The Financial Reporting Environment

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1.3.10 According to the FASB's conceptual framework, which of the following enhances information that is relevant and faithfully represented? a. Comparability b. Confirmatory Value c. Neutrality d. Materiality

Comparability (Comparability is a qualitative characteristic that enhances the usefulness of relevant and faithfully represented information. it enables users to identify similarities in and differences among items.)

1.4.7 According to the FASB's conceptual framework, an entity's revenue may result from a(n): a. Decrease in an asset from incidental b. Increase in an asset from incidental transactions c. Increase in a liability from incidental transactions d. Decrease in a liability from primary operations

Decrease in the liability from primary operations (Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing major or central operations. Thus, a revenue may result from a decrease in liability from primary operations, for example, bu delivering goods that were paid for in advance.)

1.4.11 Consolidated financial statements are prepared when a parent-subsidiary relationship exists in recognition of what accounting concept?

Entity (Accounting information pertains to a business entity, the boundaries of which are not necessarily those of the legal entity. For instance, a parent and subsidiary are legally separate but are treated as a single business entity in consolidated statements. Consolidated financial statements are prepared in acknowledgement of this phenomenon.)

1.3.1 According to the FASB's conceptual framework, what are the two fundamental qualitative characteristics that make accounting information useful for decision making?

Fairness and Precision (Relevance and faithful representation are the fundamental qualities that make accounting information useful for decision making. Relevance is the capacity of information to make a difference in the user's decision. A representation is perfectly if it is complete, neutral, and free from error.)

1.4.4 According tot he FASB's conceptual framework, what are asset valuation accounts?

Neither assets nor liabilities (Asset valuation accounts are separate items sometimes found in financial statements that reduce or increase the carrying amount of an asset. The conceptual framework considers asset valuation accounts to be part of the related asset account. They are not considered to be assets or liabilities in their own right.)

1.3.9 Under SFAC 8, the ability, through consensus among measures, to ensure that information represents what it purports to represent is an example of what concept?

Verifiability (Verifiability is a qualitative characteristic that enhances relevance and faithful representation. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (not necessarily unanimity) that it is faithfully represented.

1.6.1 According to the FASB, what is fair value?

"Fair value is 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." Thus, fair value is an exit price.)

1.9.3 A company's first IFRS reporting period is for the year ended December 31, Year 2. While preparing the Year 2 statement of financial position, management identified an error in which a $90,000 loss accrual was not recorded: $40,000 of the loss accrual related to a Year 1 event, and $50,000 related to a Year 2 event. What amount of loss accrual should the company report in its December 31, Year 1, IFRS statement of financial position? a. $0 b. $40,000 c. $50,000 d. $90,000

$40,000 (In a company's first IFRS reporting period, it must present full comparative information under IFRS. This company would include full comparative information for Year 1. Thus, the company would merely correct the error in the Year 1 financial statements and record the amount of the loss accrual related to a Year 1 event of $40,000.)

1.7.2 Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification? a. A proposed statement of position b. A proposed accounting standards update c. A proposed accounting research bulletin d. A proposed staff accounting bulletin

A proposed accounting standards update (The FASB follows a due-process procedure before issuing final pronouncements: (1) After discussing the issues and considering input from interested parties (e.g., business, academia, and the profession), the FASB votes on a final draft proposal. If a majority of the seven board members approves, an Accounting Standard Update (ASU) is issued. (2)Once an ASU has been incorporated into the FASB's Accounting Standards Codification, it has the status of U.S. GAAP.)

1.8.1 Which of the following statements is correct concerning corporations subject to the reporting requirements of the Securities Exchange Act of 1934? a. The annual report (form 10-K) need not include audited financial statements b. The annual report (Form 10-K) must be filed with the SEC within 20 days of the end of the corporation's fiscal year c. A quarterly report (Form 10-Q) need only be filed with the SEC by those corporations that are also subject to the registration d. A report (Form 8-K) must be filed with the SEC after a materially important event occurs

A report (Form 8-K) must be filed with the SEC after a materially important event occurs (The FASB's Accounting Standards Codification and SEC pronouncements are the only sources of authoritative financial accounting guidance for nongovernmental entities in the U.S. All other sources of guidance are nonauthoritative.)

