Deck 1: The Demand for and Supply of Financial Accounting Information

Question 1

The mission of the Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and assist in the formation of capital.

Answer 1

True

Question 2

What is Financial Reporting?

A) The process of communicating internal accounting information to existing and potential investors, creditors, lenders, and other external decision makers.
B) The process of communicating financial accounting information to existing and potential investors, creditors, lenders, and other external decision makers.
C) The process of preparing financial accounting information to existing and potential investors, managers, and employees.
D) The process of communicating the strategic plan to existing and potential investors, creditors, lenders, and other external decision makers.

Answer 2

B

Question 3

Which of the following is not a decision that external stakeholder's of a company's financial information would make?

A) whether or not to extend credit to the company
B) whether or not to hold the company's stock
C) whether or not the company should add a new product line
D) whether or not to ask for an increase in employees' benefits during union contract negotiations

Answer 3

C

Question 4

The Financial Accounting Standards Board FASB) began in 1973 after the AICPA phased out the Accounting Principles Board APB).

Question 5

As a potential equity investor, what information about a company would you be least interested in prior to making an investment decision?

A) What differentiates them from their competition?
B) Whether they are generating a profit?
C) Whether they have positive cash flows?
D) What are the employee benefits and compensation packages?

Question 6

Which of the following is an internal user of a company's financial information?

A) company treasurer
B) shareholder in the company
C) bank lending to the company
D) union

Question 7

The Codification is set up as a system of levels starting with sections, topics, and subtopics.

Question 8

After formulating a strategic plan, a company will engage in what three types of activities?

A) Planning, operating, and selling
B) Investing, operating, and selling
C) Financing, investing, and operating
D) Operating, planning, and financing

Question 9

The statement of shareholders' equity reports the effects from the recognition or valuation of certain asset or liability transactions that change Accumulated Other Comprehensive Income.

Question 10

The Codification was established to assist in reducing the time necessary to research an accounting issue and improve the ability to utilize accounting information that conforms with GAAP.

Question 11

When making decisions, equity investors are interested in assessing

A) the company's ability to generate cash flows.
B) management's ability to increase the capital providers' investments.
C) the company's ability to pay dividends.
D) All of these choices

Question 12

The demand for relevant and reliable financial information stems from the needs of the internal and external stakeholders.

Question 13

Creditors' information needs revolve around all of the following decisions, except

A) extending credit
B) maintaining a credit relationship
C) not extending credit
D) investing in credit instruments

Question 14

"Members should act in a way that will service the public interest, honor the public trust, and demonstrate commitment to professionalism." This is the Public Interest Principle of the AICPA's Code of Professional Conduct.

Question 15

A problem arising from equal information is called information asymmetry.

Question 16

The convergence project between the IASB and GAAP was initiated in 2002 when the two boards entered into the "Northward Agreement".

Question 17

A potential issue facing the convergence project is that many companies have entered into contracts based upon U.S. GAAP financial reporting; many of these contracts will have to be renegotiated using IFRS which potentially could cause some companies more harm than good.

Question 18

The SEC uses its authority to establish accounting standards, while also enforcing regulations on companies, exchanges, and investors.

Question 19

The balance sheet is a snapshot of a company's financial position at a particular date.

Question 20

"In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities." This is the Integrity Principle of the AICPA Code of Professional Conduct.

Question 21

The Financial Accounting Foundation FAF) is the parent organization of which of the following organizations?

A) AICPA American Institute of Certified Public Accountants)
B) AAA American Accounting Association)
C) SIFMA Securities Industry and Financial Markets Association)
D) FASB Financial Accounting Standards Board)

Question 22

Beginning in 1938 and extending to the present, which is the correct sequence of accounting rule-making bodies?

A) APB-CAP-FASB
B) CAP-FASB-APB
C) CAP-APB-FASB
D) FASB-APB-CAP

Question 23

Concerning FASB membership, which statement is not true?

A) Not all members are CPAs from public practice.
B) All members are full time and fully paid.
C) All members are also members of the Financial Accounting Foundation.
D) All members must sever organizational ties with their previous employer.

Question 24

Which of the following statements about the FASB Accounting Standards Codification is true?

A) It only exists as an electronic database; paper copies are not available.
B) When the Codification was adopted in 2009, it caused major changes in the contents of U.S. GAAP.
C) It is reviewed and periodically updated by the SEC.
D) It is only one of a large number of authoritative pronouncements that have been issued over time, all of which comprise U.S GAAP.

