Question 1

The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the
A)economic entity assumption.
B)monetary unit assumption.
C)fair value principle.
D)going concern assumption.

Accepted Answer

The going concern assumption assumes that a business will continue to operate indefinitely, and will not be sold or liquidated in the near future. A, B, and C are also important accounting assumptions, but are not related to the assumption of a business's continued existence.

Question 2

Management Discussion and Analysis (MD&A)does NOT include
A)notes to the financial statements.
B)key performance drivers.
C)the company's vision and strategy.
D)the company's capabilities (capital and other resources).

Accepted Answer

MD&A does not include notes to the financial statements, which are typically found as a separate section in the annual report. MD&A focuses on providing insights and analysis related to the performance, opportunities, and risks of the company. Key performance drivers, the company's vision and strategy, and the company's capabilities are often discussed in MD&A.

Question 3

The matching principle is best demonstrated by
A)not recognizing any expense unless some revenue is realized.
B)associating effort (expense)with accomplishment (revenue).
C)recognizing prepaid rent received as revenue.
D)measuring expenses correctly.

Accepted Answer

The matching principle dictates that expenses should be recognized in the same accounting period as the revenue they helped generate. This is best demonstrated by associating effort (expense) with accomplishment (revenue), as stated in option B. Option A is incorrect because it implies that expenses should only be recognized when revenue is realized, which is not true. Option C is also incorrect because prepaid rent received is not revenue, but a liability. Option D is too vague and does not clearly relate to the matching principle.

Question 4

Fair value (of an asset)is
A)an entry price.
B)an entity-specific measure.
C)an exit price.
D)not used when following IFRS.

Accepted Answer

Fair value is an exit price, which means it represents the amount that would be received to sell an asset or paid to transfer a liability at the measurement date. This concept is widely used in International Financial Reporting Standards (IFRS). Option A is incorrect because entry price refers to the cost of acquiring an asset, which is typically historical or original cost. Option B is incorrect because fair value is not an entity-specific measure but rather a market-based measure. Option D is incorrect because fair value is heavily used in IFRS.

Question 5

The operations of a resource company's oil sands operations results in environmental damage.While the extent of the damage cannot be determined at this time, the situation is disclosed in its financial statements.This BEST demonstrates
A)the application of professional judgement.
B)the full disclosure principle.
C)representational faithfulness.
D)good management stewardship.

Accepted Answer

The full disclosure principle requires that all relevant and necessary information for understanding a company's financial statements be included, which is why the environmental damage is disclosed even if the extent is not yet determined.

Question 6

Which of the following statements does NOT apply to the historical cost principle?
A)Historical cost represents a value at a point in time.
B)The principle does not apply to financial instruments.
C)Historical cost results from a reciprocal or two-way exchange.
D)Over time, historical cost becomes irrelevant in terms of predictive value.

Accepted Answer

The historical cost principle applies to financial instruments as well as other assets. This principle dictates that an asset is recorded on the balance sheet at its original purchase cost, which is applicable to a wide range of assets, including financial instruments.

Question 7

The economic entity assumption
A)is inapplicable to unincorporated businesses.
B)recognizes the legal aspects of business organizations.
C)requires periodic income measurement.
D)is applicable to all forms of business organizations.

Accepted Answer

The economic entity assumption is applicable to all forms of business organizations, including unincorporated businesses. It recognizes that a business is a separate economic entity from its owners and other businesses, and therefore must be accounted for separately. The assumption also requires periodic income measurement, which means that a company's financial performance must be reported on a regular basis in order to provide useful information to stakeholders. While the legal aspects of business organizations are important, they are not the primary focus of the economic entity assumption.

Question 8

Use of an allowance for doubtful accounts is an application of the
A)matching principle.
B)revenue recognition principle.
C)historical cost principle.
D)full disclosure principle.

Accepted Answer

The use of an allowance for doubtful accounts is an application of the matching principle, which requires that expenses be recognized in the same period as the related revenues. By estimating and recording an allowance for potentially uncollectible accounts, a company matches the anticipated losses with the revenues earned in the same period.

Question 9

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with the
A)full disclosure principle.
B)periodicity assumption.
C)going concern assumption.
D)economic entity assumption.
Conceptual Framework Underlying Financial Reporting 2 - 11

Accepted Answer

The periodicity assumption states that the economic life of a business can be divided into artificial time periods, such as months or years, for the purpose of preparing financial statements.

Question 10

Valuing assets at their liquidation values rather than their cost is inconsistent with the
A)periodicity assumption.
B)historical cost principle.
C)matching principle.
D)economic entity assumption.

Accepted Answer

Valuing assets at their liquidation values rather than their cost goes against the historical cost principle, which requires assets to be recorded at their original cost (or acquisition cost). The historical cost principle is one of the fundamental accounting principles that guides the accounting process. The periodicity assumption, matching principle, and economic entity assumption do not relate to the issue of valuing assets at liquidation values.

Question 11

Application of the full disclosure principle
A)is theoretically desirable but not practical because the costs of complete disclosure
Exceed the benefits.
B)is violated when important financial information is buried in the notes to the financial
Statements.
C)is demonstrated by the inclusion of information such as information about contingencies.
D)requires that the financial statements be consistent and comparable.

Accepted Answer

The full disclosure principle requires that all relevant financial information, including contingencies, be disclosed in the financial statements or notes to ensure users have a complete understanding of the company's financial position.

Question 12

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of
A)the economic entity assumption.
B)the matching principle.
C)comparability.
D)reliability.

