Chap001 Test Bank

Chapter 01
Environment and Theoretical Structure of Financial Accounting

True / False Questions

1. The primary function of fnancial accounting is to provide relevant fnancial
information to parties external to usiness enterprises.

True False

!. Accrual accounting attempts to measure revenues and expenses that occurred during
accounting periods so they e"ual net operating cash #o$.

True False

%. The FAS& is currently the pulic'sector organi(ation responsile for setting accounting
standards in the )nited States.

True False

*. The FAS&+s due process invites various interested parties to indicate their opinions
aout $hether fnancial accounting standards should e changed.

True False

,. Accounting for stoc-'ased compensation is an area in $hich the FAS& has received
little political interference.

True False

.. The /ulic 0eform and 1nvestor /rotection Act of !00! 2Saranes'3xley4 changed the
entity responsile for setting auditing standards in the )nited States.

True False

5. A rules'ased approach to standard setting stresses professional 6udgment as
opposed to follo$ing a list of rules.

True False

7. )nder federal securities la$s8 the SEC has the authority to set accounting standards in
the )nited States.

True False

9. The primary responsiility for properly applying :AA/ $hen communicating $ith
investors and creditors through fnancial statements lies $ith a frm+s auditors.

True False

10. Auditors play an important role in the resource allocation process y adding crediility
to fnancial 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!. 1n the )nited States the conceptual frame$or- indicates :AA/ $hen a more specifc
accounting standard does not apply.

True False

1%. ;ateriality can e a<ected y the dollar amount of an item8 the nature of the item8 or
oth.

True False

1*. According to the FAS&+s Statements of Financial Accounting Concepts8 conservatism is
a desired "ualitative characteristic of accounting information.

True False

1,. E"uity is a residual amount representing the o$ner+s interest in the assets of the
usiness.

True False

1.. 0evenues are in#o$s or other enhancements of assets or settlements of liailities
from activities that constitute the entity+s ongoing operations.

True False

15. :ains or losses result8 respectively8 from the disposition of usiness assets for greater
than8 or less than8 their oo- values.

True False

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 fnancial 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 numer 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>liaility approach emphasi(es matching to determine $hat assets and
liailities should e re#ected on the alance sheet.

True False

!.. 1n 1F0S8 the conceptual frame$or- indicates appropriate accounting $hen a more
specifc accounting standard does not apply.

True False

!5. The funding of the standard'setting odies that promulgate 1F0S is as independent as
that underlying ).S. :AA/.

True False

Multiple Choice Questions

!7. External decision ma-ers $ould not loo- primarily to fnancial accounting information
to assist them in ma-ing decisions on?

A. :ranting
credit.
&. Capital
udgeting.
C. Selecting
stoc-s.
=. ;ergers and
ac"uisitions.

!9. Corporations issue their shares to the investing pulic in the?

A. 3ption
a
&. 3ption
C. 3ption
c
=. 3ption
d

%0. The primary focus for fnancial accounting information is to provide information useful
for?

A. 3ption
a
&. 3ption
C. 3ption
c
=. 3ption
d

%1. @hich of the follo$ing groups is not among the external users for $hom fnancial
statements are preparedA

A. Customer
s.
&. Supplier
s.
C. Employee
s.
=. All of the aove are external users of fnancial
statements.

%!. @hich of the follo$ing is not true aout net operating cash #o$A

A. 1t is the di<erence et$een cash receipts and cash disursements from providing
goods and services.
&. 1t is a measure used in accrual accounting and is recogni(ed as the est predictor of
future operating cash #o$s.
C. 3ver short periods8 it may not e indicative of long'run cash'
generating aility.
=. 1t is easy to understand and all information re"uired to measure it
is factual.

%%. @hich of the follo$ing groups is not among fnancial intermediariesA

A. ;utual fund
managers.
&. Financial
analysts.
C. C/As.
=. Credit rating
organi(ations.

%*. @hich of the follo$ing $as the frst private'sector entity that set accounting standards
in the )nited StatesA

A. Accounting /rinciples
&oard.
&. Committee on Accounting
/rocedure.
C. Financial Accounting Standards
&oard.
=. A1C/A.

%,. @hich of the follo$ing does not apply to secondary mar-etsA

A. Transactions are important to the eBcient allocation of resources in our
economy.
&. Ce$ resources are provided $hen shares of stoc- are sold y the corporation to the
initial o$ners.
C. Transactions help to estalish mar-et prices for additional shares that may e
issued in the future.
=. ;any investors might e un$illing to provide resources to corporations if there is no
availale 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 receivale8 rather than in the period in $hich the account receivale
is collected in cash. /orite+s practice is an example of?

A. Cash asis
accounting.
&. Accrual
accounting.
C. The matching
principle.
=. Economic
entity.

%5. @hich of the follo$ing is not a potential eneft of accrual accounting8 compared to
cash'asis accountingA

A. Timelines
s.
&. &etter re#ecting economic
activity.
C. /eriodicit
y.
=. &etter matching of revenues and
expenses.

%7. 1n a recent annual report8 Apple Computer reported the follo$ing in one of its
disclosure notes? D@arranty Expense? The Company provides currently for the
estimated cost for product $arranties at the time the related revenue is recogni(ed.D
This note exemplifes Apple+s use of?

A. Conservatis
m.
&. The matching
principle.
C. 0eali(ation
principle.
=. Economic
entity.

%9. :AA/ is an areviation for?

A. :enerally authori(ed accounting
procedures.
&. :enerally applied accounting
procedures.
C. :enerally accepted auditing
practices.
=. :enerally accepted accounting
principles.

*0. The FAS& issues accounting standards in the form of?

A. Accounting 0esearch
&ulletins.
&. Accounting Standards
)pdates.
C. Financial Accounting
Standards.
=. Financial Technical
&ulletins.

*1. /ronouncements issued y the Committee on Accounting /rocedures?

A. =ealt $ith specifc accounting and reporting
prolems.
&. @ere ased on exposure drafts and pulic comment
letters.
C. 3riginated from congressional studies and SEC
directives.
=. @ere the outcome of research studies and a theoretical
frame$or-.

*!. The FAS&+s standard'setting process includes8 in the correct order?

A. Exposure draft8 research8 discussion paper8 Accounting Standards
)pdate.
&. 0esearch8 exposure draft8 discussion paper8 Accounting Standards
)pdate.
C. 0esearch8 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 /ulic Company Accounting 0eform
and 1nvestor /rotection Act of !00! 2Saranes'3xley4A The Act?

A. Changed the entity responsile for setting auditing
standards.
&. 1ncreased corporate executive responsiility for fnancial
statements.
C. Eimited nonaudit services that can e performed y auditors for
audit clients.
=. Changed the entity responsile for setting accounting
standards.

**. C/As are licensed y?

A. The
A1C/A.
&. The
SEC.
C. The federal
government.
=. State
governments.

*,. @hich of the follo$ing has the statutory authority to set accounting standards in the
)nited StatesA

A. FAS&.
&. 10S.
C. SEC.
=. A1C/A.

*.. @hen a registrant company sumits its annual fling to the SEC8 it uses?

A. Form 10'
A.
&. Form 10'
F.
C. Form 10'
G.
=. Form S'
1.

*5. The most li-ely important #a$ leading to the demise of the A/& $as the perceived
lac- of?

A. Confdenc
e.
&. Competenc
e.
C. 1ndependenc
e.
=. 1mportanc
e.

*7. Accounting standard setting has een characteri(ed as?

A. A political
process.
&. )sing the scientifc
method.
C. /ure deductive
reasoning.
=. /ure inductive
reasoning.

*9. The 1nternational Accounting Standards &oard?

A. @as the predecessor to the
1ASC.
&. Can overrule the FAS& $hen their policies
disagree.
C. /romotes the use of high'"uality8 understandale gloal accounting
standards.
=. Has its head"uarters in
:eneva.

,0. @hich of the follo$ing is not a provision of the /ulic Company Accounting 0eform
and 1nvestor /rotection Act of !00!A

A. Corporate executive
accountaility.
&. Auditor
rotation.
C. 0etention of $or-
papers.
=. All of the aove are provisions of
the Act.

,1. The primary professional organi(ation for those accountants $or-ing in the industry is
the?

A. AAA
.
&. A1C/A.
C. 11A
.
=. 1;A
.

,!. 1n the Cor$al- Agreement8 the FAS& and 1AS& pledged to?

A. Comine their organi(ations to form the
&)SI&.
&. ;a-e progress on specifc ;3)
pro6ects.
C. Achieve convergence y the year
!01,.
=. 0emove existing di<erences et$een their
standards.

,%. DCondorsementD?

A. 1s a term used y the 1AS& to refer to the conditional endorsement process used y
the E) $ith respect to 1F0S.
&. =escries a comination of convergence and endorsement that the SEC suggested
the )nited States might use in the future to incorporate 1F0S into ).S. :AA/.
C. @as coined y a representative of the A1C/A to descrie the lengthy
convergence process.
=. Has nothing to do $ith the convergence
process.

,*. The most political issue in the FAS&+s most recent delierations and amendments to
:AA/ on usiness cominations $as?

A. The negative e<ects on suse"uent earnings of amorti(ing good$ill if frms $ere
re"uired to use the purchase method of accounting for the comination.
&. The negative e<ects on suse"uent earnings of amorti(ing good$ill if frms $ere
re"uired to use the pooling method of accounting for the comination.
C. The unrealistic alance sheet assets that $ould e created if frms $ere re"uired to
use the purchase method of accounting for the comination.
=. The unrealistic alance sheet assets that $ould e created if frms $ere re"uired to
use the pooling method of accounting for the comination.

,,. The primary historical reason for the FAS& reversing its positions $hen political
pressures occur is?

A. The cost of gathering data $as
prohiitive.
&. The diBculties in measurement $ere too
great.
C. They have no authority in such
situations.
=. The SEC did not support the FAS&
position.

