D103 - Unit 2 - Module 2

Which accounting assumption is applied when a company keeps distinct and separate records of financial activities?

Economic entity The economic entity assumption is the implantation of distinct business records and financial activities between entities.

Which assumption implies that the business activities of an enterprise can be identified with a particular unit of accountability?

Economic entity assumption The economic entity assumption means that economic activity can be identified with a particular unit of accountability.

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 Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints provide "the how" - the implementation of accounting.

he Financial Accounting Foundation (FAF) has charged the Financial Accounting Standards Board (FASB) with being "robust, comprehensive, and inclusive." What is part of this demand?

Enabling interested parties to express their views on issues under consideration The FAF wants the process to be as transparent and inclusive as possible to allow all parties to express their opinions on proposed and existing standards.

What is true about the fair value principle?

Fair value is a market-based measure. Fair value is defined as 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Which entity does the Securities and Exchange Commission (SEC) currently rely on to develop accounting standards?

Financial Accounting Standards Board (FASB) The SEC generally relies on the FASB to develop accounting standards.

What is an ingredient of the fundamental quality of faithful representation?

Free from error The fundamental qualities of faithful representation include: completeness, neutrality, and free from error.

Which assumption justifies why depreciation and amortization policies are appropriate only if we assume some permanence to the company?

Going concern assumption If the company is not a going concern, the depreciable and amortizable assets will most likely be sold or abandoned - leaving little reason to record depreciation or amortization

What does a conceptual framework provide guidance on?

Identifying the boundaries of financial reporting, selecting the transactions, other events, and circumstances to be represented A conceptual framework establishes the concepts that provide guidance for identifying the boundaries of financial reporting, selecting the transactions, other events, and circumstances to be represented, and determining how transactions, events and circumstances should be recognized and measured.

Why would valuing assets at liquidation rather than cost be inconsistent with GAAP?

It would be inconsistent with the historical cost principle Because historical cost is generally verifiable, GAAP requires companies to report assets and liabilities using this principle. Liquidation value is subjective and may be inconsistently valued depending on who is preparing the financial reports.

Which characteristic describes the fundamental quality of relevance?

Materiality

Which ingredient is associated with the fundamental quality of relevance?

Materiality Materiality is an ingredient of relevance. Other ingredients of relevance are predictive value and confirmatory value.

Economic activity is measured without considering price-level changes according to generally accepted accounting principles (GAAP) as long as a certain assumption is met. Which assumption must be present?

Monetary unit The monetary unit assumption does not account for price level changes.

In the United States, inflation/deflation is ignored in accounting under which of the following assumptions?

Monetary unit assumption The monetary unit assumption means that the dollar (or other monetary unit) is relevant, simple, understandable, and useful. It is the most useful assumption when analyzing changes in financial reporting

Which ingredient is associated with faithful representation?

Neutrality Neutrality is an ingredient of faithful representation.

What basic assumption is illustrated when a firm reports financial results on an annual basis?

Periodicity assumption The periodicity assumption implies that a company can divide its economic activities time periods such as monthly, quarterly, or yearly.

What is an ingredient of the fundamental quality of relevance?

Predictive value Predictive value, confirmatory value, and materiality are all ingredients of the fundamental quality of relevance.

To be useful for decision-making, financial statements must have the fundamental quality of relevance. What are the ingredients for relevance?

Predictive value, confirmatory value, and materiality Predictive value, confirmatory value, and materiality are ingredients for relevance.

What is an ingredient of the fundamental quality of relevance in regards to accounting information?

Predictivity

1 / 1 Which principle or characteristic does this statement describe: "Revenue is recognized in the accounting period in which the performance obligation is satisfied."?

Revenue recognition principle The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Which organization enforces federal securities laws?

Securities and Exchange Commission (SEC) One of the primary responsibilities of the SEC is to enforce regulations on various securities.

Which organization enforces appropriate accounting practices for publicly traded companies?

Securities and Exchange Commission (SEC) The SEC has jurisdiction over publicly traded companies.

Which minimum level of support is required before a new Financial Accounting Standards Board (FASB) update can be passed?

Simple majority Four of the seven members must be in support.

In the conceptual framework for financial reporting, which level provides "the why", or the purpose of accounting?

The first level of the conceptual framework identifies the objective of financial reporting - the 'why' - or purpose of accounting.

Relevance ingredients of fundamental qualities

Predictive value Confirmatory value Materiality

Fundamental qualities

Relevance and Faithful representation

What is an enhancing quality of financial statements?

Comparability "Comparability" is an enhancing quality of financial reporting.

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

2nd The second level of the conceptual framework provides the qualitative characteristics and elements of the financial statements - it is the bridge between the 'why' and 'how' of accounting.

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

3 There are three levels of the conceptual framework: the objective of financial reporting; the qualitative characteristics and elements of the financial statements; the recognition, measurement, and disclosure concepts.

What are the enhancing qualities of accounting information?

Comparability and verifiability Comparability, Verifiability, Timeliness, and Understandability are all enhancing qualities of financial reporting.

Faithful representation ingredients of fundamental qualities

Completeness Neutrality Free from error

Which ingredient supports faithful representation?

Completeness is an ingredient of faithful representation.

Which type of income includes gains and losses that affect stockholders' equity and are not part of net income?

Comprehensive income Comprehensive income impacts stockholders' equity and includes items that bypass the income statement.

When a company changes accounting principles, what might its financial statements lack?

Consistency When a change in accounting principles occurs, a company's financial reports lack consistency from period to period.

Why is a conceptual framework for financial accounting necessary?

It enables standard setters to issue pronouncements that are consistent and useful. The conceptual framework enables standard-setters to issue more consistent and useful pronouncements.

Why is a conceptual framework necessary?

It increases financial statement users' understanding of and confidence in financial reporting. A conceptual framework is necessary because it allows the profession to quickly solve new and emerging issues; 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 requirement should be in place for an item to be recognized in the main body of financial statements?

It is relevant to decision makers. Items recognized should be relevant to decision-makers

Which organization was formed in hopes of preventing the government from establishing accounting standards?

Study Group on Establishment of Accounting Principles The Study Group on Establishment of Accounting Principles (also known as the Wheat Committee) was established to determine an appropriate way forward with accounting standards without the government creating the rules.

Which statement provides a distinction between the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA)?

The SEC is responsible for enforcement of securities-related regulations.

Which statement accurately describes the conceptual frameworks developed by Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB)?

The two frameworks have the same qualitative characteristics for reporting. The existing conceptual frameworks share the same underlying objective.

What is the purpose of the Financial Accounting Foundation (FAF)?

To establish and improve financial accounting standards This organization was formed in 1972 to promote effective accounting standards

What is the purpose of Statements of Financial Accounting Concepts?

To form a conceptual framework for solving existing and emerging problems The Statements of Financial Accounting Concepts set forth fundamental objectives and concepts of the FASB and provides a conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner.

According to the revenue recognition principle, at which point should revenue be recognized?

When the performance obligation is satisfied The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.