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Chapter 1
FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. Financial
accounting is the process of identifying, measuring, analyzing, and
communicating financial information needed by management to plan, evaluate, and
control a company’s operations.
2. Financial
statements are the principal means through which a company communicates its
financial information to those outside it.
3. Users
of financial reports provided by a company use that information to make their
capital allocation decisions.
4. An
effective process of capital allocation promotes productivity and provides an
efficient market for buying and selling securities and obtaining and granting
credit.
5. The
objective of financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, but
not to users who are not investors.
6. Investors
are interested in financial reporting because it provides information that is
useful for making decisions (decision-usefulness approach).
7. Users
of financial accounting statements have both coinciding and conflicting needs
for information of various types.
8. The
Securities and Exchange Commission appointed the Committee on Accounting
Procedure.
9. The
passage of a new FASB Standards Statement requires the support of five of the
seven board members.
10. Financial
Accounting Concepts set forth fundamental objectives and concepts that are used
in developing future standards of financial accounting and reporting.
11. The
AICPA created the Accounting Principles Board in 1959.
12. The
FASB’s Codification integrates existing GAAP, and creates new GAAP.
13. The
AICPA’s Code of Professional Conduct requires that members prepare financial
statements in accordance with generally accepted accounting principles.
14. GAAP
is a product of careful logic or empirical findings and are not influenced by
political action.
15. The
Public Company Accounting Oversight Board has oversight and enforcement
authority and establishes auditing and independence standards and rules.
16. The
expectations gap is caused by what the public thinks accountants should do and
what accountants think they can do.
17. Financial
reports in the early 21st century did not provide any information about a
company’s soft assets (intangibles).
18. Accounting
standards are now less likely to require the recording or disclosure of fair
value information.
19. U.S.
companies that list overseas are required to use International Financial
Reporting Standards, issued by the International Accounting Standards Board.
20. Ethical
issues in financial accounting are governed by the AICPA.
True-False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. General-purpose
financial statements are the product of
a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.
22. Users of financial reports include all of the following except
a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
23. The financial statements most frequently provided include all of
the following except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
24. The information provided by financial reporting pertains to
a. individual business enterprises, rather than
to industries or an economy as a whole or to members of society as consumers.
b. business industries, rather than to
individual enterprises or an economy as a whole or to members of society as
consumers.
c. individual business enterprises, industries,
and an economy as a whole, rather than to members of society as consumers.
d. an economy as a whole and to members of
society as consumers, rather than to individual enterprises or industries.
25. All
the following are differences between financial and managerial accounting in
how accounting information is used except to
a. plan and control company's operations.
b. decide whether to invest in the company.
c. evaluate borrowing capacity to determine the
extent of a loan to grant.
d. All the above.
26. Which
of the following represents a form of communication through financial reporting
but not through financial statements?
a. Balance sheet.
b. President's letter.
c. Income statement.
d. Notes to financial statements.
P27. The
process of identifying, measuring, analyzing, and communicating financial
information needed by management to plan, evaluate, and control an
organization’s operations is called
a. financial accounting.
b. managerial accounting.
c. tax accounting.
d. auditing.
28. How does accounting help the capital allocation process attract
investment capital?
a. Provides timely, relevant information.
b. Encourages
innovation.
c. Promotes productivity.
d. a and b above.
29. Whether a business is successful and thrives is determined by
a. markets.
b. free enterprise.
c. competition.
d. all of these.
30. An effective capital allocation process
a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and
selling securities.
d. all of these.
31. Financial statements in the early 2000s provide information
related to
a. nonfinancial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. none of these.
32. Which
of the following is not a major challenge facing the accounting profession?
a. Nonfinancial measurements.
b. Timeliness.
c. Accounting for hard assets.
d. Forward-looking information.
33. What
is the objective of financial reporting?
a. Provide information that is useful to
management in making decisions.
b. Provide information that clearly portray
nonfinancial transactions.
c. Provide information about the reporting
entity that is useful to present and potential equity investors, lenders, and
other creditors.
d. Provide information that excludes claims to
the resources.
34. Primary
users for general-purpose financial statements include
a. creditors.
b. employees.
c. investors.
d. both creditors and investors.
35. When making decisions, investors are interested in assessing
a. the company’s ability to generate net cash
inflows.
b. management’s ability to protect and enhance
the capital providers’ investments.
c. Both a and b.
d. the company’s ability to generate net income.
