Question 1

In the absence of specific GAAP guidance, an entity should adopt accounting policies that are
I.consistent with specific GAAP guidance.
Ii.consistent with the most conservative reporting choices.
Iii.collaboratively developed with the assistance of all business units.
Iv.developed through exercising professional judgement and applying the conceptual framework.

Accepted Answer

A) i, ii, and iii 
B) i and iii 
C) i and iv 
D) ii and iv

Question 2

Which of the following best describes why a conceptual framework is necessary?

Accepted Answer

A) to build all standards and rules upon a common foundation and increase financial statement users' understanding and confidence 
B) to make financial statement preparation an automated process requiring no human intervention 
C) to completely eliminate the potential for companies to exercise professional judgement in preparation of financial information 
D) to decrease the comparability of different companies' financial statements

Question 3

Which of the following is true about understandability as a qualitative characteristic of financial statements?

Accepted Answer

A) The onus to prepare understandable statements and to be able to understand them lies with the preparer. 
B) Where the underlying transactions or economic events are more complex, the user is expected to understand them without the assistance of an advisor. 
C) The onus to prepare understandable statements and to be able to understand them lies with the preparer and the user. 
D) Users with no knowledge of business and financial accounting matters are expected to understand the financial statements.

Question 4

The overriding criterion by which accounting information can be judged is that of

Accepted Answer

A) usefulness for decision making. 
B) freedom from bias. 
C) timeliness. 
D) comparability.

Question 5

Which basic assumption may NOT be followed when a firm in bankruptcy reports financial results?

Accepted Answer

A) economic entity assumption 
B) going concern assumption 
C) periodicity assumption 
D) monetary unit assumption

Question 6

Which of the following is NOT an objective of financial reporting?

Accepted Answer

A) to provide information about an entity's economic resources, obligations and equity/net assets 
B) to provide information that is useful to investors and creditors and other users in making resource allocation decisions and/or assessing management stewardship 
C) to provide information that is useful in assessing the economic performance of the entity 
D) to provide the most useful information possible even if the costs exceed the benefits

Question 7

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of

Accepted Answer

A) the economic entity assumption. 
B) the matching principle. 
C) comparability. 
D) reliability.

Question 8

Which of the following is NOT part of the conceptual framework for financial reporting?

Accepted Answer

A) elements of financial statements 
B) qualitative characteristics of accounting information 
C) notes to financial statements 
D) foundational principles

Question 9

The economic entity assumption

Accepted Answer

A) is inapplicable to unincorporated businesses. 
B) recognizes the legal aspects of business organizations. 
C) requires periodic income measurement. 
D) is applicable to all forms of business organizations.

Question 10

Materiality refers to

Accepted Answer

A) the tangible nature of an item. 
B) representational faithfulness. 
C) the decision-making relevance of a piece of information. 
D) None of these describe materiality.

Question 11

Burton Ltd.operates in both Canada and the United States.The company wants to improve the qualitative characteristics of its financial statements.Which of the following would most likely improve the comparability of Burton's financial statements?

Accepted Answer

A) the restatement of its financial statements from Canadian GAAP to US GAAP for its American investors 
B) the preparation of monthly financial statements 
C) the introduction of a policy that specifies how Sunbury's capital assets should be depreciated 
D) the use of U.S.-trained accountants

Question 12

A local businessman owns several different companies.His accountant prepares separate financial statements for each of these businesses.This is an application of the

Accepted Answer

A) full disclosure principle. 
B) periodicity assumption. 
C) going concern assumption. 
D) economic entity assumption.

Question 13

Which of the following situations does NOT demonstrate an attempt at financial engineering?

Accepted Answer

A) creating complex legal arrangements and financial instruments 
B) structuring debt financing so that it meets the GAAP definition of equity rather than debt 
C) accounting for bona fide business transactions in a transparent manner 
D) aggressively interpreting GAAP so that the impact on critical ratios is minimized

Question 14

Financial statements prepared under ASPE include a

Accepted Answer

A) statement of comprehensive income. 
B) statement of cash flows and a statement of changes in shareholders' equity. 
C) balance sheet and a statement of retained earnings. 
D) statement of retained earnings and a statement of comprehensive income.

Question 15

Fraudulent financial reporting is a business reality.While it cannot be eliminated, the risk of fraudulent reporting can be decreased.Which of the following considerations is least likely to lessen that risk?

Accepted Answer

A) an independent audit committee 
B) an internal audit function 
C) vigilant management 
D) an increased focus on tying bonuses to short-term company performance

Question 16

Principles-based GAAP is sometimes criticized for being

Accepted Answer

A) too inflexible. 
B) too flexible. 
C) too inconsistent. 
D) too difficult for the reader to understand.

Exam 2: Conceptual Framework Underlying Financial Reporting