,.. The most recent example of the political process at $or- in standard setting is the
heated deate that occurred on the issue of?

A. /ension plan
accounting.
&. Accounting for postretirement enefts other than
pensions.
C. Accounting for usiness
cominations.
=. Accounting for stoc-'ased
compensation.

,5. 1ndependent auditors express an opinion on the?

A. Fairness of fnancial
statements.
&. Accuracy of fnancial
statements.
C. Soundness of a company+s
future.
=. Guality of a company+s
management.

,7. The possiility that the capital mar-ets+ focus on periodic profts may tempt a
company+s management to end or even rea- accounting rules to in#ate reported
net income is an example of?

A. An ethical
dilemma.
&. An accounting theory
issue.
C. A technical accounting
issue.
=. Cone of the aove is
correct.

,9. 3ne of the elements that many elieve distinguishes a profession from other
occupations is the acceptance of responsiility y its memers for the interests of
those it serves8 $hich is often articulated in?

A. 1ts conceptual
frame$or-.
&. 1ts code of
ethics.
C. Federal
la$s.
=. State
la$s.

.0. /hase A of the ne$ conceptual frame$or- focuses on?

A. 36ective and "ualitative
characteristics.
&. /resentation and
disclosure.
C. 0ecognition and
measurement.
=. Elements of fnancial
statements.

.1. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accounting
information include?

A. Historical
cost.
&. 0eali(atio
n.
C. Faithful
representation.
=. Full
disclosure.

.!. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accounting

A. Full
disclosure.
&. 0elevanc
e.
C. :oing
concern.
=. Historical
cost.

.%. The conceptual frame$or-+s "ualitative characteristic of relevance includes?

A. /redictive
value.
&. Jerifailit
y.
C. Completenes
s.
=. Ceutralit
y.

.*. The conceptual frame$or-+s "ualitative characteristic of faithful representation
includes?

A. /redictive
value.
&. Ceutralit
y.
C. Confrmatory
value.
=. Timelines
s.

.,. SFAC No.5 focuses on?

A. 36ectives of fnancial
reporting.
&. Gualitative characteristics of accounting
information.
C. 0ecognition and measurement concepts in
accounting.
statements.

... The main issue in the deate over accounting for employee stoc- options $as?

A. @hich employees should receive
options.
&. The amount of compensation expense that a company should
recogni(e.
C. Ho$ many options should e granted to -ey
executives.
=. The tax conse"uences of employee stoc-
options.

.5. A frm+s comprehensive income al$ays?

A. 1s the same as its net
income.
&. 1s greater than its net
income.
C. 1s less than its net
income.
=. Could e greater than or less than net
income.

.7. Cet income e"uals?

A. Assets minus
liailities.
&. 0evenues minus cost of goods
sold.
C. 0evenues minus
expenses.
=. Cash receipts minus cash
payments.

.9. Enhancing "ualitative characteristics of accounting information include each of the
follo$ing except?

A. Timelines
s.
&. ;aterialit
y.
C. Comparaili
ty.
=. Jerifailit
y.

50. The enhancing "ualitative characteristic of understandaility means that information
should e understood y?

A. Those $ho are experts in the interpretation of fnancial
information.
&. Those $ho have a reasonale understanding of usiness and economic
activities.
C. Financial
analysts.
=. C/As.

51. Fundamental "ualitative characteristics of accounting information are?

A. 0elevance and
comparaility.
&. Comparaility and
consistency.
C. Faithful representation and
relevance.
=. Ceutrality and
consistency.

5!. Enhancing "ualitative characteristics of accounting information include?

A. 0elevance and
comparaility.
&. Comparaility and
timeliness.
C. )nderstandaility and
relevance.
=. Ceutrality and
consistency.

5%. :ains are?

A. 1n#o$s from selling a product or service to a
customer.
&. 1ncreases in e"uity resulting from transfers of assets to the company
from o$ners.
C. 1ncreases in e"uity from peripheral transactions of
an entity.
correct.

5*. @hen there is agreement et$een a measure or description and the phenomenon it
purports to represent8 information possesses $hich characteristicA

A. Jerifailit
y.
&. /redictive
value.
C. Faithful
representation.
=. Timelines
s.

5,. Surefeet Corporation changed its inventory valuation method. @hich characteristic is
6eopardi(ed y this changeA

A. Comparaili
ty.
&. 0epresentational
faithfulness.
C. Consistenc
y.
=. Feedac-
value.

5.. Elements of fnancial statements do not include?

A. ;onetary
unit.
&. 1nvestments y
o$ners.
C. Comprehensive
income.
=. Eosses
.

55. The primary o6ective of fnancial accounting information is to provide useful
information to?

A. ;anageme
nt.
&. Capital
providers.
C. 0egulator
s.
=. Cone of the
aove.

57. 3f the follo$ing8 the most important o6ective for fnancial reporting is to provide
information useful for?

A. ;a-ing
decisions.
&. =etermining taxale
income.
C. /roviding
accountaility.
=. 1ncreasing future
profts.

59. Constraints on "ualitative characteristics of accounting information include?

A. Timelines
s.
&. :oing
concern.
C. Ceutralit
y.
=. Cost'
e<ectiveness.

70. According to the conceptual frame$or-8 verifaility implies?

A. Eegal
evidence.
&. Eogic
.
C. Consensu
s.
=. Eegal
verdict.

71. ;altec Corporation has started placing its "uarterly fnancial statements on its $e
page8 therey reducing y 10 days the time to get information to investors and
creditors. The "ualitative concept improved is?

A. Comparaili
ty.
&. Consistenc
y.
C. Timelines
s.
=. Faithful
representation.

7!. 0ecogni(ing expected losses immediately8 ut deferring expected gains8 is an
example of?

A. ;aterialit
y.
&. Conservatis
m.
C. Cost'
e<ectiveness.
=. Timelines
s.

7%. Change in e"uity from nono$ner sources is?

A. Comprehensive
income.
&. 0evenue
s.
C. Expense
s.
=. :ains and
losses.

7*. @hich of the follo$ing Statements of Financial Accounting Concepts defnes the 10
elements of fnancial statementsA

A. SFAC
4.
&. SFAC
3.
C. SFAC
5.
=. SFAC
6.

7,. /rimecoat Corporation could disseminate its annual fnancial statements t$o days
earlier if it shifted sustantial human resources from other operations to the annual
report pro6ect. ;anagement decided the value of the earlier report $as not $orth the
added commitment of resources. The concept demonstrated is?

A. Timelines
s.
&. ;aterialit
y.
C. 0elevanc
e.
=. Cost'
e<ectiveness.

7.. ;ega Eoan Company has very stringent credit re"uirements and8 accordingly8 has
negligile losses from uncollectile accounts. The company+s independent
accountants did not protest $hen8 contrary to :AA/8 the company recorded ad det
expense only $hen specifc accounts $ere determined to e uncollectile8 rather than
use an allo$ance for uncollectile accounts. The concept demonstrated is?

A. Comparaili
ty.
&. Faithful
representation.
C. Cost'
e<ectiveness.
=. ;aterialit
y.

75. Four di<erent competent accountants independently agree on the amount and
method of reporting an economic event. The concept demonstrated is?

A. 0eliailit
y.
&. Comparaili
ty.
C. Completenes
s.
=. Jerifailit
y.

77. An important argument in support of historical cost information is?

A. 0elevanc
e.
&. /redictive "uality for future cash
#o$s.
C. ;aterialit
y.
=. Jerifailit
y.

79. The conceptual frame$or-+s recognition and measurement concepts recogni(e $hich
of the follo$ing as an assumption8 rather than a principleA

A. :oing
concern.
&. Historical
cost.
C. Full
disclosure.
=. 0eali(atio
n.

90. The assumption that in the asence of contrary information a usiness entity $ill
continue indefnitely is the?

A. /eriodicity
assumption.
&. Entity
assumption.
C. :oing concern
assumption.
=. Historical cost
assumption.

91. 1f a company has declared an-ruptcy8 its fnancial statements li-ely violate?

A. The matching
principle.
&. The reali(ation
principle.
C. The stale monetary unit
assumption.
=. The going concern
assumption.

9!. @hich of the follo$ing is typically characteri(ed as a principle8 rather than an
assumptionA

A. /eriodicit
y.
&. ;onetary
unit.
C. Conservatis
m.
=. Full
disclosure.

9%. @hich of the follo$ing is not an identifed valuation techni"ue in :AA/ regarding fair
value measurementA

A. Cost
approach.
&. ;ar-et
approach.
C. Cost'eneft
approach.
=. 1ncome
approach.

9*. =isclosure notes to a company+s fnancial statements?

A. Are relatively unimportant facts that don+t elong in the asic fnancial
statements.
&. =ocument the source of fnancial statement facts8 li-e literary
footnotes.
C. Are an integral part of a company+s fnancial
statements.
=. Are irrelevant facts that are immaterial in
amount.

9,. A cause'and'e<ect relationship is implicit in the?

A. 0eali(ation
principle.
&. Historical cost
principle.
C. ;atching
principle.
=. :oing concern
assumption.

9.. The full disclosure principle re"uires a alance et$een?

A. Comparaility and
consistency.
&. 0elevance and cost'
e<ectiveness.
C. 0eliaility and
neutrality.
=. Timeliness and predictive
value.

95. The recognition of $hich of the follo$ing expenses exemplifes the application of the
matching principleA

A. /resident+s
salary.
&. 0esearch and
development.
C. Cost of goods
sold.
=. Advertisin
g.

97. Eand $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 "ualifed appraiser placed its value
at K*780008 and a recent frm o<er for the land $as for a cash payment of K*.8000.
The land should e reported in the fnancial statements at?

A. K*0800
0.
&. K!5800
0.
C. K*.800
0.
=. K*7800
0.

99. 0evenue should not e recogni(ed until?

A. The earnings process is complete and collection is reasonaly
assured.
&. Contracts have een signed and payment has een
received.
C. @or- has een performed and customer has een
illed.
=. Collection has een made and $arrantees have
expired.

