Chapter 1

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

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

- deliberations: (Define) -open hearings: (define) -written comments (define)

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.)

- provide penalties for violators - require CEO accountability - regulate auditors - prevent conflicts of interests

In developing standards, the FASB considers the:

-economic transactions that standards will address -concerns and opinions of constituents

What concepts are contained in the FASB conceptual framework?

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

Cause-and-effect relationship matches Cost of goods sold Specific time period matches w/o regard to related revenue in the period incurred matches

1. Cost of goods sold 2. Monthly salary payments to an office employee 3. Advertising expenditures

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 alt course of action 5. evaluate the courses of action in terms of their consistency

The conceptual framework includes what types of information?

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

The FASB's conceptual framework lists relevance and timeliness as the two fundamental qualitative characteristics of decision-useful information.

F

The primary responsibility for properly applying GAAP when communicating with investors and creditors through financial statements lies with a firm's auditors.

F

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

FASB

The citation used to reference GAAP is

FASB ASC (the Accounting Standards Codification of the Financial Accounting Standards Board.)

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

Level 1

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

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

SFAC No.5 focuses on:

Recognition and measurement concepts in accounting

The ____ Has the authority to set acc standards for companies, but has delegated the task to the private sectors

SEC

Which of the following Statements of Financial Accounting Concepts defines the 10 elements of financial statements?

SFAC 6

Under federal securities laws, the SEC has the authority to set accounting standards in the United States.

T

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

The conceptual framework

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.

Revenue typically should not be recognized until:

The seller has transferred goods or services to a customer.

The enhancing qualitative characteristic of understandability means that information should be understood by:

Those who have a reasonable understanding of business and economic activities.

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

The conceptual framework does not prescribe which of the following?

US GAAP

GAAP (Generally Accepted Accounting Principles)

a dynamic set of broad and specific guidelines that companies should follow when measuring and reporting the info in their financial statements and related notes

The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:

an ethical dilemma

Faithful representation requires information to have which of the following characteristics? (Select all that apply.)

completeness neutrality free from material error

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

confirmatory value

The Sarbanes-Oxley Act increases accountability of who?

corp executives

Who has the responsibility for preparing financial statements in accordance with generally accepted accounting principles?

corporate management

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

cost-and-effect relationship

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

decision usefulness

Cash dividends are an example of which of the following elements?

distribution to owners

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

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

expense ; revenue

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 rep

Fundamental qualitative characteristics of accounting information are:

faithful rep and relevance

Determining fair value by calculating the present value of future cash flows is a level 1 type of input.

false

The FASB is currently the public-sector organization responsible for setting accounting standards in the United States.

false

If the SEC doesnt agree with a standard made by the private sector, it can

force a change in the standard

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

framework

Measuring assets and liabilities based on their original transaction value is an example of

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

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

identify the stakeholders take action determine the facts

What level of the fair value hierarchy includes unobservable inputs that reflect the entity's own assumptions?

level 3

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

lobbyist and politicans

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

managers

In a recent annual report, Apple Computer reported the following in one of its disclosure notes: "Warranty Expense: The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized." This note exemplifies Apple's use of:

matching

Enhancing qualitative characteristics of accounting information include each of the following except:

materiality

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

measurement

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

net realizable value

The amount of cash into which an asset is expected to be converted in the normal course of business is the asset's

net realizable value

The conceptual framework's qualitative characteristic of faithful representation includes:

neutrality

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

opinion

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; understating

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.

Proponents of objectives-based standards assert that

professional judgement minimizes sidestepping of rules

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

The hierarchy of qualitative characteristics of financial information require that, in order to be useful for decision making, information should possess the fundamental characteristics of

relavance and faithful representation

To be useful for decision making, information should possess the fundamental decision-specific qualities of (Select all that apply.)

relavant and faithful rep

The two fundamental characteristics of financial information are

relevance and faithful rep

For accounting information to be ___ it must possess predictive value and/or confirmatory value

relevant

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

revenue recognition

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

revenue recognition matching

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

Ethics deals with the ability to distinguish ____ from _____.

right;wrong

The SEC delegated the task of setting accounting standards to

the private sector

Which of the following are enhancing characteristics of financial information? (Select all that apply.)

timeliness comparability

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

timing uncertainty amount

Gains or losses result, respectively, from the disposition of business assets for greater than, or less than, their book values.

true

Materiality can be affected by the dollar amount of an item, the nature of the item, or both.

true

Revenues are inflows of assets or settlements of liabilities from activities that constitute the entity's ongoing operations.

true

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

true

Four different competent accountants independently agree on the amount and method of reporting an economic event. The concept demonstrated is:

verifiability