Deck 2: Conceptual Framework Underlying Financial Accounting

Question 1

Decision Usefulness is the underlying theme of the conceptual framework.

Answer 1

True

Question 2

The conceptual framework for accounting has been discovered through empirical research.

Answer 2

False

Question 3

A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards.

Answer 3

True

Question 4

Although the FASB intends to develop a conceptual framework, no Statements of Financial Accounting Concepts have been issued to date.

Question 5

The historical cost principle would be of limited usefulness if not for the going concern assumption.

Question 6

Timeliness and neutrality are two ingredients of relevance.

Question 7

Companies consider only quantitative factors in determining whether an item is material.

Question 8

Revenues, gains, and distributions to owners all increase equity.

Question 9

Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.

Question 10

Verifiability and predictive value are two ingredients of reliability.

Question 11

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Question 12

Conservatism in accounting means the accountant should attempt to understate assets and income when possible.

Question 13

The economic entity assumption means that economic activity can be identified with a particular legal entity.

Question 14

Relevance and reliability are the two primary qualities that make accounting information useful for decision making.

Question 15

The first level of the conceptual framework identifies the recognition and measurement concepts used in establishing accounting standards.

Question 16

The IASB has issued a conceptual framework that is broadly consistent with that of the United States.

Question 17

Users of financial statements are assumed to have no knowledge of business and financial accounting matters by financial statement preparers.

Question 18

The idea of consistency does not mean that companies cannot switch from one accounting method to another.

Question 19

The matching principle states that debits must equal credits in each transaction.

Question 20

Revenues are realizable when assets received or held are readily convertible into cash or claims to cash.

Question 21

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

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

Question 22

According to Statement of Financial Accounting Concepts No.2, verifiability is an ingredient of the primary quality of

Question 23

A soundly developed conceptual framework of concepts and objectives should

A)increase financial statement users' understanding of and confidence in financial reporting.
B)enhance comparability among companies' financial statements.
C)allow new and emerging practical problems to be more quickly soluble.
D)all of these.

Question 24

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

A)To provide information about economic resources, the claims to those resources, and the changes in them.
B)To provide information that is helpful to investors and creditors and other users in assessing the amounts, timing, and uncertainty of future cash flows.
C)To provide information that is useful to those making investment and credit decisions.
D)All of these are objectives of financial reporting.

Question 25

The objectives of financial reporting include all of the following except to provide information that

A)is useful to the Internal Revenue Service in allocating the tax burden to the business community.
B)is useful to those making investment and credit decisions.
C)is helpful in assessing future cash flows.
D)identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims.

Question 26

The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is

A)relevance.
B)reliability.
C)verifiability.
D)neutrality.

Question 27

Generally accepted accounting principles

A)are fundamental truths or axioms that can be derived from laws of nature.
B)derive their authority from legal court proceedings.
C)derive their credibility and authority from general recognition and acceptance by the accounting profession.
D)have been specified in detail in the FASB conceptual framework.

Question 28

The underlying theme of the conceptual framework is

A)decision usefulness.
B)understandability.
C)reliability.
D)comparability.

Question 29

According to Statement of Financial Accounting Concepts No.2, timeliness is an ingredient of the primary quality of

Question 30

Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information they already possess or can obtain from other sources, and their ability to process information.Consequently, for information to be useful there must be a linkage between these users and the decisions they make.This link is

A)relevance.
B)reliability.
C)understandability.
D)materiality.

Question 31

According to Statement of Financial Accounting Concepts No.2, predictive value is an ingredient of the primary quality of

Question 32

Which of the following (a-c) are not true concerning a conceptual framework in account-ing?

A)It should be a basis for standard-setting.
B)It should allow practical problems to be solved more quickly by reference to it.
C)It should be based on fundamental truths that are derived from the laws of nature.
D)All of the above (a-c) are true.

Question 33

According to Statement of Financial Accounting Concepts No.2, which of the following relates to both relevance and reliability?

A)Materiality
B)Understandability
C)Usefulness
D)All of these

Question 34

Information is neutral if it

A)provides benefits which are at least equal to the costs of its preparation.
B)can be compared with similar information about an enterprise at other points in time.
C)would have no impact on a decision maker.
D)is free from bias toward a predetermined result.