100
.
@hich of the follo$ing est demonstrates the full disclosure principleA

A. The multi'step income
statement.
&. The auditors+
report.
C. The company+s tax
return.
=. =isclosure notes to fnancial
statements.

101
.
The matching principle is?

A. A valuation
method.
&. An expense recognition accounting
principle.
C. A cash asis reporting
principle.
=. An asset classifcation
procedure.

10!
.
To meet the needs of full disclosure8 companies use supplemental information8
including?

A. /arenthetical comments or modifying comments placed on the face of the fnancial
statements.
&. =isclosure notes conveying additional insights aout company operations8
accounting principles8 contractual agreements8 and pending litigation.
C. Supplemental fnancial statements that report more detailed information than is
sho$n in the primary fnancial statements.
=. All of the aove are
correct.

10%
.
Ford ;otor Company purchases services from suppliers on account and sells its
products to distriutors on short'term credit. As a result8 do each of these events
a<ect net income faster than they a<ect net operating cash #o$sA

A. 3ption
a
&. 3ption
C. 3ption
c
=. 3ption
d

10*
.
The revenue>expense approach emphasi(es?

A. 0ecognition of revenues 2typically applying the reali(ation
principle4.
&. 0ecognition of expenses 2typically applying the matching
principle4.
C. The income
statement.
correct.

10,
.
The asset>liaility approach emphasi(es?

A. @hether amounts on the alance sheet meet the defnitions of assets
and liailities.
&. A close relation et$een the alance sheet and the statement of
cash #o$s.
C. The distinction et$een net assets and gross
assets.
correct.

10.
.
)nder 1F0S8 the role of the conceptual frame$or-?

A. /rimarily involves guiding standard setters to ma-e sure that standards are
consistent $ith each other.
&. 1ncludes serving as a guide for practitioners $hen a specifc standard does
not apply.
C. 1s less important than in ).S.
:AA/.
=. Has resulted primarily from a convergence $ith ).S.
:AA/.

105
.
)nder 1F0S8 the conceptual frame$or-?

A. Emphasi(es the overarching concept of the fnancial statements providing a Dtrue
and fair representationD of the company.
&. 1s not designed to provide guidance to standard setters8 ut rather only to
practitioners.
C. 1s not designed to provide guidance to practitioners8 ut rather only to
standard setters.
=. Specifes a set of rules that determine $hat constitutes a true 1F0S
standard.

Matching Questions

107
.
Eisted elo$ are fve terms follo$ed y a list of phrases that descrie or characteri(e
each of the terms. ;atch each phrase $ith the correct term.

1. /redictive value
1nformation is useful in pro6ecting
cash #o$s. LLLL
!. 0elevance /ertinent to the decision at hand. LLLL
%. Confrmatory
value
=ecrease in e"uity due to
transfers to o$ners. LLLL
*. =istriution to
o$ners
1nformation confrms
expectations. LLLL
,. Timeliness
1nformation is availale prior to
the decision. LLLL

109
.

1. ;ateriality
0esults if an asset is sold for more
than oo- value. LLLL
!. Faithful
representation
Concerns the decision'ma-ing
impact of oth the amount and nature
of an item. LLLL
%. Completeness
Contains all information necessary
for faithful representation. LLLL
*. :ain
The change in e"uity from
nono$ner transactions. LLLL
,. Comprehensive
income
Along $ith relevance8 a
fundamental decision'specifc "uality. LLLL

110
.

1. 0ecognition
Accounting information should e
uniased. LLLL
!. Consistency 1mportant in analysis et$een frms. LLLL
%. Cost'
e<ectiveness
Applying the same accounting
practices over time. LLLL
*. Comparaility
Considers the value of using
information relative to cost of providing
it. LLLL
,. Ceutrality
The decision to include an amount in
the fnancial statements. LLLL

111
.
Eisted elo$ are fve terms are follo$ed y a list of phrases that descrie or
characteri(e fve of the terms. ;atch each phrase $ith the correct term y placing the
letter designating the est term in the space provided y the phrase.

1. :oing concern
assumption 1gnores the possiility of in#ation. LLLL
!. Economic entity
assumption
1mplies consensus among di<erent
oservers. LLLL
%. Jerifaility
Assumes all transactions can e
identifed $ith a particular entity. LLLL
*. ;onetary unit
assumption
Assumes an entity $ill continue to
operate indefnitely. LLLL
,. /eriodicity
assumption
0e"uires reporting the fnancial life
of an entity in discrete time frames. LLLL

11!
.

1. 0eali(ation
principle
&asis of measurement for fxed
assets. LLLL
!. ;ateriality
Application of :AA/ sometimes
avoided under this constraint. LLLL
%. ;atching
principle
0ecognition of expense in the period
in $hich it is incurred to earn revenue. LLLL
*. Full
disclosure
0eporting of all information that could
a<ect decisions. LLLL
,. Historical
cost
0ecognition of revenue only after
certain criteria are satisfed. LLLL

11%
.
each of the terms. ;atch each phrase $ith the correct term y placing the letter
designating the est term in the space provided y the phrase.

1. A1C/A
1ts EITF Issues are :AA/ $hen
entered in the Accounting
Standards Codifcation. LLLL
!. Accounting
/rinciples &oard
1t estalished :AA/ efore the
FAS&. LLLL
%. Securities and
Exchange
Commission
)ndermines representational
faithfulness y eing inconsistent
$ith neutrality. LLLL
*. Conservatism
1t is the national organi(ation for
C/As in the )nited States. LLLL
,. Financial
Accounting Standards
&oard
1t has the authority to set ).S.
accounting standards. LLLL

11*
.
each of the terms. ;atch each phrase $ith the correct term y placing the letter
designating the est term in the space provided y the phrase.

1. E"uity
3ut#o$s of resources to generate
revenues. LLLL
!. =istriutions to
o$ners Cet assets. LLLL
%. Expenses Cash dividends. LLLL
*. 1nvestments y
o$ners
Transfers of resources in exchange
for common and preferred stoc-. LLLL
,. Eiailities
Claims of creditors against the
assets of a usiness. LLLL

11,
.

1. 0evenues
Cet out#o$s from peripheral
transactions. LLLL
!. :ains
/roale future economic enefts
controlled y an entity. LLLL
%. Comprehensive
income
1ncreases in e"uity from the sale
of goods and>or services. LLLL
*. Eosses
All changes in e"uity except
o$ner transactions. LLLL
,. Assets
than oo- value. LLLL

11.
.
Eisted elo$ are 10 organi(ations follo$ed y a list of phrases that descrie or
characteri(e the organi(ations. ;atch each phrase $ith the correct organi(ation y
placing the numer designating the est term in the space provided y the phrase.

1. FAF
0egulates the fnancial reporting for pulic
companies. LLLL
!. FAS&
Sets accounting standards in the )nited
States. LLLL
%. SEC Sets gloal accounting standards. LLLL
*. 1;A
Cational organi(ation of certifed pulic
accountants. LLLL
,. /CA3&
/rovides timely responses to fnancial
reporting issues. LLLL
.. A1C/A
Estalishes auditing standards in the ).S for
pulic companies. LLLL
5. 1ASC
/rimary national organi(ation of accountants
$or-ing in industry. LLLL
7. 1AS& /arent organi(ation of the 1AS&. LLLL
9. E1TF FAS&+s predecessor. LLLL
10. A/& The FAS&+s parent organi(ation. LLLL

Short Answer Questions

Alpaca Corporation had revenues of K!008000 in its frst year of operations. The
company has not collected on K!08000 of its sales and still o$es K!,8000 on K508000
of merchandise it purchased. The company had no inventory on hand at the end of
the year. The company paid K1,8000 in salaries. 3$ners invested K!08000 in the
usiness and K!08000 $as orro$ed on a fve'year note. The company paid K!8000 in
interest that $as the amount o$ed for the year8 and paid K.8000 for a t$o'year
insurance policy on the frst day of usiness. Alpaca has an e<ective income tax rate
of *0M.

115
.
Compute net income for the frst year for Alpaca Corporation.

117
.
Compute the cash alance at the end of the frst year for Alpaca Corporation.

Tri Fecta8 a partnership8 had revenues of K%.08000 in its frst year of operations. The
partnership has not collected on K%,8000 of its sales and still o$es K*08000 on
K1,08000 of merchandise it purchased. There $as no inventory on hand at the end of
the year. The partnership paid K!,8000 in salaries. The partners invested K*08000 in
the usiness and K!,8000 $as orro$ed on a fve'year note. The partnership paid
K%8000 in interest that $as the amount o$ed for the year and paid K78000 for a t$o'
year insurance policy on the frst day of usiness.

119
.
Compute net income for the frst year for Tri Fecta.

1!0
.
Compute the cash alance at the end of the frst year for Tri Fecta.

The follo$ing information 2K in millions4 comes from a recent annual report of
Ama(on.com8 1nc.?

1!1
.
Compute Ama(on+s alance in cash at the eginning of the year.

1!!
.
Compute Ama(on+s total liailities 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.

1!,
.
Compare net income 2loss4 for the year to net cash #o$ from operating activities.
@hy are these amounts di<erentA &rie#y explain.

1!.
.
For each of the follo$ing situations8 state $hether you agree or disagree $ith the
fnancial reporting practice employed8 and rie#y explain the reason for your ans$er.
1. Cantor Corporation+s accountant increased the oo- value of a patent from its
original cost of K1 million to its recently appraised value of K. million.
!. Stanton Corporation paid for the personal travel of its chief fnancial oBcer and
charged travel expense.
%. At the end of its !01% fscal year8 =o$er8 1nc.8 received an order from a customer
for K.08000. The merchandise $ill ship early in !01*. &ecause the sale $as made to a
long'time customer and the invoice $as paid in !01%8 the controller recorded the sale
in !01%.
*. 1n the middle of its !01% fscal year8 Sanguinetti8 1nc.8 paid K1!8000 to its insurance
company for one'year comprehensive insurance coverage. Sanguinetti recorded the
entire expenditure as an expense in !01%.
,. The Churchill /harmaceutical Company included a note in its fnancial statements
that descried a pending la$suit against the company.
.. The =aily Corporation8 a company $hose securities are pulicly traded8 prepares
monthly8 "uarterly8 and annual fnancial statements for internal use ut disseminates
to external users only the annual fnancial statements.

