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CHAPTER 1 Financial Reporting MULTIPLE CHOICE QUESTIONS Theory/Definitional Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
24 25 26 27 28 29
Objective of financial reporting Objectives of financial reporting Definition of financial ing Definition of management ing Responsibilities of an external auditor Responsibilities of an external auditor Internal s of financial information Issuers of GAAP prior to 1973 FASB appointed by the Financial ing Foundation Financial ing Foundation oversees operations of the FASB Differences between FASB and APB Characteristics of FASB Types of documents issued by the FASB Responsibility for GAAP and public reporting rests with FASB Responsibilities of the EITF Order followed by FASB in publishing standards Proper application of ing principles dependent upon professional judgment Responsibilities of GASB Source of GAAP for governmental operations is GASB Process of establishing ing standards Congressional involvement in ing FASB responsibility after initial issuance of standard Management has primary responsibility for preparing GAAP financial statements Historical sequence of ing rule-making bodies FASB is source of GAAP for nongovernmental operations Number of who serve on FASB Role of individual companies in standard setting Pronouncements issued by SEC Primary purpose of SEC
30
Form 10-K submitted to SEC
18 19 20 21 22 23
1
31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68
The Journal of ancy published by the AIA Purpose of IASC FASB recommended financial statements Source of credibility and authority for GAAP Purpose of conceptual framework Definition of ing periods Definition of going concern Constraints underlying qualitative characteristics of information Characteristic of verifiability Measurement attributes currently in use Characteristic of consistency Historical cost and reliability Characteristic of comparability Characteristic of conservatism Secondary qualitative characteristics of ing information Components of comprehensive income Materiality and disclosure in financial statements Going-concern assumption Purpose of conceptual framework Implications of going-concern assumption Overriding qualitative characteristic of information Objectives of financial reporting Example of materiality constraint Criteria for recognition Recognition--process of reporting an item Definition of conservatism Definition of economic entity assumption Relevance and reliability--neutrality as an ingredient Relevance and reliability--representational faithfulness Relevance and reliability--predictive and values Relevance and reliability--consistency and verifiability Services offered by national A firms Branch of ing responsible for providing information to internal s Singularly unique function performed by certified public ants Branch of ing responsible for providing information to present and potential creditors of an enterprise Characteristics of international ing standards The SEC position on international ing standards Consistency of FASB and IASC in one area of financial reporting PROBLEMS
2
1 2 3 4 5
Explain the concept of materiality. Explain trade-off of relevance and reliability. Explain how going-concern assumption and historical cost are related. Identify reasons for international ing standards. Identify factors hindering development of international ing standards.
MULTIPLE CHOICE QUESTIONS a LO5
1. The overall objective of financial reporting is to provide information a. that is useful for decision making. b. about an enterprise’s assets, liabilities, and owners’ equity. c. about an enterprise’s financial performance during a period. d. that allows owners to assess management's performance.
d L05
2. Which of the following statements is not normally an objective of financial reporting? a. To provide information about an entity's assets and claims against those assets. b. To provide information that is useful in assessing an entity's sources and uses of cash. c. To provide information that is useful in lending and investing decisions. d. To provide information about an entity's liquidation value.
d LO1
3. Financial ing is the area of ing that emphasizes reporting to a. management. b. regulatory bodies. c. internal auditors. d. creditors and investors.
d LO1
4. Management ing is the area of ing that emphasizes a. reporting financial information to external s. b. reporting to the SEC. c. combining ing knowledge with an expertise in data processing. d. developing ing information for use within a company.
3
a LO1
5. The responsibility to review the work of the ants and issue opinions as to the fairness of the financial statements rests with a. the external auditor. b. the board of directors. c. the internal auditors. d. management.
c LO1
6. As independent (or external) auditors, As are primarily responsible for a. preparing financial statements in conformity with GAAP. b. certifying the accuracy of financial statements. c. expressing an opinion as to the fairness of financial statements. d. filing financial statements with the SEC.
a LO1
7. Which of the following is an internal of a company's financial information? a. Board of directors. b. Stockholders in the company. c. Holders of the company's bonds. d. Creditors with long-term contracts with the company.
c LO2
8. Prior to 1973, generally accepted ing principles were established a. by the Financial ing Foundation. b. by the Securities and Exchange Commission. c. under the direction of the American Institute of Certified Public ants. d. by the individual states.
b LO2
9. of the Financial ing Standards Board are appointed by the a. American ing Association. b. Financial ing Foundation. c. Securities and Exchange Commission. d. American Institute of Certified Public ants.
b LO2
10. The Financial ing Foundation a. oversees the operations of the AIA. b. oversees the operations of the FASB. c. oversees the AAA. d. oversees the financial reporting arm of the SEC.
a LO2
11. A major difference between the Financial ing Standards Board (FASB) and its predecessor, the ing Principles Board (APB), is a. all of the FASB serve full time, are paid a salary, and are independent of any public or private enterprises. b. over 50 percent of the of the FASB are required to be Certified Public ants. c. the FASB issues exposure drafts of proposed standards. d. all of the FASB possess experience in both public and corporate ing.
a LO2
12. Which of the following is a characteristic of the Financial ing Standards Board? a. The FASB is composed of seven . b. FASB must come from A firms. c. FASB are part-time. d. FASB may retain their positions with previous employers.
d LO2
13. Documents issued by the FASB include all of the following except a. Statements of Financial ing Standards. b. Interpretations of Statements of Financial ing Standards. c. Statements of Financial ing Concepts. d. Financial Reporting Releases.
b 14. Primary responsibility for GAAP and public reporting currently rests with the LO2, a. SEC. LO3 b. FASB. c. Congress. d. AIA. a LO2
15. The responsibility of the Emerging Issues Task Force (EITF) is to a. issue statements which reflect a consensus of the EITF on how to for new financial reporting issues where guidance is needed quickly. b. do research on financial reporting issues that are being addressed by the AIA. c. respond to groups lobbying the FASB on issues that affect a particular industry. d. develop concept statements the AIA can use as a frame of reference to solve future problems.
d LO2
16. The normal order followed by the FASB in publishing its standards is a. statement, discussion memorandum, opinion. b. discussion memorandum, interpretation, exposure draft, statement. c. exposure draft, discussion memorandum, statement. d. discussion memorandum, exposure draft, statement.
d LO2
17. Proper application of ing principles is most dependent upon the a. existence of specific guidelines. b. oversight of regulatory bodies. c. external audit function. d. professional judgment of the ant.
c LO2
18. The Governmental ing Standards Board a. was incorporated into the Financial ing Standards Board when the FASB was created. b. addresses financial reporting issues of U.S. government treaties and treasury rulings. c. addresses the financial reporting issues related to state and local governments. d. addresses the governmental reporting activities of the SEC.