1.2.5 Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to what concept?

Accrual accounting (A basic feature of financial accounting is that it is an accrual system under which the determination of periodic earnings and financial position is dependent upon the measurement of all economic resources and obligations (i.e. receiveables and payables) and changes in them as the changes occur.)

1.4.6 Which of the following statements about accrual accounting is false? a. Accrual accounting is concerned with the process by which cash expended on resources and activities is returned as more (or perhaps less) cash to the entity, not just with the beginning and end of that process. b. Accrual accounting recognizes that buying, producing, selling, and other operations of an entity during a period often do not coincide with the cash receipts and payments of the period. c. Accrual accounting attempts to record the financial effects on an entity of transactions and other events and circumstances that have cash consequences for an entity. d. Accrual accounting primarily addresses the cash receipts and cash payments of an entity.

Accrual accounting primarily addresses the cash receipts and cash payments of an entity (Accrual accounting attempts to record the financial effects on an entity of transactions and other events and circumstances that have cash consequences in the periods in which those transactions, events, and circumstances occur, rather than only in the periods in which cash is received or paid by the entity. Thus the focus of accrual accounting is not primarily on the actual cash receipts and cash payments. It addresses the process by which cash expended on resources is returned as more (or perhaps less) cash to the entity, not just with the beginning and end of the process.)

1.3.17 Which of the following characteristics relates to both accounting relevance and faithful representation? a. Verifiability b. Timeliness c . Comparability d. All of the answers are correct

All of the answers are correct (Verifiability, timeliness, comparability, and understandability are qualitative characteristics that enhance the relevance and faithful representation of accounting information.)

1.5.13 Which of the following is an application of the principle of systematic and rational allocation? a. amortization of intangible assets b. Sales commissions c. Research and development costs d. Officer's salaries

Amortization of intangible assets (The expense recognition principle of systematic and rational allocation is applied to the amortization of intangible assets because of the absence of a direct means of associating cause and effect. The costs benefit a number of periods (they generate revenue in those periods) and should be systematically and rationally allocated.)

1.4.1 According to the FASB's conceptual framework, which of the following is an essential characteristic of an asset? a. The claims to an asset's benefits are legally enforceable b. An asset is tangible c. An asset is obtained at a cost d. An asset provides future benefits

An asset provides future benefits (One of the the essential characteristics of an asset is that the transaction or event giving rise to the entity's right to or control of it's assets has already occurred; i.e., it is not expected to occur in the future. A second essential characteristic of an asset is that an entity can obtain the benefits of and control other's access to the asset. The third essential characteristic is that an asset must embody a probable future benefit that involves a capacity to contribute to future net cash inflows.)

1.9.2 Under IFRS, which of the following is the first step within the hierarchy of guidance to which management refers, and whose applicability it considers, when selecting accounting policies? a. Consider the most recent pronouncements of other standard-setting bodies to extent that do not conflict with the IFRS or the IASB Framework b. Apply a standard from IFRS if it specifically relates to the transaction, other event, or condition c. Consider the applicability of the definitions, recognition criteria, and measurement concepts in the IASB Framework d. Apply the requirements in IFRS dealing with similar and related issues

Apply a standard form IFRS if it specifically relates to the transaction, other event, or condition (When an IASB Standard or Interpretation specifically applies to a transaction, other event, or condition, it must be selected if the effect is material. Any Implementation Guidance also must be considered. Absent such a standard or Interpretation, management considers (1) guidance for similar and related issues in other IASB Standards and Interpretations and (2) the content of the Framework for the Preparation and Presentation of Financial Statements.)

