CHAPTER 1

FINANCIAL ACCOUNTING AND

ACCOUNTING STANDARDS
IFRS questions are available at te en! o" tis #a$ter%
TRUE&FALSE'Con#e$tual
Ans(er No% Des#ri$tion
F 1. Definition of financial accounting.
T 2. Purpose of financial statements.
T 3. Definition of financial accounting.
T 4. Capital allocation process.
F 5. Objective of financial reporting.
T . Decision!"sefulness approac#.
T $. "sers of financial statements.
F %. Committee on &ccounting Proce'ure.
F (. Passage of F&)* stan'ar's.
T 1+. Financial &ccounting Concepts.
T 11. Creation of &ccounting Principles *oar'.
F 12. F&)* Co'ification.
T 13. Co'e of Professional Con'uct.
F 14. ,&&P an' political action.
T 15. Public Compan- &ccounting Oversig#t *oar'.
T 1. ./pectations gap.
F 1$. Financial reports.
F 1%. Fair value information.
F 1(. 0nternational Financial 1eporting )tan'ar's.
F 2+. .t#ical issues.
)ULTIPLE CHOICE'Con#e$tual
Ans(er No% Des#ri$tion
a 21. Financial accounting.
' 22. "sers of financial reports.
' 23. 0'entif- t#e major financial statements.
a 24. Financial reporting entit-.
' 25. Differences bet2een financial an' managerial accounting.
b 2. Financial reporting communication.
b 2$. 3anagerial accounting.
a 2%. Capital allocation process.
' 2(. .fficient use of resources.
' 3+. Capital allocation process.
c 31. Financial statement information.
c 32. &ccounting profession c#allenge.
c 33. Financial reporting objective.
' 34. Financial statements primar- users.
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
c 35. 0nvestor4s 'ecision ma5ing.
)ULTIPLE CHOICE'Con#e$tual 6cont.7
Ans(er No% Des#ri$tion
b 3. &ccrual accounting.
c 3$. Objective of financial reporting perspective.
c 3%. 3eaning of 8generall- accepte'.9
b 3(. Common set of stan'ar's an' proce'ures.
a 4+. :imitation of general purpose financial statements.
c 41. )ecurities an' ./c#ange Commission an' accounting stan'ar' setting.
' 42. Due process in F&)* stan'ar' setting.
' 43. Organi;ations responsible for setting accounting stan'ar's.
b 44. 1eason for &ccounting Principles *oar' creation
b 45. Organi;ation issuing &ccounting 1esearc# *ulletins.
a 4. C#aracteristic of ,&&P.
c 4$. C#aracteristics of ,&&P.
' 4%. F&)* accounting stan'ar's.
c 4(. F&)* stan'ar' passage.
b 5+. Purpose of .merging 0ssues Tas5 Force.
a 51. &0CP& role in stan'ar' setting.
c 52. 1ole of ).C.
c 53. Po2ers of t#e ).C.
' 54. ).C enforcement.
' 55. Creation of F&)*.
' 5. &ppointment of F&)* members.
a 5$. Purpose of t#e Financial &ccounting Foun'ation.
b 5%. C#aracteristics of F&)*.
b 5(. F&)* an' <'ue process< s-stem.
b +. Publications of F&)*.
c 1. Purpose of F&)* Tec#nical *ulletins.
' 2. Purpose of .merging 0ssues Tas5 Force.
b 3. 1ole of t#e &0CP&.
b 4. Pronouncement issue' b- t#e &P*.
c 5. )tan'ar' setting organi;ations.
' . 0'entification of stan'ar' setting organi;ations.
c $. )tatements of financial accounting concepts.
'
P
%. F&)* members.
'
P
(. F&)* statement process.
' $+. =ature of ,&&P.
' $1. *o'- 2#ic# promulgates ,&&P.
' $2. Publications 2#ic# are not ,&&P.
' $3. Publications 2#ic# are not ,&&P.
b $4. Co'e for Professional Con'uct 1ule 2+3.
c $5. Purpose of F&)* staff position.
c $. Components of ,&&P.
a $$. Political environment of stan'ar' setting.
c $%. 0nternational &ccounting )tan'ar's *oar'.
1 & /
Financial &ccounting an' &ccounting )tan'ar's
)ULTIPLE CHOICE'Con#e$tual 6cont.7
Ans(er No% Des#ri$tion
' $(. )tan'ar' setting process pressure.
a %+. Danger of politics in stan'ar' setting
c %1. Definition of <e/pectation gap<.
b %2. 1eason accounting stan'ar's 'iffer across countries.
' %3. &'vantage of countries a'opting same accounting stan'ar's.
a %4. .t#ical concern of accountants.
