Deck 2: Conceptual Framework Underlying Financial Accounting

Question 1

A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.

Answer 1

False

Question 2

Use of a sound conceptual framework in the development of accounting principles will make financial statements of all entities comparable because alternative accounting methods for similar transactions will be eliminated.

Answer 2

False

Question 3

Accounting theory is developed without consideration of the environment within which it exists.

Answer 3

False

Question 4

Information that has been measured and reported in a similar manner for different enterprises is considered comparable.

Question 5

The fact that equity represents an ownership interest and a residual claim against the net assets of an enterprise means that in the event of liquidation, creditors have a priority over owners in the distribution of assets.

Question 6

The three elements assets, liabilities, and equity describe transactions, events, and circumstances that affect an enterprise during a period of time.

Question 7

The going concern assumption is generally applicable in most business situations unless liquidation appears imminent.

Question 8

The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information.

Question 9

Recognition of revenue when cash is collected is appropriate only when it is impossible to establish the revenue figure at the time of sale because of the uncertainty of collection.

Question 10

Under the matching principle, it is possible to have an expense reported on the income statement in one period and the cash payment for that expense reported in another period.

Question 11

The full disclosure principle states that information should be provided when it is of sufficient importance to influence the judgment and decisions of an informed user.

Question 12

The notes to financial statements generally summarize the items presented in the main body of the statements.

Question 13

When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements.

Question 14

The peculiar nature of some industries and concerns sometimes requires departure from basic theory.

Question 15

Which of the following is not a benefit associated with the FASB Conceptual Framework Project?

A) A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.
B) Practical problems should be more quickly solvable by reference to an existing conceptual framework.
C) A coherent set of accounting standards and rules should result.
D) Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

Question 16

Which of the following is not an objective of financial reporting?

A) To provide information about economic resources, the claims to those resources, and the changes in them.
B) To provide information that is helpful to investors and creditors and other users in assessing the amounts, timing, and uncertainty of future cash flows.
C) To provide information that is useful to those making investment and credit decisions.
D) All of these are objectives of financial reporting.

Question 17

According to Statement of Financial Accounting Concepts No. 2, timeliness is an ingredient of the primary quality of

Question 18

According to Statement of Financial Accounting Concepts No. 2, verifiability is an ingredient of the primary quality of

Question 19

Under Statement of Financial Accounting Concepts No. 2, representational faithfulness is an ingredient of the primary quality of

Question 20

Which of the following violates the concept of reliability?

A) The management report refers to new discoveries and inventions made, but the financial statements never report the results.
B) Financial statements included goodwill with a carrying amount estimated by management.
C) Financial statements were issued one year late.
D) An interim report is not issued even though it would provide feedback on past performance.

Question 21

If accounting information is verifiable, representationally faithful, and neutral, it can be considered

A) relevant.
B) timely.
C) comparable.
D) reliable.

Question 22

The major objective of the consistency principle is to

A) provide timely financial information for statement users.
B) promote comparability between financial statements of different accounting periods.
C) match the appropriate revenues and expenses in a given accounting period.
D) be sure the same information is disclosed in each accounting period.

Question 23

Comprehensive income as characterized in SFAC No. 6 includes all changes in equity during a period except

A) sale of assets other than inventory.
B) those resulting from investments by or distribution to owners.
C) sales to a particular entity where ultimate payment by the entity is doubtful.
D) those resulting from revenue generated by a totally owned subsidiary.

Question 24

One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to

A) revenues minus expenses plus gains minus losses.
B) revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners.
C) revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities.
D) none of these.

Question 25

According to the FASB Conceptual Framework, the elements assets, liabilities, and equity describe amounts of resources and claims to resources at/during a

Question 26

The economic entity assumption in accounting is best reflected by which of the following statements?

A) When a parent and subsidiary company are merged for accounting and reporting purposes, the economic entity assumption is violated.
B) The best way to truly measure the results of enterprise activity is to measure them at the time the enterprise is liquidated.
C) The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit.
D) A business enterprise is in business to enhance the economic well being of its owners.

Question 27

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

Question 28

In accounting, an economic entity may be defined as

A) a business enterprise.
B) an individual.
C) a division within a business enterprise.
D) all of the above.

Question 29

Although many objections have been raised about the historical cost principle, it is still widely supported for financial reporting because it

A) is an objectively determinable amount.
B) is a good measure of current value.
C) facilitates comparisons between years.
D) takes into account price-level adjusted information.

Question 30

Under the revenue recognition principle, revenue is generally recognized when the earning process is virtually complete and

A) an exchange transaction has occurred.
B) the merchandise has been ordered.
C) all expenses have been identified.
D) the accounting process is virtually complete.

Question 31

Which of the following is an incorrect statement regarding the matching principle?

A) Expenses are recognized when they make a contribution to revenue.
B) Costs are never charged to the current period as an expense simply because no connection with revenue can be determined.
C) In recognizing expenses, accountants attempt to follow the approach of let the expense follow the revenue.
D) If no direct connection appears between costs and revenues, but the costs benefit future years, an allocation of cost on some systematic and rational basis might be appropriate.

Question 32

The concept referred to by the matching principle is that

A) current liabilities have the same period of existence as the current assets.
B) all cash disbursements for a period be matched to cash receipts for the period.
C) net income should be reported on a quarterly basis.
D) where possible the expenses to be included in the income statement were incurred to produce the revenues.

Question 33

In complying with the full disclosure principle, an accountant must determine the amount of disclosure necessary. How much disclosure is enough?

A) Information sufficient for a person without any knowledge of accounting to understand the statements.
B) All information that might be of interest to an owner of a business enterprise.
C) Information that is of sufficient importance to influence the judgment and decisions of an informed user.
D) Information sufficient to permit most persons coming in contact with the statements to reach an accurate decision about the financial condition of the enterprise.

Question 34

Which of the following statements concerning the cost-benefit relationship is not true?

A) Business reporting should exclude information outside of management's expertise.
B) Management should not be required to report information that would significantly harm the company's competitive position.
C) Management should not be required to provide forecasted financial information.
D) If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.

Question 35

According to the FASB's conceptual framework, predictive value is an ingredient of