1.3.13 The concept of consistency is sacrificed in the accounting for which of the following income statement items? a. Discontinued Operations b. Loss on disposal of a component of an entity c. Gain from bargain purchase d. Change in accounting principle when the cumulative effect on any prior period is not known

Change in accounting principle when the cumulative effect on any prior period is not known (Changes in accounting principles ordinarily are accounted for by retrospective application. However, if it is impracticable to determine the cumulative effect of applying the change to any prior period, the change is applied prospectively. Thus, similar events are not accounted for in the same way in succeeding accounting periods.)

1.3.14 According to the FASB's conceptual framework, what is the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena?

Comparability (Comparability is an enhancing qualitative characteristic. Information for (1) other entities and (2) the same entity for another period or date. Thus, comparability allows users to understand similarities and differences.)

1.5.6 The selling price for a product is reasonably assured, the units are interchangeable, and the costs of selling and distributing the product are insignificant. To recognize revenue from the product as early in the revenue cycle as is permitted by GAAP, what revenue recognition cycle should be used?

Completion-of-Production Method (Revenue is to be recognized when it is realized or realizable and earned. Some products or other assets, such as precious metals or certain agricultural products, are readily realizable (convertible) because they are salable at reliably determinable prices without significant effort. For such products, revenues and some gains or losses may be recognized when production is completed or when prices of the assets change. Readily realizable assets have (1) interchangeable units and (2) quoted prices in an active market.)

1.3.16 To be relevant, financial information should have which of the following? a. Neutrality b. Confirmatory Value c. Understandability d. Costs and Benefits

Confirmatory Value (Relevance is a fundamental qualitative characteristic. Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Something has confirmatory value with respect to prior evaluations if it provides feedback that confirms or changes (corrects) them.

1.3.7 According to the FASB's conceptual framework, the usefulness of providing information in financial statements is subject to what constraint?

Cost (Cost is a pervasive constraint on the information provided by financial reporting. The benefits of financial information should exceed the costs of reporting.)

1.3.4 Which of the following is considered a pervasive constraint by the FASB's conceptual framework? a. Cost b. Conservatism c. Timeliness d. Verifiability

Cost (Cost is a pervasive constraint on the information provided by financial reporting.The benefits of financial information should exceed the costs of reporting.)

1.5.17 Items currently reported in the financial statements are measured by different attributes. The amount of cash or its equivalent that would have to be paid if the same or an equivalent asset were acquired currently defines the attributes of: a. Historical Cost b. Current Cost c. Current Market Value d. Net Realizable Value

Current Cost (The amount of cash or its equivalent that would have to be paid if the same or an equivalent asset were acquired currently is the definition of the measurement attribute of current (replacement) cost. Some inventories are reported in accordance with this attribute.)

1.5.1 According to the FASB's conceptual framework, recognition is the process of formally incorporating an element into the financial statements of an entity. Recognition criteria include all of the following except: a. Measurability with sufficient relaibility b. Definitions of elements of financial statements c. Decision usefulness d. Relevance

Decision usefulness (An item and information about the item should be recognized when the following four fundamental recognition criteria are met: (1) The item meets the definition of an elements of financial statements; (2) it has a relevant attribute measurable with sufficient reliability; (3) the information about the item is capable of making a difference in user decisions; and (4) the information is representationally faithful, verifiable, and neutral. Decision usefulness is a user-specific quality of accounting information.)

1.5.2 According to the FASB conceptual framework, which of the following statements conforms to the realization concept? a. Equipment depreciation was assigned to a production department and then to product unit costs b. Depreciated equipment was sold in exchange for a note receivable c. Cash was collected on accounts receivable d. Product unit costs were assigned to cost of goods sold when the units were sold

Depreciated equipment was sold in exchange for a note recieveable (The term "realization" is used most precisely in accounting and financial reporting with regard to sales of assets for cash or claims to cash. The terms "realized" and "unrealized" identify revenues or gains and losses on assets sold and unsold, respectively. Thus, the sale of depreciated equipment results in realization.)