P
=ote> t#ese ?uestions also appear in t#e Problem!)olving )urvival ,ui'e.
E0ERCISES
Ite,
Des#ri$tion
.1!%5 Objectives of financial reporting.
.1!% Development of accounting principles.
.1!%$ Publications an' organi;ations.
.1!%% F&)*.
.1!%( .volution of a statement of financial accounting stan'ar's.
CHAPTER LEARNING O*1ECTI2ES
1. 0'entif- t#e major financial statements an' ot#er means of financial reporting.
2. ./plain #o2 accounting assists in t#e efficient use of scarce resources.
3. 0'entif- t#e objectives of financial reporting.
4. ./plain t#e nee' for accounting stan'ar's.
5. 0'entif- t#e major polic-!setting bo'ies an' t#eir role in t#e stan'ar'!setting process.
. ./plain t#e meaning of generall- accepte' accounting principles 6,&&P7 an' t#e role of t#e
Co'ification for ,&&P.
$. Describe t#e impact of user groups on t#e rule!ma5ing process.
%. Describe some of t#e c#allenges facing financial reporting.
(. "n'erstan' issues relate' to et#ics an' financial accounting.
1 & 3
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
SU))AR4 OF LEARNING O*1ECTI2ES *4 5UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learnin- Ob6e#tive 1
1. TF 21. 3C 23. 3C 25. 3C
P
2$. 3C
2. TF 22. 3C 24. 3C 2. 3C
Learnin- Ob6e#tive /
3. TF 4. TF 2%. 3C 2(. 3C 3+. 3C
Learnin- Ob6e#tive 3
5. TF 33. 3C 35. 3C 3$. 3C
. TF 34. 3C 3. 3C %5. .
Learnin- Ob6e#tive 7
$. TF 3%. 3C 3(. 3C 4+. 3C %. .
Learnin- Ob6e#tive 8
%. TF 43. 3C 4(. 3C 55. 3C 1. 3C $. 3C %(. .
(. TF 44. 3C 5+. 3C 5. 3C 2. 3C
P
%. 3C
1+. TF 45. 3C 51. 3C 5$. 3C 3. 3C
P
(. 3C
11. TF 4. 3C 52. 3C 5%. 3C 4. 3C
P
%. .
41. 3C 4$. 3C 53. 3C 5(. 3C 5. 3C %$. .
42. 3C 4%. 3C 54. 3C +. 3C . 3C %%. .
Learnin- Ob6e#tive 9
12. TF $+. 3C $2. 3C $4. 3C $. 3C
13. TF $1. 3C $3. 3C $5. 3C
Learnin- Ob6e#tive :
14. TF 1. TF $$. 3C $(. 3C %1. 3C %3. .
15. TF 2. 3C $%. 3C %+. 3C %2. 3C
Learnin- Ob6e#tive ;
1$. TF 1%. TF 1(. TF 31. 3C 32. 3C
Learnin- Ob6e#tive <
2+. TF %4. 3C
=ote> TF @ True!False
3C @ 3ultiple C#oice
. @ ./ercise
1 & 7
Financial &ccounting an' &ccounting )tan'ar's
TRUE&FALSE'Con#e$tual
1. Financial accounting is t#e process of i'entif-ingA measuringA anal-;ingA an' communicating
financial information nee'e' b- management to planA evaluateA an' control a compan-4s
operations.
2. Financial statements are t#e principal means t#roug# 2#ic# a compan- communicates its
financial information to t#ose outsi'e it.
3. "sers of financial reports provi'e' b- a compan- use t#at information to ma5e t#eir capital
allocation 'ecisions.
4. &n effective process of capital allocation promotes pro'uctivit- an' provi'es an efficient
mar5et for bu-ing an' selling securities an' obtaining an' granting cre'it.
5. T#e objective of financial reporting is to provi'e financial information about t#e reporting
entit- t#at is useful to present an' potential e?uit- investorsA but not to users 2#o are not
investors.
. 0nvestors are intereste' in financial reporting because it provi'es information t#at is useful
for ma5ing 'ecisions 6'ecision!usefulness approac#7.
$. "sers of financial accounting statements #ave bot# coinci'ing an' conflicting nee's for
information of various t-pes.
%. T#e )ecurities an' ./c#ange Commission appointe' t#e Committee on &ccounting
Proce'ure.
(. T#e passage of a ne2 F&)* )tan'ar's )tatement re?uires t#e support of five of t#e seven
boar' members.
1+. Financial &ccounting Concepts set fort# fun'amental objectives an' concepts t#at are use'
in 'eveloping future stan'ar's of financial accounting an' reporting.