Question 35

The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is

A)relevance.
B)reliability.
C)verifiability.
D)neutrality.

Question 36

Accounting information is considered to be relevant when it

A)can be depended on to represent the economic conditions and events that it is intended to represent.
B)is capable of making a difference in a decision.
C)is understandable by reasonably informed users of accounting information.
D)is verifiable and neutral.

Question 37

Which of the following is not a benefit associated with the FASB Conceptual Framework Project?

A)A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.
B)Practical problems should be more quickly solvable by reference to an existing conceptual framework.
C)A coherent set of accounting standards and rules should result.
D)Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

Question 38

The two primary qualities that make accounting information useful for decision making are

A)comparability and consistency.
B)materiality and timeliness.
C)relevance and reliability.
D)reliability and comparability.

Question 39

In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting?

A)Measurement and recognition concepts such as assumptions, principles, and constraints
B)Qualitative characteristics of accounting information
C)Elements of financial statements
D)Objectives of financial reporting

Question 40

According to Statement of Financial Accounting Concepts No.2, neutrality is an ingredient of the primary quality of

Question 41

According to the FASB Conceptual Framework, the elements-assets, liabilities, and equity-describe amounts of resources and claims to resources at/during a
$\begin{array}{lcc} & {\text { Moment in Time }} & \text { Period of Time } \\\text { a. } & \text { Yes } & \text { No } \\\text { b. } & \text { Yes } & \text { Yes } \\\text { c. } & \text { No } & \text { Yes } \\\text { d. } & \text { No } & \text { No }\end{array}$

Question 42

Financial information does not demonstrate consistency when

A)firms in the same industry use different accounting methods to account for the same type of transaction.
B)a company changes its estimate of the salvage value of a fixed asset.
C)a company fails to adjust its financial statements for changes in the value of the measuring unit.
D)none of these.

Question 43

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?

A)Cost/benefit constraint
B)Periodicity assumption
C)Conservatism constraint
D)Matching principle

Question 44

Which of the following is false with regard to the element "comprehensive income"?

A)It is more inclusive than the traditional notion of net income.
B)It includes net income and all other changes in equity exclusive of owners' invest-ments and distributions to owners.
C)This concept is not yet being applied in practice.
D)It excludes prior period adjustments (transactions that relate to previous periods, such as corrections of errors).

Question 45

What accounting concept justifies the usage of accruals and deferrals?

A)Going concern assumption
B)Materiality constraint
C)Consistency characteristic
D)Monetary unit assumption

Question 46

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

A)economic entity assumption.
B)relevance characteristic.
C)comparability characteristic.
D)neutrality characteristic.

Question 47

In classifying the elements of financial statements, the primary distinction between revenues and gains is

A)the materiality of the amounts involved.
B)the likelihood that the transactions involved will recur in the future.
C)the nature of the activities that gave rise to the transactions involved.
D)the costs versus the benefits of the alternative methods of disclosing the transactions involved.

Question 48

When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of

A)relevance.
B)reliability.
C)consistency.
D)none of these.

Question 49

The economic entity assumption

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 50

Under current GAAP, inflation is ignored in accounting due to the

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

Question 51

Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?

A)Monetary unit assumption.
B)Periodicity assumption.
C)Going-concern assumption.
D)Economic entity assumption.

Question 52

Financial information exhibits the characteristic of consistency when

A)expenses are reported as charges against revenue in the period in which they are paid.
B)accounting entities give accountable events the same accounting treatment from period to period.
C)extraordinary gains and losses are not included on the income statement.
D)accounting procedures are adopted which give a consistent rate of net income.

Question 53

Information about different entities and about different periods of the same entity can be prepared and presented in a similar manner.Comparability and consistency are related to which of these objectives?

Question 54

Under Statement of Financial Accounting Concepts No.2, representational faithfulness is an ingredient of the primary quality of

Question 55

During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of

Question 56

According to the FASB conceptual framework, earnings

A)are the same as comprehensive income.
B)exclude certain gains and losses that are included in comprehensive income.
C)include certain gains and losses that are excluded from comprehensive income.
D)include certain losses that are excluded from comprehensive income.

Question 57

One of the elements of financial statements is comprehensive income.As described in Statement of Financial Accounting Concepts No.6, "Elements of Financial Statements," comprehensive income is equal to

A)revenues minus expenses plus gains minus losses.
B)revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners.
C)revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities.
D)none of these.

