chap001 test bank
TRANSCRIPT
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7. )nder federal securities la$s8 the SEC has the authority to set accounting standards inthe )nited States.
True False 9. The primary responsi ility for properly applying :AA/ $hen communicating $ith
investors and creditors through nancial statements lies $ith a rm+s auditors.
True False 10. Auditors play an important role in the resource allocation process y adding credi ility
to nancial statements.
True False 11. The purpose of the conceptual frame$or- is to provide a structure and frame$or- for
a consistent set of :AA/.
True False 1!. n the )nited States the conceptual frame$or- indicates :AA/ $hen a more speci c
accounting standard does not apply.
True False 1%. ;ateriality can e a
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17. Comprehensive income is another term for net income.
True False 19. The FAS&+s conceptual frame$or- lists relevance and timeliness as the t$o
fundamental "ualitative characteristics of decision useful information.
True False !0. The monetary unit assumption re"uires that items in nancial statements e
measured in a particular monetary unit.
True False !1. The periodicity assumption re"uires that present value calculations ta-e into account
the num er of compounding periods in each year.
True False !!. =etermining fair value y calculating the present value of future cash #o$s is a level 1
type of input.
True False !%. The FAS&+s frame$or- for measuring fair value doesn+t change the situations in $hich
fair value is used under current :AA/.
True False !*. The revenue>expense approach emphasi(es determining the appropriate amounts of
revenue and expense in each reporting period.
True False !,. The asset>lia ility approach emphasi(es matching to determine $hat assets and
lia ilities should e re#ected on the alance sheet.
True False ! . n F S8 the conceptual frame$or- indicates appropriate accounting $hen a more
speci c accounting standard does not apply.
True False !5. The funding of the standard'setting odies that promulgate F S is as independent as
that underlying ).S. :AA/.
True False
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Multiple Choice Questions
!7. External decision ma-ers $ould not loo- primarily to nancial accounting informationto assist them in ma-ing decisions on?
A. :rantingcredit.
&. Capitaludgeting.
C. Selectingstoc-s.
=. ;ergers andac"uisitions.
!9. Corporations issue their shares to the investing pu lic in the?
A. 3ptiona
&. 3ption
C. 3ptionc
=. 3ptiond
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%0. The primary focus for nancial accounting information is to provide information usefulfor?
A. 3ptiona
&. 3ption
C. 3ptionc
=. 3ptiond %1. @hich of the follo$ing groups is not among the external users for $hom nancial
statements are prepared
A. Customers.
&. Suppliers.
C. Employee
s.=. All of the a ove are external users of nancial
statements. %!. @hich of the follo$ing is not true a out net operating cash #o$
A. t is the di
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%%. @hich of the follo$ing groups is not among nancial intermediaries
A. ;utual fundmanagers.
&. Financialanalysts.
C. C/As.=. Credit rating
organi(ations. %*. @hich of the follo$ing $as the rst private'sector entity that set accounting standards
in the )nited States
A. Accounting /rinciples&oard.
&. Committee on Accounting/rocedure.
C. Financial Accounting Standards&oard.
=. A C/A. %,. @hich of the follo$ing does not apply to secondary mar-ets
A. Transactions are important to the eBcient allocation of resources in oureconomy.
&. e$ resources are provided $hen shares of stoc- are sold y the corporation to theinitial o$ners.
C. Transactions help to esta lish mar-et prices for additional shares that may eissued in the future.
=. ;any investors might e un$illing to provide resources to corporations if there is noavaila le mechanism for the future sale of their stoc-s and onds to others.
% . /orite Company recogni(es revenue in the period in $hich it records an asset for the
related account receiva le8 rather than in the period in $hich the account receiva leis collected in cash. /orite+s practice is an example of?
A. Cash asisaccounting.&. Accrual
accounting.C. The matching
principle.=. Economic
entity.
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%5. @hich of the follo$ing is not a potential ene t of accrual accounting8 compared tocash' asis accounting
A. Timeliness.
&. &etter re#ecting economicactivity.
C. /eriodicity.
=. &etter matching of revenues andexpenses.
%7. n a recent annual report8 Apple Computer reported the follo$ing in one of its
disclosure notes? D@arranty Expense? The Company provides currently for theestimated cost for product $arranties at the time the related revenue is recogni(ed.D
This note exempli es Apple+s use of?
A. Conservatism.
&. The matchingprinciple.
C. eali(ationprinciple.
=. Economicentity.
%9. :AA/ is an a reviation for?
A. :enerally authori(ed accountingprocedures.
&. :enerally applied accountingprocedures.
C. :enerally accepted auditingpractices.
=. :enerally accepted accountingprinciples.
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*0. The FAS& issues accounting standards in the form of?
A. Accounting esearch&ulletins.
&. Accounting Standards)pdates.
C. Financial AccountingStandards.
=. Financial Technical&ulletins.
*1. /ronouncements issued y the Committee on Accounting /rocedures?
A. =ealt $ith speci c accounting and reportingpro lems.
&. @ere ased on exposure drafts and pu lic commentletters.
C. 3riginated from congressional studies and SECdirectives.
=. @ere the outcome of research studies and a theoreticalframe$or-.
*!. The FAS&+s standard'setting process includes8 in the correct order?
A. Exposure draft8 research8 discussion paper8 Accounting Standards)pdate.
&. esearch8 exposure draft8 discussion paper8 Accounting Standards)pdate.
C. esearch8 discussion paper8 exposure draft8 Accounting Standards)pdate.
=. =iscussion paper8 research8 exposure draft8 Accounting Standards)pdate.
*%. @hich of the follo$ing is not a provision of the /u lic Company Accounting eform
and nvestor /rotection Act of !00! 2Sar anes'3xley4 The Act?
A. Changed the entity responsi le for setting auditingstandards.&. ncreased corporate executive responsi ility for nancial
statements.C. imited nonaudit services that can e performed y auditors for
audit clients.=. Changed the entity responsi le for setting accounting
standards.
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*7. Accounting standard setting has een characteri(ed as?
A. A politicalprocess.
&. )sing the scienti cmethod.
C. /ure deductivereasoning.
=. /ure inductivereasoning.
*9. The nternational Accounting Standards &oard?
A. @as the predecessor to theASC.
&. Can overrule the FAS& $hen their policiesdisagree.
C. /romotes the use of high'"uality8 understanda le glo al accountingstandards.
=. Has its head"uarters in:eneva.
,0. @hich of the follo$ing is not a provision of the /u lic Company Accounting eform
and nvestor /rotection Act of !00!
A. Corporate executiveaccounta ility.
&. Auditorrotation.
C. etention of $or-papers.
=. All of the a ove are provisions ofthe Act.
,1. The primary professional organi(ation for those accountants $or-ing in the industry is
the?
A. AAA.
&. A C/A.C. A
.=. ;A
.
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,!. n the or$al- Agreement8 the FAS& and AS& pledged to?
A. Com ine their organi(ations to form the&)SI&.
&. ;a-e progress on speci c ;3)pro6ects.
C. Achieve convergence y the year!01,.
=. emove existing di
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,,. The primary historical reason for the FAS& reversing its positions $hen politicalpressures occur is?
A. The cost of gathering data $asprohi itive.
&. The diBculties in measurement $ere toogreat.
C. They have no authority in suchsituations.
=. The SEC did not support the FAS&position.
, . The most recent example of the political process at $or- in standard setting is the
heated de ate that occurred on the issue of?
A. /ension planaccounting.
&. Accounting for postretirement ene ts other thanpensions.
