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

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 3

Equitable obligations
Due to the current poor economic conditions, Inferno Corp., a medium-size manufacturer in Burnaby, is downsizing its shipping department and has to let go two of the employees, Chevron and Shell. Both are excellent workers and have been with the company for several years. The department's supervisor, Jo-Ann Roberts, goes to the company CEO to see if there is another alternative for these employees (other than termination of their employment). Jo-Ann suggests that Chevron could be retrained to learn how to operate a forklift and Shell would like to learn how to be a first aid attendant. Since Inferno always needs employees with these skills, the CEO agrees to try this. Inferno's workforce is not unionized. What type of obligation is this? Discuss.

Accepted Answer

The answer of Equitable obligations
Due to the current poor economic...

Question 4

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 5

Foundational principles
Briefly explain the foundational principles of recognition, measurement, and presentation and disclosure that underlie financial accounting.

Accepted Answer

The answer of Foundational principles
Briefly explain the foundational principles of...

Question 6

The common characteristic of both assets and liabilities is that they both

Accepted Answer

A)  provide an economic resource. 
B)  result from a past transaction or event. 
C)  represent a present responsibility. 
D)  represent contractual or other rights.

Question 7

Constructive obligations
It was recently found that a fleet of vehicles produced by Agrarium Automotive Corp. possess a manufacturing defect relating to emissions compliance. In the past, Agrarium has issued recalls to owners of such vehicles, and paid for the associated repair cost. Agrarium has announced that they will continue to stand behind their products. Owners of the vehicle thus expect that Agrarium with replace or repair their vehicles. What type of obligation is this? Discuss.

Accepted Answer

The answer of Constructive obligations
It was recently found that a...

Question 8

The matching principle is best demonstrated by

Accepted Answer

A)  not recognizing any expense unless some revenue is realized. 
B)  associating effort (expense) with accomplishment (revenue). 
C)  recognizing prepaid rent received as revenue. 
D)  measuring expenses correctly.

Question 9

Which of the following does NOT relate to the concept of relevance?

Accepted Answer

A)  The information must be capable of making a difference in a decision. 
B)  Both material and immaterial information is important. 
C)  The information has predictive value. 
D)  The information has feedback/confirmatory value.

Question 10

The operations of a resource company's oil sands operations results in environmental damage. While the extent of the damage cannot be determined at this time, the situation is disclosed in its financial statements. This best demonstrates

Accepted Answer

A)  the application of professional judgement. 
B)  the full disclosure principle. 
C)  representational faithfulness. 
D)  good management stewardship.

Question 11

Moral hazard
In Chapter 1, the issue of information asymmetry, and the concept of moral hazard were introduced. Explain why the moral hazard issue is worse where some users (such as accountants and bankers) have expert knowledge.

Accepted Answer

The answer of Moral hazard
In Chapter 1, the issue of...

Question 12

The practice of matching

Accepted Answer

A)  dictates that efforts (expenditures) be matched with associated cash flow. 
B)  requires arbitrary allocation of an asset's contribution to a revenue stream. 
C)  illustrates the cause and effect relationship between money spent to earn revenues and the revenues themselves. 
D)  is required by GAAP to approximate an asset's contribution to an entity's periodic cash flow.

Question 13

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 14

Measurement, existence, and outcome uncertainties
Explain the difference between measurement uncertainty, existence uncertainty, and outcome uncertainty.

Accepted Answer

The answer of Measurement, existence, and outcome uncertainties
Explain the difference...

Question 15

Harlow 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 Harlow'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 Harlow's capital assets should be depreciated 
D)  the use of U.S.-trained accountants

Question 16

Under GAAP, inflation has been historically ignored due to the

Accepted Answer

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

Question 17

Which of the following elements of financial statements is NOT a component of comprehensive income?

Accepted Answer

A)  Revenues 
B)  Distributions to owners 
C)  Losses 
D)  Expenses

Question 18

Equitable obligations arise due to

Accepted Answer

A)  statutory requirements. 
B)  contractual obligations. 
C)  moral or ethical considerations. 
D)  union agreements.

Question 19

Fraudulent financial reporting
Identify several factors that contribute to fraudulent financial reporting.

Accepted Answer

The answer of  Fraudulent financial reporting
Identify several factors that...

Question 20

Fair value (of an asset) is

Accepted Answer

A)  an entry price. 
B)  an entity-specific measure. 
C)  an exit price. 
D)  not used when following IFRS.

Exam 2: Conceptual Framework Underlying Financial Reporting