11. T#e &0CP& create' t#e &ccounting Principles *oar' in 1(5(.
12. T#e F&)*4s Co'ification integrates e/isting ,&&PA an' creates ne2 ,&&P.
13. T#e &0CP&4s Co'e of Professional Con'uct re?uires t#at members prepare financial
statements in accor'ance 2it# generall- accepte' accounting principles.
14. ,&&P is a pro'uct of careful logic or empirical fin'ings an' are not influence' b- political
action.
15. T#e Public Compan- &ccounting Oversig#t *oar' #as oversig#t an' enforcement aut#orit-
an' establis#es au'iting an' in'epen'ence stan'ar's an' rules.
1. T#e e/pectations gap is cause' b- 2#at t#e public t#in5s accountants s#oul' 'o an' 2#at
accountants t#in5 t#e- can 'o.
1 & 8
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
1$. Financial reports in t#e earl- 21st centur- 'i' not provi'e an- information about a
compan-4s soft assets 6intangibles7.
1%. &ccounting stan'ar's are no2 less li5el- to re?uire t#e recor'ing or 'isclosure of fair value
information.
1(. ".). companies t#at list overseas are re?uire' to use 0nternational Financial 1eporting
)tan'ar'sA issue' b- t#e 0nternational &ccounting )tan'ar's *oar'.
2+. .t#ical issues in financial accounting are governe' b- t#e &0CP&.
True&False Ans(ers'Con#e$tual
Ite, Ans% Ite, Ans% Ite, Ans% Ite, Ans%
1. F . T 11. T 1. T
2. T $. T 12. F 1$. F
3. T %. F 13. T 1%. F
4. T (. F 14. F 1(. F
5. F 1+. T 15. T 2+. F
)ULTIPLE CHOICE'Con#e$tual
21. ,eneral!purpose financial statements are t#e pro'uct of
a. financial accounting.
b. managerial accounting.
c. bot# financial an' managerial accounting.
'. neit#er financial nor managerial accounting.
22. "sers of financial reports inclu'e all of t#e follo2ing except
a. cre'itors.
b. government agencies.
c. unions.
'. &ll of t#ese are users.
23. T#e financial statements most fre?uentl- provi'e' inclu'e all of t#e follo2ing except t#e
a. balance s#eet.
b. income statement.
c. statement of cas# flo2s.
'. statement of retaine' earnings.
24. T#e information provi'e' b- financial reporting pertains to
a. in'ivi'ual business enterprisesA rat#er t#an to in'ustries or an econom- as a 2#ole or
to members of societ- as consumers.
b. business in'ustriesA rat#er t#an to in'ivi'ual enterprises or an econom- as a 2#ole or
to members of societ- as consumers.
c. in'ivi'ual business enterprisesA in'ustriesA an' an econom- as a 2#oleA rat#er t#an to
members of societ- as consumers.
'. an econom- as a 2#ole an' to members of societ- as consumersA rat#er t#an to
in'ivi'ual enterprises or in'ustries.
1 & 9
Financial &ccounting an' &ccounting )tan'ar's
25. &ll t#e follo2ing are 'ifferences bet2een financial an' managerial accounting in #o2
accounting information is use' e/cept to
a. plan an' control compan-Bs operations.
b. 'eci'e 2#et#er to invest in t#e compan-.
c. evaluate borro2ing capacit- to 'etermine t#e e/tent of a loan to grant.
'. &ll t#e above.
2. C#ic# of t#e follo2ing represents a form of communication t#roug# financial reporting but
not t#roug# financial statementsD
a. *alance s#eet.
b. Presi'entBs letter.
c. 0ncome statement.
'. =otes to financial statements.
P
2$. T#e process of i'entif-ingA measuringA anal-;ingA an' communicating financial information
nee'e' b- management to planA evaluateA an' control an organi;ation4s operations is
calle'
a. financial accounting.
b. managerial accounting.
c. ta/ accounting.
'. au'iting.
2%. Eo2 'oes accounting #elp t#e capital allocation process attract investment capitalD
a. Provi'es timel-A relevant information.
b. .ncourages innovation.
c. Promotes pro'uctivit-.
'. a an' b above.
2(. C#et#er a business is successful an' t#rives is 'etermine' b-
a. mar5ets.
b. free enterprise.
c. competition.
'. all of t#ese.
3+. &n effective capital allocation process
a. promotes pro'uctivit-.
b. encourages innovation.
c. provi'es an efficient mar5et for bu-ing an' selling securities.
'. all of t#ese.
31. Financial statements in t#e earl- 2+++s provi'e information relate' to
a. nonfinancial measurements.
b. for2ar'!loo5ing 'ata.
c. #ar' assets 6inventor- an' plant assets7.
'. none of t#ese.