1.5.15 Items reported in financial statements must have a relevant attribute that can be measured in monetary units. According to the conceptual framework: a. The unit of measure should have constant general purchasing power b. One attribute should be used for measuring all assets and one for all liabilities c. Different measurement attributes are used for different items depending on the nature of the item d. The unit of measure should be current cost

Different measurement attributes are used for different items depending on the nature of the item (current accounting practice is based on (1) nominal units of money (unadjusted for changes in purchasing power) and (2) quantifiable attributes. Attributes used in practice include (1) historical cost (historical proceeds), (2) current cost, (3) current market value, (4) net realizable (settlement) value, and (5) present (or discounted) value of future cash flows. The use of different attributes will continue.)

1.5.5 For $50/month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, how should Rawl recognize revenue?

Evenly over the contract year as the services are performed (Accrual-based revenue should be recognized when realized or realizable and earned. These conditions are usually met when services are rendered. Because these services entail monthly visits for monthly fees, the annual payment should be recognized evenly over the period in which services are performed. )

1.8.2 Integral Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. For its current fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of shareholder "short-swing" profits, did not report that a competitor made a tender offer to Integral's shareholders, and did not report changes in the price of its stock as sold on the New York Stock Exchange. under the SEC reporting requirements, which of the following was Integral required to do? a. Report the tender offer to the SEC b. Notify the SEC of shareholder "short-swing" profits c. File the periodic report listing newly appointed officers d. Report the changes in the market price of its stock

File the periodic report listing newly appointed officers (A covered corporation is required to file annual (10-K), quarterly (10-Q), and current events (8-K) reports with the SEC. Similar reports are sent to shareholders. The 10-K report contains information about the entity's business activities, accounting principles and disclosure, audited financial statements, etc. I is intended to bring the information in the registration statement up to date. Thus, newly appointed officers will be listed.)

1.1.3 Continuation of an accounting entity in the absence of evidence to the contrary is an example of what basic concept?

Going Concern. (A basic feature of financial accounting is that a business is assumed to be a going concern in the absence of evidence to the contrary. The going concern concept is based on the empirical observation that many entities have an indefinite life.)

1.1.4 Reporting inventory at the lower of cost or market (LCM) is a departure from what accounting principle?

Historical Cost (Historical cost is the amount of cash, or its equivalent, paid to acquire an asset. Thus, the LCM rule departs from the historical cost principle when the utility of the inventory is judged no longer to be as great as its cost.)

1.5.14 A patent, purchased in Year 1 and amortized over a 15 year life, was determined to be worthless in Year 6. The write-off of the asset in Year 6 is an application of what principle?

Immediate recognition (The patent was being amortized in a systematic and rational manner. When it was determined that the costs associated with the patent (recorded as an asset) no longer provided discernible benefits, the remaining unamortized costs were written off; that is, the loss was recognized immediately.)

1.5.7 Under a royalty agreement with another entity, a company will receive royalties from the assignment of a patent for 3 years. When should the royalties received should be reported as revenue?

In the period earned (Revenues should be recognized when they are realized or realizable and earned. Revenues are realized when products, merchandise, or other are exchanged for cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Earning embraces the activities that give rise to revenue, for example, allowing other entities to use entity assets (such as patents) or the occurrence of an event specified in a contract (such as production using the patented technology).)

1.6.5 Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value except: a. Quoted prices for identical assets and liabilities b. Quoted prices for similar assets and liabilities in markets that are active c. Internally generated cash flow projections for a related asset or liability d. Interest rates that are observable at commonly quoted intervals

Internally generated cash flow projections for a related asset or liability (Internally generated cash flow projections are not observable and would be considered a Level 3 input. Level 3 inputs are unobservable inputs that are used in the absence of observable inputs. They should be based on the best available information in the circumstances.)

