Deck 2: Financial Reporting: Its Conceptual Framework

Question 1

Three phases of the convergence project were put on hold they were elements and recognition, measurement, and presentation and disclosure.

Answer 1

False

Question 2

What is the goal of FASB and IASB in the creation of the conceptual framework?

A) To develop standards that are internally consistent.
B) To develop standards that are internationally converged.
C) To develop standards that lead to financial reporting that provides clear consistent information to capital providers.
D) All of these choices

Answer 2

D

Question 3

Management's stewardship is to provide information about how a company's cash flows cause changes in the company's resources and claim's.

Answer 3

False

Question 4

The first part of the conceptual framework project had to do with establishing which projects?

A) elements
B) objectives
C) qualitative characteristics
D) recognition and measurement

Question 5

To measure assets, liabilities, revenues, expenses, and other elements of the financial statements with the most relevant and faithful measurement available is the mixed attribute measurement model.

Question 6

The accounting projects portion of the FASB's conceptual framework project deals with

A) which accounting elements should be reported and how they should be measured
B) which accounting elements should be reported and where the information should be reported
C) how the accounting elements should be measured and how information should be displayed in financial reports
D) when accounting elements should be recognized and how information should be displayed in financial reports

Question 7

Relevance and faithful representation are the ultimate objectives of accounting information.

Question 8

Liquidity is positively related to financial flexibility but negatively related to risk and return on investments.

Question 9

The eight phases of the joint FASB and IASB framework project are: 1) objective and qualitative characteristics, 2) elements and recognition, 3) presentation and disclosure, 4) reporting entity, 5) measurement, 6) framework for GAAP hierarchy, 7) applicability to the not-for-profit sector, and 8) any remaining issues needing to be addressed.

Question 10

The rules for accounting are based upon concepts, and principles which broad and subject to an interpretation.

Question 11

According to GAAP, which is not a specific objective?

A) to provide information about an enterprise's cash flows
B) to provide information that is useful to present to potential investors, creditors, and other users in making rational investment, credit, and similar decisions
C) to provide information about an enterprise's comprehensive income and its components
D) to provide information about an enterprise's economic resources, obligations, and owners' equity

Question 12

The primary purpose of financial reporting is to provide useful and relevant information to the internal stakeholder's of the company.

Question 13

The FASB and IASB concluded that the most general objective of financial reporting is to

A) provide information useful in the decisions made by external users
B) meet the needs of internal users
C) provide information about an entity's earnings
D) provide information about an entity's cash flows

Question 14

Which of the following statements is not true with regard to the benefits derived from the FASB's conceptual framework of accounting?

A) It serves as a guide in establishing standards for the FASB.
B) The Statements of Financial Accounting Concepts is the primary source of GAAP for accountants.
C) It establishes the objectives of financial reporting.
D) It enhances comparability between different company's financial statements.

Question 15

Accounting principles are theories, truths, and propositions that service as the basis for financial accounting and reporting.

Question 16

Information is communicated to external users by the management of the company. Those users cannot dictate desired financial results to the company.

Question 17

The accounting projects portion of the FASB's conceptual framework project deals with all of the following except

A) how elements should be measured
B) when various elements should be reported
C) which accounting elements should be reported
D) how financial reports should be displayed

Question 18

Management discussion and analysis would be included in the supplementary information to the financial statements.

Question 19

Which of the following items is NOT included in FASB's conceptual framework of accounting theory?

A) qualities of useful accounting information
B) fundamental principles and assumptions that guide financial accounting and reporting
C) objectives of financial reporting
D) All of these choices are included in the conceptual framework

Question 20

Oil and gas reserves information would be included within the financial statements.

Question 21

Which qualitative characteristic is an ingredient of relevance?

A) understandability
B) materiality
C) neutrality
D) representational faithfulness

Question 22

Which of the following statements regarding financial flexibility is true?

A) It is the ability of a company to provide a return on investment.
B) It is the ability of a company to take effective actions to insure the return of capital to the company.
C) It is the ability of a company to take adapt changes in the amounts and timing of cash flows.
D) It is the ability of a company to maintain a given level of operations.

Question 23

Long Corporation has adopted the policy of charging to expense at the time of purchase all assets having a cost of less than $200, regardless of the life expectancy of the asset. This policy is most closely related to the

A) historical cost principle
B) period-of-time assumption
C) verifiability principle
D) materiality principle

Question 24

Which of the following is a specific objective of financial reporting?

