Chap001 Test Bank

8/11/2019 Chap001 Test Bank

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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.


=. 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.


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.


1. ecognitionAccounting information should e

un iased. LLLL!. Consistency mportant in analysis et$een rms. LLLL%. Cost'e


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11!.


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



$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


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



(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


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



$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


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




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

TRUE



(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



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(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



(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



(e rning )#*ective: +',+? I.enti-& the o#*ective n.


47/107


48/107

!1. The periodicity assumption re"uires that present value calculations ta-e intoaccount the num er of compounding periods in each year.

FALSE



$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


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



(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


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


49/107

!,. The asset>lia ility approach emphasi(es matching to determine $hat assets andlia ilities should e re#ected on the alance sheet.

FALSE



$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


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





Multiple Choice Questions


50/107

!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.



(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


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



51/107

%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



%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.



$i%cu!t&: ' E s& (e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1



52/107

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

A. t is the di


53/107

$i%cu!t&: e.iu"(e rning )#*ective: +',+' $escri#e the -unction n. /ri" r& -ocus o- 0n nci ! ccounting1


%,. @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.


AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: e.iu"


% . /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.


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


54/107

%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.


AICPA FN: Re/ortingB!oo"s: Cre te



%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.


B!oo"s: Cre te$i%cu!t&: e.iu"




55/107

%9. :AA/ is an a reviation for?

A. :enerally authori(ed accountingprocedures.

&. :enerally applied accountingprocedures.C. :enerally accepted auditing

practices.. :enerally accepted accounting

principles.



(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





56/107

*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-.





*!. 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





57/107

*%. @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.



(e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !


**. C/As are licensed y?

A. TheA C/A.

&. TheSEC.

C. The federalgovernment.

. Stategovernments.





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

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



58/107




* . @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.



$i%cu!t&: ' E s& (e rning )#*ective: +',+3 $e0ne gener !!& cce/te. ccounting /rinci/!es 78AAP9 n. .iscuss the historic !


*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.


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




59/107

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

A. A politicalprocess.

&. )sing the scienti cmethod.C. /ure deductive

reasoning.=. /ure inductive

reasoning.





*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





60/107

,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.





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

A. AAA.

&. A C/A.C. A

.

. ;A.






61/107

,!. 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


62/107

,*. The most political issue in the FAS&+s most recent deli erations and amendmentsto :AA/ on usiness com inations $as?

A. The negative e


63/107

, . 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.


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.





64/107

,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.




,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.





65/107

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.



(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.


=. Full

disclosure.





66/107

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

A. Full

disclosure.B. elevance.

C. :oingconcern.

=. Historicalcost.





67/107

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

A. /redictive

value.B. eutrality.

C. Con rmatoryvalue.

=. Timeliness.





68/107

. 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.





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




69/107

7. et income e"uals?

A. Assets minuslia ilities.

&. evenues minus cost of goodssold.C. evenues minus

expenses.=. Cash receipts minus cash

payments.





70/107

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.





71/107

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

A. elevance andcompara ility.

B. Compara ility andtimeliness.

C. )nderstanda ility andrelevance.

=. eutrality andconsistency.





72/107

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.


=. Timeliness.


B!oo"s: Cre te$i%cu!t&: ' E s&



73/107

5 . Elements of nancial statements do not include?

A. ;onetaryunit.

&. nvestments yo$ners.C. Comprehensive

income.=. osses

.





74/107

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.





75/107

70. According to the conceptual frame$or-8 veri a ility implies?

A. egalevidence.

&. ogic.C. Consensu

s.=. egal

verdict.





76/107

7!. ecogni(ing expected losses immediately8 ut deferring expected gains8 is anexample of?

A. ;aterialit

y.B. Conservatism.

C. Cost'e


77/107

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 .





78/107

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


79/107

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.



(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.





80/107

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.



(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1


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.





81/107

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

A. /eriodicit

y.&. ;onetaryunit.

C. Conservatism.

. Fulldisclosure.



(e rning )#*ective: +',+ $escri#e the -our # sic ssu"/tions un.er!&ing 8AAP1


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.






82/107

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.





9,. A cause'and'e


83/107

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

A. Compara ility andconsistency.

B. elevance and cost'e


84/107

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


85/107

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.





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





86/107

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.


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


87/107

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.



(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


(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


88/107

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/.





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




Matching Questions


89/107

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. %



(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



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. "



(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


90/107


1. ecognition

Accounting information should e

un iased. % !. Consistency mportant in analysis et$een rms. # %. Cost'e


91/107

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


92/107


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. %





93/107

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. !




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"


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





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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.




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


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


$i%cu!t&: e.iu"(e rning )#*ective: +',+ E /! in the .i erence #et een c sh n. ccru ! ccounting1


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




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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




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




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! . 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


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.




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.



(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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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&.





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.


AICPA BB: Critic ! ThinkingB!oo"s: Re"e"#er $i%cu!t&: e.iu"




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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



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"



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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.


B!oo"s: 2n.erst n.$i%cu!t&: 3 = r.



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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.




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.




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.




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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.




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

Chap001 Test Bank

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