Question 1

Which of the following best describes the importance of qualitative characteristics as part of the conceptual framework of financial reporting?

Accepted Answer

Relevance and representational faithfulness are fundamental qualitative characteristics that must always be present in financial reporting to ensure that the information is useful to users.

Question 2

You want to improve the qualitative characteristics of your firm's financial statements. Which of the following options would most likely improve the timeliness of your company's financial statements?

Accepted Answer

Increasing the frequency of issue from annually to quarterly would improve the timeliness of the financial statements as it would provide more up-to-date information to users. Other options, such as increasing disclosures or changing the timing of revenue recognition, may improve other qualitative characteristics such as completeness or reliability, but would not directly affect the timeliness of the financial statements. Increasing the amortization period for capital assets does not affect the financial statements directly, but rather affects how the assets are recognized over time.

Question 3

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

Accepted Answer

The periodic recording of amortization expense is justified by the systematic and rational allocation of cost over the periods benefited. This helps to match the expense with revenue earned during the corresponding period, as well as to accurately reflect the asset's decreasing value over time. Immediate recognition of an expense and minimization of income tax liability are not justifications for amortization. Association of efforts (expense) with accomplishments (revenue) is a broader concept that applies to matching all expenses with the revenue they generate, not just amortization.

Question 4

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?

Accepted Answer

Tying bonuses to short-term company performance may actually increase the risk of fraudulent financial reporting, as it can create pressure to meet certain financial targets even if it means misrepresenting the company's financial position. In contrast, the other options - an independent audit committee, an internal audit function, and vigilant management - all provide checks and balances that can help detect and prevent fraudulent reporting.

Question 5

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

Accepted Answer

When there is significant uncertainty with respect to the measurement of an item, the item needs to be recognized in the financial statements and disclosed in the notes to the financial statements. This will provide transparency to the users of the financial statements about the nature of the uncertainty and its potential impact on the financial position and performance of the entity. Option A, C and D are not appropriate as they don't provide complete and accurate information to the users of the financial statements.

Question 6

Which of the following statements about materiality is not correct?

Accepted Answer

All of these statements are correct about materiality.

Question 7

Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the

Accepted Answer

The answer of Charging off the cost of a wastebasket...

Question 8

The accounting principle of matching is best demonstrated by

Accepted Answer

The accounting principle of matching requires that expenses be recognized in the same period as the revenue they helped generate. This is the association of effort (expense) with accomplishment (revenue), which is demonstrated through the matching principle. Option A is incorrect since not all expenses are tied directly to revenue. Option C is incorrect because recognizing prepaid rent received as revenue violates the revenue recognition principle. Option D is incorrect because establishing an Appropriation for Contingencies account addresses the conservatism principle, not the matching principle.

Question 9

Schmidt Ltd.aims to improve the qualitative characteristics of its financial statements. Your assistant has presented you with options shown below.Which of those options would most likely improve the comparability of your company's financial statements?

Accepted Answer

Restating the financial statements from Canadian GAAP to US GAAP would ensure that investors who are familiar with US GAAP can easily compare the company's financial statements to other US companies. This improves comparability, which is one of the qualitative characteristics of financial reporting. The preparation of monthly financial statements (option B) may improve the timeliness of information but does not necessarily improve comparability. The introduction of a policy on amortization of capital assets (option C) may improve consistency, but again, comparability is not directly addressed. The use of foreign-trained accountants (option D) has no clear connection to improving qualitative characteristics of financial statements.

Question 10

The operations of a resource company's oil sands operations results in environmental damage.While the extent of the damage can not yet be determined, the situation is disclosed in its financial statements.This best demonstrates

Accepted Answer

The fact that the environmental damage resulting from oil sands operations is disclosed in the financial statements demonstrates the application of the full disclosure principle, which requires companies to provide all information that is relevant to the stakeholders in their financial statements.

Question 11

Application of the full disclosure principle

Accepted Answer

The full disclosure principle requires that financial statements include all information that could affect users' decisions. This includes information about contingencies, which are potential liabilities that may arise from past events but whose existence will not be confirmed until a future event occurs or fails to occur. Therefore, the inclusion of information about contingencies demonstrates the application of the full disclosure principle. Choices A, B, and D are incorrect because they are either false or do not accurately describe the full disclosure principle.

Question 12

Management Discussion and Analysis (MD&A) is

Accepted Answer

MD&A is supplementary information that management provides in the annual report to help investors better understand the company's financial performance and future prospects. It typically includes information on the company's financial condition, results of operations, and significant trends or risks. It is publicly available and disclosed to shareholders.

Question 13

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the

Accepted Answer

The allowance for doubtful accounts is based on the matching principle, as it is an estimate of bad debts related to sales made during a particular period. The matching principle requires that expenses be recognized in the same period as the revenues they help generate. By estimating the amount of bad debts related to a particular period and deducting it from accounts receivable, the allowance for doubtful accounts helps to match the expenses associated with those bad debts to the revenues that were earned in the same period.

Question 14

Information that is representationally faithful is

Accepted Answer

Representationally faithful information must be complete, neutral, and free from material error or bias in order to accurately represent reality.

Quiz 2: Conceptual Framework Underlying Financial Reporting