Deck 1: The Development of Accounting Theory

Question 1

Which of the following is a public sector accounting standard setter?

A) FASB
B) SEC
C) APB
D) CAP

Answer 1

B

Question 2

Considering and understanding how business decisions affect the financial statements is
A) Interpreted strictly by the company's suppliers.

A) The sole responsibility of the Securities and Exchange Commission.
B) Provided in the auditor's report.
C) Referred to as an economic consequence perspective.

Answer 2

C

Question 3

Which of the following was not a criticism of the development of accounting standards by the Accounting Principles Board?

A) The independence of the members of the APB. The individuals serving on the board had full-time responsibilities elsewhere that might influence their views of certain issues.
B) The structure of the board. The largest eight public accounting firms (at that time) were automatically awarded one member, and there were usually five or six other public accountants on the APB.
C) Harmonization. The accounting standards developed were dissimilar to those developed by the International Accounting Standards Committee.
D) Response time. The emerging accounting problems were not being investigated and solved quickly enough by the part-time members.

Answer 3

C

Question 4

What is the purpose of Emerging Issues Task Force?

A) Provide interpretation of existing standards.
B) Provide timely guidance on select issues.
C) Provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis.
D) Provide interpretive guidance

Question 5

Which of the following types of pronouncements are intended to establish the objectives and concepts that the FASB will use in developing standards of financial accounting and reporting?

A) Statements of Concepts
B) Statements of Financial Accounting Standards
C) APB Opinions
D) Accounting Standards Updates

Question 6

Some accountants maintain that accounting standards are as much a product of political action as they are of careful logic or empirical findings. This belief is an example of the concept of

A) Standard setting as a political process
B) Standards overload
C) Economic consequences
D) The role of ethics in accounting

Question 7

Which of the following committees recommended abolishing the Accounting Principles Board and replacing it with the Financial Accounting Board?

A) Wheat
B) Cohen
C) Trueblood
D) Anderson

Question 8

Which of the following bodies has the ultimate authority to issue accounting pronouncements in the United States?

A) Securities and Exchange Commission
B) Financial Accounting Standards Board
C) International Accounting Standards Committee
D) Internal Revenue Service

Question 9

Which of the following is not a consequence of the standards overload problem to small businesses?

A) If a small business omits a GAAP requirement from audited financial statements, a qualified or adverse opinion may be rendered.
B) Small businesses do not need to keep financial records
C) The cost of complying with GAAP requirements may cause a small business to forgo the development of other, more relevant information.
D) Small CPA firms that audit smaller companies must keep up to date on all the same requirements as large international firms, but they cannot afford the specialists that are available on a centralized basis in the large firms.

Question 10

Financial accounting standard-setting in the United States can be described as:

A) A democratic process in the sense that a majority of accountants must agree with a standard before it becomes enforceable.
B) A research process based on empirical findings
C) A political process which reflects actions of various interested user groups as well as a product of research and logic.
D) A legalistic process based on rules promulgated by governmental agencies

Question 11

The impact of accounting reports on various segments of our economic society is the definition of the concept of

A) Standard setting as apolitical process
B) Standards overload
C) Economic consequences
D) The role of ethics in accounting

Question 12

Which of the following types of pronouncements now establishes generally accepted accounting principles?

A) Statements of Concepts
B) Statements of Financial Accounting Standards
C) APB Opinions
D) Accounting Standards Updates

Question 13

Which of the following companies was involved in an accounting failure that caused the public accounting firm Arthur Andersen to gout of business?

A) Goldman Sachs
B) Wachovia
C) Enron
D) AIG

Question 14

Economic consequences of accounting standard-setting means:

A) Standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.
B) Standard-setters must ensure that no new costs are incurred when a new standard is issued.
C) The objective of financial reporting should be politically motivated to ensure acceptance by the general public.
D) Accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.

Question 15

What historical evidence of the business operations of the private estate of Apollonius was discovered early in the 20th century?

A) The Iliad
B) ? HYPERLINK "http://en.wikipedia.org/wiki/Plato" \o "Plato" ?Plato?'s ? HYPERLINK "http://en.wikipedia.org/wiki/The_Republic_(Plato)" \o "The Republic (Plato)" ?Republic
C) The Zenon papyri
D) Pacioli's work, Summa de Arithmetica Geometria Proportioni et Proportionalita,

Question 16

Which organization was responsible for issuing Accounting Research Bulletins?
A) The Committee on Accounting Procedure

A) The Accounting Principles board
B) The Financial Accounting Standards Board
C) The Securities and Exchange Commission

Question 17

What controversy originally highlighted the need for standard setting groups to have more authority?

