Deck 14: Accounting Principles and Reporting Standards

Question 1

Revenue should not be recorded until it is ____________________ that is, until new assets are created in the form of money or claims against others.

Answer 1

realized; earned

Question 2

Financial information is said to be ____________________ if it can be reviewed by accountants outside the company, and these accountants arrive at the same conclusions as the preparers of the firm's financial statements.

Answer 2

verifiable; objective

Question 3

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

Answer 3

True

Question 4

Accountants use footnotes to financial statements to disclose information that may influence investor decisions.

Question 5

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

Question 6

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 7

A firm is following generally accepted accounting principles if it reports merchandise inventory on the balance sheet at its expected selling price.

Question 8

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

Question 9

The concepts of objectivity and verifiability eliminate subjective decisions.

Question 10

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

Question 11

The ____________________ assumption permits the costs of assets purchased many years ago to be added to the costs of newly purchased assets for financial statement reporting.

Question 12

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 13

Assets are carried on the books at historical cost.

Question 14

Most businesses follow the general rule that revenue is recognized when cash is received.

Question 15

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

Question 16

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

Question 17

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 18

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 19

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

Question 20

The Financial Accounting Standards Board is an agency of the federal government.

Question 21

Lack of ____________________ would result in financial reports that are not comparable with earlier statements.

Question 22

Which of the following statements is not correct?

A) The Securities and Exchange Commission (SEC) issues the Statements of Financial Accounting Standards.
B) Statements issued by the Financial Accounting Standards Board (FASB) are binding on the members of the American Institute of Certified Public Accountants (AICPA).
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) The Financial Accounting Standards Board is an independent organization.

Question 23

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

Question 24

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 25

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 26

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

A) Accounting and auditing guides.
B) Statements of position.
C) Practice bulletins.
D) Tax authority guidelines.

Question 27

Accounting information that is capable of making a difference in a decision by the user of the report is

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

Question 28

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

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

Question 29

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

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

Question 30

The modifying convention of ____________________ concerns the significance of an item in relation to the particular situation of which it is a part.

Question 31

Financial report users need information about

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

Question 32

If the ____________________ basis of accounting is used, income is recorded in the period in which it is earned.

Question 33

The ____________________ basis of accounting means that business transactions are recorded based on an "arm's length" transaction in the market.

Question 34

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

A) Current and potential investors and creditors in making investment and credit decisions.
B) Company management and owners.
C) Tax Authorities.
D) Regulating Agencies.

Question 35

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

Question 36

Investors and creditors expect to receive a cash flow from the business entity

A) directly from the distribution of the company's earnings.
B) indirectly through the disposition of their interests for cash.
C) Both of the above.
D) Neither of the above.

Question 37

If an important fact that would have an effect on an investor's decisions is omitted from the financial statements, the ____________________ principle has been violated.

Question 38

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 39

Because of the modifying convention of ____________________, assets are understated rather than overstated if any uncertainty exists.

Question 40

The Financial Accounting Standards Board is

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

Question 41

The four assumptions financial statement users should be able to assume that preparers of the statements have made in preparing the statements that are listed by the FASB's conceptual framework are

A) separate economic entity, going concern, monetary unit, and periodicity of income.
B) conservatism, matching principle, revenue recognition principle, and periodicity of income.
C) conservatism, cost-benefit test, full disclosure principal, and industry practice constraint.
D) historical cost basis, materiality realization, and transparency.

Question 42

Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 months of the policy has expired by the balance sheet date, how much should Hour Place Clock Repair report as Prepaid Insurance?

A) $0
B) $600
C) $1,200
D) $1,800

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

Question 44

Depreciating equipment over its useful life is an example of

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

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

Question 46

The Boston Red Sox receives cash from its season ticket holders in advance for the entire season. Under the revenue recognition principle, the Boston Red Sox 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 47

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

Question 48

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

A) 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.
B) 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.
C) A large company recorded the $20 cost of a tool as an expense, although the item is expected to be used for 3 years.
D) 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.

Question 49

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 realization principle.
C) following the separate entity assumption.
D) applying the conservatism convention.

Question 50

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 principle.
B) the conservatism principle.
C) the matching principle.
D) industry practice principle.

Question 51

A deviation from generally accepted accounting principles is

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

Question 52

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

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

Question 53

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

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

Question 54

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

Question 55

Recording land at its cost rather than its appraisal value illustrates

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

Question 56

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 did not choose to depreciate it. The modifying convention that the accountant followed was

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

Question 57

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

Question 58

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

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

Question 59

Which of the following statements is correct?