Essay Questions

1!5
.
1dentify or defne the follo$ing terms? economic entity8 going concern.

1!7
.
Eist the four fnancial 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 in
formulating standards on controversial topics.

1%0
.
@hat is the SEC and ho$ is it involved $ith accounting standard settingA

1%1
.
@hat is the E1TF and $hat is its purposeA

1%!
.
Accounting standard setting has een characteri(ed as a political process. =iscuss
this proposition giving an example.

1%%
.
@hat are the -ey provisions of the /ulic Company Accounting 0eform and 1nvestor
/rotection 2Saranes'3xley4 Act of !00!A

1%*
.
@ith respect to the fnancial statements8 $hat is the value of an auditA

1%,
.
@hat provisions did the /ulic Company Accounting 0eform and 1nvestor /rotection
2Saranes'3xley4 Act of !00! ma-e for performance of nonaudit services y an audit
frmA

1%.
.
&rie#y descrie ho$ materiality is featured in the conceptual frame$or-.

1%5
.
:ive an example of a violation of the stale monetary unit assumption. Ho$ $ould it
a<ect the "uality of fnancial statement informationA

1%7
.
1dentify or defne the follo$ing terms? periodicity8 monetary unit.

1%9
.
1dentify or defne the follo$ing terms? historical cost8 reali(ation.

1*0
.
Ho$ does :AA/ defne fair valueA

1*1
.
3ver time8 accounting standards have developed to re#ect changes in the usiness
$orld as $ell as changes in our aility to account for such changes. )sing the
example of mar-ing assets and liailities to their fair value8 explain $hy you $ould
expect accounting standards to change.

1*!
.
Eist and rie#y descrie the fve measurement attriutes used commonly in current
:AA/.

1*%
.
Eist and rie#y descrie the three levels of inputs descried in the fair'value
measurement hierarchy.

1**
.
Contrast the asset>liaility and revenue>expense approaches to accounting standard
setting.

1*,
.
Contrast the role of the conceptual frame$or- in ).S. :AA/ and 1F0S.

Chapter 01 Environment and Theoretical Structure of Financial
Accounting Ans$er Fey

True / False Questions

1. The primary function of fnancial accounting is to provide relevant fnancial
information to parties external to usiness enterprises.

TRUE

AACSB: Refective Thinking
AICPA BB: Critic! Thinking
B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+' $escri#e the -unction n. /ri"r& -ocus o- 0nnci! ccounting1
To/ic: Finnci! Accounting Environ"ent

!. Accrual accounting attempts to measure revenues and expenses that occurred
during accounting periods so they e"ual net operating cash #o$.

FALSE

B!oo"s: 2n.erstn.
$i%cu!t&: ' Es&
(erning )#*ective: +',+3 E4/!in the .i5erence #et6een csh n. ccru! ccounting1
To/ic: Csh versus Accru! Accounting

%. The FAS& is currently the pulic'sector organi(ation responsile for setting
accounting standards in the )nited States.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+3 $e0ne gener!!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic!
.eve!o/"ent o- ccounting stn.r.s: inc!u.ing convergence #et6een 21S1 n. interntion! stn.r.s1
To/ic: The $eve!o/"ent o- Finnci! Accounting n. Re/orting Stn.r.s

*. The FAS&+s due process invites various interested parties to indicate their opinions
aout $hether fnancial accounting standards should e changed.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+4 E4/!in 6h& the est#!ish"ent o- ccounting stn.r.s is chrcteri;e. s /o!itic!
/rocess1
To/ic: The Est#!ish"ent o- Accounting Stn.r.s

,. Accounting for stoc-'ased compensation is an area in $hich the FAS& has received
little political interference.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
/rocess1

.. The /ulic 0eform and 1nvestor /rotection Act of !00! 2Saranes'3xley4 changed
the entity responsile for setting auditing standards in the )nited States.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+5 E4/!in -ctors tht encourge high,<u!it& 0nnci! re/orting1
To/ic: Encourging =igh,>u!it& Finnci! Re/orting

5. A rules'ased approach to standard setting stresses professional 6udgment as
opposed to follo$ing a list of rules.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

7. )nder federal securities la$s8 the SEC has the authority to set accounting
standards in the )nited States.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

9. The primary responsiility for properly applying :AA/ $hen communicating $ith
investors and creditors through fnancial statements lies $ith a frm+s auditors.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

10. Auditors play an important role in the resource allocation process y adding
crediility to fnancial statements.

TRUE

B!oo"s: 2n.erstn.
$i%cu!t&: ' Es&

11. The purpose of the conceptual frame$or- is to provide a structure and frame$or-
for a consistent set of :AA/.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+6 E4/!in the /ur/ose o- the conce/tu! -r"e6ork1
To/ic: The Conce/tu! Fr"e6ork

1!. 1n the )nited States the conceptual frame$or- indicates :AA/ $hen a more

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

1%. ;ateriality can e a<ected y the dollar amount of an item8 the nature of the item8
or oth.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+? I.enti-& the o#*ective n. <u!ittive chrcteristics o- 0nnci! re/orting
in-or"tion: n. the e!e"ents o- 0nnci! stte"ents1
To/ic: )#*ective@ >u!ittive Chrcteristics o- Finnci! Re/orting n. E!e"ents o- Finnci! Stte"ents

1*. According to the FAS&+s Statements of Financial Accounting Concepts8 conservatism
is a desired "ualitative characteristic of accounting information.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

1,. E"uity is a residual amount representing the o$ner+s interest in the assets of the
usiness.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

1.. 0evenues are in#o$s or other enhancements of assets or settlements of liailities
from activities that constitute the entity+s ongoing operations.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

15. :ains or losses result8 respectively8 from the disposition of usiness assets for
greater than8 or less than8 their oo- values.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

17. Comprehensive income is another term for net income.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

19. The FAS&+s conceptual frame$or- lists relevance and timeliness as the t$o
fundamental "ualitative characteristics of decision useful information.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

!0. The monetary unit assumption re"uires that items in fnancial statements e
measured in a particular monetary unit.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+A $escri#e the -our #sic ssu"/tions un.er!&ing 8AAP1
To/ic: 2n.er!&ing Assu"/tions

!1. The periodicity assumption re"uires that present value calculations ta-e into
account the numer of compounding periods in each year.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

!!. =etermining fair value y calculating the present value of future cash #o$s is a
level 1 type of input.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +',+B $escri#e the recognition: "esure"ent n. .isc!osure conce/ts tht gui.e
ccounting /rctice1
To/ic: Recognition@ Cesure"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

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
ccounting /rctice1

!*. The revenue>expense approach emphasi(es determining the appropriate amounts
of revenue and expense in each reporting period.

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +','+ Contrst revenueDe4/ense //roch n. n ssetD!i#i!it& //roch to ccounting
stn.r. setting1
To/ic: Evo!ving 8AAP

!,. The asset>liaility approach emphasi(es matching to determine $hat assets and
liailities should e re#ected on the alance sheet.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
stn.r. setting1

!.. 1n 1F0S8 the conceptual frame$or- indicates appropriate accounting $hen a more

TRUE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&
(erning )#*ective: +','' $iscuss the /ri"r& .i5erences #et6een 21S1 8AAP n. IFRS 6ith res/ect to the
.eve!o/"ent o- ccounting stn.r.s n. the conce/tu! -r"e6ork un.er!&ing ccounting stn.r.s1
To/ic: Interntion! Finnci! Re/orting Stn.r.s

!5. The funding of the standard'setting odies that promulgate 1F0S is as independent
as that underlying ).S. :AA/.

FALSE

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

Multiple Choice Questions

!7. External decision ma-ers $ould not loo- primarily to fnancial accounting
information to assist them in ma-ing decisions on?

A. :ranting
credit.
B. Capital
udgeting.
C. Selecting
stoc-s.
=. ;ergers and
ac"uisitions.

B!oo"s: 2n.erstn.
$i%cu!t&: ' Es&

!9. Corporations issue their shares to the investing pulic in the?

A. 3ption
a
&. 3ption
C. 3ption
c
=. 3ption
d

AICPA FN: Re/orting
B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

%0. The primary focus for fnancial accounting information is to provide information
useful for?

A. 3ption
a
&. 3ption
C. 3ption
c
=. 3ption
d

AICPA FN: Re/orting
B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

%1. @hich of the follo$ing groups is not among the external users for $hom fnancial
statements are preparedA

A. Customer
s.
&. Supplier
s.
C. Employee
s.
. All of the aove are external users of fnancial
statements.

AICPA FN: Re/orting
B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

%!. @hich of the follo$ing is not true aout net operating cash #o$A

A. 1t is the di<erence et$een cash receipts and cash disursements from
providing goods and services.
B. 1t is a measure used in accrual accounting and is recogni(ed as the est
predictor of future operating cash #o$s.
C. 3ver short periods8 it may not e indicative of long'run cash'
generating aility.
=. 1t is easy to understand and all information re"uired to measure it
is factual.