c LO2
19. The primary current source of generally accepted ing principles for governmental operations is the a. Financial ing Standards Board. b. Securities and Exchange Commission. c. Governmental ing Standards Board. d. Government ing Office.
d LO2
20. The process of establishing financial ing standards a. is a democratic process in that a majority of practicing ants must agree with a standard before it becomes implemented. b. is a legislative process based on rules promulgated by government agencies. c. is based solely on economic analysis of the effects each standard will have if it is implemented. d. is a social process which incorporates political actions of various interested groups as well as professional research and logic.
c LO3
21. Congress a. has legally barred the SEC from interfering with the work of the FASB. b. is restricted from holding hearings concerning the ing profession. c. gave the SEC the power to establish ing principles for corporations whose stock is sold and traded to the general public. d. appoints two of the seven of the FASB.
a LO3
22. Once the FASB has established an ing standard a. the standard is continually reviewed to see if modification is necessary. b. the standard is not reviewed unless the SEC makes a complaint. c. the task of reviewing the standard to see if modification is necessary is given to the AIA. d. the principle of consistency requires that no revisions ever be made to the standard.
b LO6
23. Primary responsibility for the preparation of financial statements in accordance with generally accepted ing principles rests with a. the internal auditors. b. management. c. the external auditors. d. the board of directors.
b LO2
24. Which is the correct historical sequence of ing rule-making bodies? a. CAP, FASB, APB b. CAP, APB, FASB c. FASB, APB, CAP d. APB, CAP, FASB
c LO2
25. The primary current source of generally accepted ing principles for nongovernmental operations is the a. American Institute of Certified Public ants. b. Securities and Exchange Commission. c. Financial ing Standards Board. d. Governmental ing Standards Board.
a LO2
26. How many board serve on the FASB? a. 7 b. 14 c. 17 d. 24
d LO2
27. When the FASB deliberates about an ing standard, firms whose financial statements would be affected by that standard a. are legally barred from lobbying the FASB. b. are not allowed to lobby the FASB if the standard would have a negative impact on their financial statements. c. are not allowed to lobby the FASB if the standard would have a positive impact on their financial statements. d. are free to lobby for or against the standard.
d LO3
28. Pronouncements issued by the SEC include a. ing Research Bulletins. b. Statements on ing Principles.
c. Financial ing Standards. d. Financial Reporting Releases. a LO3
29. The primary purpose of the Securities and Exchange Commission is to a. regulate the issuance and trading of securities. b. issue ing and auditing regulations for publicly held companies. c. prevent the trading of speculative securities. d. enforce generally accepted ing principles.
d LO3
30. Form 10-K is submitted to the a. FASB. b. GASB. c. IRS. d. SEC.
b LO3
31. The Journal of ancy is published by the a. American ing Association. b. American Institute of Certified Public ants. c. Financial Executives Institute. d. Financial ing Standards Board.
b LO4
32. The International ing Standards Committee was formed to a. enforce FASB standards in foreign countries. b. develop worldwide ing standards. c. establish ing standards for U.S. multinational companies. d. develop ing standards for countries that do not have their own standard-setting bodies.
d LO5
33. The FASB’s recommendations for a “full set of financial statements” are basically satisfied by current general purpose statements with the exception of a report showing a. cash flows during the period. b. financial position at the end of the period. c. investments by and distributions to owners during the period. d. comprehensive income for the period.
d LO2
34. Generally accepted ing principles a. are ing adaptations based on the laws of economic science. b. derive their credibility and authority from legal rulings and court precedents. c. derive their credibility and authority from the federal government through the financial reporting section of the SEC. d. derive their credibility and authority from general recognition and acceptance by the ing profession.
d LO5
35. A conceptual framework of ing should a. lead to uniformity of financial statements among companies within the same industry. b. eliminate alternative ing principles and methods. c. guide the AIA in developing generally accepted auditing standards. d. define the basic objectives, , and concepts of ing.
c LO5
36. ants prepare financial statements at arbitrary points in time during a company’s lifetime in accordance with the ing concept of a. matching. b. comparability. c. ing periods. d. materiality.
d LO5
37. The assumed continuation of a business entity in the absence of evidence to the contrary is an example of the ing concept of a. accrual. b. consistency. c. comparability. d. going concern.
b 38. LO5
Important constraints underlying the qualitative characteristics of ing information are a. historical cost and going concern. b. materiality, conservatism, and cost-effectiveness. c. consistency, comparability, and conservatism. d. verifiability, neutrality, and representational faithfulness.
a LO5
39. When a large number of individuals, using the same measurement method, demonstrate that a high degree of consensus can be secured among independent measurers, then the result exhibits the characteristic of a. verifiability. b. neutrality. c. relevance. d. reliability.
d LO5
40. Which of the following measurement attributes is not currently used in practice? a. Present value b. Net realizable value c. Current replacement cost d. Inflation-adjusted cost
c LO5
41. Financial information exhibits the characteristic of consistency when a. ing procedures are adopted which smooth net income and make results consistent between years. b. extraordinary gains and losses are shown separately on the income statement. c. ing entities give similar events the same ing treatment each period. d. expenditures are reported as expenses and netted against revenue in the period in which they are paid.
c LO5
42. Historical cost has been the valuation basis most commonly used in ing because of its a. timelessness. b. conservatism. c. reliability. d. accuracy.
c LO5
43. When financial reports from two different companies have been prepared and presented in a similar manner, the information exhibits the characteristic of a. relevance. b. reliability. c. comparability. d. consistency.
a LO5
44. ing for inventories by applying the lower-of-cost-ormarket is an example of the application of a. conservatism. b. comparability. c. consistency. d. materiality.
b LO5
45. The secondary qualitative characteristics of ing information are a. relevance and reliability. b. comparability and consistency. c. understandability and decision usefulness. d. materiality and conservatism.
d LO5
46. Which of the following elements of financial statements is not a component of comprehensive income? a. Revenues. b. Expenses. c. Losses. d. Distributions to owners.
d LO5
47. An item would be considered material and therefore would be disclosed in the financial statements if a. the expected benefits of disclosure exceed the additional costs. b. the impact on earnings is greater than 3 percent. c. the FASB definition of materiality is met. d. the amount is deemed large enough to make a difference to the s.
a LO5
48. What ing concept justifies the use of accruals and deferrals? a. Going concern assumption. b. Corporate form of organization. c. Consistency characteristic. d. Arm’s-length transactions.
b LO5
49. Which of the following is not a purpose of the conceptual framework of ing? a. To provide definitions of key and fundamental concepts. b. To provide specific guidelines for resolving situations not covered by existing ing standards. c. To assist ants and others in selecting among alternative ing and reporting methods. d. To assist the FASB in the standard-setting process.
d LO5
50. Which of the following is not 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 significant. d. Amortizing research and development costs over multiple periods is justifiable and appropriate.
