Deck 14: Accounting Principles and Reporting Standards

Question 1

Which of the following important types of documents are not issued by the Accounting Standards Executive Committee?

A)tax authority guidelines.
B)statements of position.
C)practice bulletins.
D)accounting and auditing guides.

Answer 1

A

Question 2

Identify the statement below that is incorrect.

A)Information about profits appears in the income statement.
B)Meaningful information about the financial condition of a business can be determined by analyzing a business's financial statements.
C)Information about how cash is used as well as when cash is received can be found on a business's balance sheet.
D)Information about assets, liabilities and owner's equity is provided primarily in the balance sheet.

Answer 2

C

Question 3

The matching principle is being applied when the cost of equipment is depreciated over its useful life.

Answer 3

True

Question 4

Assets are carried on the books at historical cost.

Question 5

If an expenditure that is expected to benefit future periods is made during one accounting period, the cost should be divided and charged as an expense during each period benefited.

Question 6

The concept of realization permits a company to recognize income whenever there is an increase in the market value of the assets it holds.

Question 7

The separate entity assumption permits businesses to record property and equipment as assets that will provide benefits in future periods.

Question 8

Identify the statement below that is not correct regarding generally accepted accounting principles (GAAP).

A)GAAP is used to ensure that financial statements are meaningful and useful.
B)Sole proprietorships are not required to use GAAP because there is only a single owner.
C)GAAP allows the financial statements of different companies to be compared and meaningful conclusions drawn from the comparison.
D)Using generally accepting accounting principles (GAAP)allows companies to compare its own statements from period to period.

Question 9

The matching principle requires that all known costs be charged to the current period of operations.

Question 10

In its conceptual framework, the FASB concluded that financial reporting rules should concentrate on providing information that is helpful to

A)company management and owners.
B)tax authorities.
C)current and potential investors and creditors in making investment and credit decisions.
D)regulating agencies.

Question 11

The Financial Accounting Standards Board is

A)a branch of the IRS.
B)an independent organization.
C)a branch of the SEC.
D)a branch of the AICPA.

Question 12

In order to ensure they are meaningful and useful, financial statements should be prepared

A)on a daily basis.
B)in accordance with section 108 of the Sarbanes-Oxley Act.
C)using generally accepting accounting principles (GAAP).
D)on a timely basis.

Question 13

Footnotes to financial statements are used to disclose information that may influence investor decisions.

Question 14

Because financial statements must be objective and based on verifiable evidence, data obtained from estimates cannot be presented.

Question 15

For convenience, accountants assume that the value of money is stable or that changes in its value are not great enough to affect the recorded financial data.

Question 16

If too much of the cost of an asset is charged as depreciation expense in the present period, the firm's net income will be understated in later periods.

Question 17

The Statements of Financial Accounting Standards that automatically become generally accepted accounting principles are issued by

A)the SEC.
B)the AICPA.
C)the FASB.
D)the IRS.

Question 18

Which of the following statements is not correct?

A)The Financial Accounting Standards Board is an independent organization.
B)The Securities and Exchange Commission (SEC)issues the Statements of Financial Accounting Standards.
C)An act of law gave the SEC the authority to determine the form and content of accounting reports filed by companies under its jurisdiction.
D)Statements issued by the Financial Accounting Standards Board (FASB)are binding on the members of the American Institute of Certified Public Accountants (AICPA).

Question 19

Most businesses follow the general rule that revenue is recognized when earned, not necessarily when the cash is received.

Question 20

Assets are recorded at cost when they are purchased, but the asset accounts are adjusted each year to reflect changes in market value.

Question 21

The separate economic entity assumption assumes that:

A)the business will continue to operate indefinitely.
B)financial events are meaningful only when they can be expressed in economic terms.
C)a business's life can be separated into time periods with income being reported within one economic time period.
D)the financial statements of a business reflect the affairs of the business-not the affairs of the owners.

Question 22

The Cervantes Company uses the same method of depreciation for its equipment in each fiscal period. This practice is an example of

A)materiality.
B)matching.
C)consistency.
D)conservatism.