32. C#ic# of t#e follo2ing is not a major c#allenge facing t#e accounting professionD
a. =onfinancial measurements.
b. Timeliness.
c. &ccounting for #ar' assets.
'. For2ar'!loo5ing information.
1 & :
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
33. C#at is t#e objective of financial reportingD
a. Provi'e information t#at is useful to management in ma5ing 'ecisions.
b. Provi'e information t#at clearl- portra- nonfinancial transactions.
c. Provi'e information about t#e reporting entit- t#at is useful to present an' potential
e?uit- investorsA len'ersA an' ot#er cre'itors.
'. Provi'e information t#at e/clu'es claims to t#e resources.
34. Primar- users for general!purpose financial statements inclu'e
a. cre'itors.
b. emplo-ees.
c. investors.
'. bot# cre'itors an' investors.
35. C#en ma5ing 'ecisionsA investors are intereste' in assessing
a. t#e compan-4s abilit- to generate net cas# inflo2s.
b. management4s abilit- to protect an' en#ance t#e capital provi'ers4 investments.
c. *ot# a an' b.
'. t#e compan-4s abilit- to generate net income.
3. &ccrual accounting is use' because
a. cas# flo2s are consi'ere' less important.
b. it provi'es a better in'ication of abilit- to generate cas# flo2s t#an t#e cas# basis.
c. it recogni;es revenues 2#en cas# is receive' an' e/penses 2#en cas# is pai'.
'. none of t#e above.
3$. C#ic# perspective is a'opte' as part of t#e objective of general!purpose financial
reportingD
a. Decision!usefulness perspective.
b. Proprietar- perspective.
c. .ntit- perspective.
'. Financial reporting perspective.
3%. &ccounting principles are <generall- accepte'< onl- 2#en
a. an aut#oritative accounting rule!ma5ing bo'- #as establis#e' it in an official pro!
nouncement.
b. it #as been accepte' as appropriate because of its universal application.
c. bot# a an' b.
'. neit#er a nor b.
3(. & common set of accounting stan'ar's an' proce'ures are calle'
a. financial accounting stan'ar's.
b. generall- accepte' accounting principles.
c. objectives of financial reporting.
'. statements of financial accounting concepts.
1 & ;
Financial &ccounting an' &ccounting )tan'ar's
4+. C#ic# of t#e follo2ing is a general limitation of <general purpose financial statements<D
a. ,eneral purpose financial statements ma- not be t#e most informative for a specific
enterprise.
b. ,eneral purpose financial statements are comparable.
c. ,eneral purpose financial statements are assume' to present fairl- t#e compan-Bs
financial operations.
'. =one of t#e above.
41. C#at is t#e relations#ip bet2een t#e )ecurities an' ./c#ange Commission an'
accounting stan'ar' setting in t#e "nite' )tatesD
a. T#e ).C re?uires all companies liste' on an e/c#ange to submit t#eir financial
statements to t#e ).C.
b. T#e ).C coor'inates 2it# t#e &0CP& in establis#ing accounting stan'ar's.
c. T#e ).C #as a man'ate to establis# accounting stan'ar's for enterprises un'er its
juris'iction.
'. T#e ).C revie2s financial statements for compliance.
42. C#at is 'ue process in t#e conte/t of stan'ar' setting at t#e F&)*D
a. F&)* operates in full vie2 of t#e public.
b. Public #earings are #el' on propose' accounting stan'ar's.
c. 0ntereste' parties can ma5e t#eir vie2s 5no2n.
'. &ll of t#e above.
43. C#ic# of t#e follo2ing organi;ations #as been responsible for setting ".). accounting
stan'ar'sD
a. &ccounting Principles *oar'.
b. Committee on &ccounting Proce'ure.
c. Financial &ccounting )tan'ar's *oar'.
'. &ll of t#e above.
44. C#- 'i' t#e &0CP& create t#e &ccounting Principles *oar'D
a. T#e ).C 'isban'e' t#e previous stan'ar' setting organi;ation.
b. T#e previous stan'ar' setting organi;ation 'i' not provi'e a structure' set of
accounting principles.
c. =o suc# organi;ation e/iste' in t#e past.
'. =one of t#e above.
45. C#ic# organi;ation 2as responsible for issuing &ccounting 1esearc# *ulletinsD
a. &ccounting Principles *oar'.
b. Committee on &ccounting Proce'ure.
c. T#e ).C.
'. &0CP&.
4. & c#aracteristic of generall- accepte' accounting principles inclu'e t#e follo2ing>
a. common set of stan'ar's an' principles.
b. stan'ar's an' principles are base' fe'eral statutes.
c. acceptance re?uires an affirmative vote of Certifie' Public &ccountants.
'. practices t#at become accepte' for at least a -ear b- all in'ustr- members.