B!oo"s: Re"e"#er
$i%cu!t&: 3 Ce.iu"

%%. @hich of the follo$ing groups is not among fnancial intermediariesA

A. ;utual fund
managers.
&. Financial
analysts.
C. C/As.
=. Credit rating
organi(ations.

B!oo"s: Re"e"#er
$i%cu!t&: 3 Ce.iu"

%*. @hich of the follo$ing $as the frst private'sector entity that set accounting
standards in the )nited StatesA

A. Accounting /rinciples
&oard.
B. Committee on Accounting
/rocedure.
C. Financial Accounting Standards
&oard.
=. A1C/A.

B!oo"s: Re"e"#er
$i%cu!t&: 3 Ce.iu"

%,. @hich of the follo$ing does not apply to secondary mar-etsA

A. Transactions are important to the eBcient allocation of resources in our
economy.
B. Ce$ resources are provided $hen shares of stoc- are sold y the corporation to
the initial o$ners.
C. Transactions help to estalish mar-et prices for additional shares that may e
issued in the future.
=. ;any investors might e un$illing to provide resources to corporations if there
is no availale mechanism for the future sale of their stoc-s and onds to
others.

B!oo"s: Re"e"#er
$i%cu!t&: 3 Ce.iu"

%.. /orite Company recogni(es revenue in the period in $hich it records an asset for
the related account receivale8 rather than in the period in $hich the account
receivale is collected in cash. /orite+s practice is an example of?

A. Cash asis
accounting.
B. Accrual
accounting.
C. The matching
principle.
=. Economic
entity.

AICPA FN: Re/orting
B!oo"s: Crete
$i%cu!t&: ' Es&

%5. @hich of the follo$ing is not a potential eneft of accrual accounting8 compared to
cash'asis accountingA

A. Timelines
s.
&. &etter re#ecting economic
activity.
C. /eriodicit
y.
=. &etter matching of revenues and
expenses.

AICPA FN: Re/orting
B!oo"s: Crete
$i%cu!t&: ' Es&

%7. 1n a recent annual report8 Apple Computer reported the follo$ing in one of its
disclosure notes? D@arranty Expense? The Company provides currently for the
estimated cost for product $arranties at the time the related revenue is
recogni(ed.D This note exemplifes Apple+s use of?

A. Conservatis
m.
B. The matching
principle.
C. 0eali(ation
principle.
=. Economic
entity.

B!oo"s: Crete
$i%cu!t&: 3 Ce.iu"
ccounting /rctice1

%9. :AA/ is an areviation for?

A. :enerally authori(ed accounting
procedures.
&. :enerally applied accounting
procedures.
C. :enerally accepted auditing
practices.
. :enerally accepted accounting
principles.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*0. The FAS& issues accounting standards in the form of?

A. Accounting 0esearch
&ulletins.
B. Accounting Standards
)pdates.
C. Financial Accounting
Standards.
=. Financial Technical
&ulletins.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*1. /ronouncements issued y the Committee on Accounting /rocedures?

A. =ealt $ith specifc accounting and reporting
prolems.
&. @ere ased on exposure drafts and pulic comment
letters.
C. 3riginated from congressional studies and SEC
directives.
=. @ere the outcome of research studies and a theoretical
frame$or-.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*!. The FAS&+s standard'setting process includes8 in the correct order?

A. Exposure draft8 research8 discussion paper8 Accounting Standards
)pdate.
&. 0esearch8 exposure draft8 discussion paper8 Accounting Standards
)pdate.
C. 0esearch8 discussion paper8 exposure draft8 Accounting Standards
)pdate.
=. =iscussion paper8 research8 exposure draft8 Accounting Standards
)pdate.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*%. @hich of the follo$ing is not a provision of the /ulic Company Accounting 0eform
and 1nvestor /rotection Act of !00! 2Saranes'3xley4A The Act?

A. Changed the entity responsile for setting auditing
standards.
&. 1ncreased corporate executive responsiility for fnancial
statements.
C. Eimited nonaudit services that can e performed y auditors for
audit clients.
. Changed the entity responsile for setting accounting
standards.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

**. C/As are licensed y?

A. The
A1C/A.
&. The
SEC.
C. The federal
government.
. State
governments.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*,. @hich of the follo$ing has the statutory authority to set accounting standards in
the )nited StatesA

A. FAS&.
&. 10S.
C. SEC.
=. A1C/A.

B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*.. @hen a registrant company sumits its annual fling to the SEC8 it uses?

A. Form 10'
A.
B. Form 10'
F.
C. Form 10'
G.
=. Form S'
1.

AICPA FN: Re/orting
B!oo"s: Re"e"#er
$i%cu!t&: ' Es&

*5. The most li-ely important #a$ leading to the demise of the A/& $as the perceived
lac- of?

A. Confdenc
e.
&. Competenc
e.
C. 1ndependenc
e.
=. 1mportanc
e.

B!oo"s: Re"e"#er
$i%cu!t&: 3 Ce.iu"

*7. Accounting standard setting has een characteri(ed as?

A. A political
process.
&. )sing the scientifc
method.
C. /ure deductive
reasoning.
=. /ure inductive
reasoning.

B!oo"s: Re"e"#er
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/rocess1

*9. The 1nternational Accounting Standards &oard?

A. @as the predecessor to the
1ASC.
&. Can overrule the FAS& $hen their policies
disagree.
C. /romotes the use of high'"uality8 understandale gloal accounting
standards.
=. Has its head"uarters in
:eneva.

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,0. @hich of the follo$ing is not a provision of the /ulic Company Accounting 0eform
and 1nvestor /rotection Act of !00!A

A. Corporate executive
accountaility.
&. Auditor
rotation.
C. 0etention of $or-
papers.
. All of the aove are provisions of
the Act.

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,1. The primary professional organi(ation for those accountants $or-ing in the industry
is the?

A. AAA
.
&. A1C/A.
C. 11A
.
. 1;A
.

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,!. 1n the Cor$al- Agreement8 the FAS& and 1AS& pledged to?

A. Comine their organi(ations to form the
&)SI&.
&. ;a-e progress on specifc ;3)
pro6ects.
C. Achieve convergence y the year
!01,.
. 0emove existing di<erences et$een their
standards.

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,%. DCondorsementD?

A. 1s a term used y the 1AS& to refer to the conditional endorsement process used
y the E) $ith respect to 1F0S.
B. =escries a comination of convergence and endorsement that the SEC
suggested the )nited States might use in the future to incorporate 1F0S into ).S.
:AA/.
C. @as coined y a representative of the A1C/A to descrie the lengthy
convergence process.
=. Has nothing to do $ith the convergence
process.

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,*. The most political issue in the FAS&+s most recent delierations and amendments
to :AA/ on usiness cominations $as?

A. The negative e<ects on suse"uent earnings of amorti(ing good$ill if frms $ere
re"uired to use the purchase method of accounting for the comination.
&. The negative e<ects on suse"uent earnings of amorti(ing good$ill if frms $ere
re"uired to use the pooling method of accounting for the comination.
C. The unrealistic alance sheet assets that $ould e created if frms $ere re"uired
to use the purchase method of accounting for the comination.
=. The unrealistic alance sheet assets that $ould e created if frms $ere re"uired
to use the pooling method of accounting for the comination.

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/rocess1

,,. The primary historical reason for the FAS& reversing its positions $hen political
pressures occur is?

A. The cost of gathering data $as
prohiitive.
&. The diBculties in measurement $ere too
great.
C. They have no authority in such
situations.
. The SEC did not support the FAS&
position.

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/rocess1

,.. The most recent example of the political process at $or- in standard setting is the
heated deate that occurred on the issue of?

A. /ension plan
accounting.
&. Accounting for postretirement enefts other than
pensions.
C. Accounting for usiness
cominations.
=. Accounting for stoc-'ased
compensation.

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/rocess1

,5. 1ndependent auditors express an opinion on the?

A. Fairness of fnancial
statements.
&. Accuracy of fnancial
statements.
C. Soundness of a company+s
future.
=. Guality of a company+s
management.

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,7. The possiility that the capital mar-ets+ focus on periodic profts may tempt a
company+s management to end or even rea- accounting rules to in#ate reported
net income is an example of?

A. An ethical
dilemma.
&. An accounting theory
issue.
C. A technical accounting
issue.
correct.

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,9. 3ne of the elements that many elieve distinguishes a profession from other
occupations is the acceptance of responsiility y its memers for the interests of
those it serves8 $hich is often articulated in?

A. 1ts conceptual
frame$or-.
B. 1ts code of
ethics.
C. Federal
la$s.
=. State
la$s.

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.0. /hase A of the ne$ conceptual frame$or- focuses on?

A. 36ective and "ualitative
characteristics.
&. /resentation and
disclosure.
C. 0ecognition and
measurement.
statements.

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.1. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accounting

A. Historical
cost.
&. 0eali(atio
n.
C. Faithful
representation.
=. Full
disclosure.

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.!. The FAS&+s conceptual frame$or-+s "ualitative characteristics of accounting

A. Full
disclosure.
B. 0elevanc
e.
C. :oing
concern.
=. Historical
cost.

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.%. The conceptual frame$or-+s "ualitative characteristic of relevance includes?

A. /redictive
value.
&. Jerifailit
y.
C. Completenes
s.
=. Ceutralit
y.

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.*. The conceptual frame$or-+s "ualitative characteristic of faithful representation
includes?

A. /redictive
value.
B. Ceutralit
y.
C. Confrmatory
value.
=. Timelines
s.

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.,. SFAC No.5 focuses on?

A. 36ectives of fnancial
reporting.
&. Gualitative characteristics of accounting
information.
C. 0ecognition and measurement concepts in
accounting.
statements.

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... The main issue in the deate over accounting for employee stoc- options $as?

A. @hich employees should receive
options.
B. The amount of compensation expense that a company should
recogni(e.
C. Ho$ many options should e granted to -ey
executives.
=. The tax conse"uences of employee stoc-
options.

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/rocess1

.5. A frm+s comprehensive income al$ays?

A. 1s the same as its net
income.
&. 1s greater than its net
income.
C. 1s less than its net
income.
. Could e greater than or less than net
income.

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.7. Cet income e"uals?

A. Assets minus
liailities.
&. 0evenues minus cost of goods
sold.
C. 0evenues minus
expenses.
=. Cash receipts minus cash
payments.

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.9. Enhancing "ualitative characteristics of accounting information include each of the
follo$ing except?