d LO5
51. The overriding qualitative characteristic of ing information is a. relevance. b. understandability. c. reliability. d. decision usefulness.
d LO5
52. Which of the following statements concerning the objectives of financial reporting is correct? a. The objectives are intended to be specific in nature. b. The objectives are directed primarily toward the needs of internal s of ing information. c. The objectives were the end result of the FASB’s conceptual framework project. d. The objectives encom not only financial statement disclosures, but other information as well.
b LO5
53. Recording the purchase price of a chalkboard eraser (with an estimated useful life of 10 years) as an expense of the current period is justified by the a. going-concern assumption. b. materiality constraint. c. matching principle. d. comparability principle.
a LO5
54. Which of the following is not one of the fundamental criteria for recognition? a. Timeliness. b. Measurability. c. Relevance. d. Reliability.
b LO5
55. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is a. realization. b. recognition. c. matching. d. allocation.
b LO5
56. Conservatism is best described as selecting an ing alternative that a. understates assets and/or net income. b. has the least favorable impact on owners’ equity. c. overstates, as opposed to understates, liabilities. d. is least likely to mislead s of financial information.
c LO5
57. The financial statements that are prepared for the business are separate and distinct from the owners according to the a. going-concern principle. b. matching principle. c. economic entity assumption. d. full disclosure principle.
d LO5
58. According to Statement of Financial ing Concepts No. 2, neutrality is an ingredient of Relevance Reliability a. Yes Yes b. Yes No c. No No d. No Yes
d LO5
59. Under Statement of Financial ing Concepts No. 2, representational faithfulness is an ingredient of Relevance Reliability a. Yes Yes b. Yes No c. No No d. No Yes
a LO5
60. According to the FASB's conceptual framework, predictive and values are ingredients of Relevance Reliability a. Yes No b. Yes Yes c. No Yes d. No No
b LO5
61. According to the FASB's conceptual framework, which of the following relates to both relevance and reliability? Consistency Verifiability a. Yes Yes b. Yes No c. No Yes d. No No
a LO6
62. Most of the large national A firms a. offer audit, tax, and management advisory services. b. emphasize auditing to a lesser degree than do smaller local and regional firms. c. are organized as corporations to obtain the benefit of limited liability. d. expect professional staff to be ing generalists as opposed to the specialization of As in smaller firms.
b LO6
63. The branch of ing that is concerned primarily with providing information for internal s is called a. auditing. b. managerial ing. c. financial ing. d. income tax ing.
c LO6
64. The singularly unique function performed by certified public ants in United States is a. tax preparation. b. management advisory services. c. the attest function. d. the preparation of financial statements.
c 65. The branch of ing that is concerned with providing information to LO6 present and potential creditors of an enterprise is a. auditing. b. managerial ing. c. financial ing. d. income tax ing. a 66. Which of the following is true about international ing standards? LO4 a. Significant differences exist between U.S. GAAP and GAAP of other countries. b. Few differences exist between U.S. GAAP and GAAP of other countries. c. The IASC is the standards setting body of . d. It is unlikely that the differences between U.S. GAAP and GAAP of other countries will diminish over time. b 67. The United States Securities and Exchange Commission LO4 a. has recognized IASC standards as an acceptable alternative to U.S. GAAP. b. requires foreign companies listing their shares on U.S. stock exchanges to restate their financial statements to U.S. GAAP. c. has barred foreign companies from listing their shares on U.S. stock exchanges. d. has no jurisdiction in the United States over foreign companies listing their shares on U.S. stock exchanges. b 68. For which of the following reporting issues has the FASB adopted LO4 substantially the same approach as the IASC? a. Segment reporting. b. Earnings per share. c. Statement of cash flows. d. Pension plans. PROBLEMS Problem 1 In providing information with the qualitative characteristics that render the information useful, the constraint of materiality may affect what is included and excluded from the financial information reported. Explain the concept of materiality.
Solution 1 LO5 An item is material if its inclusion or omission would influence or change the judgment of a reasonable person. The omission of a material item would have an impact on the decision a reasonable person would make. Materiality varies both with the relative size and relative importance of an item. If an amount is significant when compared with some other financial statement element, then the amount should be included in the financial statements in accordance with the applicable ing standard involved. The nature of an item may be an important consideration in determining if the item is material. Amounts that relate to violation of the law or fraudulent transactions may require disclosure. Items that may be important in of possible consequences arising from contractual obligations (such as failing to comply with a debt covenant with the result that a material loan may be called) also may require separate disclosure. The SEC currently is paying particular attention to the concept of materiality. An “immaterial” adjustment, for example, that changes a loss to a profit, helps maintain an earnings trend, or impacts management compensation under a bonus plan may be scrutinized by the Commission. The Commission is particularly interested in adjustments that represent intentional misstatements that individually are immaterial but collectively have a material effect on the financial statements. Problem 2 Many ants argue that relevance and reliability often require trade-offs. Define both relevance and reliability and explain what is meant by “trade-offs” between relevance and reliability. Include in your explanation a specific example of where tradeoffs could occur. Solution 2 LO5 Relevance is the capacity of information to make a difference in a s form predictions about the outcome of past, present, and confirm or correct prior expectations. Reliability is the quality assures that information is reasonably free from error and bias and what it purports to represent.
decision by helping future events or to of information that faithfully represents
ing information must be both relevant and reliable to be useful to decision makers. Attributes relevant to a ’s decision process may not always be susceptible to reliable measurement. The current value of the intellectual assets of a high technology company clearly is relevant to many decisions relating to the company. No reliable means of establishing these values may exist, however.