1.2.2 What is the objective of general-purpose financial reporting?

Investment and credit decision often are based, at least in part, on evaluations of the past performance of an entity (Although investment and credit decisions reflect investors' and creditors' expectations about future performance, those expectations are commonly based, at least in part, on evaluations of past performance. Information about financial performance helps users to understand the return on the entity's economic resources and how well management has discharged its responsibilities.)

1.3.12 Financial information is most likely to be verifiable when an accounting transaction occurs that does what?

Involves an arm's length transaction between to independent interests (Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm's -length transaction between independent interests suggests that the transaction is verifiable.)

1.3.2 According to the FASB's conceptual framework, How does neutrality relate to faithful representation & relevance?

It relates to faithful representation but not to relevance. (Useful information faithfully represents the economic phenomena that it purports to represent. A representation is perfectly faithful if it is complete (containing what is needed for user understanding), neutral (unbiased in its selection or presentation), and free from error (but not necessarily perfectly accurate). Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both.)

1.9.1 On July1, Year 2, a company decided to adopt IFRS. The company's first IFRS reporting period is as of and for the year ended December 31, Year 2. The company will present 1 year of comparative information. What is the company's date of transition to IFRS?

January 1, Year 2 (The date of transition is "the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements, it must present at least (1) three statements of financial position, (2) two statements of comprehensive income, (3) two separate income statements (if presented), (4) two statements of cash flows, and (5) two statements of changes in equity and related notes.)

1.4.3 According to the FASB's conceptual framework, which of the following is an essential characteristic of a liability? a. Liabilities must require the obligated entity to pay cash to a recipient entity b. Liabilities must be legally enforceable c. The identity of the recipient entity must be known to the obligated entity before the time of settlement d. Liabilities represent an obligation that has arisen as the result of a previous transaction

Liabilities represent an obligation that has arisen as the result of a previous transaction (A liability has three essential characteristics: (1) It represents an obligation that requires settlement by a probable future transfer or use of assets, (2) the entity has little or no discretion to avoid the obligation, and (3) the transaction or other event giving rise to the obligation has already occurred.)

1.4.8 According to the FASB's conceptual framework, which of the following best describes the distinction between expenses and losses? a. Losses are reported new of related tax effect, and expenses are not. b. Losses are decreases in net assets, and expenses are not c. Losses are material, and expenses are immaterial d. Losses result from peripheral or incidental transactions, and expenses result from ongoing major or central operations of the entity.

Losses result from peripheral or incidental transactions, and expenses result from ongoing major or central operations of the entity (According the the FASB's conceptual framework, expenses are outflows or other uses of assets or incurrences of liabilities (or both) from (1) delivering or producing goods (2) providing services, or (3) other activities that qualify as ongoing major or central operations. Losses are decreases in equity (net assets) other than expenses r distributions to owners.)

1.5.10 Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows what accounting concept?

Matching (Matching bad debt expense with related revenues is an application of the matching principle. Matching is synonymous with associating cause and effect. It is based on a direct relationship between the expense and the revenue.)

1.3.6 According to the FASB's conceptual framework, what does the concept of faithful representation in financial reporting include?

Neutrality (Faithful representation and relevance are the fundamental qualitative characteristics of accounting information. A perfectly faithful representation is complete, neutral, and free from error. Faithfully represented information is neutral if it is unbiased in its selection or presentation of information.)

1.1.2 During the lifetime of an entity, accountants produce financial statements at arbitrary moments in time in accordance with which basic accounting concept?

Periodicity. (A basic feature of the financial accounting process is that information about the economic activities of the business should be issued at regular intervals. These time periods should be of equal length to facilitate comparability. The should also be of relatively short duration, e.g., 1 year, to provide business information useful for decision making.)