A. Timelines
s.
B. ;aterialit
y.
C. Comparaili
ty.
=. Jerifailit
y.

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50. The enhancing "ualitative characteristic of understandaility means that
information should e understood y?

A. Those $ho are experts in the interpretation of fnancial
information.
B. Those $ho have a reasonale understanding of usiness and economic
activities.
C. Financial
analysts.
=. C/As.

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51. Fundamental "ualitative characteristics of accounting information are?

A. 0elevance and
comparaility.
&. Comparaility and
consistency.
C. Faithful representation and
relevance.
=. Ceutrality and
consistency.

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5!. Enhancing "ualitative characteristics of accounting information include?

A. 0elevance and
comparaility.
B. Comparaility and
timeliness.
C. )nderstandaility and
relevance.
=. Ceutrality and
consistency.

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5%. :ains are?

A. 1n#o$s from selling a product or service to a
customer.
&. 1ncreases in e"uity resulting from transfers of assets to the company
from o$ners.
C. 1ncreases in e"uity from peripheral transactions of
an entity.
correct.

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5*. @hen there is agreement et$een a measure or description and the phenomenon
it purports to represent8 information possesses $hich characteristicA

A. Jerifailit
y.
&. /redictive
value.
C. Faithful
representation.
=. Timelines
s.

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5,. Surefeet Corporation changed its inventory valuation method. @hich characteristic
is 6eopardi(ed y this changeA

A. Comparaili
ty.
&. 0epresentational
faithfulness.
C. Consistenc
y.
=. Feedac-
value.

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5.. Elements of fnancial statements do not include?

A. ;onetary
unit.
&. 1nvestments y
o$ners.
C. Comprehensive
income.
=. Eosses
.

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55. The primary o6ective of fnancial accounting information is to provide useful
information to?

A. ;anageme
nt.
B. Capital
providers.
C. 0egulator
s.
=. Cone of the
aove.

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57. 3f the follo$ing8 the most important o6ective for fnancial reporting is to provide
information useful for?

A. ;a-ing
decisions.
&. =etermining taxale
income.
C. /roviding
accountaility.
=. 1ncreasing future
profts.

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59. Constraints on "ualitative characteristics of accounting information include?

A. Timelines
s.
&. :oing
concern.
C. Ceutralit
y.
. Cost'
e<ectiveness.

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70. According to the conceptual frame$or-8 verifaility implies?

A. Eegal
evidence.
&. Eogic
.
C. Consensu
s.
=. Eegal
verdict.

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71. ;altec Corporation has started placing its "uarterly fnancial statements on its $e
page8 therey reducing y 10 days the time to get information to investors and
creditors. The "ualitative concept improved is?

A. Comparaili
ty.
&. Consistenc
y.
C. Timelines
s.
=. Faithful
representation.

AICPA FN: Re/orting
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7!. 0ecogni(ing expected losses immediately8 ut deferring expected gains8 is an
example of?

A. ;aterialit
y.
B. Conservatis
m.
C. Cost'
e<ectiveness.
=. Timelines
s.

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7%. Change in e"uity from nono$ner sources is?

A. Comprehensive
income.
&. 0evenue
s.
C. Expense
s.
=. :ains and
losses.

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7*. @hich of the follo$ing Statements of Financial Accounting Concepts defnes the 10
elements of fnancial statementsA

A. SFAC
4.
&. SFAC
3.
C. SFAC
5.
. SFAC
6.

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7,. /rimecoat Corporation could disseminate its annual fnancial statements t$o days
earlier if it shifted sustantial human resources from other operations to the annual
report pro6ect. ;anagement decided the value of the earlier report $as not $orth
the added commitment of resources. The concept demonstrated is?

A. Timelines
s.
&. ;aterialit
y.
C. 0elevanc
e.
. Cost'
e<ectiveness.

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7.. ;ega Eoan Company has very stringent credit re"uirements and8 accordingly8 has
negligile losses from uncollectile accounts. The company+s independent
accountants did not protest $hen8 contrary to :AA/8 the company recorded ad
det expense only $hen specifc accounts $ere determined to e uncollectile8
rather than use an allo$ance for uncollectile accounts. The concept demonstrated
is?

A. Comparaili
ty.
&. Faithful
representation.
C. Cost'
e<ectiveness.
. ;aterialit
y.

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75. Four di<erent competent accountants independently agree on the amount and
method of reporting an economic event. The concept demonstrated is?

A. 0eliailit
y.
&. Comparaili
ty.
C. Completenes
s.
. Jerifailit
y.

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77. An important argument in support of historical cost information is?

A. 0elevanc
e.
&. /redictive "uality for future cash
#o$s.
C. ;aterialit
y.
. Jerifailit
y.

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79. The conceptual frame$or-+s recognition and measurement concepts recogni(e
$hich of the follo$ing as an assumption8 rather than a principleA

A. :oing
concern.
&. Historical
cost.
C. Full
disclosure.
=. 0eali(atio
n.

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90. The assumption that in the asence of contrary information a usiness entity $ill
continue indefnitely is the?

A. /eriodicity
assumption.
&. Entity
assumption.
C. :oing concern
assumption.
=. Historical cost
assumption.

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91. 1f a company has declared an-ruptcy8 its fnancial statements li-ely violate?

A. The matching
principle.
&. The reali(ation
principle.
C. The stale monetary unit
assumption.
. The going concern
assumption.

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9!. @hich of the follo$ing is typically characteri(ed as a principle8 rather than an
assumptionA

A. /eriodicit
y.
&. ;onetary
unit.
C. Conservatis
m.
. Full
disclosure.

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9%. @hich of the follo$ing is not an identifed valuation techni"ue in :AA/ regarding
fair value measurementA

A. Cost
approach.
&. ;ar-et
approach.
C. Cost'eneft
approach.
=. 1ncome
approach.

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ccounting /rctice1

9*. =isclosure notes to a company+s fnancial statements?

A. Are relatively unimportant facts that don+t elong in the asic fnancial
statements.
&. =ocument the source of fnancial statement facts8 li-e literary
footnotes.
C. Are an integral part of a company+s fnancial
statements.
=. Are irrelevant facts that are immaterial in
amount.

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ccounting /rctice1

9,. A cause'and'e<ect relationship is implicit in the?

A. 0eali(ation
principle.
&. Historical cost
principle.
C. ;atching
principle.
=. :oing concern
assumption.

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ccounting /rctice1

9.. The full disclosure principle re"uires a alance et$een?

A. Comparaility and
consistency.
B. 0elevance and cost'
e<ectiveness.
C. 0eliaility and
neutrality.
=. Timeliness and predictive
value.

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ccounting /rctice1

95. The recognition of $hich of the follo$ing expenses exemplifes the application of
the matching principleA

A. /resident+s
salary.
&. 0esearch and
development.
C. Cost of goods
sold.
=. Advertisin
g.

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ccounting /rctice1

97. Eand $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 "ualifed appraiser placed its
value at K*780008 and a recent frm o<er for the land $as for a cash payment of
K*.8000. The land should e reported in the fnancial statements at?

A. K*0800
0.
&. K!5800
0.
C. K*.800
0.
=. K*7800
0.

AACSB: An!&tic
AICPA FN: Cesure"ent
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ccounting /rctice1

99. 0evenue should not e recogni(ed until?

A. The earnings process is complete and collection is reasonaly
assured.
&. Contracts have een signed and payment has een
received.
C. @or- has een performed and customer has een
illed.
=. Collection has een made and $arrantees have
expired.

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ccounting /rctice1
To/ic: $escri#e the recognition@ "esure"ent n. .isc!osure conce/ts tht gui.e ccounting /rctice

100. @hich of the follo$ing est demonstrates the full disclosure principleA

A. The multi'step income
statement.
&. The auditors+
report.
C. The company+s tax
return.
. =isclosure notes to fnancial
statements.

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ccounting /rctice1

101. The matching principle is?

A. A valuation
method.
B. An expense recognition accounting
principle.
C. A cash asis reporting
principle.
=. An asset classifcation
procedure.

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10!. To meet the needs of full disclosure8 companies use supplemental information8
including?

A. /arenthetical comments or modifying comments placed on the face of the
fnancial statements.
&. =isclosure notes conveying additional insights aout company operations8
accounting principles8 contractual agreements8 and pending litigation.
C. Supplemental fnancial statements that report more detailed information than is
sho$n in the primary fnancial statements.
. All of the aove are
correct.

AICPA FN: Re/orting
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ccounting /rctice1

10%. Ford ;otor Company purchases services from suppliers on account and sells its
products to distriutors on short'term credit. As a result8 do each of these events
a<ect net income faster than they a<ect net operating cash #o$sA

A. 3ption
a
&. 3ption
C. 3ption
c
=. 3ption
d

AACSB: An!&tic
B!oo"s: An!&;e
$i%cu!t&: 3 =r.
ccounting /rctice1

10*. The revenue>expense approach emphasi(es?

A. 0ecognition of revenues 2typically applying the reali(ation
principle4.
&. 0ecognition of expenses 2typically applying the matching
principle4.
C. The income
statement.
. All of the aove are
correct.

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stn.r. setting1

10,. The asset>liaility approach emphasi(es?

A. @hether amounts on the alance sheet meet the defnitions of assets
and liailities.
&. A close relation et$een the alance sheet and the statement of
cash #o$s.
C. The distinction et$een net assets and gross
assets.
correct.

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stn.r. setting1

10.. )nder 1F0S8 the role of the conceptual frame$or-?

A. /rimarily involves guiding standard setters to ma-e sure that standards are
consistent $ith each other.
B. 1ncludes serving as a guide for practitioners $hen a specifc standard does
not apply.
C. 1s less important than in ).S.
:AA/.
=. Has resulted primarily from a convergence $ith ).S.
:AA/.

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105. )nder 1F0S8 the conceptual frame$or-?