Emphasizing reliability results in long preparation times as information is doublechecked. Estimates and forecasts that cloud data with uncertainty are avoided. Relevance, on the other hand, often requires the use of instant information full of uncertainty. Problem 3 The going-concern assumption holds that the business entity will continue its operations long enough to realize its projects, commitments, and ongoing activities. The assumption is that the entity is not expected to be liquidated in the foreseeable future or that the entity will continue for an indefinite period of time. Explain the relationship between the going-concern assumption and the historical cost principle and the amortization of assets. Solution 3 LO5 The going-concern assumption justifies the valuation of assets on a nonliquidation basis. The assumption that the entity will continue its operations long enough to realize its projects, commitments, and activities renders liquidation values irrelevant since assets typically will be held and not sold in the foreseeable future. Fixed assets and intangibles thus are amortized over their useful life rather than over a shorter period in anticipation of early liquidation. Problem 4 The mission statement of the Financial ing Standards Board includes a goal of promoting international comparability of ing standards. Furthermore, the International ing Standards Committee has begun over the last 20 years to issue international ing standards designed to create a common set of international ing and reporting standards. Identify reasons why such a set of international ing standards would be desirable. Solution 4 LO4 A common set of international ing standards would enhance the comparability of the financial information produced by enterprises in countries throughout the world. Comparability would allow United States and foreign companies to better assess their position relative to their competitors. Comparability also would facilitate the management of relationships with customers, suppliers, and others throughout the world. Additionally, comparability would ease the process of raising capital or investing in foreign securities. Foreign companies wishing to list their equity securities on the New York Stock Exchange, for example, must convert their financial statements and accompanying
notes to U.S. generally accepted ing principles. This can be a very costly and time-consuming process. International ing standards accepted in all countries could eliminate the cost of such a conversion and speed the process of raising capital. Problem 5 The harmonization of world ing standards is viewed by many ants, analysts, standard setters, and others as being among the most important issues facing business throughout the world. Advocates of harmonization seek to establish a common set of international ing and reporting standards. Such a task has proven formidable, however. Identify factors that would that would hinder the process of harmonization of ing standards. Solution 5 LO4 ing standards throughout the world exhibit a great breadth of scope, complexity, and rigidity. Some countries currently have in place standards that are relatively weak when compared with those of the United States, for example. The United States typically is viewed as having the most highly developed and rigid ing standards in the world. The rigidity, completeness, and complexity of U.S. standards is due in no small part to the role of the Securities and Exchange Commission (SEC). The SEC is a government agency that has the right (granted to it by the United States Congress) to set ing standards in the United States, but has delegated this standards setting process to the private sector. This does not mean, however, that the SEC is not involved in the process of standard setting. The SEC assumes an active role in the establishment of ing standards. Any set of international ing standards must be accepted by the SEC if such standards are to be allowed for non-U.S. companies seeking to sell securities in U.S. capital markets. The SEC has a history of demanding strict ing standards. A set of international ing standards likely will not be as strict as existing U.S. standards as a result of the need for compromise among various nations who have different standard-setting philosophies. These compromises likely will result in the SEC rejecting such international standards. National pride is another issue that will complicate the harmonization of ing standards. The leaders and citizens of many countries would not welcome a set of international standards heavily based on the U.S. model, for example. Finally, the question of the degree of uniformity of ing standards arises. The degree of uniformity may be limited by the differences in the economies and cultures of the nations of the world.
CHAPTER 1 -- QUIZ A Name _________________________ Section ________________________ T F 1. The two groups identified as the principal s of external financial information are investors and creditors. T F 2. External financial information is generally more highly summarized than the information reported internally. T F 3. The auditor’s report that accompanies the financial statements is based on evidence gathered by the auditor from the detailed records and documents maintained by the company and from a review of the controls over the ing system. T F 4. The Securities and Exchange Commission recommends, but does not require, that all nationally ed companies have an annual independent audit as protection for the shareholders. T F 5. The standard three-paragraph auditor’s report deemphasizes the separate responsibilities of management and the auditors for the ing system and the information in the financial statements. T F 6. The Financial ing Standards Board is an independent organization consisting of seven part-time board who are permitted to retain limited connections with their firms or institutions after assuming hip on the Board. T F 7. Following the research of a major project by a task force, the FASB issues a Discussion Memorandum that identifies the principal issues involved. T F 8. The primary responsibilities of the Emerging Issues Task Force are to identify new ing issues for which no authoritative statements exist and to discuss alternative approaches to the issues and arrive at a consensus statement that provides guidance until such time as they may be addressed by the FASB. T F 9. Congress gave the Securities and Exchange Commission the power to establish ing principles. T F 10. Generally accepted ing principles have, in most cases, eliminated the need for ants to exercise professional judgment in interpreting and applying ing standards. 19
CHAPTER 1 -- QUIZ B Name _________________________ Section ________________________
T F 1. GAAP includes standards and interpretations issued by the FASB and those pronouncements issued by previous standard-setting bodies that have not been suspended or superseded. T F 2. One major purpose of the conceptual framework is to provide broad definitions of the objectives, , and concepts involved in the practice of ing. T F 3. The overriding quality or characteristic of ing information is decision usefulness. T F 4. Conservatism means that when ants have genuine doubt concerning which of two or more reporting alternatives to select, the alternative with the most favorable impact on owners’ equity should be chosen. T F 5. Current general-purpose financial statements would seem to satisfy all the recommendations of Statement of Financial ing Concepts No. 5. T F 6. According to the conceptual framework of the FASB, the qualities that distinguish more useful information from less useful information are primarily the qualities of relevance and reliability. T F 7. The overall objective of financial reporting is to provide information that is useful for decision making by present and potential creditors and investors. T F 8. In an attempt to clarify current reporting standards, the FASB has established specific guidelines for materiality. T F 9. Consistency is synonymous with comparability in financial reporting. T F 10. Comprehensive income is a concept specifically defined in Statement of Financial ing Concepts Statement No. 5 as including all changes in owners’ equity except investments by and distributions to owners.
20
CHAPTER 1 -- QUIZ C Name _________________________ Section ________________________ A. Statements of Financial ing Concepts B. Comprehensive income C. American ing Association (AAA) D. Arm's-length transaction E. ing and Research Bulletins F. Financial ing Standards Board (FASB) G. Representational faithfulness H. Financial ing I. Net realizable value
J. Governmental ing Standards Board (GASB) K. Materiality L. Management ing M. Financial ing Foundation N. Timeliness O. Generally accepted ing principles (GAAP) P. ing Principles Board (APB) Q. Securities and Exchange Commission (SEC)
____ 1. An organization responsible for selecting and funding the activities of the FASB, GASB, and their Advisory Councils. 2. The activity associated with financial reporting for internal s. 3. ing standards recognized by the profession as required in the preparation of financial statements for external s. ____ 4. The activity associated with the development and communication of financial information for external s, primarily in the form of general purpose financial statements. ____ 5. An independent private organization consisting of seven full-time with the responsibility of studying ing issues and establishing ing standards to govern financial reporting to external s. ____ 6. An organization for ing academicians. ____ 7. An agency of the federal government. ____ 8. A board of the AIA that issued Opinions establishing ing standards during the period 1959-1973. ____ 9. Transactions occurring between independent parties, each of which is capable of protecting its own interests. ____ 10. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ____ 11. Involves the relative size and importance of an item to the business. ____ 12. Agreement between the information being reported and the actual results of economic activity being measured. ____ 13. The availability of information when it is needed by the s of financial statements. ____ 14. An independent private organization responsible for establishing standards in the governmental area. ____ ____