36. Accrual
accounting is used because
a. cash flows are considered less important.
b. it provides a better indication of ability to
generate cash flows than the cash basis.
c. it recognizes revenues when cash is received
and expenses when cash is paid.
d.
none of the above.
37. Which
perspective is adopted as part of the objective of general-purpose financial
reporting?
a. Decision-usefulness perspective.
b. Proprietary perspective.
c. Entity perspective.
d. Financial reporting perspective.
38. Accounting
principles are "generally accepted" only when
a. an authoritative accounting rule-making body
has established it in an official pro-nouncement.
b. it has been accepted as appropriate because
of its universal application.
c. both a and b.
d. neither a nor b.
39. A common set of accounting standards and procedures are called
a. financial accounting standards.
b. generally accepted accounting principles.
c. objectives of financial reporting.
d. statements of financial accounting concepts.
40. Which of the following is a general limitation of "general
purpose financial statements"?
a. General purpose financial statements may not
be the most informative for a specific enterprise.
b. General purpose financial statements are
comparable.
c. General purpose financial statements are
assumed to present fairly the company's financial operations.
d. None of the above.
41. What is the relationship between the Securities and Exchange
Commission and accounting standard setting in the United States?
a. The SEC requires all companies listed on an
exchange to submit their financial statements to the SEC.
b. The SEC coordinates with the AICPA in
establishing accounting standards.
c. The SEC has a mandate to establish accounting
standards for enterprises under its jurisdiction.
d. The SEC reviews financial statements for
compliance.
42. What is due process in the context of standard setting at the
FASB?
a. FASB operates in full view of the public.
b. Public hearings are held on proposed
accounting standards.
c. Interested parties can make their views
known.
d. All of the above.
43. Which of the following organizations has been responsible for
setting U.S. accounting standards?
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. Financial Accounting Standards Board.
d. All of the above.
44. Why did the AICPA create the Accounting Principles Board?
a. The SEC disbanded the previous standard
setting organization.
b. The previous standard setting organization
did not provide a structured set of accounting principles.
c. No such organization existed in the past.
d. None of the above.
45. Which
organization was responsible for issuing Accounting Research Bulletins?
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. The SEC.
d. AICPA.
46. A characteristic of generally accepted accounting principles
include the following:
a. common set of standards and principles.
b. standards and principles are based federal
statutes.
c. acceptance requires an affirmative vote of
Certified Public Accountants.
d. practices that become accepted for at least a
year by all industry members.
47. Characteristics of generally accepted accounting principles
include all of the following except
a. authoritative accounting the rule-making body
established a principle of reporting.
b. standards are considered useful by the
profession.
c. each principle is approved by the SEC.
d. practice has become universally accepted over
time.
48. Why was it believed that accounting standards that were issued
by the Financial Accounting Standards Board would carry more weight?
a. Smaller membership.
b. FASB board members are well-paid.
c. FASB board members must be CPAs.
d. Due process.
49. The passage of a new FASB Standards Statement requires the
support of
a. all Board members.
b. three Board members.
c. four Board members.
d. five Board members.
50. What is the purpose of Emerging Issues Task Force?
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new
and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.
51. Which organization is responsible for issuing Emerging Issues
Task Force Statements?
a. FASB
b. CAP
c. APB
d. SEC
52. The role of the Securities and Exchange Commission in the
formulation of accounting principles can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
53. The body that has the power
to prescribe the accounting practices and standards to be employed by companies
that fall under its jurisdiction is the
a. FASB.
b. AICPA.
c. SEC.
d. APB.
54. Companies that are listed on a stock exchange are required to
submit their financial statements to the
a. AICPA.
b. APB
c. FASB.
d. SEC.
55. The Financial Accounting Standards Board (FASB) was proposed by
the
a. American Institute of Certified Public
Accountants.
b. Accounting Principles Board.
c. Study Group on the Objectives of Financial
Statements.
d. Special Study Group on establishment of
Accounting Principles (Wheat Committee).
56. The Financial Accounting Standards Board
a. has issued a series of pronouncements
entitled Statements on Auditing Standards.
b. was the forerunner of the current Accounting
Principles Board.
c. is the arm of the Securities and Exchange
Commission responsible for setting financial accounting standards.
d. is appointed by the Financial Accounting
Foundation.
