global accounting standards is the

International Accounting Standards Board

The International Accounting Standards Committee (IASC) reorganized in 2001 to create a new standard-setting body called the International Accounting Standards Board (IASB). The IASB issues global accounting standards called

International Financial Reporting Standards

The International Accounting Standards Committee issued International Accounting Standards (IAS), whereas the International Accounting Standards Board currently issues

International Financial Reporting Standards.

What is the distinguishing feature of a profession?

Its members accept responsibility for the interests of those it serves.

External users of a company's financial information include (Select all that apply.)

Labor unions Banks Credit-rating agencies

Pressure from ___________ and _________ influenced the FASB to revise guidance on fair value accounting.

Lobbyists Politicians

The difference between revenue and expenses when revenue is greater is called _________ _______

Net income

Where does political pressure come from in International standard setting?

Politicians from countries utilizing IFRS The European Union (EU)

The objectives of financial accounting include

Provide information to investors and creditors. Provide information used to evaluate future cash flows.

What is the primary function of financial accounting?

Provide useful information to users external to the business

Financial reporting is the process of

Providing information to outside users

The ______ has the authority to set accounting standards for companies, but has delegated the task to the private sector.

SEC

The legal authority to set accounting and reporting standards for companies whose securities are publicly traded lies with the

SEC

In which of the following areas did the FASB and IASB already develop converged accounting standards?

Share-based compensation Earnings-per-share Non-monetary exchanges

What are the three primary forms of business organizations?

Sole proprietorship Corporation Partnership

Which of the following is a financial statement provided to investors?

Statement of Stockholders' equity

Which of the following are external users of financial information? (Select all that apply.)

Suppliers Creditors Government agencies Investors

Which organization is currently the national professional organization for certified professional public accountants?

The AICPA

Which of the following are steps the FASB takes before issuing an Accounting Standards Update?

The Board holds a public meeting Receives requests from stakeholders

The FASB's standard setting process begins when the board adds a project to its technical agenda. Identify the final step in this process.

The Board issues an Accounting Standards Update

What is the purpose of the audit report?

To add credibility to the financial statements

True or false: Capital markets foster the efficient allocation of resources.

True

True or false: Economic consequences for EU member nations are an important consideration in the adoption of International Financial Reporting Standards.

True

True or false: The uncertainty of the return on an investment is also referred to as risk.

True

Financial accounting provides investors with information that should help them to evaluate the

Uncertainty of the firm's future cash flow. Amounts of the firm's future cash flow. Timing of the firm's future cash flow.

What is the testing requirement for a licensed certified public accountant?

Uniform CPA Examination

What classification would the following auditor opinion receive?: "In our opinion, the consolidated financial statements listed in the accompanying index present fairly . . . in conformity with U.S. GAAP."

a clean opinion

The abbreviation GAAP stands for generally _________ accounting principles.

accepted

The AICPA is the national professional organization for certified professional public ___________.

accountants

The financial reporting model used by the majority of profit oriented companies is ________ accounting

accrual

The accrual accounting model measures the entity's accomplishments and resource sacrifices during the period regardless of when ____________ is received or paid.

cash

What accounting model produces a measure called net operating cash flow?

cash basis

Differences in implementation and enforcement of IFRS across countries can impact the ____________ of financial statements.

comparability

The 1933 and 1934 Acts were designed to restore investor __________ in the stock market.

confidence

The FASB and IASB will continue to work together to converge where possible, but _________ between IFRS and U.S. GAAP will likely remain.

differences

What are the requirements of all states to become a licensed certified public accountant?

education experience testing

A code or moral system that provides criteria for evaluating right and wrong is referred to as

ethics

Under the accrual accounting model, the measure of resources sacrificed is called

expense

Financial accounting is chiefly concerned with providing information to various users. (Enter only one word.)

external

Labor unions and creditors are examples of ______ users of financial information. (Enter only one word.)

external

Labor unions and creditors are examples of _________ users of financial information.