C. Accounting for usinesscom inations.
=. Accounting for stoc-' asedcompensation.
,5. ndependent auditors express an opinion on the?
A. Fairness of nancialstatements.
&. Accuracy of nancialstatements.
C. Soundness of a company+sfuture.
=. Guality of a company+smanagement.
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,7. The possi ility that the capital mar-ets+ focus on periodic pro ts may tempt acompany+s management to end or even rea- accounting rules to in#ate reportednet income is an example of?
A. An ethicaldilemma.
&. An accounting theoryissue.
C. A technical accountingissue.
=. one of the a ove iscorrect.
,9. 3ne of the elements that many elieve distinguishes a profession from other
occupations is the acceptance of responsi ility y its mem ers for the interests ofthose it serves8 $hich is often articulated in?
A. ts conceptualframe$or-.
&. ts code ofethics.
C. Federalla$s.
=. Statela$s.
0. /hase A of the ne$ conceptual frame$or- focuses on?
A. 3 6ective and "ualitativecharacteristics.
&. /resentation anddisclosure.
C. ecognition andmeasurement.
=. Elements of nancialstatements.
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1. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accountinginformation include?
A. Historicalcost.
&. eali(ation.
C. Faithfulrepresentation.
=. Fulldisclosure.
!. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accounting
information include?
A. Fulldisclosure.
&. elevance.
C. :oingconcern.
=. Historicalcost.
%. The conceptual frame$or-+s "ualitative characteristic of relevance includes?
A. /redictivevalue.
&. Jeri a ility.
C. Completeness.
=. eutrality.
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*. The conceptual frame$or-+s "ualitative characteristic of faithful representationincludes?
A. /redictivevalue.
&. eutrality.
C. Con rmatoryvalue.
=. Timeliness.
,. SFAC No .5 focuses on?
A. 3 6ectives of nancial
reporting.&. Gualitative characteristics of accounting
information.C. ecognition and measurement concepts in
accounting.=. Elements of nancial
statements. . The main issue in the de ate over accounting for employee stoc- options $as?
A. @hich employees should receiveoptions.
&. The amount of compensation expense that a company shouldrecogni(e.
C. Ho$ many options should e granted to -eyexecutives.
=. The tax conse"uences of employee stoc-options.
5. A rm+s comprehensive income al$ays?
A. s the same as its netincome.&. s greater than its net
income.C. s less than its net
income.=. Could e greater than or less than net
income.
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7. et income e"uals?
A. Assets minuslia ilities.
&. evenues minus cost of goodssold.
C. evenues minusexpenses.
=. Cash receipts minus cashpayments.
9. Enhancing "ualitative characteristics of accounting information include each of the
follo$ing except?
A. Timelines
s.&. ;aterialit
y.C. Compara ili
ty.=. Jeri a ilit
y. 50. The enhancing "ualitative characteristic of understanda ility means that information
should e understood y?
A. Those $ho are experts in the interpretation of nancialinformation.
&. Those $ho have a reasona le understanding of usiness and economicactivities.
C. Financialanalysts.
=. C/As. 51. Fundamental "ualitative characteristics of accounting information are?
A. elevance andcompara ility.&. Compara ility and
consistency.C. Faithful representation and
relevance.=. eutrality and
consistency.
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5!. Enhancing "ualitative characteristics of accounting information include?
A. elevance andcompara ility.
&. Compara ility andtimeliness.
C. )nderstanda ility andrelevance.
=. eutrality andconsistency.
5%. :ains are?
A. n#o$s from selling a product or service to acustomer.
&. ncreases in e"uity resulting from transfers of assets to the companyfrom o$ners.
C. ncreases in e"uity from peripheral transactions ofan entity.
=. one of the a ove iscorrect.
5*. @hen there is agreement et$een a measure or description and the phenomenon it
purports to represent8 information possesses $hich characteristic
A. Jeri a ility.
&. /redictivevalue.
C. Faithfulrepresentation.
=. Timeliness.
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5,. Surefeet Corporation changed its inventory valuation method. @hich characteristic is 6eopardi(ed y this change
A. Compara ility.
&. epresentationalfaithfulness.
C. Consistency.
=. Feed ac-value.
5 . Elements of nancial statements do not include?
A. ;onetary
unit.&. nvestments y
o$ners.C. Comprehensive
income.=. osses
. 55. The primary o 6ective of nancial accounting information is to provide useful
information to?
A. ;anagement.
&. Capitalproviders.
C. egulators.
=. one of thea ove.
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57. 3f the follo$ing8 the most important o 6ective for nancial reporting is to provideinformation useful for?
A. ;a-ingdecisions.
&. =etermining taxa leincome.
C. /rovidingaccounta ility.
=. ncreasing futurepro ts.
59. Constraints on "ualitative characteristics of accounting information include?
A. Timelines
s.&. :oing
concern.C. eutralit
y.=. Cost'
e
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71. ;altec Corporation has started placing its "uarterly nancial statements on its $epage8 there y reducing y 10 days the time to get information to investors andcreditors. The "ualitative concept improved is?
A. Compara ility.
&. Consistency.
C. Timeliness.
=. Faithfulrepresentation.
7!. ecogni(ing expected losses immediately8 ut deferring expected gains8 is an
example of?
A. ;ateriality.
&. Conservatism.
C. Cost'e
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7*. @hich of the follo$ing Statements of Financial Accounting Concepts de nes the 10elements of nancial statements
A. SFAC 4 .
&. SFAC 3 .
C. SFAC 5 .
=. SFAC 6 .
7,. /rimecoat Corporation could disseminate its annual nancial statements t$o days
earlier if it shifted su stantial human resources from other operations to the annualreport pro6ect. ;anagement decided the value of the earlier report $as not $orth theadded commitment of resources. The concept demonstrated is?
A. Timeliness.
&. ;ateriality.
C. elevance.
=. Cost'e
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75. Four di
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90. The assumption that in the a sence of contrary information a usiness entity $illcontinue inde nitely is the?
A. /eriodicityassumption.
&. Entityassumption.
C. :oing concernassumption.
=. Historical costassumption.
91. f a company has declared an-ruptcy8 its nancial statements li-ely violate?
A. The matching
principle.&. The reali(ation
principle.C. The sta le monetary unit
assumption.=. The going concern
assumption. 9!. @hich of the follo$ing is typically characteri(ed as a principle8 rather than an
assumption
A. /eriodicity.
&. ;onetaryunit.
C. Conservatism.
=. Fulldisclosure.
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9%. @hich of the follo$ing is not an identi ed valuation techni"ue in :AA/ regarding fairvalue measurement
A. Costapproach.
&. ;ar-etapproach.
C. Cost' ene tapproach.
=. ncomeapproach.
9*. =isclosure notes to a company+s nancial statements?
A. Are relatively unimportant facts that don+t elong in the asic nancial
statements.&. =ocument the source of nancial statement facts8 li-e literary
footnotes.C. Are an integral part of a company+s nancial
statements.=. Are irrelevant facts that are immaterial in
amount. 9,. A cause'and'e
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95. The recognition of $hich of the follo$ing expenses exempli es the application of thematching principle
A. /resident+ssalary.
&. esearch anddevelopment.
C. Cost of goodssold.
=. Advertising.
97. and $as ac"uired in !01% for a future uilding site at a cost of K*08000. The
assessed valuation for tax purposes is K!580008 a "uali ed appraiser placed its valueat K*780008 and a recent rm o
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100.
@hich of the follo$ing est demonstrates the full disclosure principle
A. The multi'step incomestatement.
&. The auditors+report.