1 & <
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
4$. C#aracteristics of generall- accepte' accounting principles inclu'e all of t#e follo2ing
e/cept
a. aut#oritative accounting t#e rule!ma5ing bo'- establis#e' a principle of reporting.
b. stan'ar's are consi'ere' useful b- t#e profession.
c. eac# principle is approve' b- t#e ).C.
'. practice #as become universall- accepte' over time.
4%. C#- 2as it believe' t#at accounting stan'ar's t#at 2ere issue' b- t#e Financial
&ccounting )tan'ar's *oar' 2oul' carr- more 2eig#tD
a. )maller members#ip.
b. F&)* boar' members are 2ell!pai'.
c. F&)* boar' members must be CP&s.
'. Due process.
4(. T#e passage of a ne2 F&)* )tan'ar's )tatement re?uires t#e support of
a. all *oar' members.
b. t#ree *oar' members.
c. four *oar' members.
'. five *oar' members.
5+. C#at is t#e purpose of .merging 0ssues Tas5 ForceD
a. Provi'e interpretation of e/isting stan'ar's.
b. Provi'e a consensus on #o2 to account for ne2 an' unusual financial transactions.
c. Provi'e interpretive gui'ance.
'. Provi'e timel- gui'ance on select issues.
51. C#ic# organi;ation is responsible for issuing .merging 0ssues Tas5 Force )tatementsD
a. F&)*
b. C&P
c. &P*
'. ).C
52. T#e role of t#e )ecurities an' ./c#ange Commission in t#e formulation of accounting
principles can be best 'escribe' as
a. consistentl- primar-.
b. consistentl- secon'ar-.
c. sometimes primar- an' sometimes secon'ar-.
'. non!e/istent.
53. T#e bo'- t#at #as t#e po2er to prescribe t#e accounting practices an' stan'ar's to be
emplo-e' b- companies t#at fall un'er its juris'iction is t#e
a. F&)*.
b. &0CP&.
c. ).C.
'. &P*.
1 & 1=
Financial &ccounting an' &ccounting )tan'ar's
54. Companies t#at are liste' on a stoc5 e/c#ange are re?uire' to submit t#eir financial
statements to t#e
a. &0CP&.
b. &P*
c. F&)*.
'. ).C.
55. T#e Financial &ccounting )tan'ar's *oar' 6F&)*7 2as propose' b- t#e
a. &merican 0nstitute of Certifie' Public &ccountants.
b. &ccounting Principles *oar'.
c. )tu'- ,roup on t#e Objectives of Financial )tatements.
'. )pecial )tu'- ,roup on establis#ment of &ccounting Principles 6C#eat Committee7.
5. T#e Financial &ccounting )tan'ar's *oar'
a. #as issue' a series of pronouncements entitle' )tatements on &u'iting )tan'ar's.
b. 2as t#e forerunner of t#e current &ccounting Principles *oar'.
c. is t#e arm of t#e )ecurities an' ./c#ange Commission responsible for setting
financial accounting stan'ar's.
'. is appointe' b- t#e Financial &ccounting Foun'ation.
5$. T#e Financial &ccounting Foun'ation
a. oversees t#e operations of t#e F&)*.
b. oversees t#e operations of t#e &0CP&.
c. provi'es information to intereste' parties on financial reporting issues.
'. 2or5s 2it# t#e Financial &ccounting )tan'ar's &'visor- Council to provi'e informa!
tion to intereste' parties on financial reporting issues.
5%. T#e major 'istinction bet2een t#e Financial &ccounting )tan'ar's *oar' 6F&)*7 an' its
pre'ecessorA t#e &ccounting Principles *oar' 6&P*7A is
a. t#e F&)* issues e/posure 'rafts of propose' stan'ar's.
b. all members of t#e F&)* are full- remunerate'A serve full timeA an' are in'epen'ent
of an- companies or institutions.
c. all members of t#e F&)* possess e/tensive e/perience in financial reporting.
'. a majorit- of t#e members of t#e F&)* are CP&s 'ra2n from public practice.
5(. T#e Financial &ccounting )tan'ar's *oar' emplo-s a <'ue process< s-stem 2#ic#
a. is an efficient s-stem for collecting 'ues from members.
b. enables intereste' parties to e/press t#eir vie2s on issues un'er consi'eration.
c. i'entifies t#e accounting issues t#at are t#e most important.
'. re?uires t#at all accountants must receive a cop- of financial stan'ar's.
