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