21
____ 15. A set of guidelines established by the FASB to provide a framework for establishing and applying ing standards.
22
CHAPTER 1 -- QUIZ SOLUTIONS Quiz A 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
T T T F F F T T T F
Quiz B 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
T T T F F T T F F T
Quiz C 1. M 2. L 3. O 4. H 5. F 6. C 7. Q 8. P 9. D 10. B 11. K 12. G 13. N 14. J 15. A
24 25 26 27 28 29
Objective of financial reporting Objectives of financial reporting Definition of financial ing Definition of management ing Responsibilities of an external auditor Responsibilities of an external auditor Internal s of financial information Issuers of GAAP prior to 1973 FASB appointed by the Financial ing Foundation Financial ing Foundation oversees operations of the FASB Differences between FASB and APB Characteristics of FASB Types of documents issued by the FASB Responsibility for GAAP and public reporting rests with FASB Responsibilities of the EITF Order followed by FASB in publishing standards Proper application of ing principles dependent upon professional judgment Responsibilities of GASB Source of GAAP for governmental operations is GASB Process of establishing ing standards Congressional involvement in ing FASB responsibility after initial issuance of standard Management has primary responsibility for preparing GAAP financial statements Historical sequence of ing rule-making bodies FASB is source of GAAP for nongovernmental operations Number of who serve on FASB Role of individual companies in standard setting Pronouncements issued by SEC Primary purpose of SEC
30
Form 10-K submitted to SEC
18 19 20 21 22 23
1
31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68
The Journal of ancy published by the AIA Purpose of IASC FASB recommended financial statements Source of credibility and authority for GAAP Purpose of conceptual framework Definition of ing periods Definition of going concern Constraints underlying qualitative characteristics of information Characteristic of verifiability Measurement attributes currently in use Characteristic of consistency Historical cost and reliability Characteristic of comparability Characteristic of conservatism Secondary qualitative characteristics of ing information Components of comprehensive income Materiality and disclosure in financial statements Going-concern assumption Purpose of conceptual framework Implications of going-concern assumption Overriding qualitative characteristic of information Objectives of financial reporting Example of materiality constraint Criteria for recognition Recognition--process of reporting an item Definition of conservatism Definition of economic entity assumption Relevance and reliability--neutrality as an ingredient Relevance and reliability--representational faithfulness Relevance and reliability--predictive and values Relevance and reliability--consistency and verifiability Services offered by national A firms Branch of ing responsible for providing information to internal s Singularly unique function performed by certified public ants Branch of ing responsible for providing information to present and potential creditors of an enterprise Characteristics of international ing standards The SEC position on international ing standards Consistency of FASB and IASC in one area of financial reporting PROBLEMS
2
1 2 3 4 5
Explain the concept of materiality. Explain trade-off of relevance and reliability. Explain how going-concern assumption and historical cost are related. Identify reasons for international ing standards. Identify factors hindering development of international ing standards.
MULTIPLE CHOICE QUESTIONS a LO5
1. The overall objective of financial reporting is to provide information a. that is useful for decision making. b. about an enterprise’s assets, liabilities, and owners’ equity. c. about an enterprise’s financial performance during a period. d. that allows owners to assess management's performance.
d L05
2. Which of the following statements is not normally an objective of financial reporting? a. To provide information about an entity's assets and claims against those assets. b. To provide information that is useful in assessing an entity's sources and uses of cash. c. To provide information that is useful in lending and investing decisions. d. To provide information about an entity's liquidation value.
d LO1
3. Financial ing is the area of ing that emphasizes reporting to a. management. b. regulatory bodies. c. internal auditors. d. creditors and investors.
d LO1
4. Management ing is the area of ing that emphasizes a. reporting financial information to external s. b. reporting to the SEC. c. combining ing knowledge with an expertise in data processing. d. developing ing information for use within a company.
3
a LO1
5. The responsibility to review the work of the ants and issue opinions as to the fairness of the financial statements rests with a. the external auditor. b. the board of directors. c. the internal auditors. d. management.
c LO1
6. As independent (or external) auditors, As are primarily responsible for a. preparing financial statements in conformity with GAAP. b. certifying the accuracy of financial statements. c. expressing an opinion as to the fairness of financial statements. d. filing financial statements with the SEC.
a LO1
7. Which of the following is an internal of a company's financial information? a. Board of directors. b. Stockholders in the company. c. Holders of the company's bonds. d. Creditors with long-term contracts with the company.
c LO2
8. Prior to 1973, generally accepted ing principles were established a. by the Financial ing Foundation. b. by the Securities and Exchange Commission. c. under the direction of the American Institute of Certified Public ants. d. by the individual states.
b LO2
9. of the Financial ing Standards Board are appointed by the a. American ing Association. b. Financial ing Foundation. c. Securities and Exchange Commission. d. American Institute of Certified Public ants.
b LO2
10. The Financial ing Foundation a. oversees the operations of the AIA. b. oversees the operations of the FASB. c. oversees the AAA. d. oversees the financial reporting arm of the SEC.
a LO2
11. A major difference between the Financial ing Standards Board (FASB) and its predecessor, the ing Principles Board (APB), is a. all of the FASB serve full time, are paid a salary, and are independent of any public or private enterprises. b. over 50 percent of the of the FASB are required to be Certified Public ants. c. the FASB issues exposure drafts of proposed standards. d. all of the FASB possess experience in both public and corporate ing.
a LO2
12. Which of the following is a characteristic of the Financial ing Standards Board? a. The FASB is composed of seven . b. FASB must come from A firms. c. FASB are part-time. d. FASB may retain their positions with previous employers.
d LO2
13. Documents issued by the FASB include all of the following except a. Statements of Financial ing Standards. b. Interpretations of Statements of Financial ing Standards. c. Statements of Financial ing Concepts. d. Financial Reporting Releases.
b 14. Primary responsibility for GAAP and public reporting currently rests with the LO2, a. SEC. LO3 b. FASB. c. Congress. d. AIA. a LO2
15. The responsibility of the Emerging Issues Task Force (EITF) is to a. issue statements which reflect a consensus of the EITF on how to for new financial reporting issues where guidance is needed quickly. b. do research on financial reporting issues that are being addressed by the AIA. c. respond to groups lobbying the FASB on issues that affect a particular industry. d. develop concept statements the AIA can use as a frame of reference to solve future problems.
d LO2
16. The normal order followed by the FASB in publishing its standards is a. statement, discussion memorandum, opinion. b. discussion memorandum, interpretation, exposure draft, statement. c. exposure draft, discussion memorandum, statement. d. discussion memorandum, exposure draft, statement.
d LO2
17. Proper application of ing principles is most dependent upon the a. existence of specific guidelines. b. oversight of regulatory bodies. c. external audit function. d. professional judgment of the ant.
c LO2
18. The Governmental ing Standards Board a. was incorporated into the Financial ing Standards Board when the FASB was created. b. addresses financial reporting issues of U.S. government treaties and treasury rulings. c. addresses the financial reporting issues related to state and local governments. d. addresses the governmental reporting activities of the SEC.