A) provide information that is useful to investors in making investment decisions
B) provide information useful in assessing the amounts, timing, and uncertainty of prospective cash receipts
C) provide information useful in assessing the amounts, timing, and uncertainty of prospective cash inflows
D) provide information about a company's resources and the claims against the company

Question 25

In order to be relevant, accounting information should have

A) timeliness
B) verifiability
C) confirmatory value
D) All of these choices

Question 26

The IASB and FASB boards have agreed that the objective of general purpose financial reporting is to provide

A) financial information about a company that is useful to investors, lenders and other creditors
B) mainly cash flow information about a company that is useful to external users in making decisions in their capacity as capital providers
C) financial information about a company that is useful to internal users in making decisions in their capacity as capital custodians
D) financial information about a company that is used by government regulators for taxation

Question 27

Similar to the constraints in the FASB's qualitative characteristics, the joint IASB/FASB boards have identified which constraint

A) consistency
B) benefits that justify the costs
C) materiality
D) objectivity

Question 28

A constraint mentioned by GAAP on qualitative characteristics is

A) understandability
B) timeliness
C) faithful representation
D) benefits greater than costs

Question 29

In its "Objectives of Financial Reporting by Business Enterprises" the FASB identified a variety of primary users including all of the following except

A) internal management
B) investors
C) creditors
D) security analysts

Question 30

Information about comprehensive income is useful to external users for all of the following purposes except

A) evaluating management's performance
B) examining cash flows for the current period
C) predicting future income
D) assessing the risk of lending to the company

Question 31

Which of the following items would most likely be a violation of the materiality constraint?

A) A company did not separately report an unusual gain of $100,000. Its income from operations was $20,000,000.
B) A company having reported total assets of $50,000,000 immediately expensed the purchase of 20 pencil sharpeners that have an estimated useful life of three years.
C) A $75,000 illegal bribe by an executive of the company to a foreign official was not separately disclosed in the annual report.
D) A $2,000 expenditure to improve a building that originally cost $10,000,000 was immediately expensed.

Question 32

Intracompany comparability would be violated if

A) a company used LIFO as its inventory cost method while other companies in the same industry used FIFO
B) a company changed its bad debts expense estimate from one percent to two percent
C) a bank did not classify its assets as current assets and noncurrent assets
D) a company expenses all expenditures of less than $500 even if the expenditures result in probable future economic benefit

Question 33

Which fundamental characteristic is an ingredient of faithful representation?

A) predictive value
B) confirmatory value
C) timeliness
D) neutrality

Question 34

Which of the following are considered enhancing characteristics of accounting information?

A) verifiability and confirmatory value
B) predictive value and timeliness
C) comparability and consistency
D) representational faithfulness and neutrality

Question 35

What is the ultimate objective of accounting information?

A) faithful representation
B) decision usefulness
C) relevance
D) predictive value

Question 36

According to the FASB hierarchy of fundamental qualitative characteristics, the two primary qualities making accounting information useful are

A) understandability and decision usefulness
B) relevance and faithful representation
C) verifiability and neutrality
D) predictive value and feedback value

Question 37

When investors and creditors make investment and credit decisions, they need information to assist them in assessing future cash receipts. Their focus is on assessing the potential of generating

A) a return of investment of capital
B) a return on investment of capital
C) both a return of and a return on investment of capital
D) neither a return of nor a return on investment of capital

Question 38

Which of the following types of information was specifically identified by the FASB as being useful in assessing the amounts, timing, and uncertainty of a company's future cash flows?

A) liquidity
B) return of investment
C) financial capability
D) credit standing

Question 39

Which of the following fundamental qualitative characteristics may have to be sacrificed in order to achieve timeliness?

A) relevance
B) verifiability
C) comparability
D) predictive value

Question 40

Accrual accounting relates the financial effects of a company's transactions

A) so that the costs of nonoperational events are matched to the balance sheet in the period impacted
B) to the period in which they occur rather than to when the cash receipts or payment occurs
C) so that the revenue impact of every transaction in a period is properly reflected in the income statement
D) so that the impact of every transaction is reflected in the statement of cash flows

Question 41

How many phases of the FASB / IASB convergence project are there?

A) 6
B) 8
C) 3
D) over 10

Question 42

The materiality of an item of financial information refers to the likelihood that its omission or misstatement would affect the decisions of those relying on that information and thus make differing choices if the information had been presented. This concept most closely relates to the

A) financial magnitude of the item
B) verifiability of the item
C) neutrality of the item
D) confirmatory value of the item

Question 43

Understandability is a characteristic that is

A) a secondary and interactive quality
B) a threshold for recognition
C) an overall quality
D) an enhancing quality

Question 44

The city of Anchorage sold land for its appraised value to the Big Bear Oil Company on June 1, 2014, that originally cost the city $950,000. On June 1, 2014, the land was appraised at a value of $1,400,000, and on December 31, 2014, the land's value was estimated to be $1,450,000. On Big Bear Oil Company's balance sheet at December 31, 2014, the land should be valued at

A) $1,400,000
B) $1,450,000
C) $950,000
D) $0

Question 45

All of the following items are classified as accounting assumptions and conventions except for

A) going concern
B) timeliness
C) monetary unit
D) reporting entity

Question 46

Which of the following sets includes only accounting assumptions and conventions?

