Smartbook Ch 1

Expense recognition is implemented by which of the following ways?

-in the period incurred -systematic and rational allocation -cause-and-effect relationship -associating expenses and revenues in a specific period of time.

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

Accrual accounting

Under the Sarbanes-Oxley Act, who is responsible for the selection of a corporation's auditor?

Audit committee of the board of directors.

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

Cash, money, or monies

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

Conceptual framework

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

Corporation

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

Expense

Financial accounting is chiefly concerned with providing information to various _________ users.

External or outside

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

External or outside

The ________ was established to set U.S. accounting standards and is the current standard setting body

FASB

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

False; Accrual basis accounting is the required accounting method for most profit-oriented and not-for-profit entities.

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

Framework

An increase in equity from peripheral or incidental transactions of an entity is referred to as a(n)

Gains

What level of the fair value hierarchy includes quoted market prices in active markets for identical assets and liabilities?

Level 1

What level of the fair value hierarchy includes inputs other than quoted prices that are observable for the asset or liability?

Level 2; Inputs other than quoted prices that are observable for the asset or liability.

Which approach to measuring fair value uses information from actively traded stock on the New York Stock Exchange?

Market approach

Revenue should be recognized when the seller satisfies its performance obligation(s) to its customers. What is the accounting issue if the revenue recognition rule is not followed?

Net income may be overstated or understated for the period. The income statement would not report the accomplishments of the period.

Faithful representation requires information to have which of the following characteristics?

Neutrality, Completeness, Freedom from Material Error

The measurement method based on future cash flows discounted for the time value of money is referred to as ______ value

Present

The objectives of financial accounting include

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

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

Receives requests from stakeholders The Board holds a public meeting

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

SEC

What are the three primary forms of business organizations?

Sole proprietorship, partnership, corporation

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.

Revenue should be recognized when the seller satisfies its performance obligation(s) to its customers. What is the accounting issue if the revenue recognition rule is not followed?

The income statement would not report the accomplishments of the period. Net income may be overstated or understated for the period.

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

Timing, uncertainty, and amounts of the firm's future cash flow.

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

Timing, uncertainty, and amounts of the firm's future cash flow. of the firm's future cash flow.

Which of the following represents the IASB's primary objective?

To develop high quality global standards used to make economic decisions

What is the purpose of the auditor?

To help ensure management has appropriately applied GAAP in preparing the financial statements.

The main focus of accounting information is to

To provide useful information for decision making

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

True

True or false: The conceptual framework does not prescribe GAAP.

True; The conceptual framework provides an underlying foundation for accounting standards.

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as

assets

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

Matching cost of goods sold with the revenues generated during the period is an example of which approach to expense recognition?

cause and effect relationship

_______ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.

comprehensive income

What concepts are contained in the FASB conceptual framework?

concepts regarding types of events to be accounted for, measurement concepts, underlying concepts of accounting

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

External users of a company's financial information include

credit-rating agencies, labor unions, banks.

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

decision usefulness

The process of including additional pertinent information in the financial statements and accompanying notes is referred to as

disclosure

Measurement is the process of associating numerical amounts to the _________ reported in financial statements

elements

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

ethics

Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations are referred to as

expenses

Expense recognition often matches _______ and _______ that arise from the same transaction.

expenses and revenues

The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date is the

fair value

________ ________ bases measurements on the price that would be received in an orderly market transaction.

fair value

When there is agreement between a measure or description of an item and the phenomenon it purports to represent, the item possesses the fundamental characteristic of

faithful representation

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

full disclosure

Any information useful to decision makers should be provided in the financial statements, subject to the cost effectiveness constraint. This describes which accounting principle?

full disclosure principle

Reporting assets at net realizable value helps predict:

future cash flows

Increases in equity from peripheral or incidental transactions of an entity are called

gains

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

high-quality, understandable, and enforceable

Which of the following are acceptable measurement attributes for certain financial statement items?

historical cost fair value present value of future cash flows net realizable value current cost

Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests is a(n) __________ by owners.

investment, contribution, or investments

A transfer of something of value to obtain or increase ownerships interests in a business is called

investments by owners

Increases in equity of a particular business enterprise resulting from transfers to it from other entities or individuals of something of value to obtain or increase ownership interests in it are called

investments by owners

Simply put, _________ are the obligations of a company.