Question 23

When Tamar Snyder opened a shoe store, her accountant did not include the cash in her personal savings account as one of the assets of the business. This is an example of

A)the conservatism constraint.
B)the materiality constraint.
C)industry practice constraint.
D)the separate entity assumption.

Question 24

Which of the following is allowed under generally accepted accounting principles?

A)A large company recorded the $20 cost of a tool as an expense, although the item is expected to be used for 3 years.
B)The Equipment account shows a balance of $55,000. This amount represents the original cost of $75,000 less the accumulated depreciation of $20,000.
C)An owner lists the full cost of his or her personal automobile, which is occasionally used for business purposes, on the company's balance sheet.
D)A company was offered $60,000 for land that it had purchased for $15,000. The company did not sell the land but increased the Land account to $60,000.

Question 25

An accountant who records revenue when a credit sale is made rather than waiting for the receipt of cash from the customer is

A)violating generally accepted accounting principles.
B)following the accrual principle.
C)following the conservatism constraint.
D)following the consistency principle.

Question 26

The monetary unit assumption assumes that:

A)the value of money is not stable.
B)the idea that expressing financial facts and events is meaningful only when they can be expressed in monetary terms.
C)the business will continue to operate indefinitely.
D)revenues and expenses of a business can be separated into separate time periods.

Question 27

Which of the following statements is correct?

A)Under the accrual basis of accounting, revenue is recorded in the period in which it is received.
B)Under the accrual basis of accounting, revenue is recorded in the period in which it is earned.
C)Under the accrual basis of accounting, revenue is recorded in the period in which it is paid.
D)Under the accrual basis of accounting, expenses are recorded in the period in which they are paid.

Question 28

Accounting information that could make a difference in a decision by the user of the accounting information is

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

Question 29

Recording land at its cost rather than its appraisal value illustrates

A)the matching principle.
B)the realization principle.
C)the cost basis principle.
D)the full disclosure principle.

Question 30

Each year there was an increase in the market value of some of the stock owned by the Mudstream Company, but the accountant did not record the increase in the asset's value and equity until the stock was sold. In this situation, the accountant

A)followed the realization principle.
B)violated the accrual principle.
C)followed the matching principle.
D)violated the matching principle.

Question 31

The basic financial reports of a business provide users with information about all of the following with the exception of

A)claims against the assets (liabilities and owner's equity).
B)economic resources (assets).
C)competitors of a business.
D)profits.

Question 32

The accounting assumption of expressing financial facts and events is meaningful only when they can be expressed in monetary terms is the:

A)matching assumption .
B)dollar value assumption.
C) monetary unit assumption.
D)separate economic entity assumption.

Question 33

Keeping the personal assets of the owner of a business separate from the assets of the firm is an example of

A)following the going concern assumption.
B)applying the conservatism constraint.
C)following the separate entity assumption.
D)applying the realization principle.

Question 34

The accounting assumption that the financial statements of a business reflect the activities of the business and not the activities of the owners is the:

A)matching assumption.
B)periodicity of income assumption.
C)separate economic entity assumption.
D)monetary unit assumption.

Question 35

Select the statement below that does not correctly describe the qualitative characteristic of
Reliability.

A)Reliable information should be compared with the same data for other companies.
B)Reliability means that the information should be dependable.
C)Information that is reasonably free of error and bias is assumed to be reliable.
D)Reliable information is a faithful representation of the company's financial affairs.

Question 36

Depreciating equipment over its useful life is an example of

A)following the objectivity assumption.
B)applying the realization principle.
C)applying the matching principle.
D)applying the conservatism constraint.

Question 37

The financial statements in the annual report of a corporation contain footnotes explaining the methods used to depreciate the firm's equipment. This practice is an example of

A)the accrual principle.
B)the consistency principle.
C)the conservatism constraint.
D)the full disclosure principle.

Question 38

Select the statement below that correctly describes the qualitative characteristic of comparability.

A)Information is reasonably free of error and bias to be comparable.
B)Financial data is presented in such a manner that it can be meaningfully compared with the same data for other companies.
C)Financial results of one period should closely resemble the financial results of a previous period.
D)The financial reports reflect what really happened during a time period.

