Question 1

Which qualitative characteristic is an ingredient of relevance?
A) understandability
B) materiality
C) neutrality
D) representational faithfulness

Accepted Answer

Materiality is an ingredient of relevance because it refers to the importance or significance of information, which makes it relevant to the decision-making needs of users. Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.

Question 2

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.

Accepted Answer

Financial flexibility refers to a company's ability to adapt to changes in the amounts and timing of cash flows, allowing it to seize opportunities or weather financial difficulties without significant strain.

Question 3

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

Accepted Answer

The materiality principle allows companies to disregard GAAP rules for items that are insignificant to the financial statements. Long Corporation's policy of expensing assets under $200, regardless of their life expectancy, is an application of this principle, as it simplifies accounting for small-value items that would not materially impact financial statements.

Question 4

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

Accepted Answer

The answer of Which of the following is a specific...

Question 5

In order to be relevant, accounting information should have
A) timeliness
B) verifiability
C) confirmatory value
D) All of these choices

Accepted Answer

The answer of In order to be relevant, accounting information...

Question 6

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

Accepted Answer

The objective of general purpose financial reporting, as agreed upon by the IASB and FASB, is to provide financial information about a company that is useful to investors, lenders, and other creditors in making decisions related to providing resources to the entity.

Question 7

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

Accepted Answer

The joint IASB/FASB boards have identified "benefits that justify the costs" as a constraint in the development of accounting standards, emphasizing that the benefits derived from information should outweigh the costs of providing it.

Question 8

A constraint mentioned by GAAP on qualitative characteristics is
A) understandability
B) timeliness
C) faithful representation
D) benefits greater than costs

Accepted Answer

GAAP includes the constraint that the benefits of financial information should outweigh the costs of providing it.

Question 9

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

Accepted Answer

The primary users identified by the FASB in its "Objectives of Financial Reporting by Business Enterprises" include investors, creditors, and security analysts, but not internal management, as the main focus is on external users of financial information.

Question 10

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

Accepted Answer

Comprehensive income includes both net income and other items, such as unrealized gains/losses on investments and foreign currency translations. While it may provide insight into future income and the company's risk profile, it does not directly relate to examining cash flows for the current period.

Question 11

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.

Accepted Answer

C) A $75,000 illegal bribe by an executive of the company to a foreign official was not separately disclosed in the annual report. This is a significant ethical and legal issue that impacts the integrity and reputation of the company, making it material regardless of the amount relative to the company's financial position.

Question 12

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

Accepted Answer

The answer of Intracompany comparability would be violated if
A) a...

Question 13

Which fundamental characteristic is an ingredient of faithful representation?
A) predictive value
B) confirmatory value
C) timeliness
D) neutrality

Accepted Answer

Neutrality is a fundamental characteristic of faithful representation, meaning that information must be unbiased and impartial to be considered faithfully representative.

Question 14

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

Accepted Answer

Comparability and consistency are considered enhancing characteristics of accounting information, as they help users identify similarities and differences between different sets of financial data.

Question 15

What is the ultimate objective of accounting information?
A) faithful representation
B) decision usefulness
C) relevance
D) predictive value

Accepted Answer

The ultimate objective of accounting information is decision usefulness. This means that the information provided by accounting processes is intended to be useful for making economic decisions, such as investing in or lending to a company. This encompasses ensuring the information is relevant, reliable, and can assist users in making predictions about the financial performance and position of an entity.

Question 16

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

Accepted Answer

The FASB (Financial Accounting Standards Board) hierarchy of fundamental qualitative characteristics prioritizes relevance and faithful representation as the two primary qualities that make accounting information useful. Relevance ensures the information can make a difference in decision-making, while faithful representation means the information accurately reflects the economic phenomena it purports to represent.

Question 17

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

Accepted Answer

Investors and creditors are interested in both the return of their initial investment (getting their original investment back) and the return on their investment (earning a profit on their investment). This includes assessing the entity's ability to generate future cash flows to ensure both the recovery of the invested capital and the earning of a satisfactory return on that capital.

Question 18

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

Accepted Answer

The FASB specifically identified liquidity information as being useful in assessing the amounts, timing, and uncertainty of a company's future cash flows. While return of investment, financial capability, and credit standing may also be important factors in assessing a company's financial position and performance, they were not specifically identified by the FASB in this context.

Question 19

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

Accepted Answer

Verifiability may have to be sacrificed to achieve timeliness because providing information in a timely manner can sometimes mean that there hasn't been enough time to verify the information to the fullest extent.

Question 20

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

Accepted Answer

Accrual accounting records the financial effects of transactions in the period in which they occur, regardless of when cash is exchanged. This ensures that financial statements reflect the economic activity of the period accurately, rather than just the cash transactions.

Quiz 2: Financial Reporting: Its Conceptual Framework

Which qualitative characteristic is an ingredient of relevance?

Which of the following statements regarding financial flexibility is true?

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

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

In order to be relevant, accounting information should have

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

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

A constraint mentioned by GAAP on qualitative characteristics is

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

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

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

Intracompany comparability would be violated if

Which fundamental characteristic is an ingredient of faithful representation?

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

What is the ultimate objective of accounting information?

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

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

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?

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

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