A. Emphasi(es the overarching concept of the fnancial statements providing a
Dtrue and fair representationD of the company.
&. 1s not designed to provide guidance to standard setters8 ut rather only to
practitioners.
C. 1s not designed to provide guidance to practitioners8 ut rather only to
standard setters.
=. Specifes a set of rules that determine $hat constitutes a true 1F0S
standard.

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Matching Questions

107. Eisted elo$ are fve terms follo$ed y a list of phrases that descrie or
characteri(e each of the terms. ;atch each phrase $ith the correct term.

1. /redictive value
1nformation is useful in pro6ecting
cash #o$s. !
!. 0elevance /ertinent to the decision at hand. "
%. Confrmatory
value
=ecrease in e"uity due to transfers
to o$ners. #
*. =istriution to
o$ners 1nformation confrms expectations. $
,. Timeliness
1nformation is availale prior to the
decision. %

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1. ;ateriality
than oo- value. #
!. Faithful
representation
Concerns the decision'ma-ing
impact of oth the amount and nature
of an item. !
%. Completeness
Contains all information necessary
for faithful representation. $
*. :ain
The change in e"uity from nono$ner
transactions. %
,. Comprehensive
income
Along $ith relevance8 a fundamental
decision'specifc "uality. "

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To/ic: E4/!in the /ur/ose o- the conce/tu! -r"e6ork


1. 0ecognition
Accounting information should e
uniased. %
!. Consistency 1mportant in analysis et$een frms. #
%. Cost'
e<ectiveness
Applying the same accounting
practices over time. "
*. Comparaility
Considers the value of using
information relative to cost of providing
it. $
,. Ceutrality
The decision to include an amount in
the fnancial statements. !

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111. Eisted elo$ are fve terms are follo$ed y a list of phrases that descrie or
characteri(e fve of the terms. ;atch each phrase $ith the correct term y placing
the letter designating the est term in the space provided y the phrase.

1. :oing concern
assumption 1gnores the possiility of in#ation. #
!. Economic entity
assumption
1mplies consensus among di<erent
oservers. $
%. Jerifaility
Assumes all transactions can e
identifed $ith a particular entity. "
*. ;onetary unit
assumption
Assumes an entity $ill continue to
operate indefnitely. !
,. /eriodicity
assumption
0e"uires reporting the fnancial life
of an entity in discrete time frames. %

B!oo"s: 2n.erstn.
$i%cu!t&: 3 Ce.iu"
To/ic: $escri#e the -our #sic ssu"/tions un.er!&ing 8AAP
To/ic: I.enti-& the o#*ective n. <u!ittive chrcteristics o- 0nnci! re/orting in-or"tion@ n. the e!e"ents
o- 0nnci! stte"ents

11!. Eisted elo$ are fve terms follo$ed y a list of phrases that descrie or

1. 0eali(ation
principle &asis of measurement for fxed assets. %
!. ;ateriality
Application of :AA/ sometimes
avoided under this constraint. "
%. ;atching
principle
0ecognition of expense in the period in
$hich it is incurred to earn revenue. $
*. Full
disclosure
0eporting of all information that could
a<ect decisions. #
,. Historical
cost
0ecognition of revenue only after
certain criteria are satisfed. !

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ccounting /rctice1

11%. Eisted elo$ are fve terms follo$ed y a list of phrases that descrie or
characteri(e each of the terms. ;atch each phrase $ith the correct term y placing

1. A1C/A
1ts EITF Issues are :AA/ $hen
entered in the Accounting Standards
Codifcation. %
!. Accounting
/rinciples &oard
1t estalished :AA/ efore the
FAS&. "
%. Securities and
Exchange
Commission
)ndermines representational
faithfulness y eing inconsistent
$ith neutrality. #
*. Conservatism
1t is the national organi(ation for
C/As in the )nited States. !
,. Financial
Accounting Standards
&oard
1t has the authority to set ).S.
accounting standards. $

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To/ic: $e0ne 8AAP n. .iscuss the historic! .eve!o/"ent o- ccounting stn.r.s@ inc!u.ing the convergence
#et6een 8AAP n. IFRS

11*. Eisted elo$ are fve terms follo$ed y a list of phrases that descrie or
characteri(e each of the terms. ;atch each phrase $ith the correct term y placing

1. E"uity
3ut#o$s of resources to generate
revenues. $
!. =istriutions to
o$ners Cet assets. !
%. Expenses Cash dividends. "
*. 1nvestments y
o$ners
Transfers of resources in exchange
for common and preferred stoc-. #
,. Eiailities
Claims of creditors against the assets
of a usiness. %

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To/ic: I.enti-& the o#*ective n. <u!ittive chrcteristics o- 0nnci! re/orting in-or"tion@ n. the e!e"ents
o- 0nnci! stte"ents

11,. Eisted elo$ are fve terms follo$ed y a list of phrases that descrie or

1. 0evenues
Cet out#o$s from peripheral
transactions. #
!. :ains
/roale future economic enefts
controlled y an entity. %
%. Comprehensive
income
1ncreases in e"uity from the sale of
goods and>or services. !
*. Eosses
All changes in e"uity except o$ner
transactions. $
,. Assets
than oo- value. "

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11.. Eisted elo$ are 10 organi(ations follo$ed y a list of phrases that descrie or
characteri(e the organi(ations. ;atch each phrase $ith the correct organi(ation y
placing the numer designating the est term in the space provided y the phrase.

1. FAF
0egulates the fnancial reporting for pulic
companies. $
!. FAS&
Sets accounting standards in the )nited
States. "
%. SEC Sets gloal accounting standards. &
*. 1;A
Cational organi(ation of certifed pulic
accountants. '
,. /CA3&
/rovides timely responses to fnancial
reporting issues. (
.. A1C/A
Estalishes auditing standards in the ).S for
pulic companies. %
5. 1ASC
/rimary national organi(ation of accountants
$or-ing in industry. #
7. 1AS& /arent organi(ation of the 1AS&. )
9. E1TF FAS&+s predecessor.
!
*
10. A/& The FAS&+s parent organi(ation. !

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To/ic: $e0ne 8AAP n. .iscuss the historic! .eve!o/"ent o- ccounting stn.r.s@ inc!u.ing the convergence
#et6een 8AAP n. IFRS

Short Answer Questions

Alpaca Corporation had revenues of K!008000 in its frst year of operations. The
company has not collected on K!08000 of its sales and still o$es K!,8000 on
K508000 of merchandise it purchased. The company had no inventory on hand at
the end of the year. The company paid K1,8000 in salaries. 3$ners invested
K!08000 in the usiness and K!08000 $as orro$ed on a fve'year note. The
company paid K!8000 in interest that $as the amount o$ed for the year8 and paid
K.8000 for a t$o'year insurance policy on the frst day of usiness. Alpaca has an
e<ective income tax rate of *0M.

115. Compute net income for the frst year for Alpaca Corporation.

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117. Compute the cash alance at the end of the frst year for Alpaca Corporation.

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Tri Fecta8 a partnership8 had revenues of K%.08000 in its frst year of operations.
The partnership has not collected on K%,8000 of its sales and still o$es K*08000 on
K1,08000 of merchandise it purchased. There $as no inventory on hand at the end
of the year. The partnership paid K!,8000 in salaries. The partners invested
K*08000 in the usiness and K!,8000 $as orro$ed on a fve'year note. The
partnership paid K%8000 in interest that $as the amount o$ed for the year and paid
K78000 for a t$o'year insurance policy on the frst day of usiness.

119. Compute net income for the frst year for Tri Fecta.

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1!0. Compute the cash alance at the end of the frst year for Tri Fecta.

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The follo$ing information 2K in millions4 comes from a recent annual report of
Ama(on.com8 1nc.?

1!1. Compute Ama(on+s alance in cash at the eginning of the year.

&eginning alance in Cash N Cet increase in Cash O Ending alance in Cash
Therefore8 &eginning alance in Cash O Ending alance in Cash ' Cet increase in
Cash
O K180!! ' 9 O K1801%

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1!!. Compute Ama(on+s total liailities at the end of the year.

Total assets O Total liailities N Total stoc-holders+ e"uity
Therefore8 Total liailities O Total assets ' Total stoc-holders+ e"uity O
K*8%.% '*%1 O K%89%!

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1!%. Compute Ama(on+s cost of goods sold for the year.

:ross proft O Cet sales ' Cost of goods sold
Therefore8 Cost of goods sold O Cet sales ' :ross proft
O K108511 ' !8*,. O K78!,,

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1!*. Compute the income efore income tax for Ama(on.

Cet income O :ross proft ' 3perating expenses N 3ther income 2expense48 net
O K!8*,. ' !80.5 N 21!4 O K%55

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1!,. Compare net income 2loss4 for the year to net cash #o$ from operating activities.
@hy are these amounts di<erentA &rie#y explain.

These amounts are di<erent ecause of the di<erences et$een cash and accrual
accounting. As opposed to cash #o$s from operations8 net income includes oth
revenues and expenses the timing of $hich di<ers from the timing of certain cash
receipts and payments. Examples $ould e credit sales in $hich the revenues are
recorded efore the collection of cash and cost of goods sold in $hich the expense
often is recorded later than the cash payment to the supplier for the merchandise.

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AICPA FN: $ecision Cking
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1!.. For each of the follo$ing situations8 state $hether you agree or disagree $ith the
fnancial reporting practice employed8 and rie#y explain the reason for your
ans$er.
1. Cantor Corporation+s accountant increased the oo- value of a patent from its
original cost of K1 million to its recently appraised value of K. million.
!. Stanton Corporation paid for the personal travel of its chief fnancial oBcer and
charged travel expense.
%. At the end of its !01% fscal year8 =o$er8 1nc.8 received an order from a customer
for K.08000. The merchandise $ill ship early in !01*. &ecause the sale $as made
to a long'time customer and the invoice $as paid in !01%8 the controller recorded
the sale in !01%.
*. 1n the middle of its !01% fscal year8 Sanguinetti8 1nc.8 paid K1!8000 to its
insurance company for one'year comprehensive insurance coverage. Sanguinetti
recorded the entire expenditure as an expense in !01%.
,. The Churchill /harmaceutical Company included a note in its fnancial
statements that descried a pending la$suit against the company.
.. The =aily Corporation8 a company $hose securities are pulicly traded8 prepares
monthly8 "uarterly8 and annual fnancial statements for internal use ut
disseminates to external users only the annual fnancial statements.