C. The company+s taxreturn.
=. =isclosure notes to nancialstatements.
101.
The matching principle is?
A. A valuationmethod.
&. An expense recognition accountingprinciple.
C. A cash asis reportingprinciple.
=. An asset classi cationprocedure.
10!.
To meet the needs of full disclosure8 companies use supplemental information8including?
A. /arenthetical comments or modifying comments placed on the face of the nancialstatements.
&. =isclosure notes conveying additional insights a out company operations8accounting principles8 contractual agreements8 and pending litigation.
C. Supplemental nancial statements that report more detailed information than issho$n in the primary nancial statements.
=. All of the a ove arecorrect.
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10%.
Ford ;otor Company purchases services from suppliers on account and sells itsproducts to distri utors on short'term credit. As a result8 do each of these eventsalia ility approach emphasi(es?
A. @hether amounts on the alance sheet meet the de nitions of assetsand lia ilities.
&. A close relation et$een the alance sheet and the statement ofcash #o$s.
C. The distinction et$een net assets and grossassets.
=. All of the a ove arecorrect.
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10.
)nder F S8 the role of the conceptual frame$or-?
A. /rimarily involves guiding standard setters to ma-e sure that standards areconsistent $ith each other.
&. ncludes serving as a guide for practitioners $hen a speci c standard doesnot apply.
C. s less important than in ).S.:AA/.
=. Has resulted primarily from a convergence $ith ).S.:AA/.
105.
)nder F S8 the conceptual frame$or-?
A. Emphasi(es the overarching concept of the nancial statements providing a Dtrueand fair representationD of the company.
&. s not designed to provide guidance to standard setters8 ut rather only topractitioners.
C. s not designed to provide guidance to practitioners8 ut rather only tostandard setters.
=. Speci es a set of rules that determine $hat constitutes a true F Sstandard.
Matching Questions
107.
isted elo$ are ve terms follo$ed y a list of phrases that descri e or characteri(eeach of the terms. ;atch each phrase $ith the correct term.
1. /redictive valuenformation is useful in pro6ecting
cash #o$s. LLLL!. elevance /ertinent to the decision at hand. LLLL%. Con rmatoryvalue
=ecrease in e"uity due totransfers to o$ners. LLLL
*. =istri ution too$ners
nformation con rmsexpectations. LLLL
,. Timelinessnformation is availa le prior to
the decision. LLLL
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109.
isted elo$ are ve terms follo$ed y a list of phrases that descri e or characteri(eeach of the terms. ;atch each phrase $ith the correct term.
1. ;aterialityesults if an asset is sold for more
than oo- value. LLLL
!. Faithfulrepresentation
Concerns the decision'ma-ingimpact of oth the amount and nature
of an item. LLLL
%. CompletenessContains all information necessary
for faithful representation. LLLL
*. :ain The change in e"uity from
nono$ner transactions. LLLL,. Comprehensiveincome
Along $ith relevance8 afundamental decision'speci c "uality. LLLL
110.
isted elo$ are ve terms follo$ed y a list of phrases that descri e or characteri(eeach of the terms. ;atch each phrase $ith the correct term.
1. ecognitionAccounting information should e
un iased. LLLL!. Consistency mportant in analysis et$een rms. LLLL%. Cost'e
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11!.
isted elo$ are ve terms follo$ed y a list of phrases that descri e or characteri(eeach of the terms. ;atch each phrase $ith the correct term.
1. eali(ationprinciple
&asis of measurement for xedassets. LLLL
!. ;aterialityApplication of :AA/ sometimesavoided under this constraint. LLLL
%. ;atchingprinciple
ecognition of expense in the periodin $hich it is incurred to earn revenue. LLLL
*. Fulldisclosure
eporting of all information that coulda
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Alpaca Corporation had revenues of K!008000 in its rst year of operations. Thecompany has not collected on K!08000 of its sales and still o$es K!,8000 on K508000of merchandise it purchased. The company had no inventory on hand at the end ofthe year. The company paid K1,8000 in salaries. 3$ners invested K!08000 in theusiness and K!08000 $as orro$ed on a ve'year note. The company paid K!8000 ininterest that $as the amount o$ed for the year8 and paid K 8000 for a t$o'yearinsurance policy on the rst day of usiness. Alpaca has an e
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119.
Compute net income for the rst year for Tri Fecta.
1!0.
Compute the cash alance at the end of the rst year for Tri Fecta.
The follo$ing information 2K in millions4 comes from a recent annual report ofAma(on.com8 nc.?
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1!1.
Compute Ama(on+s alance in cash at the eginning of the year.
1!!.
Compute Ama(on+s total lia ilities at the end of the year.
1!%.
Compute Ama(on+s cost of goods sold for the year.
1!*.
Compute the income efore income tax for Ama(on.
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1!,.
Compare net income 2loss4 for the year to net cash #o$ from operating activities.@hy are these amounts di
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1!5.
dentify or de ne the follo$ing terms? economic entity8 going concern.
1!7.
ist the four nancial statements most fre"uently provided to external users.
1!9.
Explain and sho$ an example of ho$ the FAS&+s conceptual frame$or- is needed informulating standards on controversial topics.
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1%0.
@hat is the SEC and ho$ is it involved $ith accounting standard setting
1%1.
@hat is the E TF and $hat is its purpose
1%!.
Accounting standard setting has een characteri(ed as a political process. =iscussthis proposition giving an example.
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1%%.
@hat are the -ey provisions of the /u lic Company Accounting eform and nvestor/rotection 2Sar anes'3xley4 Act of !00!
1%*.
@ith respect to the nancial statements8 $hat is the value of an audit
1%,.
@hat provisions did the /u lic Company Accounting eform and nvestor /rotection2Sar anes'3xley4 Act of !00! ma-e for performance of nonaudit services y an auditrm
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1%.
&rie#y descri e ho$ materiality is featured in the conceptual frame$or-.
1%5.
:ive an example of a violation of the sta le monetary unit assumption. Ho$ $ould ita
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1%9.
dentify or de ne the follo$ing terms? historical cost8 reali(ation.
1*0.
Ho$ does :AA/ de ne fair value
1*1.
3ver time8 accounting standards have developed to re#ect changes in the usiness$orld as $ell as changes in our a ility to account for such changes. )sing theexample of mar-ing assets and lia ilities to their fair value8 explain $hy you $ouldexpect accounting standards to change.
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1*!.
ist and rie#y descri e the ve measurement attri utes used commonly in current:AA/.
1*%.
ist and rie#y descri e the three levels of inputs descri ed in the fair'valuemeasurement hierarchy.
1**.
Contrast the asset>lia ility and revenue>expense approaches to accounting standardsetting.
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1*,.
Contrast the role of the conceptual frame$or- in ).S. :AA/ and F S.
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Chapter 01 Environment and Theoretical Structure of Financial
Accounting Ans$er ey
True / False Questions
1. The primary function of nancial accounting is to provide relevant nancialinformation to parties external to usiness enterprises.
TRUE AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1To/ic: Fin nci ! Accounting Environ"ent
!. Accrual accounting attempts to measure revenues and expenses that occurredduring accounting periods so they e"ual net operating cash #o$.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: ' E s&
(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1To/ic: C sh versus Accru ! Accounting
%. The FAS& is currently the pu lic'sector organi(ation responsi le for settingaccounting standards in the )nited States.
FALSE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !
.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
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*. The FAS&+s due process invites various interested parties to indicate their opinionsa out $hether nancial accounting standards should e changed.