c LO2
19. The primary current source of generally accepted ing principles for governmental operations is the a. Financial ing Standards Board. b. Securities and Exchange Commission. c. Governmental ing Standards Board. d. Government ing Office.
d LO2
20. The process of establishing financial ing standards a. is a democratic process in that a majority of practicing ants must agree with a standard before it becomes implemented. b. is a legislative process based on rules promulgated by government agencies. c. is based solely on economic analysis of the effects each standard will have if it is implemented. d. is a social process which incorporates political actions of various interested groups as well as professional research and logic.
c LO3
21. Congress a. has legally barred the SEC from interfering with the work of the FASB. b. is restricted from holding hearings concerning the ing profession. c. gave the SEC the power to establish ing principles for corporations whose stock is sold and traded to the general public. d. appoints two of the seven of the FASB.
a LO3
22. Once the FASB has established an ing standard a. the standard is continually reviewed to see if modification is necessary. b. the standard is not reviewed unless the SEC makes a complaint. c. the task of reviewing the standard to see if modification is necessary is given to the AIA. d. the principle of consistency requires that no revisions ever be made to the standard.
b LO6
23. Primary responsibility for the preparation of financial statements in accordance with generally accepted ing principles rests with a. the internal auditors. b. management. c. the external auditors. d. the board of directors.
b LO2
24. Which is the correct historical sequence of ing rule-making bodies? a. CAP, FASB, APB b. CAP, APB, FASB c. FASB, APB, CAP d. APB, CAP, FASB
c LO2
25. The primary current source of generally accepted ing principles for nongovernmental operations is the a. American Institute of Certified Public ants. b. Securities and Exchange Commission. c. Financial ing Standards Board. d. Governmental ing Standards Board.
a LO2
26. How many board serve on the FASB? a. 7 b. 14 c. 17 d. 24
d LO2
27. When the FASB deliberates about an ing standard, firms whose financial statements would be affected by that standard a. are legally barred from lobbying the FASB. b. are not allowed to lobby the FASB if the standard would have a negative impact on their financial statements. c. are not allowed to lobby the FASB if the standard would have a positive impact on their financial statements. d. are free to lobby for or against the standard.
d LO3
28. Pronouncements issued by the SEC include a. ing Research Bulletins. b. Statements on ing Principles.
c. Financial ing Standards. d. Financial Reporting Releases. a LO3
29. The primary purpose of the Securities and Exchange Commission is to a. regulate the issuance and trading of securities. b. issue ing and auditing regulations for publicly held companies. c. prevent the trading of speculative securities. d. enforce generally accepted ing principles.
d LO3
30. Form 10-K is submitted to the a. FASB. b. GASB. c. IRS. d. SEC.
b LO3
31. The Journal of ancy is published by the a. American ing Association. b. American Institute of Certified Public ants. c. Financial Executives Institute. d. Financial ing Standards Board.
b LO4
32. The International ing Standards Committee was formed to a. enforce FASB standards in foreign countries. b. develop worldwide ing standards. c. establish ing standards for U.S. multinational companies. d. develop ing standards for countries that do not have their own standard-setting bodies.
d LO5
33. The FASB’s recommendations for a “full set of financial statements” are basically satisfied by current general purpose statements with the exception of a report showing a. cash flows during the period. b. financial position at the end of the period. c. investments by and distributions to owners during the period. d. comprehensive income for the period.
d LO2
34. Generally accepted ing principles a. are ing adaptations based on the laws of economic science. b. derive their credibility and authority from legal rulings and court precedents. c. derive their credibility and authority from the federal government through the financial reporting section of the SEC. d. derive their credibility and authority from general recognition and acceptance by the ing profession.
d LO5
35. A conceptual framework of ing should a. lead to uniformity of financial statements among companies within the same industry. b. eliminate alternative ing principles and methods. c. guide the AIA in developing generally accepted auditing standards. d. define the basic objectives, , and concepts of ing.
c LO5
36. ants prepare financial statements at arbitrary points in time during a company’s lifetime in accordance with the ing concept of a. matching. b. comparability. c. ing periods. d. materiality.
d LO5
37. The assumed continuation of a business entity in the absence of evidence to the contrary is an example of the ing concept of a. accrual. b. consistency. c. comparability. d. going concern.
b 38. LO5
Important constraints underlying the qualitative characteristics of ing information are a. historical cost and going concern. b. materiality, conservatism, and cost-effectiveness. c. consistency, comparability, and conservatism. d. verifiability, neutrality, and representational faithfulness.
a LO5
39. When a large number of individuals, using the same measurement method, demonstrate that a high degree of consensus can be secured among independent measurers, then the result exhibits the characteristic of a. verifiability. b. neutrality. c. relevance. d. reliability.
d LO5
40. Which of the following measurement attributes is not currently used in practice? a. Present value b. Net realizable value c. Current replacement cost d. Inflation-adjusted cost
c LO5
41. Financial information exhibits the characteristic of consistency when a. ing procedures are adopted which smooth net income and make results consistent between years. b. extraordinary gains and losses are shown separately on the income statement. c. ing entities give similar events the same ing treatment each period. d. expenditures are reported as expenses and netted against revenue in the period in which they are paid.
c LO5
42. Historical cost has been the valuation basis most commonly used in ing because of its a. timelessness. b. conservatism. c. reliability. d. accuracy.
c LO5
43. When financial reports from two different companies have been prepared and presented in a similar manner, the information exhibits the characteristic of a. relevance. b. reliability. c. comparability. d. consistency.
a LO5
44. ing for inventories by applying the lower-of-cost-ormarket is an example of the application of a. conservatism. b. comparability. c. consistency. d. materiality.
b LO5
45. The secondary qualitative characteristics of ing information are a. relevance and reliability. b. comparability and consistency. c. understandability and decision usefulness. d. materiality and conservatism.
d LO5
46. Which of the following elements of financial statements is not a component of comprehensive income? a. Revenues. b. Expenses. c. Losses. d. Distributions to owners.
d LO5
47. An item would be considered material and therefore would be disclosed in the financial statements if a. the expected benefits of disclosure exceed the additional costs. b. the impact on earnings is greater than 3 percent. c. the FASB definition of materiality is met. d. the amount is deemed large enough to make a difference to the s.
a LO5
48. What ing concept justifies the use of accruals and deferrals? a. Going concern assumption. b. Corporate form of organization. c. Consistency characteristic. d. Arm’s-length transactions.
b LO5
49. Which of the following is not a purpose of the conceptual framework of ing? a. To provide definitions of key and fundamental concepts. b. To provide specific guidelines for resolving situations not covered by existing ing standards. c. To assist ants and others in selecting among alternative ing and reporting methods. d. To assist the FASB in the standard-setting process.
d LO5
50. Which of the following is not 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 significant. d. Amortizing research and development costs over multiple periods is justifiable and appropriate.