1.3.15 According to the FASB's conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called what?

Predictive Value (Relevant information is able to make a difference in user decisions. to do so, it must have predictive value, confirmatory value, or both. Financial information has predictive value if it can be used as an input in a predictive process.)

1.3.5 According to SFAC, how does predictive value relate to relevance and faithful representation?

Predictive value relates to relevance but not to faithful representation. (Faithful representation and relevance are the fundamental qualitative characteristics of accounting information. A perfectly faithful representation is complete, neutral, and free from error. Faithfully represented information is neutral if it is unbiased in its selection or presentation of information.)

1.5.18 What is the appropriate attribute for measuring noncurrent payable?

Present value of future cash flows (According to SFAC 5, the appropriate measurement attribute for noncurrent liabilities is "the present or discounted value of the future cash outflows expected to be required to satisfy the liability om die course of business.")

1.6.2 For the purpose of a fair value measurement (FVM) of an asset or liability, a transaction is assumed to occur in the _____?

Principal market if one exists (For FVM purposes, a transaction is assumed to occur in the principal market for an asset or liability if one exists. The principal market has the greatest volume or level of activity. If no such market exists, the transaction is assumed to occur in the most advantageous market.)

1.5.8 Which of the following is not a theoretical basis for the allocation of expenses? a. Systematic allocation b. Cause and effect c. Profit maximization d. Immediate recogntion

Profit maximization (Profit maximization is not a theoretical basis for the allocation of expense. The allocation of expenses on such a basis would subvert the purpose of GAAP to present fairly the results of operations and financial position because expenses would not be reported.)

1.6.4 Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet? a. Discounted cash flow of Favre's operations b. Quoted market prices available from a business broker for a similar asset c. Quoted market prices on a stock exchange for an identical asset d. Historical performance and return on Driver's investment in Favre

Quoted market prices on a stock exchange for an identical asset (In the fair value hierarchy, Level 1 inputs are the most reliable. They are unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.)

1.6.3 The fair value measurement (FVM) of an asset: a. Assumes transfer, not a settlement b. Is based on the expected use by the reporting entity c. Reflects the highest and best use by market participants d. Includes the entity's own credit risk

Reflects the highest and best use by market participants (The FVM is based on the highest and best use (HBU) by market participants. This use maximizes the value of the asset. The HBU is in-use if the value-maximizing use is in combination with other assets in a group. An example is machinery. The HBU is in-exchange if the value-maximizing use is as a standalone asset. An example is a financial asset.)

1.3.3 According to the FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of useful financial information with one of its aspects? a. Relevance and Materiality b. Relevance and Neutrality c. Faithful Represenation and Predictive Value d. Faithful Representation and Confirmatory Value

Relevance & Materiality (Relevance is a fundamental qualitative characteristic, and materiality is an entity-specific aspect of relevance. Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Information is material if its omission or misstatement can influence user decisions based on a specific entity's financial information.)

1.5.20 According to the FASB's conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

Replacement Cost (The measurement attribute that results in reporting assets at the cash amount (or equivalent) that would have to be paid currently for them.)

1.3.8 According to the FASB's conceptual framework, which of the following most likely does not violate the concept of faithful representation? a. Financial statements were issued 9 months late b. Report data on segments having the same expected risks and growth rate to analiyst's estimating future profit c. Financial statements included property with a carrying amount increased to management's estimate of market value d. Management reports to shareholders regularly refer to new projects undertaken, but the financial statements never report project results

Report data on segments having the same expected risks and growth rates to analysts estimating future profits (Useful information faithfully represents the economic phenomena that it purports to represent. A representation is perfectly faithful if it is complete (containing what is needed for user understanding), neutral (unbiased in its selection or presentation) and free from error. The faithful representation of any given information is logically unrelated to whether the segments have the same expected risks as growth rates (assuming freedom from error) or the identity of the users.)