A) timeliness, prudence, historical cost, and neutrality
B) matching, comparability, period of time, and faithful representation
C) monetary unit, going concern, relevance, and materiality
D) monetary unit, entity, going concern, and recognition

Question 47

The IASB and FASB joint boards have identified the primary user groups of financial information as all of the following except

A) equity investors
B) labor groups
C) lenders
D) other creditors capital providers)

Question 48

What additional supplementary information should be included as part of the financial statements under GAAP?

A) Economic statistics
B) Notes to financial statements
C) Letters to Stockholder's
D) Management Discussion and Analysis

Question 49

Using the straight-line method to amortize patents is an application of expense recognition using

A) cause and effect
B) a systematic and rational allocation over time
C) immediate consumption
D) the percentage-of-completion method

Question 50

Which one of the following assumptions or principles most logically supports the preparation of a single set of consolidated financial statements that combines the financial information of several wholly owned but separately identifiable businesses?

A) historical cost
B) industry practices
C) reporting entity
D) materiality

Question 51

Using an allowance method of accounting to recognize uncollectible accounts receivable is an application of which accounting convention?

A) revenue recognition
B) historical cost
C) matching principle
D) period of time

Question 52

The joint IASB and FASB boards identified several "enhancing" decision useful characteristics of financial information including

A) comparability, verifiability, timeliness, and understandability
B) materiality, verifiability, timeliness, and understandability
C) comparability, verifiability, timeliness, and materiality
D) comparability, relevance, timeliness, and understandability

Question 53

What three phases were active under the Joint FASB and IASB convergence project but were put on hold to focus on other convergence topics?

A) Reporting entity, measurement, and presentation and disclosure
B) Framework for a GAAP hierarchy, elements and recognition , and objective and qualitative characteristics
C) Elements and recognition, measurement, presentation and disclosure
D) Measurement, reporting entity, and elements and recognition

Question 54

FASB's financial reporting model identifies which specific financial statements?

A) Statement of Shareholder's Equity
B) Statements of Net Income and Comprehensive Income
C) Statement of Financial Position
D) All of these choices

Question 55

Which of the following is a phase of the joint FASB and IASB conceptual framework project?

A) going-concern assumption
B) mixed attribute measurement
C) elements and recognition
D) period of time assumption

Question 56

What sources of information used by external decision making are directly affected by existing FASB standards?

A) Accounting Policies
B) Management Discussion and Analysis
C) Economic Statistics
D) Letters to Stockholders

Question 57

The use of the historical cost principle is justified because the resulting information has the qualitative characteristics of

A) neutrality and materiality
B) neutrality and verifiability
C) timeliness and relevance
D) verifiability and predictive value

Question 58

Expenses are recognized and matched against revenues on the basis of three principles. Which of the following is not one of these principles?

A) immediate consumption
B) associating cash flows
C) systematic and rational allocation over time
D) cause and effect

Question 59

The state legislature is currently debating a bill that, if passed, would require the Roberts Company to go out of business. Which of the following principles or assumptions related to the preparation of Roberts financial statements is most directly affected by this impending vote of the legislature?

A) going concern
B) verifiability principle
C) entity concept
D) materiality concept

Question 60

A company that uses accounting methods in preparing its tax returns that differ from the accounting methods used to prepare its financial statements is

A) in violation of the consistency principle
B) not necessarily violating either the income tax laws or generally accepted accounting principles
C) probably guilty of tax evasion
D) in violation of the relevance assumption

Question 61

The FASB and IASB describe four characteristics that enhance the decision usefulness of information that is relevant and faithfully represented. What are these characteristics and provide a brief explanation of each.
Comparability Information must be able to be compared with similar information

Question 62

Financial statements provide limited information for external users to ascertain the necessary information upon which to base decisions. What are other sources in which companies can disclose financial information to external users?

Question 63

The Framework of Financial Accounting Theory and Practice is made up based upon several objectives. Provide a brief summary of one of these objectives.

Question 64

The Conceptual Framework includes two "fundamental qualitative characteristics" that must be present for financial reporting information to be useful.
Required:
List and describe the two fundamental characteristics of usefulness.

Question 65

The task of developing the conceptual framework was so enormous that the FASB had to divide it into several projects.
Required:
A specific objective of financial reporting is to provide information about a company's economic resources and the claims on the company. In what ways is this information useful to external users?