TRUE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic !
/rocess1To/ic: The Est #!ish"ent o- Accounting St n. r.s
,. Accounting for stoc-' ased compensation is an area in $hich the FAS& has receivedlittle political interference.
FALSE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic ! /rocess1
To/ic: The Est #!ish"ent o- Accounting St n. r.s
. The /u lic eform and nvestor /rotection Act of !00! 2Sar anes'3xley4 changedthe entity responsi le for setting auditing standards in the )nited States.
TRUE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
5. A rules' ased approach to standard setting stresses professional 6udgment asopposed to follo$ing a list of rules.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
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7. )nder federal securities la$s8 the SEC has the authority to set accountingstandards in the )nited States.
TRUE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
9. The primary responsi ility for properly applying :AA/ $hen communicating $ithinvestors and creditors through nancial statements lies $ith a rm+s auditors.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s& (e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
10. Auditors play an important role in the resource allocation process y addingcredi ility to nancial statements.
TRUE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: ' E s&
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
11. The purpose of the conceptual frame$or- is to provide a structure and frame$or-for a consistent set of :AA/.
TRUE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+6 E /! in the /ur/ose o- the conce/tu ! -r "e ork1
To/ic: The Conce/tu ! Fr "e ork
1!. n the )nited States the conceptual frame$or- indicates :AA/ $hen a morespeci c accounting standard does not apply.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
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B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+6 E /! in the /ur/ose o- the conce/tu ! -r "e ork1To/ic: The Conce/tu ! Fr "e ork
1%. ;ateriality can e au !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
1*. According to the FAS&+s Statements of Financial Accounting Concepts8 conservatismis a desired "ualitative characteristic of accounting information.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
1 . evenues are in#o$s or other enhancements of assets or settlements of lia ilitiesfrom activities that constitute the entity+s ongoing operations.
TRUE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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!1. The periodicity assumption re"uires that present value calculations ta-e intoaccount the num er of compounding periods in each year.
FALSE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1
To/ic: 2n.er!&ing Assu"/tions
!!. =etermining fair value y calculating the present value of future cash #o$s is alevel 1 type of input.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s& (e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.e
ccounting /r ctice1To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
!%. The FAS&+s frame$or- for measuring fair value doesn+t change the situations in$hich fair value is used under current :AA/.
TRUE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
!*. The revenue>expense approach emphasi(es determining the appropriate amountsof revenue and expense in each reporting period.
TRUE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +','+ Contr st revenueDe /ense //ro ch n. n ssetD!i #i!it& //ro ch to ccounting
st n. r. setting1To/ic: Evo!ving 8AAP
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!,. The asset>lia ility approach emphasi(es matching to determine $hat assets andlia ilities should e re#ected on the alance sheet.
FALSE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +','+ Contr st revenueDe /ense //ro ch n. n ssetD!i #i!it& //ro ch to ccounting
st n. r. setting1To/ic: Evo!ving 8AAP
! . n F S8 the conceptual frame$or- indicates appropriate accounting $hen a morespeci c accounting standard does not apply.
TRUE
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +','' $iscuss the /ri" r& .i erences #et een 21S1 8AAP n. IFRS ith res/ect to the.eve!o/"ent o- ccounting st n. r.s n. the conce/tu ! -r "e ork un.er!&ing ccounting st n. r.s1
To/ic: Intern tion ! Fin nci ! Re/orting St n. r.s
!5. The funding of the standard'setting odies that promulgate F S is as independentas that underlying ).S. :AA/.
FALSE
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +','' $iscuss the /ri" r& .i erences #et een 21S1 8AAP n. IFRS ith res/ect to the.eve!o/"ent o- ccounting st n. r.s n. the conce/tu ! -r "e ork un.er!&ing ccounting st n. r.s1
To/ic: Intern tion ! Fin nci ! Re/orting St n. r.s
Multiple Choice Questions
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!7. External decision ma-ers $ould not loo- primarily to nancial accountinginformation to assist them in ma-ing decisions on?
A. :rantingcredit.
B. Capitaludgeting.
C. Selectingstoc-s.
=. ;ergers andac"uisitions.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: ' E s&
(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1
To/ic: Fin nci ! Accounting Environ"ent
!9. Corporations issue their shares to the investing pu lic in the?
A. 3ptiona
&. 3ption
C. 3ptionc
=. 3ptiond
AACSB: Refective Thinking
AICPA FN: Re/ortingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1
To/ic: Fin nci ! Accounting Environ"ent
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%0. The primary focus for nancial accounting information is to provide informationuseful for?
A. 3ptiona
&. 3ption
C. 3ptionc
=. 3ptiond
AACSB: Refective Thinking AICPA FN: Re/orting
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1To/ic: Fin nci ! Accounting Environ"ent
%1. @hich of the follo$ing groups is not among the external users for $hom nancialstatements are prepared
A. Customers.
&. Suppliers.
C. Employees.
. All of the a ove are external users of nancialstatements.
AACSB: Refective Thinking
AICPA FN: Re/ortingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1
To/ic: Fin nci ! Accounting Environ"ent
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%!. @hich of the follo$ing is not true a out net operating cash #o$
A. t is the di
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$i%cu!t&: e.iu"(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1
To/ic: Fin nci ! Accounting Environ"ent
%,. @hich of the follo$ing does not apply to secondary mar-ets
A. Transactions are important to the eBcient allocation of resources in oureconomy.
B. e$ resources are provided $hen shares of stoc- are sold y the corporation tothe initial o$ners.
C. Transactions help to esta lish mar-et prices for additional shares that may eissued in the future.
=. ;any investors might e un$illing to provide resources to corporations if thereis no availa le mechanism for the future sale of their stoc-s and onds toothers.
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1To/ic: Fin nci ! Accounting Environ"ent
% . /orite Company recogni(es revenue in the period in $hich it records an asset forthe related account receiva le8 rather than in the period in $hich the accountreceiva le is collected in cash. /orite+s practice is an example of?
A. Cash asisaccounting.
B. Accrualaccounting.
C. The matchingprinciple.
=. Economicentity.
AACSB: Refective Thinking
AICPA FN: Re/ortingB!oo"s: Cre te
$i%cu!t&: ' E s& (e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
To/ic: C sh versus Accru ! Accounting
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%5. @hich of the follo$ing is not a potential ene t of accrual accounting8 compared tocash' asis accounting
A. Timelines
s.&. &etter re#ecting economicactivity.
C. /eriodicity.
=. &etter matching of revenues andexpenses.
AACSB: Refective Thinking
AICPA FN: Re/ortingB!oo"s: Cre te
$i%cu!t&: ' E s& (e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
To/ic: C sh versus Accru ! Accounting
%7. n a recent annual report8 Apple Computer reported the follo$ing in one of itsdisclosure notes? D@arranty Expense? The Company provides currently for theestimated cost for product $arranties at the time the related revenue isrecogni(ed.D This note exempli es Apple+s use of?
A. Conservatism.
B. The matchingprinciple.
C. eali(ationprinciple.
=. Economicentity.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
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%9. :AA/ is an a reviation for?
A. :enerally authori(ed accountingprocedures.
&. :enerally applied accountingprocedures.C. :enerally accepted auditing
practices.. :enerally accepted accounting
principles.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
*0. The FAS& issues accounting standards in the form of?
A. Accounting esearch&ulletins.
B. Accounting Standards)pdates.
C. Financial AccountingStandards.
=. Financial Technical
&ulletins. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
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*1. /ronouncements issued y the Committee on Accounting /rocedures?