57. The Financial Accounting Foundation
a. oversees the operations of the FASB.
b. oversees the operations of the AICPA.
c. provides information to interested parties on
financial reporting issues.
d. works with the Financial Accounting Standards
Advisory Council to provide informa-tion to interested parties on financial
reporting issues.
58. The major distinction between the Financial Accounting Standards
Board (FASB) and its predecessor, the Accounting Principles Board (APB), is
a. the FASB issues exposure drafts of proposed
standards.
b. all members of the FASB are fully
remunerated, serve full time, and are independent of any companies or
institutions.
c. all members of the FASB possess extensive
experience in financial reporting.
d. a majority of the members of the FASB are
CPAs drawn from public practice.
59. The Financial Accounting Standards Board employs a "due
process" system which
a. is an efficient system for collecting dues
from members.
b. enables interested parties to express their
views on issues under consideration.
c. identifies the accounting issues that are the
most important.
d. requires that all accountants must receive a
copy of financial standards.
60. Which of the following is not
a publication of the FASB?
a. Statements of Financial Accounting Concepts
b. Accounting Research Bulletins
c. Interpretations
d. Technical
Bulletins
61. FASB Technical Bulletins
a. are similar to FASB Interpretations in that
they establish enforceable standards under the AICPA's Code of Professional
Ethics.
b. are issued monthly by the FASB to deal with
current topics.
c. are not expected to have a significant impact
on financial reporting in general and provide guidance when it does not
conflict with any broad fundamental accounting principle.
d. were recently discontinued by the FASB
because they dealt with specialized topics having little impact on financial
reporting in general.
62. The purpose of the Emerging Issues Task Force is to
a. develop a conceptual framework as a frame of
reference for the solution of future problems.
b. lobby the FASB on issues that affect a
particular industry.
c. do research on issues that relate to
long-term accounting problems.
d. issue statements which reflect a consensus on
how to account for new and unusual financial transactions that need to be
resolved quickly.
63. The American Institute of Certified Public Accountants (AICPA)
continues to be involved in all of the following except
a. developing and enforcing professional ethics.
b. developing auditing standards.
c. providing professional education programs.
d. all of the above.
P64. Which of
the following pronouncements were issued by the Accounting Principles Board?
a. Accounting Research Bulletins
b. Opinions
c. Statements of Position
d. Statements of Financial Accounting Concepts
65. Which of the following organizations has not been instrumental in the development of financial accounting
standards in the United States?
a. AICPA
b. FASB
c. IASB
d. SEC
66. An organization that has not
published accounting standards is the
a. American Institute of Certified Public
Accountants.
b. Securities and Exchange Commission.
c. Financial Accounting Standards Board.
d. All of these have published accounting
standards.
67. The
purpose of Statements of Financial Accounting Concepts is to
a. establish GAAP.
b. modify or extend the existing FASB Standards
Statement.
c. form a conceptual framework for solving
existing and emerging problems.
d. determine the need for FASB involvement in an
emerging issue.
P68. Members
of the Financial Accounting Standards Board are
a. employed by the American Institute of
Certified Public Accountants (AICPA).
b. part-time employees.
c. required to hold a CPA certificate.
d. independent of any other organization.
P69. The
following are part of the "due process" system used by the FASB in
the evolution of a typical FASB Statement of Financial Accounting Standards:
1. Exposure Draft
2. Statement
of Financial Accounting Standards
3. Preliminary
Views
The
chronological order in which these items are released is as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 3, 1.
d. 3, 1, 2.
70. Generally accepted accounting principles
a. include detailed practices and procedures as
well as broad guidelines of general application.
b. are influenced by pronouncements of the SEC
and IRS.
c. change over time as the nature of the
business environment changes.
d. all of these.
71. The most significant current source of generally accepted
accounting principles is the
a. AICPA.
b. SEC.
c. APB.
d. FASB.
72. Which of the following is not
a part of generally accepted accounting principles?
a. FASB Interpretations
b. CAP Accounting Research Bulletins
c. APB Opinions
d. All of these are part of generally accepted
accounting principles.
73. Which of the following publications does not qualify as a statement of generally accepted accounting
principles?
a. Statements of financial standards issued by
the FASB
b. Accounting interpretations issued by the FASB
c. APB Opinions
d. Accounting research studies issued by the
AICPA
74. Rule 203 of the Code of Professional Conduct addresses:
a. ethical requirements.
b. financial statements should be based on
generally accepted accounting principles.
c. advertising to obtained clients.
d. auditing financial statements.