Question 39

Marvin's Appliance Store sold a 3-year service contract on a refrigerator receiving the entire amount in cash at the time of the sale. Recording the revenue from the prepaid service contract over its 3-year life is an example of

A)following the objectivity assumption.
B)applying the conservatism constraint.
C)applying the realization principle.
D)applying the revenue recognition principle.

Question 40

The SEC's 2003 report to the Congress on "principles-based" accounting observed that the first characteristic of objectives-based standards, as dictated by the Sarbanes-Oxley Act, is that any standard must be based on

A)qualitative characteristics.
B)transparency.
C)an improved and consistently applied framework.
D)the cost-benefit test.

Question 41

A deviation from generally accepted accounting principles is

A)never allowed.
B)permissible only if its required in order to conform to the monetary unit assumption.
C)permissible if the amount involved is immaterial.
D)permissible if the amount involved is material.

Question 42

When a new company was formed, one partner contributed some used equipment he owned. The equipment was appraised at $44,000 and $50,000 by two different dealers. The accountant entered the equipment at $44,000 in the financial records of the partnership. This is an example of

A)the materiality constraint.
B)the matching principle.
C)the conservatism constraint.
D)industry practice constraint.

Question 43

Under the accrual basis of accounting

A)Revenue is recorded in the period in which it is earned and expenses are recorded in the period in which incurred.
B)Revenue and expenses are recorded when cash is received or paid.
C)Expenses are recorded in the period in which they are incurred and revenue is recorded when payment is received.
D)When revenues and expenses are recorded is up to the owners and/or managers.

Question 44

Select the statement below that correctly describes the matching principle.

A)Assets must be matched against liabilities on the financial statements.
B)The historical costs of assets are matched to expenses associated with their purchase.
C)Expenses (debts)will be paid when matched to corresponding invoices.
D)Income (revenue)must be matched against expired costs incurred in earning the revenue.

Question 45

Paige Turner Publishing paid cash in advance for a one year insurance policy. According to the matching principle, Paige Turner Publishing should recognize the policy as insurance expense

A)after the one year policy has expired.
B)in equal installments over the one year policy period, as the expense is incurred.
C)at the time the cash is paid.
D)in two equal installments, six months apart.

Question 46

The Garrison Company offers terms of net 30 days for its credit sales, recording the revenue from the sales when the cash is received from the customers. Garrison Company is

A)following the conservatism constraint.
B)violating the revenue recognition principle.
C)violating the consistency principle.
D)following the realization principle.

Question 47

Hour Place Clock Repair paid $2,400 cash in advance for a one year insurance policy. According to the matching principle, if 5 months of the policy has expired by the balance sheet date, how much should Hour Place Clock Repair report as Prepaid Insurance?

A)$200
B)$1,000
C)$2,400
D)$1,400

Question 48

Paige Turner Publishing receives cash from its subscribers in advance for a one year subscription. Under the revenue recognition principle, Paige Turner Publishing should recognize the revenue from the subscriptions

A)in equal installments over the one year subscription period, as it is earned.
B)at the time the cash is received.
C)after the one year subscription has expired.
D)in two equal installments, six months apart.

Question 49

The New York Mets entered into a vendor contract with Immaculate Landscaping to maintain their field for the entire season and paid the full contract fee in advance, expensing the full amount at the time of payment, which is

A)violating the full disclosure principle.
B)following the revenue recognition principle.
C)in full compliance with all GAAP principles.
D)violating the matching principle.

Question 50

An accountant charged the Repairs Expense account for a tool that cost $12. The tool had an estimated useful life of 5 years; however, the accountant chose not to depreciate it. The modifying constraint that the accountant followed was

A)industry practice.
B)materiality.
C)conservatism.
D)objectivity.

Question 51

Paige Turner Publishing's employees worked the last 3 days of December 2019, that they will not be paid for until January 2020. According to the matching principle, Paige Turner Publishing should recognize the wages expense for the last 3 days of 2019

A)in whichever year the management wants to.
B)half in 2019 and half in 2020.
C)in 2019 when the employees worked.
D)in 2020 when they were paid.