A. =ealt $ith speci c accounting and reportingpro lems.
&. @ere ased on exposure drafts and pu lic commentletters.C. 3riginated from congressional studies and SEC
directives.=. @ere the outcome of research studies and a theoretical
frame$or-.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
*!. The FAS&+s standard'setting process includes8 in the correct order?
A. Exposure draft8 research8 discussion paper8 Accounting Standards)pdate.
&. esearch8 exposure draft8 discussion paper8 Accounting Standards)pdate.
C. esearch8 discussion paper8 exposure draft8 Accounting Standards)pdate.
=. =iscussion paper8 research8 exposure draft8 Accounting Standards
)pdate. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
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*%. @hich of the follo$ing is not a provision of the /u lic Company Accounting eformand nvestor /rotection Act of !00! 2Sar anes'3xley4 The Act?
A. Changed the entity responsi le for setting auditing
standards.&. ncreased corporate executive responsi ility for nancialstatements.
C. imited nonaudit services that can e performed y auditors foraudit clients.
. Changed the entity responsi le for setting accountingstandards.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !
.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
**. C/As are licensed y?
A. TheA C/A.
&. TheSEC.
C. The federalgovernment.
. Stategovernments.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
*,. @hich of the follo$ing has the statutory authority to set accounting standards inthe )nited States
A. FAS&.&. S.C. SEC.=. A C/A.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
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B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
* . @hen a registrant company su mits its annual ling to the SEC8 it uses?
A. Form 10'A.
B. Form 10'.
C. Form 10'G.
=. Form S'1.
AACSB: Refective Thinking
AICPA FN: Re/ortingB!oo"s: Re"e"#er
$i%cu!t&: ' E s& (e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !
.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
*5. The most li-ely important #a$ leading to the demise of the A/& $as the perceivedlac- of?
A. Con denc
e.&. Competence.
C. ndependence.
=. mportance.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !
.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
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*7. Accounting standard setting has een characteri(ed as?
A. A politicalprocess.
&. )sing the scienti cmethod.C. /ure deductive
reasoning.=. /ure inductive
reasoning.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic ! /rocess1
To/ic: The Est #!ish"ent o- Accounting St n. r.s
*9. The nternational Accounting Standards &oard?
A. @as the predecessor to theASC.
&. Can overrule the FAS& $hen their policiesdisagree.
C. /romotes the use of high'"uality8 understanda le glo al accountingstandards.
=. Has its head"uarters in
:eneva. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
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,0. @hich of the follo$ing is not a provision of the /u lic Company Accounting eformand nvestor /rotection Act of !00!
A. Corporate executive
accounta ility.&. Auditorrotation.
C. etention of $or-papers.
. All of the a ove are provisions ofthe Act.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !
.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
,1. The primary professional organi(ation for those accountants $or-ing in the industryis the?
A. AAA.
&. A C/A.C. A
.
. ;A.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: The $eve!o/"ent o- Fin nci ! Accounting n. Re/orting St n. r.s
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,!. n the or$al- Agreement8 the FAS& and AS& pledged to?
A. Com ine their organi(ations to form the&)SI&.
&. ;a-e progress on speci c ;3)pro6ects.C. Achieve convergence y the year
!01,.. emove existing di
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,*. The most political issue in the FAS&+s most recent deli erations and amendmentsto :AA/ on usiness com inations $as?
A. The negative e
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, . The most recent example of the political process at $or- in standard setting is theheated de ate that occurred on the issue of?
A. /ension plan
accounting.&. Accounting for postretirement ene ts other thanpensions.
C. Accounting for usinesscom inations.
=. Accounting for stoc-' asedcompensation.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: e.iu"
(e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic !
/rocess1To/ic: The Est #!ish"ent o- Accounting St n. r.s
,5. ndependent auditors express an opinion on the?
A. Fairness of nancialstatements.
&. Accuracy of nancialstatements.
C. Soundness of a company+sfuture.
=. Guality of a company+smanagement.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
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,7. The possi ility that the capital mar-ets+ focus on periodic pro ts may tempt acompany+s management to end or even rea- accounting rules to in#ate reportednet income is an example of?
A. An ethicaldilemma.&. An accounting theory
issue.C. A technical accounting
issue.=. one of the a ove is
correct.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: e.iu"
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
,9. 3ne of the elements that many elieve distinguishes a profession from otheroccupations is the acceptance of responsi ility y its mem ers for the interests ofthose it serves8 $hich is often articulated in?
A. ts conceptualframe$or-.
B. ts code ofethics.
C. Federalla$s.
=. Statela$s.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
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0. /hase A of the ne$ conceptual frame$or- focuses on?
A. 3 6ective and "ualitativecharacteristics.
&. /resentation anddisclosure.C. ecognition and
measurement.=. Elements of nancial
statements.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+6 E /! in the /ur/ose o- the conce/tu ! -r "e ork1To/ic: The Conce/tu ! Fr "e ork
1. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accountinginformation include?
A. Historicalcost.
&. eali(ation.
C. Faithfulrepresentation.
=. Full
disclosure.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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!. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accountinginformation include?
A. Full
disclosure.B. elevance.
C. :oingconcern.
=. Historicalcost.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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*. The conceptual frame$or-+s "ualitative characteristic of faithful representationincludes?
A. /redictive
value.B. eutrality.
C. Con rmatoryvalue.
=. Timeliness.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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. The main issue in the de ate over accounting for employee stoc- options $as?
A. @hich employees should receiveoptions.
B. The amount of compensation expense that a company shouldrecogni(e.
C. Ho$ many options should e granted to -eyexecutives.
=. The tax conse"uences of employee stoc-options.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: e.iu"
(e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic ! /rocess1
To/ic: The Est #!ish"ent o- Accounting St n. r.s
5. A rm+s comprehensive income al$ays?
A. s the same as its netincome.
&. s greater than its netincome.
C. s less than its netincome.
. Could e greater than or less than net
income. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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7. et income e"uals?
A. Assets minuslia ilities.
&. evenues minus cost of goodssold.C. evenues minus
expenses.=. Cash receipts minus cash
payments.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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50. The enhancing "ualitative characteristic of understanda ility means thatinformation should e understood y?
A. Those $ho are experts in the interpretation of nancial
information.B. Those $ho have a reasona le understanding of usiness and economicactivities.
C. Financialanalysts.
=. C/As.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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5!. Enhancing "ualitative characteristics of accounting information include?
A. elevance andcompara ility.
B. Compara ility andtimeliness.
C. )nderstanda ility andrelevance.
=. eutrality andconsistency.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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5*. @hen there is agreement et$een a measure or description and the phenomenonit purports to represent8 information possesses $hich characteristic
A. Jeri a ilit
y.&. /redictivevalue.
C. Faithfulrepresentation.
=. Timeliness.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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5 . Elements of nancial statements do not include?
A. ;onetaryunit.
&. nvestments yo$ners.C. Comprehensive
income.=. osses
.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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57. 3f the follo$ing8 the most important o 6ective for nancial reporting is to provideinformation useful for?
A. ;a-ing
decisions.&. =etermining taxa leincome.
C. /rovidingaccounta ility.
=. ncreasing futurepro ts.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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70. According to the conceptual frame$or-8 veri a ility implies?
A. egalevidence.
&. ogic.C. Consensu
s.=. egal
verdict.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: e.iu"
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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7!. ecogni(ing expected losses immediately8 ut deferring expected gains8 is anexample of?
A. ;aterialit
y.B. Conservatism.