Question 58

A decrease in net assets arising from peripheral or incidental transactions is called a(n)

A)capital expenditure.
B)cost.
C)loss.
D)expense.

Question 59

Which of the following elements of financial statements is not a component of compre-hensive income?

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

Question 60

The elements of financial statements include investments by owners.These are increases in an entity's net assets resulting from owners'

A)transfers of assets to the entity.
B)rendering services to the entity.
C)satisfaction of liabilities of the entity.
D)all of these.

Question 61

Application of the full disclosure principle

A)is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
B)is violated when important financial information is buried in the notes to the financial statements.
C)is demonstrated by the use of supplementary information presenting the effects of changing prices.
D)requires that the financial statements be consistent and comparable.

Question 62

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more

A)reliable.
B)relevant.
C)indicative of the entity's purchasing power.
D)conservative.

Question 63

Which of the following statements concerning the cost-benefit relationship is not true?

A)Business reporting should exclude information outside of management's expertise.
B)Management should not be required to report information that would significantly harm the company's competitive position.
C)Management should not be required to provide forecasted financial information.
D)If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.

Question 64

The accounting principle of matching is best demonstrated by

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)establishing an Appropriation for Contingencies account.

Question 65

Revenue generally should be recognized

A)at the end of production.
B)at the time of cash collection.
C)when realized.
D)when realized or realizable and earned.

Question 66

Under Statement of Financial Accounting Concepts No.5, which of the following, in the most precise sense, means the process of converting noncash resources and rights into cash or claims to cash?

A)Recognition
B)Measurement
C)Realization
D)Allocation

Question 67

Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the

A)consistency characteristic.
B)matching principle.
C)materiality constraint.
D)historical cost principle.

Question 68

Which of the following serves as the justification for the periodic recording of depreciation expense?

A)Association of efforts (expense) with accomplishments (revenue)
B)Systematic and rational allocation of cost over the periods benefited
C)Immediate recognition of an expense
D)Minimization of income tax liability

Question 69

Revenue is generally recognized when realized or realizable and earned.This statement describes the

A)consistency characteristic.
B)matching principle.
C)revenue recognition principle.
D)relevance characteristic.

Question 70

"When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash" is a definition of

A)allocated.
B)realized.
C)realizable.
D)earned.

Question 71

Which of the following is an implication of the going concern assumption?

A)The historical cost principle is credible.
B)Depreciation and amortization policies are justifiable and appropriate.
C)The current-noncurrent classification of assets and liabilities is justifiable and signify-cant.
D)All of these.

Question 72

Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No.2?

A)Cost-benefit relationship and conservatism
B)Timeliness and feedback value
C)Conservatism and verifiability
D)Materiality and cost-benefit relationship

Question 73

The assumption that a business enterprise will not be sold or liquidated in the near future is known as the

A)economic entity assumption.
B)monetary unit assumption.
C)conservatism assumption.
D)none of these.

Question 74

Generally, revenue from sales should be recognized at a point when

A)management decides it is appropriate to do so.
B)the product is available for sale to the ultimate consumer.
C)the entire amount receivable has been collected from the customer and there remains no further warranty liability.
D)none of these.

Question 75

Which of the following statements about materiality is not correct?

A)An item must make a difference or it need not be disclosed.
B)Materiality is a matter of relative size or importance.
C)An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
D)All of these are correct statements about materiality.

Question 76

Which of the following is not a time when revenue may be recognized?

A)At time of sale
B)At receipt of cash
C)During production
D)All of these are possible times of revenue recognition.

Question 77

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the

A)consistency characteristic.
B)matching principle.
C)materiality constraint.
D)revenue recognition principle.

Question 78

The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the

A)conservatism constraint.
B)materiality constraint.
C)substance over form principle.
D)industry practices constraint.

Question 79

Under Statement of Financial Accounting Concepts No.2, which of the following relates to both relevance and reliability?

A)Cost-benefit constraint
B)Predictive value
C)Verifiability
D)Representational faithfulness

Question 80

Valuing assets at their liquidation values rather than their cost is inconsistent with the

A)periodicity assumption.
B)matching principle.
C)materiality constraint.
D)historical cost principle.