Question 25

Which of the following statements regarding Standards contained in the FASB Accounting Standards Codification ASC) is true?

A) They have the force of law, and failure to follow them can be prosecuted.
B) They apply to financial reporting by all U.S. companies.
C) They were created in 2009 when the ASC was created and did not exist prior to that time.
D) They have to be approved by the SEC before they become effective.

Question 26

The Securities and Exchange Commission has the legal authority to prescribe accounting principles and reporting practices for

A) all companies issuing publicly traded securities
B) all companies issuing any type of securities
C) all companies
D) all corporations

Question 27

What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?

A) The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.
B) The SEC coordinates with the FASB in establishing accounting standards.
C) The SEC has a mandate to establish accounting standards for corporations listed in the U.S. capital markets.
D) The SEC reviews financial statements for compliance with U.S. GAAP or IFRS.

Question 28

Which of the following statements is true?

A) In order to remain impartial, the FASB discourages public input during development of standards.
B) FASB accounting standards are the result of clearly defined objectives, an integrated body of theory, and the known consequences of actions.
C) The FASB deliberates and issues accounting standards only after receiving a formal letter of request from the SEC.
D) Accounting standards, which have economic and political consequences, are often the result of compromise.

Question 29

While formally the SEC is charged with the responsibility for establishing accounting principles to be followed in the preparation of SEC filings, the impact of the SEC generally has been

A) in its assistance to Congress with the development of tax law.
B) in guiding the development of stock exchanges.
C) ineffective in controlling foreign corporations and investors.
D) in its informal review and approval of standards developed in the private sector prior to their release.

Question 30

Information asymmetry may cause problems because management's behavior

A) may be to enhance the owners' financial interests at the expense of their self-interests.
B) will always follow classic agency law.
C) may not always be in the best interests of the owners shareholders).
D) as agents will always be in the best interests of the owners shareholders).

Question 31

Which of the following statements about the FASB Accounting Standards Codification is false?

A) The Codification is currently the only authoritative source of U.S. GAAP.
B) The purpose of creating the Codification was to simplify user access to authoritative U.S. GAAP.
C) The framework of the Codification contains six levels, which are increasingly more specific.
D) The six levels contained within the Codification framework are hierarchical in nature, such that the higher levels are considered to be more authoritative than the lower levels.

Question 32

Which organization has the most legal authority?

A) Financial Accounting Standards Board
B) Accounting Standards Executive Committee
C) Governmental Accounting Standards Board
D) Securities and Exchange Commission

Question 33

The FASB Accounting Standards Codification is expected to provide all of the following benefits except

A) to reduce the research time necessary to solve an accounting research issue.
B) to codify authoritative support such as results of academic research.
C) to provide real-time updates as new standards are issued.
D) to improve the usability of the authoritative accounting literature.

Question 34

How many FASB members currently make up the Board?

A) 5
B) 7
C) 21
D) 33

Question 35

Which of the following organizations has legal authority to prescribe accounting principles and reporting practices for all corporations issuing publicly traded securities within the U.S. capital markets?

A) Accounting Principles Board
B) Securities and Exchange Commission
C) Financial Accounting Standards Board
D) Committee on Accounting Procedure

Question 36

The primary reason that financial accounting and managerial accounting have somewhat different objectives is because they

A) need information in different formats
B) provide information for different decisions
C) need information in different geographic locations
D) need information at different times

Question 37

Which of the following is not a major standard-setting body responsible for the establishment of U.S. and International Financial Reporting Standards?

A) SEC Securities Exchange Commission)
B) PCAOB Public Company Accounting Oversight Board)
C) FASB Financial Accounting Standards Board)
D) IASB International Accounting Standards Board)

Question 38

Three major organizations in the private and public sector develop U.S. and International Financial Reporting Standards. They include all of the following except the

A) EU European Union).
B) SEC Securities and Exchange Commission).
C) FASB Financial Accounting Standards Board).
D) IASB International Accounting Standards Board).

Question 39

Which of the following is not one of the stages used by the FASB process before issuing an Accounting Standards Update?

A) Conducting research
B) Issuing an Exposure Draft
C) Obtaining approval from the SEC for the new standard
D) Holding public hearings

Question 40

The Securities Exchange Act of 1934 established extensive reporting requirements for listed companies. Which is not a commonly required report?

A) Form 10-Q. An extensive quarterly report, including financial statements.
B) Form S-2. A registration statement
C) Form 10-K. An extensive annual report, including financial statements
D) Form 8-K. A report used to describe significant events that may affect the company.