C. Cost'e
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7*. @hich of the follo$ing Statements of Financial Accounting Concepts de nes the 10elements of nancial statements
A. SFAC
4 .&. SFAC 3 .
C. SFAC 5 .
. SFAC 6 .
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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7 . ;ega oan Company has very stringent credit re"uirements and8 accordingly8 hasnegligi le losses from uncollecti le accounts. The company+s independentaccountants did not protest $hen8 contrary to :AA/8 the company recorded adde t expense only $hen speci c accounts $ere determined to e uncollecti le8rather than use an allo$ance for uncollecti le accounts. The concept demonstratedis?
A. Compara ility.
&. Faithfulrepresentation.
C. Cost'e
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77. An important argument in support of historical cost information is?
A. elevance.
&. /redictive "uality for future cash#o$s.C. ;aterialit
y.. Jeri a ilit
y.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1To/ic: 2n.er!&ing Assu"/tions
79. The conceptual frame$or-+s recognition and measurement concepts recogni(e$hich of the follo$ing as an assumption8 rather than a principle
A. :oingconcern.
&. Historicalcost.
C. Fulldisclosure.
=. eali(atio
n.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1To/ic: 2n.er!&ing Assu"/tions
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90. The assumption that in the a sence of contrary information a usiness entity $illcontinue inde nitely is the?
A. /eriodicity
assumption.&. Entityassumption.
C. :oing concernassumption.
=. Historical costassumption.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1
To/ic: 2n.er!&ing Assu"/tions
91. f a company has declared an-ruptcy8 its nancial statements li-ely violate?
A. The matchingprinciple.
&. The reali(ationprinciple.
C. The sta le monetary unitassumption.
. The going concern
assumption.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1To/ic: 2n.er!&ing Assu"/tions
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9!. @hich of the follo$ing is typically characteri(ed as a principle8 rather than anassumption
A. /eriodicit
y.&. ;onetaryunit.
C. Conservatism.
. Fulldisclosure.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1
To/ic: 2n.er!&ing Assu"/tions
9%. @hich of the follo$ing is not an identi ed valuation techni"ue in :AA/ regardingfair value measurement
A. Costapproach.
&. ;ar-etapproach.
C. Cost' ene tapproach.
=. ncomeapproach.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
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9*. =isclosure notes to a company+s nancial statements?
A. Are relatively unimportant facts that don+t elong in the asic nancialstatements.
&. =ocument the source of nancial statement facts8 li-e literaryfootnotes.C. Are an integral part of a company+s nancial
statements.=. Are irrelevant facts that are immaterial in
amount.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
9,. A cause'and'e
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9 . The full disclosure principle re"uires a alance et$een?
A. Compara ility andconsistency.
B. elevance and cost'e
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97. and $as ac"uired in !01% for a future uilding site at a cost of K*08000. Theassessed valuation for tax purposes is K!580008 a "uali ed appraiser placed itsvalue at K*780008 and a recent rm o
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100. @hich of the follo$ing est demonstrates the full disclosure principle
A. The multi'step incomestatement.
&. The auditors+report.C. The company+s tax
return.. =isclosure notes to nancial
statements.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
101. The matching principle is?
A. A valuationmethod.
B. An expense recognition accountingprinciple.
C. A cash asis reportingprinciple.
=. An asset classi cation
procedure. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
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10!. To meet the needs of full disclosure8 companies use supplemental information8including?
A. /arenthetical comments or modifying comments placed on the face of the
nancial statements.&. =isclosure notes conveying additional insights a out company operations8accounting principles8 contractual agreements8 and pending litigation.
C. Supplemental nancial statements that report more detailed information than issho$n in the primary nancial statements.
. All of the a ove arecorrect.
AACSB: Refective Thinking
AICPA FN: Re/ortingB!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.e
ccounting /r ctice1To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
10%. Ford ;otor Company purchases services from suppliers on account and sells itsproducts to distri utors on short'term credit. As a result8 do each of these eventsa
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10*. The revenue>expense approach emphasi(es?
A. ecognition of revenues 2typically applying the reali(ationprinciple4.
&. ecognition of expenses 2typically applying the matchingprinciple4.C. The income
statement.. All of the a ove are
correct.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +','+ Contr st revenueDe /ense //ro ch n. n ssetD!i #i!it& //ro ch to ccountingst n. r. setting1
To/ic: Evo!ving 8AAP
10,. The asset>lia ility approach emphasi(es?
A. @hether amounts on the alance sheet meet the de nitions of assetsand lia ilities.
&. A close relation et$een the alance sheet and the statement ofcash #o$s.
C. The distinction et$een net assets and grossassets.
=. All of the a ove are
correct. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +','+ Contr st revenueDe /ense //ro ch n. n ssetD!i #i!it& //ro ch to ccountingst n. r. setting1
To/ic: Evo!ving 8AAP
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10 . )nder F S8 the role of the conceptual frame$or-?
A. /rimarily involves guiding standard setters to ma-e sure that standards areconsistent $ith each other.
B. ncludes serving as a guide for practitioners $hen a speci c standard doesnot apply.
C. s less important than in ).S.:AA/.
=. Has resulted primarily from a convergence $ith ).S.:AA/.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +','' $iscuss the /ri" r& .i erences #et een 21S1 8AAP n. IFRS ith res/ect to the.eve!o/"ent o- ccounting st n. r.s n. the conce/tu ! -r "e ork un.er!&ing ccounting st n. r.s1
To/ic: Intern tion ! Fin nci ! Re/orting St n. r.s
105. )nder F S8 the conceptual frame$or-?
A. Emphasi(es the overarching concept of the nancial statements providing aDtrue and fair representationD of the company.
&. s not designed to provide guidance to standard setters8 ut rather only topractitioners.
C. s not designed to provide guidance to practitioners8 ut rather only tostandard setters.
=. Speci es a set of rules that determine $hat constitutes a true F S
standard. AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +','' $iscuss the /ri" r& .i erences #et een 21S1 8AAP n. IFRS ith res/ect to the.eve!o/"ent o- ccounting st n. r.s n. the conce/tu ! -r "e ork un.er!&ing ccounting st n. r.s1
To/ic: Intern tion ! Fin nci ! Re/orting St n. r.s
Matching Questions
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107. isted elo$ are ve terms follo$ed y a list of phrases that descri e orcharacteri(e each of the terms. ;atch each phrase $ith the correct term.
1. /redictive valuenformation is useful in pro6ecting
cash #o$s. ! !. elevance /ertinent to the decision at hand. " %. Con rmatoryvalue
=ecrease in e"uity due to transfersto o$ners. #
*. =istri ution too$ners nformation con rms expectations. $
,. Timelinessnformation is availa le prior to the
decision. %
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: e.iu"
(e rning )#*ective: +',+6 E /! in the /ur/ose o- the conce/tu ! -r "e ork1(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"entsTo/ic: The Conce/tu ! Fr "e ork
To/ic: 2n.er!&ing Assu"/tions
109. isted elo$ are ve terms follo$ed y a list of phrases that descri e orcharacteri(e each of the terms. ;atch each phrase $ith the correct term.
1. ;ateriality
esults if an asset is sold for more
than oo- value. #
!. Faithfulrepresentation
Concerns the decision'ma-ingimpact of oth the amount and nature
of an item. !