d LO5
51. The overriding qualitative characteristic of ing information is a. relevance. b. understandability. c. reliability. d. decision usefulness.
d LO5
52. Which of the following statements concerning the objectives of financial reporting is correct? a. The objectives are intended to be specific in nature. b. The objectives are directed primarily toward the needs of internal s of ing information. c. The objectives were the end result of the FASB’s conceptual framework project. d. The objectives encom not only financial statement disclosures, but other information as well.
b LO5
53. Recording the purchase price of a chalkboard eraser (with an estimated useful life of 10 years) as an expense of the current period is justified by the a. going-concern assumption. b. materiality constraint. c. matching principle. d. comparability principle.
a LO5
54. Which of the following is not one of the fundamental criteria for recognition? a. Timeliness. b. Measurability. c. Relevance. d. Reliability.
b LO5
55. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is a. realization. b. recognition. c. matching. d. allocation.
b LO5
56. Conservatism is best described as selecting an ing alternative that a. understates assets and/or net income. b. has the least favorable impact on owners’ equity. c. overstates, as opposed to understates, liabilities. d. is least likely to mislead s of financial information.
c LO5
57. The financial statements that are prepared for the business are separate and distinct from the owners according to the a. going-concern principle. b. matching principle. c. economic entity assumption. d. full disclosure principle.
d LO5
58. According to Statement of Financial ing Concepts No. 2, neutrality is an ingredient of Relevance Reliability a. Yes Yes b. Yes No c. No No d. No Yes
d LO5
59. Under Statement of Financial ing Concepts No. 2, representational faithfulness is an ingredient of Relevance Reliability a. Yes Yes b. Yes No c. No No d. No Yes
a LO5
60. According to the FASB's conceptual framework, predictive and values are ingredients of Relevance Reliability a. Yes No b. Yes Yes c. No Yes d. No No
b LO5
61. According to the FASB's conceptual framework, which of the following relates to both relevance and reliability? Consistency Verifiability a. Yes Yes b. Yes No c. No Yes d. No No
a LO6
62. Most of the large national A firms a. offer audit, tax, and management advisory services. b. emphasize auditing to a lesser degree than do smaller local and regional firms. c. are organized as corporations to obtain the benefit of limited liability. d. expect professional staff to be ing generalists as opposed to the specialization of As in smaller firms.
b LO6
63. The branch of ing that is concerned primarily with providing information for internal s is called a. auditing. b. managerial ing. c. financial ing. d. income tax ing.
c LO6
64. The singularly unique function performed by certified public ants in United States is a. tax preparation. b. management advisory services. c. the attest function. d. the preparation of financial statements.
c 65. The branch of ing that is concerned with providing information to LO6 present and potential creditors of an enterprise is a. auditing. b. managerial ing. c. financial ing. d. income tax ing. a 66. Which of the following is true about international ing standards? LO4 a. Significant differences exist between U.S. GAAP and GAAP of other countries. b. Few differences exist between U.S. GAAP and GAAP of other countries. c. The IASC is the standards setting body of . d. It is unlikely that the differences between U.S. GAAP and GAAP of other countries will diminish over time. b 67. The United States Securities and Exchange Commission LO4 a. has recognized IASC standards as an acceptable alternative to U.S. GAAP. b. requires foreign companies listing their shares on U.S. stock exchanges to restate their financial statements to U.S. GAAP. c. has barred foreign companies from listing their shares on U.S. stock exchanges. d. has no jurisdiction in the United States over foreign companies listing their shares on U.S. stock exchanges. b 68. For which of the following reporting issues has the FASB adopted LO4 substantially the same approach as the IASC? a. Segment reporting. b. Earnings per share. c. Statement of cash flows. d. Pension plans. PROBLEMS Problem 1 In providing information with the qualitative characteristics that render the information useful, the constraint of materiality may affect what is included and excluded from the financial information reported. Explain the concept of materiality.
Solution 1 LO5 An item is material if its inclusion or omission would influence or change the judgment of a reasonable person. The omission of a material item would have an impact on the decision a reasonable person would make. Materiality varies both with the relative size and relative importance of an item. If an amount is significant when compared with some other financial statement element, then the amount should be included in the financial statements in accordance with the applicable ing standard involved. The nature of an item may be an important consideration in determining if the item is material. Amounts that relate to violation of the law or fraudulent transactions may require disclosure. Items that may be important in of possible consequences arising from contractual obligations (such as failing to comply with a debt covenant with the result that a material loan may be called) also may require separate disclosure. The SEC currently is paying particular attention to the concept of materiality. An “immaterial” adjustment, for example, that changes a loss to a profit, helps maintain an earnings trend, or impacts management compensation under a bonus plan may be scrutinized by the Commission. The Commission is particularly interested in adjustments that represent intentional misstatements that individually are immaterial but collectively have a material effect on the financial statements. Problem 2 Many ants argue that relevance and reliability often require trade-offs. Define both relevance and reliability and explain what is meant by “trade-offs” between relevance and reliability. Include in your explanation a specific example of where tradeoffs could occur. Solution 2 LO5 Relevance is the capacity of information to make a difference in a s form predictions about the outcome of past, present, and confirm or correct prior expectations. Reliability is the quality assures that information is reasonably free from error and bias and what it purports to represent.
decision by helping future events or to of information that faithfully represents
ing information must be both relevant and reliable to be useful to decision makers. Attributes relevant to a ’s decision process may not always be susceptible to reliable measurement. The current value of the intellectual assets of a high technology company clearly is relevant to many decisions relating to the company. No reliable means of establishing these values may exist, however.
