Connect: the Conceptual Framework
Recognition refers to the process of
recording information in the basic financial statements
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
According to SFAC 5, the four criteria that must be met for an item to be recognized in the basic financial statements are
Definition Measurability relevance reliability
The _____ approach for measuring fair value estimates value by estimating future amounts of earnings or cash flows and then mathematically converting these amounts to a single present value.
Income
Accounting information meets the qualitative characteristic of consistency if it is measured and reported the same way
across different reporting periods
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
Using the same accounting methods in each period refers to the qualitative characteristic of
consistency
The _____ approach determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition.
cost
Which approach to measuring fair value determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition?
cost approach
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
Schoene Company reports its inventory at replacement cost. This is an application of the measurement attribute of
current cost
The cost that would be incurred to purchase or reproduce an asset is referred to as
current cost
The overriding objective in the hierarchy of qualitative characteristics of financial reporting information is
decision usefulness
Select the four criteria used to determine if an item is recognized in the financial statements according to SFAC 5.
definition reliability measurability relevance
The process of including additional pertinent information in the financial statements and accompanying notes is referred to as _____
disclosure
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
Disclosure is the process of including additional pertinent information in
financial statements notes to the financial statements
The FASB recently issued a standard that requires companies recognize revenue
for the amount the company expects to be entitled to receive when goods or services are transferred to customers at a point in time or over a period of time
Faithful representation requires information to have which of the following characteristics?
free from material error neutrality completeness
the _____ _____ principle requires that any information useful to decision makers be provided in the financial statements, subject to the cost effectiveness constraint.
full-disclosure
Measuring assets and liabilities based on their original transaction value is an example of
historical cost
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
A transfer of something of value to obtain or increase ownerships interests in a business is called
investments by owners
What level of the fair value hierarchy includes inputs other than quoted prices that are observable for the asset or liability?
level 2
Simply put, _____ are the obligations of a company
liability
The fair value approach that uses current information from recent transactions or exchanges in active trading on stock exchanges is the _____ approach
market
Which approach to measuring fair value uses information from actively traded stock on the New York Stock Exchange?
market approach
Predictive value, confirmatory value, and _____ all relate to the fundamental characteristic of relevance in financial information.
material
The process of associating numerical amounts to the elements of the financial statements is referred to as
measurements
Another term for equity is
net assets
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
Reporting assets at net realizable value helps predict:
predict future cash flows
The income approach for measuring fair value estimates future amounts of earnings or cash flows first and then mathematically converts these amounts to a single _____ value
present
The measurement method based on future cash flows discounted for the time value of money is referred to as _____ value
present
The measurement attribute that is based on future cash flows discounted for the time value of money is
present value
The main focus of accounting information is to
provide useful information for decision making
The primary purpose of financial reporting is to provide useful information for decision making to
providers of capital
Predictive value and confirmatory value are components of which primary qualitative characteristic?
relevance
The two fundamental characteristics of financial information are
relevance and faithful representation
For accounting information to be _____, it must possess predictive value and/or confirmatory value.
relevant
Expense recognition is implemented by which of the following ways?
systematic and rational allocation associating expenses and revenues in a specific period of time in the period incurred cause-and-effect relationship
A recently issued FASB standard requires that companies recognize revenue when goods or services are _____ to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.
transferred
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
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
Which of the following are enhancing characteristics of financial information?
comparability verifiability timeliness Understandability
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
According to the conceptual framework, for accounting information to be relevant, what qualities must it possess?
confirmatory value predictive value
Before they can be recognized, favorable items tend to require more verification than unfavorable items. Accountants refer to this as
conservatism
Which of the following are among the basic assumptions underlying U.S. GAAP?
economic entity going concern monetary unit periodicity
Which of the following are among the basic assumptions underlying U.S. GAAP?
economic entity assumption going concern assumption periodicity assumption monetary unit assumption
Measurement is the process of associating numerical amounts to the _____ reported in financial statements.
elements
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
investments
A liability has which of the following characteristics?
it is a present obligation it is due to a past transaction or event it is a probably future sacrifice of an economic benefit
What level of the fair value hierarchy includes quoted market prices in active markets for identical assets and liabilities?
level 1: quoted market prices in active markets for identical assets or liabilities
Conservatism is inconsistent with which characteristic of accounting information?
neutrality
The process of admitting or recording an item into the basic financial statements is referred to as
recognition
True or false: The conceptual framework does not prescribe GAAP.
true
What information regarding an entity's future cash flows are investors and lenders interested in?
uncertainty amount timing
When the cost of an item can be traced to objective evidence of a transaction, such as a sales receipt, canceled check, and bank statement, the information has the quality of
verifiability
Information is _____ if different independent measures would reach consensus about whether it is representationally faithful.
verifiable