%. CompletenessContains all information necessary
for faithful representation. $
*. :ain The change in e"uity from nono$ner
transactions. % ,. Comprehensiveincome
Along $ith relevance8 a fundamentaldecision'speci c "uality. "
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: e.iu"
(e rning )#*ective: +',+6 E /! in the /ur/ose o- the conce/tu ! -r "e ork1(e rning )#*ective: +',+? I.enti-& the o#*ective n. u !it tive Ch r cteristics o- Fin nci ! Re/orting n. E!e"ents o- Fin nci ! St te"ents
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110. isted elo$ are ve terms follo$ed y a list of phrases that descri e orcharacteri(e each of the terms. ;atch each phrase $ith the correct term.
1. ecognition
Accounting information should e
un iased. % !. Consistency mportant in analysis et$een rms. # %. Cost'e
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11!. isted elo$ are ve terms follo$ed y a list of phrases that descri e orcharacteri(e each of the terms. ;atch each phrase $ith the correct term.
1. eali(ation
principle &asis of measurement for xed assets. % !. ;ateriality
Application of :AA/ sometimesavoided under this constraint. "
%. ;atchingprinciple
ecognition of expense in the period in$hich it is incurred to earn revenue. $
*. Fulldisclosure
eporting of all information that coulda
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To/ic: The Conce/tu ! Fr "e ork
11*. isted elo$ are ve terms follo$ed y a list of phrases that descri e orcharacteri(e each of the terms. ;atch each phrase $ith the correct term y placingthe letter designating the est term in the space provided y the phrase.
1. E"uity3ut#o$s of resources to generate
revenues. $ !. =istri utions too$ners et assets. ! %. Expenses Cash dividends. " *. nvestments yo$ners
Transfers of resources in exchangefor common and preferred stoc-. #
,. ia ilitiesClaims of creditors against the assets
of a usiness. %
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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11 . isted elo$ are 10 organi(ations follo$ed y a list of phrases that descri e orcharacteri(e the organi(ations. ;atch each phrase $ith the correct organi(ation yplacing the num er designating the est term in the space provided y the phrase.
1. FAF egulates the nancial reporting for pu liccompanies. $
!. FAS&Sets accounting standards in the )nited
States. " %. SEC Sets glo al accounting standards. &
*. ;Aational organi(ation of certi ed pu lic
accountants. '
,. /CA3&/rovides timely responses to nancial
reporting issues. (
. A C/AEsta lishes auditing standards in the ).S for
pu lic companies. %
5. ASC/rimary national organi(ation of accountants
$or-ing in industry. # 7. AS& /arent organi(ation of the AS&. )
9. E TF FAS&+s predecessor.!
* 10. A/& The FAS&+s parent organi(ation. !
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !.eve!o/"ent o- ccounting st n. r.s inc!u.ing convergence #et een 21S1 n. intern tion ! st n. r.s1
To/ic: $e0ne 8AAP n. .iscuss the historic ! .eve!o/"ent o- ccounting st n. r.s@ inc!u.ing the convergence#et een 8AAP n. IFRS
Short Answer Questions
Alpaca Corporation had revenues of K!008000 in its rst year of operations. Thecompany has not collected on K!08000 of its sales and still o$es K!,8000 onK508000 of merchandise it purchased. The company had no inventory on hand atthe end of the year. The company paid K1,8000 in salaries. 3$ners investedK!08000 in the usiness and K!08000 $as orro$ed on a ve'year note. The
company paid K!8000 in interest that $as the amount o$ed for the year8 and paidK 8000 for a t$o'year insurance policy on the rst day of usiness. Alpaca has ane
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115. Compute net income for the rst year for Alpaca Corporation.
AACSB: An !&tic AICPA FN: e sure"ent
B!oo"s: A//!& $i%cu!t&: e.iu"
(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1To/ic: C sh versus Accru ! Accounting
117. Compute the cash alance at the end of the rst year for Alpaca Corporation.
AACSB: An !&tic AICPA FN: e sure"ent
B!oo"s: A//!& $i%cu!t&: e.iu"
(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1To/ic: C sh versus Accru ! Accounting
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Tri Fecta8 a partnership8 had revenues of K% 08000 in its rst year of operations. The partnership has not collected on K%,8000 of its sales and still o$es K*08000 onK1,08000 of merchandise it purchased. There $as no inventory on hand at the endof the year. The partnership paid K!,8000 in salaries. The partners investedK*08000 in the usiness and K!,8000 $as orro$ed on a ve'year note. Thepartnership paid K%8000 in interest that $as the amount o$ed for the year and paidK78000 for a t$o'year insurance policy on the rst day of usiness.
119. Compute net income for the rst year for Tri Fecta.
AACSB: An !&tic AICPA FN: e sure"ent
B!oo"s: A//!& $i%cu!t&: e.iu"
(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1To/ic: C sh versus Accru ! Accounting
1!0. Compute the cash alance at the end of the rst year for Tri Fecta.
AACSB: An !&tic
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AICPA FN: e sure"ent B!oo"s: A//!&
$i%cu!t&: e.iu"(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
To/ic: C sh versus Accru ! Accounting
The follo$ing information 2K in millions4 comes from a recent annual report ofAma(on.com8 nc.?
1!1. Compute Ama(on+s alance in cash at the eginning of the year.
&eginning alance in Cash N et increase in Cash O Ending alance in Cash Therefore8 &eginning alance in Cash O Ending alance in Cash ' et increase inCashO K180!! ' 9 O K1801%
AACSB: An !&tic
AICPA FN: e sure"ent B!oo"s: A//!&
$i%cu!t&: e.iu"(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
To/ic: C sh versus Accru ! Accounting
1!!. Compute Ama(on+s total lia ilities at the end of the year.
Total assets O Total lia ilities N Total stoc-holders+ e"uity Therefore8 Total lia ilities O Total assets ' Total stoc-holders+ e"uity OK*8% % '*%1 O K%89%!
AACSB: An !&tic
AICPA FN: e sure"ent B!oo"s: A//!&
$i%cu!t&: ' E s& (e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
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To/ic: C sh versus Accru ! Accounting
1!%. Compute Ama(on+s cost of goods sold for the year.
:ross pro t O et sales ' Cost of goods sold Therefore8 Cost of goods sold O et sales ' :ross pro tO K108511 ' !8*, O K78!,,
AACSB: An !&tic
AICPA FN: e sure"ent B!oo"s: A//!&
$i%cu!t&: ' E s& (e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
To/ic: C sh versus Accru ! Accounting
1!*. Compute the income efore income tax for Ama(on.
et income O :ross pro t ' 3perating expenses N 3ther income 2expense48 netO K!8*, ' !80 5 N 21!4 O K%55
AACSB: An !&tic
AICPA FN: e sure"ent B!oo"s: A//!&
$i%cu!t&: ' E s& (e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1
To/ic: C sh versus Accru ! Accounting
1!,. Compare net income 2loss4 for the year to net cash #o$ from operating activities.@hy are these amounts di
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To/ic: C sh versus Accru ! Accounting
1! . For each of the follo$ing situations8 state $hether you agree or disagree $ith thenancial reporting practice employed8 and rie#y explain the reason for yourans$er.
1. Cantor Corporation+s accountant increased the oo- value of a patent from itsoriginal cost of K1 million to its recently appraised value of K million.!. Stanton Corporation paid for the personal travel of its chief nancial oBcer andcharged travel expense.%. At the end of its !01% scal year8 =o$er8 nc.8 received an order from a customerfor K 08000. The merchandise $ill ship early in !01*. &ecause the sale $as madeto a long'time customer and the invoice $as paid in !01%8 the controller recordedthe sale in !01%.*. n the middle of its !01% scal year8 Sanguinetti8 nc.8 paid K1!8000 to itsinsurance company for one'year comprehensive insurance coverage. Sanguinettirecorded the entire expenditure as an expense in !01%.