Emphasizing reliability results in long preparation times as information is doublechecked. Estimates and forecasts that cloud data with uncertainty are avoided. Relevance, on the other hand, often requires the use of instant information full of uncertainty. Problem 3 The going-concern assumption holds that the business entity will continue its operations long enough to realize its projects, commitments, and ongoing activities. The assumption is that the entity is not expected to be liquidated in the foreseeable future or that the entity will continue for an indefinite period of time. Explain the relationship between the going-concern assumption and the historical cost principle and the amortization of assets. Solution 3 LO5 The going-concern assumption justifies the valuation of assets on a nonliquidation basis. The assumption that the entity will continue its operations long enough to realize its projects, commitments, and activities renders liquidation values irrelevant since assets typically will be held and not sold in the foreseeable future. Fixed assets and intangibles thus are amortized over their useful life rather than over a shorter period in anticipation of early liquidation. Problem 4 The mission statement of the Financial ing Standards Board includes a goal of promoting international comparability of ing standards. Furthermore, the International ing Standards Committee has begun over the last 20 years to issue international ing standards designed to create a common set of international ing and reporting standards. Identify reasons why such a set of international ing standards would be desirable. Solution 4 LO4 A common set of international ing standards would enhance the comparability of the financial information produced by enterprises in countries throughout the world. Comparability would allow United States and foreign companies to better assess their position relative to their competitors. Comparability also would facilitate the management of relationships with customers, suppliers, and others throughout the world. Additionally, comparability would ease the process of raising capital or investing in foreign securities. Foreign companies wishing to list their equity securities on the New York Stock Exchange, for example, must convert their financial statements and accompanying
notes to U.S. generally accepted ing principles. This can be a very costly and time-consuming process. International ing standards accepted in all countries could eliminate the cost of such a conversion and speed the process of raising capital. Problem 5 The harmonization of world ing standards is viewed by many ants, analysts, standard setters, and others as being among the most important issues facing business throughout the world. Advocates of harmonization seek to establish a common set of international ing and reporting standards. Such a task has proven formidable, however. Identify factors that would that would hinder the process of harmonization of ing standards. Solution 5 LO4 ing standards throughout the world exhibit a great breadth of scope, complexity, and rigidity. Some countries currently have in place standards that are relatively weak when compared with those of the United States, for example. The United States typically is viewed as having the most highly developed and rigid ing standards in the world. The rigidity, completeness, and complexity of U.S. standards is due in no small part to the role of the Securities and Exchange Commission (SEC). The SEC is a government agency that has the right (granted to it by the United States Congress) to set ing standards in the United States, but has delegated this standards setting process to the private sector. This does not mean, however, that the SEC is not involved in the process of standard setting. The SEC assumes an active role in the establishment of ing standards. Any set of international ing standards must be accepted by the SEC if such standards are to be allowed for non-U.S. companies seeking to sell securities in U.S. capital markets. The SEC has a history of demanding strict ing standards. A set of international ing standards likely will not be as strict as existing U.S. standards as a result of the need for compromise among various nations who have different standard-setting philosophies. These compromises likely will result in the SEC rejecting such international standards. National pride is another issue that will complicate the harmonization of ing standards. The leaders and citizens of many countries would not welcome a set of international standards heavily based on the U.S. model, for example. Finally, the question of the degree of uniformity of ing standards arises. The degree of uniformity may be limited by the differences in the economies and cultures of the nations of the world.
CHAPTER 1 -- QUIZ A Name _________________________ Section ________________________ T F 1. The two groups identified as the principal s of external financial information are investors and creditors. T F 2. External financial information is generally more highly summarized than the information reported internally. T F 3. The auditor’s report that accompanies the financial statements is based on evidence gathered by the auditor from the detailed records and documents maintained by the company and from a review of the controls over the ing system. T F 4. The Securities and Exchange Commission recommends, but does not require, that all nationally ed companies have an annual independent audit as protection for the shareholders. T F 5. The standard three-paragraph auditor’s report deemphasizes the separate responsibilities of management and the auditors for the ing system and the information in the financial statements. T F 6. The Financial ing Standards Board is an independent organization consisting of seven part-time board who are permitted to retain limited connections with their firms or institutions after assuming hip on the Board. T F 7. Following the research of a major project by a task force, the FASB issues a Discussion Memorandum that identifies the principal issues involved. T F 8. The primary responsibilities of the Emerging Issues Task Force are to identify new ing issues for which no authoritative statements exist and to discuss alternative approaches to the issues and arrive at a consensus statement that provides guidance until such time as they may be addressed by the FASB. T F 9. Congress gave the Securities and Exchange Commission the power to establish ing principles. T F 10. Generally accepted ing principles have, in most cases, eliminated the need for ants to exercise professional judgment in interpreting and applying ing standards. 19
CHAPTER 1 -- QUIZ B Name _________________________ Section ________________________
T F 1. GAAP includes standards and interpretations issued by the FASB and those pronouncements issued by previous standard-setting bodies that have not been suspended or superseded. T F 2. One major purpose of the conceptual framework is to provide broad definitions of the objectives, , and concepts involved in the practice of ing. T F 3. The overriding quality or characteristic of ing information is decision usefulness. T F 4. Conservatism means that when ants have genuine doubt concerning which of two or more reporting alternatives to select, the alternative with the most favorable impact on owners’ equity should be chosen. T F 5. Current general-purpose financial statements would seem to satisfy all the recommendations of Statement of Financial ing Concepts No. 5. T F 6. According to the conceptual framework of the FASB, the qualities that distinguish more useful information from less useful information are primarily the qualities of relevance and reliability. T F 7. The overall objective of financial reporting is to provide information that is useful for decision making by present and potential creditors and investors. T F 8. In an attempt to clarify current reporting standards, the FASB has established specific guidelines for materiality. T F 9. Consistency is synonymous with comparability in financial reporting. T F 10. Comprehensive income is a concept specifically defined in Statement of Financial ing Concepts Statement No. 5 as including all changes in owners’ equity except investments by and distributions to owners.
20
CHAPTER 1 -- QUIZ C Name _________________________ Section ________________________ A. Statements of Financial ing Concepts B. Comprehensive income C. American ing Association (AAA) D. Arm's-length transaction E. ing and Research Bulletins F. Financial ing Standards Board (FASB) G. Representational faithfulness H. Financial ing I. Net realizable value
J. Governmental ing Standards Board (GASB) K. Materiality L. Management ing M. Financial ing Foundation N. Timeliness O. Generally accepted ing principles (GAAP) P. ing Principles Board (APB) Q. Securities and Exchange Commission (SEC)
____ 1. An organization responsible for selecting and funding the activities of the FASB, GASB, and their Advisory Councils. 2. The activity associated with financial reporting for internal s. 3. ing standards recognized by the profession as required in the preparation of financial statements for external s. ____ 4. The activity associated with the development and communication of financial information for external s, primarily in the form of general purpose financial statements. ____ 5. An independent private organization consisting of seven full-time with the responsibility of studying ing issues and establishing ing standards to govern financial reporting to external s. ____ 6. An organization for ing academicians. ____ 7. An agency of the federal government. ____ 8. A board of the AIA that issued Opinions establishing ing standards during the period 1959-1973. ____ 9. Transactions occurring between independent parties, each of which is capable of protecting its own interests. ____ 10. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ____ 11. Involves the relative size and importance of an item to the business. ____ 12. Agreement between the information being reported and the actual results of economic activity being measured. ____ 13. The availability of information when it is needed by the s of financial statements. ____ 14. An independent private organization responsible for establishing standards in the governmental area. ____ ____
21
____ 15. A set of guidelines established by the FASB to provide a framework for establishing and applying ing standards.
22
CHAPTER 1 -- QUIZ SOLUTIONS Quiz A 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
T T T F F F T T T F
Quiz B 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
T T T F F T T F F T
Quiz C 1. M 2. L 3. O 4. H 5. F 6. C 7. Q 8. P 9. D 10. B 11. K 12. G 13. N 14. J 15. A
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