Question 41

Notes to financial statements provide

A) discussions that further explain items shown in the financial statements.
B) comparative financial information with the previous year.
C) management's discussions about plans for the future.
D) the report of the independent auditors.

Question 42

Dividends that are paid to owners would affect both the

A) balance sheet and statement of cash flows.
B) balance sheet and income statement.
C) income statement and statement of changes in equity.
D) income statement and statement of cash flows.

Question 43

What is the responsibility of the International Accounting Standards Board?

A) IASB promotes uniform accounting standards among different countries.
B) IASB settles accounting disputes between auditors and international companies.
C) IASB issues standards which regulate the financial accounting and reporting of multinational corporations and then enforces them through legal channels.
D) IASB is to develop a uniform currency in which the financial transactions would be measured.

Question 44

Certain U.S. accounting standards have been, and will be, amended to aid in the international convergence process. The process of changing these standards usually involves

A) a short deliberation followed by a vote of the U.S. Congress.
B) acceptance of the change by the Internal Revenue Service.
C) rejecting all existing standards and developing an entirely new concept.
D) selecting the best standard between existing U.S. and international standards.

Question 45

U.S. companies that have subsidiaries in foreign countries can file their financial statements with the SEC by using?

A) IFRS
B) GAAP
C) either IFRS or GAAP
D) IFRS for their subsidiaries and GAAP for their holdings in the United States.

Question 46

For foreign companies that issue securities in the United States to raise capital, the SEC

A) requires these companies to file form 20-F which reconciles certain amounts reported in their financial statements with US GAAP.
B) accepts all financial statements that use IFRS.
C) accepts only financial statements that are fully stated under US GAAP.
D) accepts financial statements from foreign companies that use English-language IFRS without exception.

Question 47

The four major financial statements of a corporation consist of the

A) income statement, balance sheet, statement of cash flows, and statement of changes in shareholders' equity.
B) balance sheet, statement of cash flows, statement of retained earnings, and income statement.
C) income statement, statement of cash flows, statement of financial flexibility, and balance sheet.
D) statement of cash flows, balance sheet, income statement, and statement of capital equity.

Question 48

What is the correct presentation of the income statement?

A) Revenues - expenses + gains - losses = Net Income
B) Revenues - expenses = Net income - losses + gains
C) Revenues - losses - expenses + gains = Net Income
D) Revenues + gains - losses - expenses = Net Income

Question 49

Conversion to IFRS reporting by all U.S. companies would be best accomplished with a transition plan for all of the following reasons except

A) it would have to be a multi-year process.
B) it needs to be an orderly process with a minimum of cost and disruption to the participants.
C) certain IFRS need further improvement through continued convergence efforts.
D) careful planning would enable maximum manipulation of the IFRS for the financial benefit of the United States.

Question 50

What important topics are discussed in the Management Discussion and Analysis section of the financial statements?

A) Business risk factors associated with the company.
B) Management provides insight into key decisions implemented during that time period and future developments.
C) Management utilizes this area as a forum to discuss strategic motives.
D) All of these choices are discussed.

Question 51

Which statement measures and reports the financial results of a company's performance for a period of time?

A) income statement
B) balance sheet
C) statement of cash flows
D) statement of financial position

Question 52

What financial statement is considered the cornerstone of financial reporting?

A) the income statement
B) the statement of cash flows
C) the statement of shareholders' equity
D) the balance sheet

Question 53

The FASB Accounting Standards Codification includes six levels or components. Which of the following is not one of those levels?

A) Area
B) Topic
C) Sub-paragraphs
D) Paragraphs

Question 54

The accounting equations is

A) Assets + Liabilities = Shareholders' Equity
B) Assets -Liabilities = Shareholders' Equity
C) Assets = Liabilities - Shareholders' Equity
D) Assets + Shareholders' Equity = Liabilities

Question 55

Which of the following is not a major standard-setting body responsible for the establishment of U.S. and international GAAP Generally Accepted Accounting Principles)?

A) SEC Securities Exchange Commission)
B) PCAOB Public Company Accounting Oversight Board)
C) FASB Financial Accounting Standards Board)
D) IASB International Accounting Standards Board)

Question 56

The agreement in 2002 by the FASB and IASB to develop high quality, compatible accounting standards that could be used by both domestic and cross-border financial reporting was called the

A) International Accounting Standards agreement
B) Financial Accounting Standards Board Global agreement
C) Norwalk agreement
D) United GAAP agreement

Question 57

What is the correct order of presentation for the statement of cash flows?