75. What is the purpose of a FASB Staff Position?
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new
and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.
76. Which of the following is not considered a component of
generally accepted accounting principles?
a. FASB Implementation Guides.
b. Widely recognized industry practices.
c. Articles published in CPA journals.
d. AICPA Accounting Interpretations.
77. Financial accounting standard-setting in the United States
a. can be described as a social process which
reflects political actions of various interested user groups as well as a
product of research and logic.
b. is based solely on research and empirical
findings.
c. is a legalistic process based on rules
promulgated by governmental agencies.
d. is democratic in the sense that a majority of
accountants must agree with a standard before it becomes enforceable.
78. The purpose of the International Accounting Standards Board is
to
a. issue enforceable standards which regulate
the financial accounting and reporting of multinational corporations.
b. develop a uniform currency in which the
financial transactions of companies through-out the world would be measured.
c. promote uniform accounting standards among
countries of the world.
d. arbitrate accounting disputes between auditors
and international companies.
79. What is not a source of pressure that may influence the
accounting standard setting process?
a. Congress.
b. Lobbyist.
c. CPA firms.
d. None of the above.
80. What is a possible danger if politics plays too big a role in
accounting standard setting?
a. Accounting standards that are not truly
generally accepted.
b. Individuals may influence the standards.
c. User groups become active.
d. The FASB delegates its authority to elected
officials.
81. What is "expectation gap"?
a. The difference between what the public thinks
the accountant is not doing and what the accountant knows they don't do.
b. The difference between what the public thinks
the accountant is doing and what Congress says the accountant is doing.
c. The difference between what the public thinks
the accountant is doing and what the accountant thinks they can do.
d. The difference between what the accountant is
doing and what the Courts say the accountant should be doing.
82. What is not a reason that accounting standards may differ across
countries?
a. Governments.
b. Language.
c. Culture.
d. Past Practice.
83. What would be an advantage of having all countries adopt and
follow the same accounting standards?
a. Consistency.
b. Comparability.
c. Lower preparation costs.
d. b and c
84. Which of the following is an ethical concern of accountants?
a. Earnings manipulation.
b. Conservative accounting.
c. Industry practices.
d. None of the above.
Multiple Choice
Answers—Conceptual
IFRS QUESTIONS
True/False:
1. IFRS includes both International Financial Reporting Standards and
International Accounting Standards.
2. International Financial Reporting Standards preceded International
Accounting Standards
3. The standard-setting structure used by the International
Accounting Standards Board is very similar to that used by the Financial
Accounting Standards Board.
4. The rules-based standards of IFRS are more detailed than the
simpler, principles-based standards of U.S. GAAP.
5. The International Accounting Standards Board issues International
Financial Reporting Standards.
6. International Accounting Standards are no longer considered part
of IFRS because they have been replaced by International Financial Reporting
Standards.
Answers to True/False questions:
Multiple Choice:
1. Authoritative standards for IFRS include:
a. International Financial Reporting Standards
only.
b. International Financial Reporting Standards
and International Accounting Standards only.
c. International Financial Reporting Standards,
International Accounting Standards and U.S. GAAP only.
d. International Financial Reporting Standards,
International Accounting Standards and any GAAP standard recognized by an
organized stock exchange.
2. Which of these statements
regarding the IFRS and U.S. GAAP is correct?
a. U.S. GAAP is considered to be
"principles-based" and more detailed than IFRS.
b. U.S. GAAP is considered to be
"rules-based" and less detailed than IFRS.
c. IFRS is considered to be
"principles-based" and less detailed than U.S. GAAP
d. Both U.S. GAAP and IFRS are considered to be
"rules-based", but U.S. GAAP tends to be more complex.
3. The IASB's standard-setting
structure includes all of the following except
a. Standing Interpretations Committee
b. Standards Advisory Council
c. Standards Comparison Committee
d. Trustees
Answers to Multiple Choice:
Short Answer:
1. Why would it be advantageous for U.S. GAAP and
International GAAP to be the same?
2. What is the difference
between principles-based and rules-based accounting rules? Is IFRS more
principles-based than U.S. GAAP? Explain.
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