liabilities

Which of the following is a probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events?

liability

Decreases in equity from peripheral or incidental transactions of an entity are called

losses

The fair value approach that uses current information from recent transactions or exchanges in active trading on stock exchanges is the _______ approach.

market

The revenue/expense approach focuses on the income statement because it relies on which accounting principles?

matching and revenue recognition

The process of associating numerical amounts to the elements in the financial statements is called

measurement

Another term for equity is

net assets

Measuring assets at what value helps financial statement users predict a company's future cash flows?

net realizable value

Revenue recognition criteria are designed to prevent companies from ________ revenue and net income in one period and, consequently, ________ revenue and net income in another period.

overstating or overstate understating or understate

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

periodicity

The measurement attribute that is based on future cash flows discounted for the time value of money is

present value

Which of the following are acceptable measurement attributes for certain financial statement items?

present value net realizable value historical cost fair value

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

For accounting information to be _________ , it must possess predictive value and/or confirmatory value.

relevant

The key provisions of the Sarbanes-Oxley Act include

restricting activities of auditors to prevent conflicts of interest, requiring documentation and assessing effectiveness of internal controls, requiring that corporate executives certify financial statements

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

revenue/expense approach

Expenses are matched to ________ from the same transaction.

revenues

Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations are referred to as

revenues

Under the Sarbanes-Oxley Act, corporate management is responsible for

the financial statements. internal control.

What information regarding an entity's future cash flows are investors and lenders interested in?

uncertainty, timing, amount

A company purchases a building by signing a $200,000 10% interest-bearing note due at the end of five years. At what amount should the building be recorded?

$200,000

Hernandez Corporation purchases a building for $300,000 cash. The building was appraised at $310,000. The tax assessment on the building was $280,000. Three months after purchasing the building, Company Z offers Hernandez $320,000 for the building. At what amount should the building be reported in Hernandez's financial statements according to the historical cost principle?

$300,000

The conceptual framework includes what types of information?

A system of objectives and fundamentals that help in setting consistent accounting standards.

Match the financial reporting law with its requirements. A)Sets forth accounting and disclosure requirements for initial public offerings of securities. B)Mandates reporting requirements for companies whose stock is publicly traded.

A)1933 Securities Act B)1934 Securities and Exchange Act

Who serves as an independent intermediary to help ensure that management has appropriately applied GAAP in preparing the financial statements?

Auditors

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

Confidence, faith, belief, or trust

Decreases in equity of a particular enterprise resulting from transfers to owners are called ________ to owners

Distributions

Decreases in equity of a particular enterprise resulting from transfers to owners is called

Distributions to owners

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

Financial Accounting Standards Board (FASB)

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

Force a change in the standard

Which are the financial statements most frequently provided to external users?

Income statement, statement of cash flows, balance sheet, and statement of shareholders' equity

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

Lobbyists/lobbyist and politicians, politics, or politician

A decrease in equity from peripheral or incidental transactions of an entity is referred to as a(n)

Loss or losses

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from what type of sources?

Nonowner

Disclosure is the process of including additional pertinent information in

Notes to the financial statements Financial statements

Which of the following are provisions included in the Sarbanes-Oxley Act?

Require that audit firms are hired by the audit committee of the board of directors. Require auditors to retain work papers for 7 years.

Ethics deals with the ability to distinguish ________ from _________.

Right, wrong

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

Statement of Shareholders' Equity

On January 1, 20X1, 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?

The return on investment is calculated as the dividends received plus the appreciation in the value of the stock divided by the initial investment in the stock. ROI is ($3,000 + 4,000)/$100,000 = 7%.

On January 1, 20X1, an investor purchases shares of stock in a company for $10,000 cash. At the end of 20X1, the investor receives $400 in dividends and sells his ownership at the end of 20X1 for $10,600. What is the return on investment?

The return on investment is the amount of dividends and the appreciation of the stock divided by the initial investment. Therefore, the return on investment is ($400 + 600)/$10,000 = 10%.

What type of measurement model does U.S. GAAP currently employ?

mixed attribute

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

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

recognition