external / outside

True or false: In the United States, we have a free enterprise economy with the majority of productive resources being government owned.

false

True or false: Over short periods of time, net operating cash flow is a good indicator of a company's long-run cash-generating ability.

false

True or false: The FASB Codification project revised and updated U.S. accounting standards with international accounting standards.

false

_______ accounting is chiefly concerned with providing information to external users.

financial

If the SEC does not agree with a standard issued by the private sector, it can

force a change in the standard

In 2007, the SEC eliminated the requirement for ____________ companies that issue stock in the United States to include in their financial statements a reconciliation of IFRS to U.S. GAAP.

foreign

In addition to issuing accounting standards, the FASB has formulated a conceptual to provide an underlying theoretical and conceptual ___________ structure for accounting standards.

framework

The accrual accounting model is best able to achieve the goal of predicting ________ cash flows.

future

The IASB is dedicated to developing a set of high-quality, understandable, and enforceable __________ accounting standards.

global

The Emerging Issues Task Force (EITF) was formed to

identify potential problem areas and provide a timely response to issues.

Which of the following fields are considered a profession that has its own code of professional ethics?

law accounting medicine

Jody's expenses exceed revenues for the period. Jody has a net ________ for the period.

loss

It is the responsibility of ____________ to apply Generally Accepted Accounting Principles in preparation of the company's financial statements.

management

The Emerging Issues Task Force (EITF) was formed to resolve ______ financial accounting issues within the framework of existing GAAP.

narrowly-defined

Which approach to standard setting emphasizes the use of professional judgment when choosing how to account for a transaction?

objectives-oriented

Before issuing an Accounting Standards Update, the FASB undertakes a series of information-gathering steps including

open hearings written comments deliberations

Accrual income attempts to measure the resource inflows and outflows generated by the company's _____________ during the reporting period.

operations

Auditors examine financial statements to express a professional, independent ___________ on the financial statements

opinion

The primary forms of business organization in the United States are the sole proprietorship, the ____________ and the corporation.

partnership

A corporation's shareholders will receive cash from their investment in which of the following ways?

periodic dividends

The most recent issue in implementing the fair value accounting standard is

pressure to reduce the extent to which fair value changes are reported in net income.

Criticisms of the objectives-oriented approach for accounting standards are

professional judgment may result in different treatments of similar transactions. an absence of rules may lead to intentional misuse of a standard.

Proponents of objectives-based standards assert that

professional judgment minimizes sidestepping of rules

The capital markets foster an efficient allocation of ___________.

resources

In which of the following areas did the FASB and IASB achieve converged standards?

revenue recognition

A company generates profits when it provides goods and services and

revenues are greater than expenses.

Ethics deals with the ability to distinguish __________ from ________.

right wrong

The uncertainty regarding an investment is also referred to as ____________.

risk

The IASB's main objective is to develop a single set of global accounting ___________ that are high-quality, understandable, and enforceable.

standards

Which of the following provides an underlying structure for the development of accounting standards?

the conceptual framework

The Accounting Standards Codification is organized into

topics and subtopics

True or false: Both profit-oriented companies and not-for-profit companies are providers of financial information.

true

True or false: In the United States, sole proprietorships and partnerships outnumber corporations.

true

True or false: Investors expect that if an investment has greater risk, it should also pay a higher return.

true

True or false: Political pressure has deterred the FASB from issuing particular standard changes.

true

True or false: Resource inflows and outflows may not correspond to cash inflows and outflows

true

True or false: The FASB considers written comments from interested parties before issuing an Accounting Standards Update.

true

The IASB's main objective is to develop a single set of standards that have what characteristics?

understandable enforceable high-quality

A(n) __________ opinion signals that a company's financial statements do not contain material departures from US GAAP.

unqualified

The Private Company Council (PCC) determines whether changes to existing GAAP are necessary to meet the needs of

users of private company financial statements

In developing standards, the FASB considers the:

views of key constituents economic transactions that standards will address

Recent events suggest that full convergence ______ be achieved in the foreseeable future.

will not