+. C#ic# of t#e follo2ing is not a publication of t#e F&)*D
a. )tatements of Financial &ccounting Concepts
b. &ccounting 1esearc# *ulletins
c. 0nterpretations
'. Tec#nical *ulletins
1 & 11
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
1. F&)* Tec#nical *ulletins
a. are similar to F&)* 0nterpretations in t#at t#e- establis# enforceable stan'ar's un'er
t#e &0CP&Bs Co'e of Professional .t#ics.
b. are issue' mont#l- b- t#e F&)* to 'eal 2it# current topics.
c. are not e/pecte' to #ave a significant impact on financial reporting in general an'
provi'e gui'ance 2#en it 'oes not conflict 2it# an- broa' fun'amental accounting
principle.
'. 2ere recentl- 'iscontinue' b- t#e F&)* because t#e- 'ealt 2it# speciali;e' topics
#aving little impact on financial reporting in general.
2. T#e purpose of t#e .merging 0ssues Tas5 Force is to
a. 'evelop a conceptual frame2or5 as a frame of reference for t#e solution of future
problems.
b. lobb- t#e F&)* on issues t#at affect a particular in'ustr-.
c. 'o researc# on issues t#at relate to long!term accounting problems.
'. issue statements 2#ic# reflect a consensus on #o2 to account for ne2 an' unusual
financial transactions t#at nee' to be resolve' ?uic5l-.
3. T#e &merican 0nstitute of Certifie' Public &ccountants 6&0CP&7 continues to be involve' in
all of t#e follo2ing e/cept
a. 'eveloping an' enforcing professional et#ics.
b. 'eveloping au'iting stan'ar's.
c. provi'ing professional e'ucation programs.
'. all of t#e above.
P
4. C#ic# of t#e follo2ing pronouncements 2ere issue' b- t#e &ccounting Principles *oar'D
a. &ccounting 1esearc# *ulletins
b. Opinions
c. )tatements of Position
'. )tatements of Financial &ccounting Concepts
5. C#ic# of t#e follo2ing organi;ations #as not been instrumental in t#e 'evelopment of
financial accounting stan'ar's in t#e "nite' )tatesD
a. &0CP&
b. F&)*
c. 0&)*
'. ).C
. &n organi;ation t#at #as not publis#e' accounting stan'ar's is t#e
a. &merican 0nstitute of Certifie' Public &ccountants.
b. )ecurities an' ./c#ange Commission.
c. Financial &ccounting )tan'ar's *oar'.
'. &ll of t#ese #ave publis#e' accounting stan'ar's.
$. T#e purpose of )tatements of Financial &ccounting Concepts is to
a. establis# ,&&P.
b. mo'if- or e/ten' t#e e/isting F&)* )tan'ar's )tatement.
c. form a conceptual frame2or5 for solving e/isting an' emerging problems.
'. 'etermine t#e nee' for F&)* involvement in an emerging issue.
1 & 1/
Financial &ccounting an' &ccounting )tan'ar's
P
%. 3embers of t#e Financial &ccounting )tan'ar's *oar' are
a. emplo-e' b- t#e &merican 0nstitute of Certifie' Public &ccountants 6&0CP&7.
b. part!time emplo-ees.
c. re?uire' to #ol' a CP& certificate.
'. in'epen'ent of an- ot#er organi;ation.
P
(. T#e follo2ing are part of t#e <'ue process< s-stem use' b- t#e F&)* in t#e evolution of a
t-pical F&)* )tatement of Financial &ccounting )tan'ar's>
1. ./posure Draft
2. )tatement of Financial &ccounting )tan'ar's
3. Preliminar- Fie2s
T#e c#ronological or'er in 2#ic# t#ese items are release' is as follo2s>
a. 1A 2A 3.
b. 1A 3A 2.
c. 2A 3A 1.
'. 3A 1A 2.
$+. ,enerall- accepte' accounting principles
a. inclu'e 'etaile' practices an' proce'ures as 2ell as broa' gui'elines of general
application.
b. are influence' b- pronouncements of t#e ).C an' 01).
c. c#ange over time as t#e nature of t#e business environment c#anges.
'. all of t#ese.
$1. T#e most significant current source of generall- accepte' accounting principles is t#e
a. &0CP&.
b. ).C.
c. &P*.
'. F&)*.
$2. C#ic# of t#e follo2ing is not a part of generall- accepte' accounting principlesD
a. F&)* 0nterpretations
b. C&P &ccounting 1esearc# *ulletins
c. &P* Opinions
'. &ll of t#ese are part of generall- accepte' accounting principles.
$3. C#ic# of t#e follo2ing publications 'oes not ?ualif- as a statement of generall- accepte'
accounting principlesD
a. )tatements of financial stan'ar's issue' b- t#e F&)*
b. &ccounting interpretations issue' b- t#e F&)*
c. &P* Opinions
'. &ccounting researc# stu'ies issue' b- t#e &0CP&
$4. 1ule 2+3 of t#e Co'e of Professional Con'uct a''resses>
a. et#ical re?uirements.
b. financial statements s#oul' be base' on generall- accepte' accounting principles.
c. a'vertising to obtaine' clients.