Question 52

The materiality constraint refers to:

A)the significance of an item of financial data in relation to other financial data.
B)whether the increased cost of complying with an accounting principle is justified by the benefit that would result.
C)existing accounting practices that have evolved based on the amount of debt that would be incurred by the business.
D)the idea that "when in doubt, take the conservative action."

Question 53

Hour Place Clock Repair paid $2,580 cash in advance for a one year insurance policy. According to the matching principle, if 3 months of the policy has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement?

A)$2,580
B)$5,805
C)$215
D)$645

Question 54

Holly Day Company purchased a piece of land 10 years ago for $50,000. Holly Day Company is considering selling the land. The piece of land was recently appraised for $120,000, they received an offer from a prospective buyer for $105,000, and a similar piece of land 5 blocks away recently sold for $113,000. How much should Holly Day Company report on its balance sheet for the piece of land?

A)$113,000
B)$105,000
C)$50,000
D)$120,000

Question 55

The cost-benefit test constraint refers to:

A)the requirement that all benefit transactions must conform to "industry practice."
B)the benefit of complying with an accounting principle should outweigh the cost of compliance.
C)the idea that "when in doubt, take the most beneficial action."
D)the recording of assets at their historical cost rather than their fair market value.

Question 56

Hour Place Clock Repair paid $2,400 cash in advance for a six month advertising contract with the local newspaper. According to the matching principle, if 2 months of the contract has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Advertising Expense on the Income Statement?

A)$400
B)$2,400
C)$800
D)$1,600

Question 57

Select the statement below that correctly describes the revenue recognition principle.

A)Revenue is recognized when it is both earned and realized.
B)Assets will generally be recorded and carried at their historical cost.
C)Income (revenue)must be matched against expired costs incurred in earning the revenue.
D)Revenue will be recorded when payment has been received.

Question 58

The New York Mets received cash from their season ticket holders for the entire season in advance. Under the revenue recognition principle, the New York Mets should recognize the revenue from the season ticket holders

A)at the time the cash is received.
B)after the season is completed.
C)as each game is played.
D)in two equal installments, six months apart.

Question 59

The Garrison Company offers terms of net 30 days for its credit sales. It records the revenue from these sales as soon as the sales are made rather than waiting until cash is received from the customers. This is an example of the

A)consistency principle.
B)realization principle.
C)matching principle.
D)conservatism constraint.

Question 60

Spanky's Market sells organic foods and the owners and employees pride themselves on being environmentally conscious by using as little paper products as possible. As such, when the annual financial statements were issued, they omitted the notes to the financial statements thus using 70% less paper. Omitting the notes to the financial statements is

A)a violation of the full disclosure principle
B)following the environmentally conscious principle
C)violating the matching principle
D)following the historical cost principle

Question 61

The income statement shown below was prepared and sent by Jenna Preston, the owner of Preston Gifts, to several of her creditors. The business is a sole proprietorship that sells miscellaneous gifts. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles.


Additional information provided by owner:
1. All sales were for cash.
2. The beginning and ending merchandise inventories were valued at their estimated selling price. The actual cost of the ending inventory is estimated to be $12,000. The actual cost of the beginning inventory is estimated to be
$20,000.
3. On December 31, 2019, suppliers of merchandise are owed $11,000. On January 1, 2019, they were owed $14,000.
4. The owner paid herself a salary of $1,250 per month and charged this amount to the Salary of Owner account.
5. A check for $800 to cover the December rent on the owner's personal apartment was issued from the firm's bank account. This amount was charged to Rent Expense.

Question 62

The ________ principle requires that if income is to be properly measured, all expired costs associated with the earning of revenue must be deducted from the revenue in the same accounting period.

Question 63

What is meant by the concept of neutrality in accounting?

Question 64

The SEC has authority to define accounting terms and to prescribe accounting procedures used by all ________ held corporations.

Question 65

The ________ principle requires important facts that would have an effect on an investor's decisions be included in the financial statements.

Question 66

The ________ assumption, which assumes that a firm will continue to operate indefinitely, permits carrying forward a portion of the cost of assets that will be used in future periods .

Question 67

Which of the following statements is NOT true?