A) Accounting for stock options
B) Accounting for derivatives
C) Accounting for marketable securities
D) Accounting for the investment tax credit

Question 18

Which of the following pronouncements were issued by the Accounting Principles Board?

A) Accounting Research Bulletins
B) APB Opinions
C) Statements of Financial Accounting Concepts
D) Accounting Standards Updates

Question 19

Which of the following is the professional organization of university accounting professors?

A) American Accounting Association
B) American Institute of Certified Public Accountants
C) American Institute of Accountants
D) Financial Executives Institute

Question 20

The mission of the International Accounting Standards Board (IASB) is to

A) Develop a uniform currency in which the financial transactions of companies throughout the world would be measured.
B) Issue enforceable standards which regulate the financial accounting and reporting of multinational corporations.
C) Develop a single set of high-quality and understandable IFRS for general-purpose financial statements.
D) Arbitrate accounting disputes between auditors and international companies.

Question 21

How did the Sarbanes-Oxley Act change the way the FASB is funded?

Question 22

All the following are true regarding the FASB Accounting Standards Codification except:

A) The Codification changes the way GAAP is documented, presented, and updated.
B) The goal of the Codification was to provide one place where all authoritative literature about a particular topic could be found.
C) The purpose of the Codification is to create new GAAP.
D) The Codification was created to simplify user access.

Question 23

What was the purpose of the GAAP Hierarchy?

Question 24

Discuss the evolution of the three private sector accenting standard setting organizations.
a. The independence of the members of the APB. The individuals serving on the board had full-time responsibilities elsewhere that might influence their views of certain issues.
b. The structure of the board. The largest eight public accounting firms (at that time) were automatically awarded one member, and there were usually five or six other public accountants on the APB.
c. Response time. The emerging accounting problems were not being investigated and solved quickly enough by the part-time members.
As a result of the growing criticism of the APB, in 1971, the board of directors of the AICPA appointed two committees. The Wheat Committee, chaired by Francis Wheat, was to study how financial accounting principles should be established. The Trueblood Committee, chaired by Robert Trueblood, was asked to determine the objectives of financial statements.
The Wheat Committee issued its report in 1972 recommending that the APB be abolished and the Financial Accounting Standards Board (FASB) be created. This new board was to comprise representatives from various organizations, in contrast to the APB, whose members were all from the AICPA. The members of the FASB were also to be full-time paid employees, unlike the APB members, who served part time and were not paid.
The Trueblood Committee, formally known as the Study Group on Objectives of Financial Statements, issued its report in 1973 after substantial debate and with considerably more tentativeness in its recommendations about objectives than the Wheat Committee had with respect to the establishment of principles. The study group requested that its report be regarded as an initial step in developing objectives and that significant efforts should be made to continue progress on the refinement and improvement of accounting standards and practices.
The AICPA quickly adopted the Wheat Committee recommendations, and the FASB became the official body charged with issuing accounting standards. The structure of the FASB is as follows. A board of trustees nominated by organizations whose members have special knowledge and interest in financial reporting is selected. The organizations originally chosen to select the trustees were the American Accounting Association; the AICPA; the Financial Executives Institute; the National Association of Accountants (The NAA's name was later changed to Institute of Management Accountants in 1991) and the Financial Analysts Federation. In 1997 the Board of Trustees added four members from public interest organizations. The board that governs the FASB is the Financial Accounting Foundation (FAF). The FAF appoints the Financial Accounting Standards Advisory Council (FASAC), which advises the FASB on major policy issues, the selection of task forces, and the agenda of topics. The number of members on the FASAC varies from year to year. The bylaws call for at least twenty members to be appointed. However, the actual number of members has grown to about thirty in recent years to obtain representation from a wider group of interested parties

Question 25

Which of the following organizations was established by the federal government to help develop and standardize financial information presented to stockholders?

A) AICPA (American Institute of Certified Public Accountants).
B) SEC (Securities and Exchange Commission).
C) FASB (Financial Accounting Standards Board).
D) CAP (Committee on Accounting Procedure)

Question 26

Discuss the role of ethics in accounting.