'. au'iting financial statements.
1 & 13
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
$5. C#at is t#e purpose of a F&)* )taff PositionD
a. Provi'e interpretation of e/isting stan'ar's.
b. Provi'e a consensus on #o2 to account for ne2 an' unusual financial transactions.
c. Provi'e interpretive gui'ance.
'. Provi'e timel- gui'ance on select issues.
$. C#ic# of t#e follo2ing is not consi'ere' a component of generall- accepte' accounting
principlesD
a. F&)* 0mplementation ,ui'es.
b. Ci'el- recogni;e' in'ustr- practices.
c. &rticles publis#e' in CP& journals.
'. &0CP& &ccounting 0nterpretations.
$$. Financial accounting stan'ar'!setting in t#e "nite' )tates
a. can be 'escribe' as a social process 2#ic# reflects political actions of various
intereste' user groups as 2ell as a pro'uct of researc# an' logic.
b. is base' solel- on researc# an' empirical fin'ings.
c. is a legalistic process base' on rules promulgate' b- governmental agencies.
'. is 'emocratic in t#e sense t#at a majorit- of accountants must agree 2it# a stan'ar'
before it becomes enforceable.
$%. T#e purpose of t#e 0nternational &ccounting )tan'ar's *oar' is to
a. issue enforceable stan'ar's 2#ic# regulate t#e financial accounting an' reporting of
multinational corporations.
b. 'evelop a uniform currenc- in 2#ic# t#e financial transactions of companies t#roug#!
out t#e 2orl' 2oul' be measure'.
c. promote uniform accounting stan'ar's among countries of t#e 2orl'.
'. arbitrate accounting 'isputes bet2een au'itors an' international companies.
$(. C#at is not a source of pressure t#at ma- influence t#e accounting stan'ar' setting
processD
a. Congress.
b. :obb-ist.
c. CP& firms.
'. =one of t#e above.
%+. C#at is a possible 'anger if politics pla-s too big a role in accounting stan'ar' settingD
a. &ccounting stan'ar's t#at are not trul- generall- accepte'.
b. 0n'ivi'uals ma- influence t#e stan'ar's.
c. "ser groups become active.
'. T#e F&)* 'elegates its aut#orit- to electe' officials.
1 & 17
Financial &ccounting an' &ccounting )tan'ar's
%1. C#at is <e/pectation gap<D
a. T#e 'ifference bet2een 2#at t#e public t#in5s t#e accountant is not 'oing an' 2#at
t#e accountant 5no2s t#e- 'onBt 'o.
b. T#e 'ifference bet2een 2#at t#e public t#in5s t#e accountant is 'oing an' 2#at
Congress sa-s t#e accountant is 'oing.
c. T#e 'ifference bet2een 2#at t#e public t#in5s t#e accountant is 'oing an' 2#at t#e
accountant t#in5s t#e- can 'o.
'. T#e 'ifference bet2een 2#at t#e accountant is 'oing an' 2#at t#e Courts sa- t#e
accountant s#oul' be 'oing.
%2. C#at is not a reason t#at accounting stan'ar's ma- 'iffer across countriesD
a. ,overnments.
b. :anguage.
c. Culture.
'. Past Practice.
%3. C#at 2oul' be an a'vantage of #aving all countries a'opt an' follo2 t#e same
accounting stan'ar'sD
a. Consistenc-.
b. Comparabilit-.
c. :o2er preparation costs.
'. b an' c
%4. C#ic# of t#e follo2ing is an et#ical concern of accountantsD
a. .arnings manipulation.
b. Conservative accounting.
c. 0n'ustr- practices.
'. =one of t#e above.
)ulti$le Coi#e Ans(ers'Con#e$tual
Ite, Ans% Ite, Ans% Ite, Ans% Ite, Ans% Ite, Ans% Ite, Ans% Ite, Ans%
21. a 31. c 41. c 51. a 1. c $1. ' %1. c
22. ' 32. c 42. ' 52. c 2. ' $2. ' %2. b
23. ' 33. c 43. ' 53. c 3. b $3. ' %3. '
24. a 34. ' 44. b 54. ' 4. b $4. b %4. a
25. ' 35. c 45. b 55. ' 5. c $5. c
2. b 3. b 4. a 5. ' . ' $. c
2$. b 3$. c 4$. c 5$. a $. c $$. a
2%. a 3%. c 4%. ' 5%. b %. ' $%. c
2(. ' 3(. b 4(. c 5(. b (. ' $(. '
3+. ' 4+. a 5+. b +. b $+. ' %+. a
1 & 18
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
E0ERCISES
E>% 1&;8GObjective of financial reporting.