A) Operating, Investing, Financing
B) Financing, Operating, Investing
C) Investing, Financing, Operating
D) Operating, Financing, Investing

Question 58

Which of the following documents includes all of the accounting standards?

A) Regulation S-X
B) The FASB Conceptual Framework
C) Statements of Financial Accounting Standards
D) none of these

Question 59

Prior to 2009, which of the following types of FASB Pronouncements carried the highest authority within GAAP by establishing the methods and procedures required on specific accounting issues?

A) Staff Positions
B) Statements of Financial Accounting Standards
C) Statements of Financial Accounting Concepts
D) Technical Bulletins

Question 60

Which of the following statements regarding the requirement to follow U.S. GAAP in financial reporting is true?

A) U.S. GAAP has been adopted as federal law, so failure to follow U.S. GAAP is prosecuted through the federal court system.
B) U.S. GAAP has been adopted as state law in all 50 states, so failure to follow U.S. GAAP is prosecuted through the state court system.
C) U.S. GAAP represents a set of professional standards, and the requirement to follow U.S. GAAP is enforced through the AICPA Code of Professional Conduct.
D) Compliance with U.S. GAAP is not enforced; it is a voluntary choice made by most companies and by most professional accountants

Question 61

What is the responsibility of FASB?

Question 62

What are the FASB operating procedures when reviewing whether to issue a new standard?

Question 63

Which Principle of the AICPA Code of Professional Conduct is: As a member one should continually strive to improve competence and the quality of services, observe all technical and ethical standards, and provide professional responsibility to the best of his/her ability?

A) The Public Interest
B) Responsibilities
C) Scope and Nature of Services
D) Due Care

Question 64

Define:
1) What are assets?
2) What are liabilities?
3) What is shareholder's equity?
4) In which financial statement would one find assets, liabilities and shareholder's equity?

Question 65

Define:
1) What are revenues?
2) What are expenses?
3) What is net income?
4) In which financial statement would one find revenues, expenses, and net income?

Question 66

Which Principle of the AICPA Code of Professional Conduct is: A member, as a professional, should exercise sensitive and moral judgments in all their activities?

A) Objectivity and Independence
B) Integrity
C) Responsibilities
D) Due Care

Question 67

Which of the following is not considered an ethical issue in accounting?

A) Biased financial statement presentation
B) Accelerated revenue recognition
C) Earnings manipulation
D) Industry practices

Question 68

Which of the following transactions would be reported in the cash flows from investing activities section in the statement of cash flows for the Harlem Company?

A) Harlem sold a piece of land for $600,000.
B) Harlem borrowed $3,000,000
C) Harlem issued common stock for $700,000 to investors.
D) Harlem paid a cash dividend to its shareholders.

Question 69

The FASB Codification consists of six components or levels, what are the components or levels?

Question 70

What are the six areas covered in the AICPA Code of Professional Conduct?

Question 71

Which Principle of the AICPA Code of Professional Conduct is: Members should broaden and maintain public confidence by performing all of their professional responsibilities with the highest sense of honesty possible?

A) Scope and Nature of Services
B) Due Care
C) Integrity
D) Objectivity and Independence

Question 72

The stated principles of the AICPA Code of Professional Conduct do not include

A) Integrity.
B) Optimism.
C) Objectivity and Independence.
D) Responsibilities.

Question 73

Auditors face ethical issues because

A) GAAP permits various standards to be used to produce profits.
B) auditors may express an opinion that may impact employees of a company.
C) auditors may not discover insider trading.
D) GAAP does not permit fraud.

Question 74

The AICPA Code of Professional Conduct includes which of the following principles?

A) Professionalism
B) Conservatism
C) Objectivity
D) Quality

Question 75

What is the mission of the Securities and Exchange Commission? How did the SEC come into being?

Question 76

The FASB and IASB have some ambitious accounting standards projects to complete prior to their convergence. List three of the projects currently on the agenda.

Question 77

Unethical actions include which of the following?

A) polluting lakes and streams
B) overcharging on government contracts
C) securities fraud
D) All of these choices are unethical actions.

Question 78

What types of resources do companies compete for and why?

Question 79

The demand for accounting information arises from the informational needs of various stakeholders.
Required
List five internal stakeholders or external stakeholders.

Question 80

Assume you are tutoring a beginning accounting student who tells you that the members of the FASB must have a great deal of power because they have the authority to issue standards that dictate accounting procedure.
Required:
Explain why accounting standards are the result of compromise and how such compromises are reached.