Accepted Answer

The preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the economic entity assumption, which assumes that the parent company and its subsidiaries are one economic entity and should be treated as such for financial reporting purposes.

Question 13

Which of the following situations does NOT demonstrate an attempt at financial engineering?
A)creating complex legal arrangements and financial instruments
B)structuring debt financing so that it meets the GAAP definition of equity rather than debt
C)accounting for bona fide business transactions in a transparent manner
D)aggressively interpreting GAAP so that the impact on critical ratios is minimized

Accepted Answer

Option A, B, and D describe attempts at financial engineering by manipulating financial arrangements and accounting standards to achieve specific financial goals. Option C, however, describes standard and transparent accounting practices, which are unrelated to financial engineering.

Question 14

Management Discussion and Analysis (MD&A)is
A)notes on meetings between management and auditors.
B)internal documents not released to shareholders.
C)supplementary information included in the annual report.
D)supplementary information included in the notes to the financial statements.
Conceptual Framework Underlying Financial Reporting 2 - 13

Accepted Answer

The Management Discussion and Analysis (MD&A) is supplementary information included in the annual report, providing management's perspective on the financial results and future outlook of the company.

Question 15

Where there is a significant uncertainty with respect to the measurement of an item,
A)do not record anything in the financial statements.
B)recognize the item in the financial statements and disclose the measurement uncertainty
In the notes to the financial statements.
C)do not record anything in the financial statements but disclose the measurement
Uncertainty in the notes to the financial statements.
D)record the maximum amount in the financial statements.

Accepted Answer

When there is significant uncertainty in measurement, it is appropriate to recognize the item in the financial statements and disclose the uncertainty in the notes, providing transparency and additional context for users of the financial statements.

Question 16

When deciding whether to recognize a financial statement element (or not), and how to measure it, the accountant should
A)always use estimates.
B)record "hard" numbers and ignore "soft" numbers.
C)determine an acceptable level of uncertainty.
D)recognize a financial statement element even if it cannot be measured.

Accepted Answer

The accountant should determine an acceptable level of uncertainty when deciding whether to recognize a financial statement element and how to measure it. While estimates may be used in some cases, they should be based on reasonable assumptions and be disclosed appropriately. Ignoring "soft" numbers or recognizing elements that cannot be measured would not result in reliable financial statements.

Question 17

Fraudulent financial reporting is a business reality.While it cannot be eliminated, the risk of fraudulent reporting can be decreased.Which of the following considerations is LEAST likely to lessen that risk?
A)an independent audit committee
B)an internal audit function
C)vigilant management
D)an increased focus on tying bonuses to short-term company performance

Accepted Answer

Tying bonuses to short-term company performance can incentivize management to manipulate financial results to meet targets, potentially increasing the risk of fraudulent reporting rather than decreasing it.

Question 18

Which of the following serves as the justification for the periodic recording of depreciation expense?
A)association of efforts (expense)with accomplishments (revenue)
B)minimization of income tax liability
C)immediate recognition of an expense
D)systematic and rational allocation of cost over the periods benefited

Accepted Answer

The systematic and rational allocation of cost over the periods benefited is the primary justification for the periodic recording of depreciation expense. It allocates the cost of a long-term asset over its useful life, rather than recognizing the expense immediately, which better matches the expense with the revenue generated over that same period.

Question 19

Which of the following is NOT a good example of the matching principle?
A)A machine that produces certain goods is depreciated over its useful life.The
Depreciation expense is matched with the proceeds from the sale of those goods.
B)The entire amount of a two-year insurance premium is expensed in the first year.
C)An uncollectible receivable is written off in the year that the sale was made.
D)Recognition of revenue for which associated expenses cannot yet be determined is
Delayed until such determination can be made.

Accepted Answer

The matching principle requires expenses to be recognized in the same period as the revenues they help generate. Expensing a two-year insurance premium entirely in the first year does not match the expense with the periods it benefits.

Question 20

Principles-based GAAP is sometimes criticized for being
A)too inflexible.
B)too flexible.
C)too inconsistent.
D)too difficult for the reader to understand.

Accepted Answer

Principles-based GAAP is criticized for being too flexible because it allows for a broad range of interpretations and judgments by companies and auditors. This can lead to inconsistencies in financial reporting and make it difficult for users of financial statements to compare companies.

Quiz 1: Intermediate Accounting Volume 1

The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the

Management Discussion and Analysis (MD&A) does NOT include

The matching principle is best demonstrated by

Fair value (of an asset) is

The operations of a resource company's oil sands operations results in environmental damage.While the extent of the damage cannot be determined at this time, the situation is disclosed in its financial statements.This BEST demonstrates

Which of the following statements does NOT apply to the historical cost principle?

The economic entity assumption

Use of an allowance for doubtful accounts is an application of the

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with the

Valuing assets at their liquidation values rather than their cost is inconsistent with the

Application of the full disclosure principle

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of

Which of the following situations does NOT demonstrate an attempt at financial engineering?

Management Discussion and Analysis (MD&A) is

Where there is a significant uncertainty with respect to the measurement of an item,

When deciding whether to recognize a financial statement element (or not) , and how to measure it, the accountant should

Fraudulent financial reporting is a business reality.While it cannot be eliminated, the risk of fraudulent reporting can be decreased.Which of the following considerations is LEAST likely to lessen that risk?

Which of the following serves as the justification for the periodic recording of depreciation expense?

Which of the following is NOT a good example of the matching principle?

Principles-based GAAP is sometimes criticized for being