1.5.12 Which of the following is an example of the expense recognition principle of associating cause and effect? a. Allocation of insurance cost b. Sales commissions c. Depreciation of fixed assets d. Officer's salaries

Sales commissions (if a direct cause-and-effect relationship can be established between costs and revenues, the costs should be recognized as expenses when the related revenue is recognized. Costs of products sold or services provided and sales commissions are examples of costs that can be associated with specific revenues.)

1.5.9 Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is: a. Salesperson's monthly salaries b. Salesperson's commissions c. Transportation to customers d. Prepaid insurance

Salesperson's monthly salary (Expenses should be recognized when there is a consumption of benefit. The consumption of benefit may occur when the expenses are matched with the revenues, when they are allocated on a systematic and rational basis to the periods in which the related assets are expected to provide benefits, or in the period in which the cash is spent or liabilities are incurred for goods and services that are used up either simultaneously with the acquisition or soon after. An example of a cost that cannot be directly related to particular revenues but which is incurred to obtain benefits that are exhausted in the same period in which the cost is incurred is salesperson's monthly salary.)

1.7.1 Arpco, Inc., a for profit provider of healthcare services, recently purchased two smaller companies and is researching accounting issues arising from the two business combinations. Which of the following accounting pronouncements are the most authoritative? a.FASB Accounting Standards Updates b. FASB Statements of Financial Accounting Concepts c. FASB Statements of Financial Account Standards d. The Accounting Standards Codificatioin

The Accounting Standards Codification (The FASB's Accounting Standards Codification and SEC pronouncements are the only sources of authoritative financial accounting guidance for nongovernmental entities in the U.S. All other sources of guidance are nonauthoritative.)

1.5.16 Which of the following is not a basis for the immediate recognition of a cost during a period? a. The cost provides no discernible future benefit b. The cost recorded in a prior period no longer produces discernible benefits c. The federal income tax savings using the immediate write-off method exceed the savings obtained by allocating the cost to several periods d. Allocation of the cost of the basis of association with revenue or among several accounting periods is considered to serve no useful purpose

The federal income tax savings using the immediate write-off method exceed the savings obtained by allocating the cost to several periods (In applying the principles of expense recognition, costs are analyzed to determine whether they can be associated with revenue on a cause-and-effect basis, e.g. cost of goods sold. If not, a systematic and rational allocation should be attempted, e.g., depreciation. if neither principle applies, costs are recognized immediately. Accordingly, even though federal income tax savings could be obtained by the immediate write-off method, GAAP might require another treatment of the expense.)

1.4.9 The FASB's conceptual framework explains both financial and physical capital maintenance concepts. What capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?

The financial capital concept is applied to currently reported net income and to comprehensive income (The financial capital maintenance concept is the traditional basis of financial statements as well as the full set of financial statements, including comprehensive income, discussed in the conceptual framework. Under this concept, a return on investment (defined in terms of financial capital) results only if the financial amount of net assets at the end of the period exceeds the amount at the beginning after excluding the effects of transactions with owners. under a physical capital concept, a return on investment (in terms of physical capital) results only if the physical productive capacity (or the resources needed to achieve that capacity) at the end of the period exceeds the capacity at the beginning after excluding the effects of transactions with owners. The latter concept requires many assets to be measured at current (replacement) cost.)

1.2.3 Which of the following is a true statement about the objective of general-purpose financial reporting? a. Financial reporting is ordinarily focused on industries rather than individual entities. b. The objective applies only to information that is useful for investment professionals. c. Financial reporting directly measures management performance. d. the information provided relates to the entity's economic resources and claims.

The information provided relates to the entity's economic resources and claims. (The information reported relates to the entity's economic resources and claims to them (financial position) and to changes in those resources and claims)

1.2.1 According to the FASB's conceptual framework, the objective of general-purpose financial reporting is most likely based on what?

The needs of the users of the information. (The objective of general-purpose financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.)