Question 27

What controversy caused the AICPA to issue Rule 203 that requires companies to use GAAP when issuing financial statements?
F. Kennedy took office, his advisors suggested an innovative fiscal economic policy that involved a direct income tax credit (as opposed to a tax deduction) based on a percentage of the cost of a qualified investment. Congress passed legislation creating the investment tax credit in 1961.
The APB was then faced with deciding how companies should record and report the effects of the investment tax credit. It considered two alternative approaches:

Question 28

Discuss the evolution of the phrase "generally accepted accounting principles".
a. AICPA Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by action of the FASB, FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, and FASB Staff Positions.
b. FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position.
c. AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB and consensus positions of the FASB Emerging Issues Task Force (EITF).
d. Implementation guides published by the FASB staff, AICPA accounting interpretations, and practices that are widely recognized and prevalent either generally or in the industry.
Finally, in 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162. SFAS No. 168 identified the FASB ASC as the official source of U. S. GAAP.
Despite the continuing effort to narrow the scope of GAAP, critics maintain that management is allowed too much leeway in the selection of the accounting procedures used in corporate financial reports. These criticisms revolve around two issues that are elaborated on later in the text: (1) Executive compensation is frequently tied to reported earnings, so management is inclined to adopt accounting principles that increase current revenues and decrease current expenses and (2) the value of a firm in the marketplace is determined by its stock price. This value is highly influenced by financial analysts' quarterly earnings estimates. Managers are fearful that failing to meet these earnings estimates will trigger a sell-off of the company's stock and a resultant decline in the market value of the firm.
Previously, SEC Chairman Levitt noted these issues and indicated his belief that financial reports were descending "into the gray area between illegitimacy and outright fraud." As a consequence, the SEC has set up an earnings management task force to uncover accounting distortions. Some companies have already voluntarily agreed to restructure their financial statements as a result of this new effort by the SEC. For example, SunTrust Bank, Inc., of Atlanta, though not accused of any wrongdoing, agreed to a three-year restructuring of earnings for the period ended December 31, 1996.

Question 29

Why is the development of a general theory of accounting important?

Question 30

What were the purposes of the Wheat and Trueblood committees?

Question 31

Discuss why standard setting may be viewed as a political process.

Question 32

What is the difference between normative and positive theory?

Question 33

What were the four types of pronouncements originally issued by the FASB prior to the adoption of the FASB ASC?

Question 34

What is a special purpose entity and how do they work?

Question 35

Define the following terms
a. Economic consequences
Economic consequences refers to the impact of accounting reports on various segments of our economic society. This concept holds that the accounting practices a company adopts affect its security price and value. Consequently, the choice of accounting methods influences decision making rather than just reflecting the results of these decisions.
b. Standards overload
Over the years, the FASB, the SEC, and the AICPA have been criticized for imposing too many accounting standards on the business community. This standards overload problem has been particularly burdensome for small businesses that do not have the economic resources to research and apply all the pronouncements issued by these authoritative bodies. Those who contend that there is a standards overload problem base their arguments on two allegations: (1) Not all GAAP requirements are relevant to small business financial reporting needs and (2) even when GAAP requirements are relevant, they frequently violate the pervasive cost-benefit constraint.
Critics of the standard-setting process for small businesses also assert that GAAP were developed primarily to serve the needs of the securities market. Many small businesses do not raise capital in these markets; therefore, it is contended that GAAP were not developed with small business needs in mind.

Question 36

Discuss the FASB ASC including the reasons for its adoption and the FASB's goals in developing it.

Question 37

Discuss the evolution of accounting during the 1930s.

Question 38

The body that has the ultimate power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the

A) SEC
B) APB.
C) FASB.
D) AICPA.

Question 39

The Financial Accounting Standards Board (FASB) was proposed by the

A) American Institute of Certified Public Accountants.
B) Study Group on establishment of Accounting Principles (Wheat Committee).
C) Accounting Principles Board.
D) Study Group on the Objectives of Financial Statements (Trueblood Committee)

Question 40

International Financial Reporting Standards (IFRS) are issued by the:

A) EU (European Union).
B) SEC (Securities and Exchange Commission).
C) FASB (Financial Accounting Standards Board).
D) IASB (International Accounting Standards Board).

Question 41

Discuss the objectives of the International Accounting Standards Board.