1. =isagree. This is a violation of the historical cost 2original transaction value4
principle.
!. =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.

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Essay Questions

1!5. 1dentify or defne the follo$ing terms? economic entity8 going concern.

Economic entity? All economic events can e identifed $ith a particular economic
entity.
:oing concern? 1n the asence of information to the contrary8 it is anticipated that a
usiness entity $ill continue to operate indefnitely.

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1!7. Eist the four fnancial statements most fre"uently provided to external users.

&alance sheet8 1ncome statement8 Statement of cash #o$s8 Statement of
shareholders+ e"uity.

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1!9. Explain and sho$ an example of ho$ the FAS&+s conceptual frame$or- is needed in
formulating standards on controversial topics.

1n order to provide consistency8 a conceptual frame$or- 2a map clearly defning
eliefs or structure4 must e provided. This is the foundation for a strong8 logical8
and fair system. For example8 in deating accounting for stoc-'ased
compensation8 the FAS&+s conceptual frame$or- explains the rationale for treating
stoc- options as an expense. &y relating the accounting for such compensation to
the purpose of fnancial statements and their "ualitative characteristics8 the FAS&
can defend its positions $ithout the ias inherent in such controversial issues.

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1%0. @hat is the SEC and ho$ is it involved $ith accounting standard settingA

The Securities and Exchange Commission is a federal agency that has the authority
to set accounting standards. Ho$ever8 the SEC has al$ays delegated the tas- to a
private'sector ody8 such as the current FAS&.

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/rocess1

1%1. @hat is the E1TF and $hat is its purposeA

The Emerging 1ssues Tas- Force 2E1TF4 acts as a flter for the FAS&. 1t includes 1,
individuals from pulic accounting and private industry along $ith a representative
from the FAS& and an SEC oserver. The tas- force focuses on emerging issues and
attempts to reach a consensus8 speeding up the standard'setting process.

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/rocess1

1%!. Accounting standard setting has een characteri(ed as a political process. =iscuss
this proposition giving an example.

Changes in :AA/ can have signifcant di<erential e<ects on companies8 investors8
creditors8 and other interest groups. The FAS& must gauge the economic
conse"uences of a change in accounting standards. The process y $hich fnancial
accounting standards are created includes pulic comment and sometimes
hearings. )ltimately8 a vote must e ta-en to pass a proposed change in :AA/.
Accounting for stoc-'ased compensations 2options4 and postretirement health
care enefts are examples $here accounting practices have een a<ected y
political in#uences on :AA/.

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/rocess1

1%%. @hat are the -ey provisions of the /ulic Company Accounting 0eform and 1nvestor
/rotection 2Saranes'3xley4 Act of !00!A

The Act re"uires the regulation of auditors and the types of services they furnish to
clients8 increases accountaility of corporate executives8 addresses con#icts of
interest for auditors and securities analysts8 and re"uires that companies document
and assess their internal controls. 1t also re"uires auditors to express an opinion on
management+s assessment of internal controls8 and the auditors must also express
their o$n opinion on company internal controls.

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1%*. @ith respect to the fnancial statements8 $hat is the value of an auditA

3utside auditors add crediility to fnancial statements8 increasing the confdence
of capital mar-et participants $ho rely on fnancial statements in ma-ing
investment and credit decisions and recommendations.

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1%,. @hat provisions did the /ulic Company Accounting 0eform and 1nvestor /rotection
2Saranes'3xley4 Act of !00! ma-e for performance of nonaudit services y an
audit frmA

The la$ ma-es it unla$ful for the auditors of pulic companies to perform a variety
of nonaudit services for audit clients. /rohiited services include oo--eeping8
internal audit outsourcing8 appraisal or valuation services8 and various other
consulting services. 3ther nonaudit services8 including tax services8 re"uire
preapproval y the audit committee of the company eing audited.

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1%.. &rie#y descrie ho$ materiality is featured in the conceptual frame$or-.

;aterialityP1nformation is material if it can have an e<ect on a decision made y a
user. Thus8 materiality is an aspect of relevance. 1f an item is not material8 :AA/
need not e follo$ed. For example8 if a large corporation purchased a $ater cooler
for one of its common areas for K1!08 the amount could e expensed rather than
recorded as an asset even though the cooler $ill e useful for several years.
;ateriality is a 6udgment call. ;ateriality is concerned $ith oth the dollar amount
of an item and>or the nature of an item. 1t $ould proaly e material if ;icrosoft
received K180008000 in ries from a Chinese company for its technology. A
K180008000 $rite'o< of old e"uipment $ould proaly e immaterial for ;icrosoft.

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1%5. :ive an example of a violation of the stale monetary unit assumption. Ho$ $ould
it a<ect the "uality of fnancial statement informationA

1f a country experiences severe in#ation8 this $ould violate the assumption that
dollar amounts are constantly valued. This $ould limit the usefulness of adding
numers in fnancial statements8 ecause 2for instance4 costs at di<erent times are
not comparale $ithout ad6usting for changes in purchasing po$er.

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1%7. 1dentify or defne the follo$ing terms? periodicity8 monetary unit.

/eriodicityPThe life of a company can e divided into artifcial periods to provide
timely information to external users.
;onetary unitP1n the )nited States8 fnancial statement elements should e
measured in terms of the ).S. dollar. 1t assumes that the value of a dollar is stale
over time.

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1%9. 1dentify or defne the follo$ing terms? historical cost8 reali(ation.

Historical costPA measurement attriute under $hich asset and liaility
measurements are ased on the amount given or received in an exchange
transaction.
0eali(ationP0evenue should e recogni(ed only after the earnings process is
virtually complete and there is reasonale certainty of collecting the asset to e
received from the customer.

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ccounting /rctice1

1*0. Ho$ does :AA/ defne fair valueA

Fair value is defned as the price that $ould e received to sell assets or paid to
transfer a liaility in an orderly transaction et$een mar-et participants at the
measurement date.

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ccounting /rctice1

1*1. 3ver time8 accounting standards have developed to re#ect changes in the usiness
$orld as $ell as changes in our aility to account for such changes. )sing the
example of mar-ing assets and liailities to their fair value8 explain $hy you $ould
expect accounting standards to change.

Historically8 fnancial accounting relied on transaction amounts 2historical cost4 as
the fundamental measurement approach for reporting assets and liailities. As
mar-ets have matured8 it is more relevant and feasile to report some assets and
liailities at their fair values8 particularly if such items have a ready mar-et that is
active.

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ccounting /rctice1

1*!. Eist and rie#y descrie the fve measurement attriutes used commonly in current
:AA/.

a. Historical cost? the amount given or received in an exchange transaction.
. Cet reali(ale value? the amount of cash into $hich an asset is expected to e
converted in the ordinary course of usiness.
c. Current cost? the cost that $ould e incurred to purchase or reproduce an asset.
d. /resent value? the sum of future cash #o$s discounted for the time value of
money.
e. Fair value? the price that $ould e received to sell assets or transfer liailities in
an orderly mar-et transaction.

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ccounting /rctice1

1*%. Eist and rie#y descrie the three levels of inputs descried in the fair'value
measurement hierarchy.

a. Guoted mar-et prices in active mar-ets for identical assets or liailities.
. 1nputs other than "uoted prices that can e oserved for the asset or liaility.
These inputs include "uoted prices for similar assets or liailities in active or
inactive mar-ets and inputs that are derived principally from or corroorated y
mar-et data that can e oserved.
c. 1nputs that cannot e oserved that re#ect the entity+s o$n assumptions aout
the assumptions mar-et participants $ould use in pricing the asset or liaility
developed ased on the est information availale in the circumstances.

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ccounting /rctice1

1**. Contrast the asset>liaility and revenue>expense approaches to accounting
standard setting.

)nder the revenue>expense approach8 $e emphasi(e principles for recogni(ing
revenues and expenses8 $ith some assets and liailities recogni(ed as necessary to
ma-e the alance sheet reconcile $ith the income statement. ;uch of our
accounting for revenues and expenses follo$s this revenue>expense approach. Fey
to the revenue>expense approach are the reali(ation principle and the matching
principle.
)nder the asset>liaility approach8 on the other hand8 $e frst recogni(e and
measure the assets and liailities that exist at a alance sheet date and8 secondly8
recogni(e and measure the revenues8 expenses8 gains and losses needed to
account for the changes in these assets and liailities from the previous
measurement date. Therefore8 $e should try to recogni(e and measure assets and
liailities appropriately8 and as a result $ill also capture their in#o$s and out#o$s
in a manner that provides relevant and representationally faithful information aout
revenues and expenses.

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stn.r. setting1

1*,. Contrast the role of the conceptual frame$or- in ).S. :AA/ and 1F0S.

The conceptual frame$or-s in ).S. :AA/ and 1F0S are very similar and are
converging even more $ith ongoing e<orts y the FAS& and 1AS&. Ho$ever8 in ).S.
:AA/8 the conceptual frame$or- primarily provides guidance to standard setters to
help them develop high'"uality standards. 1n 1F0S the conceptual frame$or- guides
standard setting8 ut in addition it is supposed to provide a asis for practitioners
to ma-e accounting 6udgments $hen another 1F0S standard does not apply. Also8
1F0S emphasi(es the overarching concept of the fnancial statements providing a
Dtrue and fair representationD of the company. ).S. :AA/ does not include a similar
re"uirement8 ut ).S. auditing standards re"uire this consideration.

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Chap001 Test Bank

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Chapter 01

Environment and Theoretical Structure of Financial Accounting

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