1.1.1 What are the SFAC intended to establish?

The objectives and concepts for use in developing standards of financial accounting and reporting (SFACs do not establish accounting and reporting requirements. They are non-authoritative guidance for nongovernmental entities. SFACs describe the objectives, qualitative characteristics, and other fundamental concepts that guide the FASB in developing sound accounting principles.)

1.4.5 What is a stated purpose of SFAC 6, Elements of Financial Statements?

To define the elements necessary for presentation of financial statements of both business and not-for-profit entities (SFAC 6 defines 10 interrelated elements of financial statements that are directly related to measuring the performance and status of an entity. Of these, seven are found in statements of both business and not-for-profit entities: (1) assets, (2) liabilities, (3) equity or net assets, (4) revenues, (5) expenses, (6) gains, and (7) losses. Investments by owners, distributions to owners, and comprehensive income are elements of financial statements of business only.

1.5.11 Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?

To match the costs of production with revenues as earned (If costs benefit more than one accounting period, they should be systematically and rationally allocated to all periods benefited. This is done by capitalizing the costs and depreciating or amortizing them over the periods in which the asset helps generate revenue. The term "matching" is most narrowly defined as the expense recognition principle of associating cause and effect, but it is sometimes used more broadly (as here) to apply to the entire process of expense recognition or even of income determination.)

1.5.19 What is the purpose of information presented in notes to the financial statements?

To provide disclosures required by generally accepted accounting principles (Notes are an integral part of the basic financial statements. Notes provide information essential to understanding the financial statements, including disclosures required by GAAP.)

1.2.4 Which of the following is least likely to be accomplished by providing general-purpose financial information useful for making decision about providing resources to an entity? a. To provide information about an entity's performance through measures of earnings and its components b. to provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the entity. c. To provide sufficient information to determine the value of the entity. d. To provide information about management's performance

To provide sufficient information to determine the value of the entity (General-purpose financial reports are significantly based on estimates and do not suffice to determine the value of the entity.)

1.4.10 What is the primary purpose of the statement of financial position of a business?

To reflect items of value, debts, and net worth (In conformity with GAAP, the statement of financial position or balance sheet of a business presents three major financial accounting elements: assets (items of value), liabilities (debt), and equity (net worth). According to SFAC 6, Elements of Financial Statements, "Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events." SFAC 6 defines liabilities as "probable future sacrifices 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." SFAC 6 defines the equity of a business as "the residual interest in the assets of an entity that remains after deducting its liabilities.")

1.5.3 Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved. Recognition of revenue does not occur until when?

Until the revenue is realized and earned (According to the FASB's conceptual framework, revenues should be recognized when they are realized or realizable and earned. Revenues are realized when products, merchandise, or other assets are exchanged for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.)

1.3.11 Which of the following accounting concepts states that an accounting transaction should be supported by sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures and conclusions? a. Matching b. Verifiability c. Periodicity d. Stable monetary unit

Verifiability (Verifiability is n enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable directly or indirectly) is knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm's -length transaction between independent interests suggests that the transaction is verifiable.)

1.5.4 The Star Company is a service entity that requires customers to place their orders 2 weeks in advance. Star bills its customers on the 15th day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Star recognize revenue from its services?

When the service is provided (According to SFAC 5, revenues should be recognized when they are realized or realizable and earned. the most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers.)

1.4.2 Under SFAC No.6, Elements of Financial Statements, do interrelated elements of financial statements include distribution to owners & notes to financial statements?

interrelated elements of financial statements do include distribution to owners but do not include notes to financial statements (The elements of financial statements directly related to measuring the performance and status of business enterprises and non-business organizations are assets, liabilities, equity of a business or net assets of a non-business organization, revenues, expenses, gains, and losses. The elements of investments by owners, distributions to owners, and comprehensive income relate only to business enterprises. Information disclosed in notes or parenthetically on the face of financial statements amplifies or explains information recognized in the financial statements.)


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