A) Under the accrual basis of accounting, revenue is recorded in the period in which it is earned.
B) Under the accrual basis of accounting, expenses are recorded in the period in which they are incurred.
C) Both of the above statements are correct.
D) Neither of the above statements is correct.

Question 60

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

Question 61

How are the concepts of materiality and cost-benefit related?

Question 62

What is meant by the concept of neutrality in accounting?

Question 63

Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented.
1. A piece of machinery has a book value (cost less accumulated depreciation) of $90,000. However, the machinery could not be sold for more than $70,000 today. The company's owner thinks that the machinery should nevertheless be reported on the balance sheet at $90,000 and depreciated over its useful life, because the equipment is being used regularly in the business and it is expected to be used for the next five years-the remaining useful life that is being used for depreciation purposes.
2. At the beginning of the year, the company bought a building for $1,000,000. At the end of the year, the building's value was appraised at $1,220,000. Since there was an increase in value, the company did not record depreciation on the building.
3. The assets listed in the accounting records of the company, which is operated as a sole proprietorship, include a savings account of the owner of the business. The owner established the savings account so that if she needs to invest more cash in the business, it will be readily available.
4. Three years ago, the company paid for a three-year insurance policy on its automobiles by writing a check for $6,000. At the end of the current year, the balance sheet of the company reported prepaid insurance at $6,000.

Question 64

The process used by FASB in developing conceptual framework statements reflects deductive reasoning and involves which steps?

Question 65

Why is the cost principle dependent on the going concern assumption?

Question 66

What two tests must be met in order for revenues to be recognized?

Question 67

Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 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) $0
B) $600
C) $1,200
D) $1,800

Question 68

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) $0
B) $400
C) $800
D) $2,400

Question 69

Paige Turner Publishing's employees worked the last 3 days of December 2013, that they will not be paid for until January 2014. According to the matching principle, Paige Turner Publishing should recognize the wages expense for the last 3 days of 2013

A) in 2013 when the employees worked.
B) in 2014 when they were paid.
C) half in 2013 and half in 2014.
D) in whichever year the management wants to.

Question 70

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.

Question 71

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.

Question 72

Define and give an example of all modifying constraints on accounting principles.

Question 73

According to FASB's conceptual framework, what are the 4 assumptions that financial statement users should assume that preparers of the statements have made in preparing the statements?

Question 74

Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented.
1. White Farm Equipment Company manufactures tractors and combines. It pays its salespeople a commission of 15 percent of the sales price as their compensation. During the current year, the company's sales were $100,000,000 and commissions amounted to $15,000,000. In the income statement, sales are shown as $100,000,000, but the $15,000,000 in commissions was not recorded in the current year as it will not be paid until the next year.
2. Plato Plastics Molding uses a large quantity of small tools in its manufacturing process. The annual purchases of the tools, which have a life of about two years, are approximately 1 percent of the company's net income for the year. The company has followed the practice of capitalizing the cost of the tools and depreciating the cost over two years. The owner asks why the accountant spends so much time on "bookkeeping" and tells her to simply charge the tools to expense when they are purchased. The accountant agrees.
3. Lauren Fox owns a snow removal business in Maine. Customers who will be vacationing in Florida for the winter must make a deposit of one-half of the seasonal rate on September 1, the last date to make arrangements to have their sidewalks and driveways plowed throughout the winter while they are gone. The balance is due on November 1. At the time deposits are received, Fox records them as revenue. Refunds, if any, are treated as expenses at the time they are made.
4. The Dollar Store sells such items as discontinued products and merchandise purchased from bankrupt companies. Freight costs on goods purchased are quite high. The company adds the freight costs to the purchase price and treats the total as cost of its merchandise inventory.
5. Each year, Neuman Enterprises has a large number of uncollectible accounts. Neuman charges uncollectible accounts to expense when they are deemed to be uncollectible. On the average, an account is deemed to be uncollectible about 18 months after the due date of the account.

Question 75

Explain the following statement. "Investors and creditors expect to receive a cash flow directly or indirectly from the business entity."

Question 76

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.

Question 77

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.

Question 78

Which of the following statements is NOT true?

A) The American Institute of CPA's has in the past had strong influence on the development of accounting principles.
B) The Sarbanes-Oxley Act places great emphasis on internal controls and fraud prevention.
C) The SEC has authority to accept or reject financial accounting principles and standards developed by the FASB.
D) 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.

Question 79

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.

Question 80

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 block away recently sold for $113,000. How much should Holly Day Company report on its balance sheet for the piece of land?

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