Question 66

GAAP lists and describes the qualitative characteristics that make accounting information useful for decision-making purposes. The FASB viewed the characteristics as a hierarchy of qualities that make accounting information useful. The FASB stated that accounting information must possess both relevance and faithful representation qualities to be useful, but it was noted that relevance and faithful representation may conflict with each other in some instances. For example, to increase relevance, faithful representation may have to be sacrificed, or vice versa.
Required:
a. Define "relevance" and "faithful representation" and list the components or "ingredients" of each quality.
b. Give an example in financial accounting that illustrates the following tradeoffs:
1) Relevance is sacrificed in order to make accounting information more reliable.
2) Faithful representation is sacrificed in order to make accounting information more relevant.

Question 67

Describe the basic nature of the three expense recognition methods. Provide two examples of each.

Question 68

The primary objective if financial reporting is to provide information that is useful to external decision makers. The following is a list of types of information that are helpful in assessing expected future cash flows and statements describing those types of information..
a. Liquidity
b. Operating capability
c. Risk
d. Return on investment
e. Financial Flexibility
______ 1. The uncertainty of the future profitability of a company
______ 2. The ability of a company to use its financial resources to adapt to change.
______ 3. The ability of a company to efficiently produce goods and services for customers.
______ 4. Refers to how quickly a company can convert assets into cash.
______ 5. A measure of overall company performance for equity shareholders.
______ 6. Comes from a company's ability to raise new capital.
______ 7. Caused by factors such as technological, political, and economic change.
______ 8. Indicated by the productive capacity of long-lived assets.
______ 9. Negatively related to risk.
Required:
Match each type of information with the appropriate statement by placing the appropriate letter in the space provided.

Question 69

Information about a company helps external users assess the return a company has earned on its economic resources and form expectations about its future performance. In what ways is the information concerning the company's net income, comprehensive income and their components useful to external users?

Question 70

At lunch recently, two accountants were discussing the merits of the FASB's conceptual framework project, which resulted in the publication of seven Statements of Financial Accounting Concepts and required more than ten years of effort. One accountant thought the effort was a waste of resources, since accounting was unlike physics, chemistry, and biology, where natural laws apply. The other accountant thought the effort was very valuable. He stated that "accounting, like any other discipline, benefits from having a coherent theory."
Required:
Write a brief essay that discusses the advantages that are derived from the existence of a conceptual framework for financial accounting and reporting.

Question 71

List five of the important accounting assumptions that have had an impact on the development of generally accepted accounting principles.

Question 72

What are five types of information that are helpful in accessing the amounts, timing, and uncertainty of future cash flows?

Question 73

A list of statements follows:
a. GAAP states that the two primary qualitative characteristics that make accounting information useful for decision-making purposes are________ and____________.
b. Corporations prepare quarterly financial statements in order to help achieve
______, an ingredient of the primary quality of relevance.
c. Expensing the purchase of waste paper baskets that have a three-year estimated useful life at the date of acquisition is a permissible procedure according to the______________ constraint.
d. The three components of relevance are ____,___________, and _____.
e. is the overall qualitative______characteristic to be used in judging the quality of accounting information.
Required:
Fill in the words necessary to complete the statements.

Question 74

Discuss the purpose of the Conceptual Framework.

Question 75

Define the following terms as they relate to decision usefulness, the ultimate objective of accounting information.
a. Relevance
b. Predictive value
c. Confirmatory value
d. Materiality

Question 76

A list of statements follows:
a. _______________on_____ provides a measure of overall
company performance for equity shareholders..
b.______ is the uncertainty or unpredictability of the future results of a company.
c. is the ability of a company to take_____effective actions to change the amounts and timing of cash flows.
d. _____is the term used to describe how quickly a company can convert its assets into cash to pay a liability.
e. refers to the ability of a company to____maintain a given physical level of operations.
Required:
Fill in the words necessary to complete the statements.

Question 77

Presented below are five inappropriate accounting procedures that are being used by the Playground Equipment Corporation.
a. On the year-end balance sheet, Playground Equipment Corporation reported its inventory at market value, which was greater than cost. As a result of this procedure, a gain was recognized on the company's income statement.
b. Mrs. Devlin, the president of the company, purchased an automobile for her son using the company's money. The company's accountant recorded the expenditure as salaries expense.
c. Playground Equipment Corporation reported income from operations of $5,000,000 for the current year. During the year, Devlin settled and paid a $5,000,000 class action lawsuit against the company resulting from damages incurred from the sale of defective products. The settlement was reported as a miscellaneous expense with no footnotes provided.
d. Playground Equipment is going to issue additional common stock next year. In order to improve its income, the company switched from the LIFO inventory cost flow method to FIFO. The company did not disclose the accounting change. Comparative financial statements were prepared.
e. The company made $3,000,000 of expenditures to expand a building that originally cost
$5,000,000. The expenditures are expected to benefit operations over the building's remaining useful life of ten years. The expenditures were expensed as maintenance.
Required:
For each of the above items, list the accounting assumptions), or principles) that is are) being violated.