A)The SEC has authority to accept or reject financial accounting principles and standards developed by the FASB.
B)The Sarbanes-Oxley Act places great emphasis on internal controls and fraud prevention.
C)Because of the Sarbanes-Oxley Act, it is probable that the FASB's conceptual framework will become less important in developing accounting principles and standards.
D)The American Institute of CPA's has in the past had strong influence on the development of accounting principles.

Question 68

The income statement shown below was prepared and sent by Curtis Brown, the owner of Curt's Crafts, to several of his creditors. The business is a sole proprietorship that sells crafts and toys. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles.
Income Statement
CURT'S CRAFTS
Year Ended December 31, 2019

Additional information provided by owner:
1. On December 31, 2019, accounts receivable from customers total $32,000. On January 1, 2019, accounts receivable totaled $52,000.
2. The beginning and ending merchandise inventories were valued at their
1. The beginning and ending merchandise inventories were valued at their estimated selling price. The actual cost of the ending inventory is estimated to be $6,000. The actual cost of the beginning inventory is estimated to be
$18,000.
2. On December 31, 2019 suppliers of merchandise are owed $16,000. On January 1, 2019, they were owed $11,000.
3. The owner paid himself a salary of $1,600 per month and charged this amount to the Salaries Expense account.
4. A check for $300 to cover the December electric bill on the owner's personal home was issued from the firm's bank account. This amount was charged to Utilities Expense.

Question 69

Under the ________ basis of accounting, income is recorded in the period in which it is earned.

Question 70

Antonio Hanley owns a small automobile service center. He recently approached the local bank for a loan to finance an expansion of his service center. Antonio prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles.

Additional information provided by owner:
1. The inventory has an original cost of $84,000. It is listed on the balance sheet at what it would cost to purchase today.
2. Included in the cash listed on the balance sheet is $8,000 in Antonio Hanley's personal checking account.
3. Depreciation allowable to date on the equipment is $10,000. Depreciation allowable to date on the truck is $6,000.

Question 71

Reporting the information on the income statement and the statement of owner's equity over a period of time and the balance sheet as of a specific date is complying with the

A)going concern assumption
B)periodicity of income assumption
C)monetary unit assumption
D)the time value of money principle

Question 72

Carlos Verde owns a small nursery. He recently approached the local bank for a loan to finance an expansion of his nursery. Carlos prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles.
VERDE GARDEN SPOT
Balance Sheet December 31, 2019
Assets
Cash $15,000
Accounts Receivable 13,000
Supplies 2,500
Inventory 46,000
Equipment 16,000
Truck 11,000
Personal Residence 178,000
Family Car 17,500
Total Assets $299,000
Liabilities and Owner's Equity
Accounts Payable 23,000
Note Payable on Family Car 9,000
Note Payable on Truck 6,000
Mortgage on House 127,000
Carlos Verde, Capital 134,000 Total Liabilities and Owner's Equity $299,000
Additional information provided by owner:
1. The inventory has an original cost of $42,000. It is listed on the balance sheet at what it would cost to purchase today.
2. Included in the cash listed on the balance sheet is $4,000 in Carlos Verde's personal checking account.
3. Depreciation allowable to date on the equipment is $5,000. Depreciation
3. Depreciation allowable to date on the equipment is $5,000. Depreciation allowable to date on the truck is $3,000.

Question 73

The modifying constraint of ________ concerns the monetary or financial significance of an item in relation to the particular monetary or financial situation of which it is a part.

Question 74

An accountant generally assumes that a firm is a(n) ________and will continue to operate indefinitely.

Question 75

Revenue should not be recorded until it is ________; that is, until new assets are created in the form of money or receivables.

Question 76

The accountant records an expense for wages earned by employees during the last four days of the year, even though the wages will not be paid in that year. The accountant is following the________ principle.

Question 77

Because of the modifying constraint of ________, if uncertainty exists, assets are understated rather than overstated.

Question 78

Financial accounting rules affect the recording of data used to prepare financial reports that go to________ and ________.

Question 79

In recent years, it has been reported that several large companies have manipulated business transactions and accounting records to change the net income reported on their income statements. Suggest five concepts, assumptions, principles, or conventions that such manipulation would violate.