,. The Churchill /harmaceutical Company included a note in its nancialstatements that descri ed a pending la$suit against the company.. The =aily Corporation8 a company $hose securities are pu licly traded8 preparesmonthly8 "uarterly8 and annual nancial statements for internal use utdisseminates to external users only the annual nancial statements.
1. =isagree. This is a violation of the historical cost 2original transaction value4principle.!. =isagree. This is a violation of the economic entity assumption.%. =isagree. This is a violation of the reali(ation 2revenue recognition4 principle.*. =isagree. This is a violation of the matching principle.,. Agree. The company is conforming to the full disclosure principle.. =isagree. This is a violation of the periodicity assumption.
AACSB: An !&tic
AICPA FN: $ecision kingB!oo"s: A//!&
$i%cu!t&: e.iu"(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1
To/ic: 2n.er!&ing Assu"/tions
Essay Questions
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1!5. dentify or de ne the follo$ing terms? economic entity8 going concern.
Economic entity? All economic events can e identi ed $ith a particular economic
entity.:oing concern? n the a sence of information to the contrary8 it is anticipated that ausiness entity $ill continue to operate inde nitely.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1To/ic: 2n.er!&ing Assu"/tions
1!7. ist the four nancial statements most fre"uently provided to external users.
&alance sheet8 ncome statement8 Statement of cash #o$s8 Statement ofshareholders+ e"uity.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1To/ic: C sh versus Accru ! Accounting
1!9. Explain and sho$ an example of ho$ the FAS&+s conceptual frame$or- is needed informulating standards on controversial topics.
n order to provide consistency8 a conceptual frame$or- 2a map clearly de ningeliefs or structure4 must e provided. This is the foundation for a strong8 logical8and fair system. For example8 in de ating accounting for stoc-' asedcompensation8 the FAS&+s conceptual frame$or- explains the rationale for treatingstoc- options as an expense. &y relating the accounting for such compensation tothe purpose of nancial statements and their "ualitative characteristics8 the FAS&can defend its positions $ithout the ias inherent in such controversial issues.
AACSB: Refective Thinking AICPA FN: $ecision king
B!oo"s: 2n.erst n.$i%cu!t&: 3 = r.
(e rning )#*ective: +',+6 E /! in the /ur/ose o- the conce/tu ! -r "e ork1
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To/ic: The Conce/tu ! Fr "e ork
1%0. @hat is the SEC and ho$ is it involved $ith accounting standard setting
The Securities and Exchange Commission is a federal agency that has the authorityto set accounting standards. Ho$ever8 the SEC has al$ays delegated the tas- to aprivate'sector ody8 such as the current FAS&.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic ! /rocess1
To/ic: The Est #!ish"ent o- Accounting St n. r.s
1%1. @hat is the E TF and $hat is its purpose
The Emerging ssues Tas- Force 2E TF4 acts as a lter for the FAS&. t includes 1,individuals from pu lic accounting and private industry along $ith a representativefrom the FAS& and an SEC o server. The tas- force focuses on emerging issues andattempts to reach a consensus8 speeding up the standard'setting process.
AACSB: Refective Thinking
AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+4 E /! in h& the est #!ish"ent o- ccounting st n. r.s is ch r cteri;e. s /o!itic ! /rocess1
To/ic: The Est #!ish"ent o- Accounting St n. r.s
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1%!. Accounting standard setting has een characteri(ed as a political process. =iscussthis proposition giving an example.
Changes in :AA/ can have signi cant di
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1%*. @ith respect to the nancial statements8 $hat is the value of an audit
3utside auditors add credi ility to nancial statements8 increasing the con dence
of capital mar-et participants $ho rely on nancial statements in ma-inginvestment and credit decisions and recommendations.
AACSB: Refective Thinking AICPA FN: $ecision king
B!oo"s: 2n.erst n.$i%cu!t&: e.iu"
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
1%,. @hat provisions did the /u lic Company Accounting eform and nvestor /rotection2Sar anes'3xley4 Act of !00! ma-e for performance of nonaudit services y an
audit rm
The la$ ma-es it unla$ful for the auditors of pu lic companies to perform a varietyof nonaudit services for audit clients. /rohi ited services include oo--eeping8internal audit outsourcing8 appraisal or valuation services8 and various otherconsulting services. 3ther nonaudit services8 including tax services8 re"uirepreapproval y the audit committee of the company eing audited.
AACSB: Refective Thinking AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: e.iu"
(e rning )#*ective: +',+5 E /! in - ctors th t encour ge high,u !it& Fin nci ! Re/orting
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1% . &rie#y descri e ho$ materiality is featured in the conceptual frame$or-.
;aterialityP nformation is material if it can have an eor the nature of an item. t $ould pro a ly e material if ;icrosoftreceived K180008000 in ri es from a Chinese company for its technology. AK180008000 $rite'o< of old e"uipment $ould pro a ly e immaterial for ;icrosoft.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: 2n.erst n.$i%cu!t&: 3 = r.
(e rning )#*ective: +',+? I.enti-& the o#*ective n.
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1%7. dentify or de ne the follo$ing terms? periodicity8 monetary unit.
/eriodicityPThe life of a company can e divided into arti cial periods to provide
timely information to external users.;onetary unitP n the )nited States8 nancial statement elements should emeasured in terms of the ).S. dollar. t assumes that the value of a dollar is sta leover time.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1To/ic: 2n.er!&ing Assu"/tions
1%9. dentify or de ne the follo$ing terms? historical cost8 reali(ation.
Historical costPA measurement attri ute under $hich asset and lia ilitymeasurements are ased on the amount given or received in an exchangetransaction.eali(ationP evenue should e recogni(ed only after the earnings process isvirtually complete and there is reasona le certainty of collecting the asset to ereceived from the customer.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: ' E s&
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: $escri#e the recognition@ "e sure"ent n. .isc!osure conce/ts th t gui.e ccounting /r ctice
1*0. Ho$ does :AA/ de ne fair value
Fair value is de ned as the price that $ould e received to sell assets or paid totransfer a lia ility in an orderly transaction et$een mar-et participants at themeasurement date.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Re"e"#er $i%cu!t&: e.iu"
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(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: Recognition@ e sure"ent@ n. $isc!osure Conce/ts
1*1. 3ver time8 accounting standards have developed to re#ect changes in the usiness$orld as $ell as changes in our a ility to account for such changes. )sing the
example of mar-ing assets and lia ilities to their fair value8 explain $hy you $ouldexpect accounting standards to change.
Historically8 nancial accounting relied on transaction amounts 2historical cost4 asthe fundamental measurement approach for reporting assets and lia ilities. Asmar-ets have matured8 it is more relevant and feasi le to report some assets andlia ilities at their fair values8 particularly if such items have a ready mar-et that isactive.
AACSB: Refective Thinking AICPA BB: Critic ! Thinking
B!oo"s: Cre te$i%cu!t&: e.iu"
(e rning )#*ective: +',+ $escri#e the recognition "e sure"ent n. .isc!osure conce/ts th t gui.eccounting /r ctice1
To/ic: $escri#e the recognition@ "e sure"ent n. .isc!osure conce/ts th t gui.e ccounting /r ctice
1*!. ist and rie#y descri e the ve measurement attri utes used commonly in current:AA/.
a. Historical cost? the amount given or received in an exchange transaction.. et reali(a le value? the amount of cash