Ch 1 Smartbook

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? (Select all that apply.)

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

Select the four criteria used to determine if an item is recognized in the financial statements according to SFAC 5.

-Reliability -Relevance -Definition -Measurability

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?

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

Criticisms of the objectives-oriented approach for accounting standards are (Select all that apply.)

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

According to the conceptual framework, for accounting information to be relevant, what qualities must it possess? (Select all that apply.)

-confirmatory value -predictive value

Before issuing an Accounting Standards Update, the FASB undertakes a series of information-gathering steps including (Select all that apply.)

-deliberations -written comments -open hearings

Which of the following are among the basic assumptions underlying U.S. GAAP? (Select all that apply.)

-going concern -monetary unit -economic entity -periodicity

The four basic accounting assumptions (Select all that apply.)

-identify the entity being reported on -assume the entity will continue to exist -identify the frequency of reporting -identify the denomination in which reporting occurs

The revenue/expense approach focuses on the income statement because it relies on which accounting principles? (Select all that apply.)

-matching -revenue recognition

According to SFAC 5, the four criteria that must be met for an item to be recognized in the basic financial statements are

-the item has relevant attributes that are measurable. -The item meets the definition of an element. -the information about the item is relevant to decision making. -the information about the item is reliable.

What information regarding an entity's future cash flows are investors and lenders interested in? (Select all that apply.)

-timing -uncertainty -amount

Which of the following models is best in helping predict future cash flows?

Accrual accounting

An essential assumption underlying GAAP is that all economic events can be identified with what?

An economic entity

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

Corporation

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

False

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

Financial

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

Future

Who has the responsibility to appropriately apply GAAP when preparing financial statements?

Management

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

Objectives-oriented

What is the primary function of financial accounting?

Provide useful information to users external to the business.

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

What does it mean if information is cost effective?

The benefits of providing financial information exceed the costs of doing so.

True or false: A weakness of the monetary unit assumption is that the dollar is presumed to be stable over time and no adjustment is made for inflation.

True

True or false: Financial accounting is primarily concerned with providing financial information to external users.

True

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

True

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

True

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

accrual accounting

corporate executives

accrual accounting

A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events is a(n)

asset.

What element of the financial statements is described by the following definition? "Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions."

assets

An enhancing qualitative characteristic of accounting information that allows users to better understand similarities and differences in the financial reports across different companies is called

comparability.

Accounting information is ___ if similar items are treated the same way among various companies highlighting similarities and differences between events and conditions.

comparable

The "Accounting Constitution", a coherent system of interrelated objectives and fundamentals that lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting is referred to as the ___ framework.

conceptual

What component of financial information helps investors analyze their prior assessments regarding a company's cash flow generating ability?

confirmatory value

Cost effectiveness is a(n) ___ on the accounting choices a company makes.

constraint

The Sarbanes-Oxley Act increases accountability of who?

corporate executives

The full-disclosure principle requires that financial reports should include any information that could affect the decisions made by external users, within the constraint that the benefits of that information should exceed the ___ of providing the information.

costs

The primary focus of the qualitative characteristics of accounting information is:

decision usefulness

The overriding objective in the hierarchy of qualitative characteristics of financial reporting information is

decision usefulness.

The requirement that the economic activities of a business owner should be separated from the activities of the business is an example of which accounting assumption?

economic entity

The purpose of the FASB's conceptual framework in accounting is to

establish objectives and fundamental concepts on which to base standards.

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

ethics.

The primary role of financial accounting is to provide useful financial information to users who are ______ to the business enterprise.

external

The ___ ___ principle requires that any information useful to decision makers be provided in the financial statements, subject to the cost effectiveness constraint.

full disclosure

The assumption that a business entity will continue to operate indefinitely in the future refers to what assumption?

going concern

The principle stating that asset and liability measurements should be based on the amount given or received in the original transaction is referred to as the ___ ___ principle.

historical cost

What accounting principle states that an asset or liability should be recorded at the amount given or received in the exchange transaction?

historical cost

The going concern assumption is critical to the measurement of assets because if a business were going to cease operations, its assets would be measured at their

liquidation values.

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

management

The assumption that financial statement elements should be measured in terms of the United States dollar for U.S. financial reporting is referred to as the ___ unit assumption.

monetary

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

partnership

Which assumption allows the life of the company to be divided into artificial time periods to provide timely information?

periodicity

The primary purpose of financial reporting is to provide useful information for decision making to

providers of capital

The process of admitting information into the financial statements is referred to as

recognition

The process of admitting or recording an item into the basic financial statements is referred to as

recognition.

An emphasis is placed on proper income statement item recognition under what approach under US GAAP?

revenue/expense approach

Ethics deals with the ability to distinguish ___ from ___.

right, wrong

The periodicity assumption relates to which qualitative characteristic?

timeliness

Risk refers to the ______ of an investment.

uncertainty