C#at is t#e objective of financial reportingD Eo2 'o general!purpose financial statements #elp
meet t#is objective.
Solution 1&;8
T#e objective of financial reporting is to provi'e financial information about t#e reporting entit-
t#at is useful to present an' potential e?uit- investorsA len'ersA an' ot#er cre'itors in 'ecisions
about provi'ing resources to t#e entit-.
,eneral!purpose financial statements provi'e financial reporting information to a 2i'e variet- of
users. T#e- #elp s#are#ol'ersA cre'itorsA emplo-eesA an' regulators to better un'erstan' a
compan-4s financial position an' relate' performance.
E>% 1&;9GDevelopment of accounting principles.
Presente' belo2 are t#ree in'epen'entA unrelate' statements regar'ing t#e formulation of
generall- accepte' accounting principles. .ac# statement contains some incorrect or 'ebatable
statement6s7.
)tatement 0
T#e users of financial accounting statements #ave coinci'ing an' conflicting nee's for
statements of various t-pes. To meet t#ese nee'sA an' to satisf- t#e financial reporting
responsibilit- of managementA accountants prepare 'ifferent sets of financial statements for
'ifferent users.
)tatement 00
T#e F&)* s#oul' be responsive to t#e nee's an' vie2points of t#e entire economic communit-A
not just t#e public accounting profession. T#e F&)* t#erefore 2ill succee' because it 2ill 'eal
effectivel- 2it# all intereste' groups.
)tatement 000
T#e )ecurities an' ./c#ange Commission is ver- concerne' about financial reporting an' #as
formulate' a committee calle' t#e &ccounting )tan'ar's ./ecutive Committee 6&c).C7 to
provi'e input to t#e F&)*. 0n a''itionA after eac# F&)* )tatement is issue'A t#e &c).C issues
)tatements of Position stating its position on t#e F&)* statement.
Instru#tions
.valuate eac# of t#e in'epen'ent statements an' i'entif- t#e areas of fallacious reasoning in
eac#. ./plain 2#- t#e reasoning is incorrect. Complete -our 'iscussion of eac# statement before
procee'ing to t#e ne/t statement.
1 & 19
Financial &ccounting an' &ccounting )tan'ar's
Solution 1&;9
)tatement 0
0t is true t#at users of financial accounting statements #ave coinci'ing an' conflicting nee's for
statements of various t-pes. Eo2everA to meet t#ese nee'sA accountants generall- prepare a
single set of general!purpose financial statementsA rat#er t#an a number of 'ifferent t-pes of
financial statements. 0t ma- be argue' t#at accountants often 'o prepare special statements for
particular purposesA but in general t#e accounting profession #as relie' on general purpose
financial statements prepare' in conformance 2it# generall- accepte' accounting principles.
)tatement 00
0t is true t#at t#e F&)* s#oul' be responsive to t#e nee's of t#e entire economic communit-A not
just t#e public accounting profession. Eo2everA it is not clear 2#et#er t#e F&)* 2ill succee'. T#e
F&)* 2ill #ave t#e best c#ance of survival if it 'eals 2it# problems promptl-A sets proper
prioritiesA ta5es 2#atever action it t#in5s is rig#t an' in t#e public interestA an' #an'les pressures
responsibl- 2it#out overreacting to t#em.
)tatement 000
T#e &ccounting )tan'ar's ./ecutive Committee 6&c).C7 2as establis#e' 2it#in t#e &merican
0nstitute of Certifie' Public &ccountantsA not t#e )ecurities an' ./c#ange CommissionA to
respon' to pronouncements of t#e F&)*. T#e &c).C 'oes issue )tatements of PositionA but
issues t#em before t#e F&)* sets stan'ar's on t#e issue.
E>% 1&;:GPublications an' organi;ations.
)ignificant accounting publications are liste' belo2 61!%7. )ources or sponsors of accounting
publications are i'entifie' ne/t b- alp#abetical c#aracter 6a!f7. 3atc# t#e publications 2it# t#eir
sources.
Publications
HHHHH 1. &ccounting 1esearc# *ulletins 61(53!1(5(7
HHHHH 2. )tatements on &u'iting )tan'ar's
HHHHH 3. )tatements of Position 6)OPs7
HHHHH 4. .merging 0ssues Tas5 Force )tatements
HHHHH 5. Opinions 61(2!1($37
HHHHH . Tec#nical *ulletins
HHHHH $. )tatements of Financial &ccounting )tan'ar's
HHHHH %. )tatements of Financial &ccounting Concepts
)ourcesI)ponsors
a. &u'iting )tan'ar's *oar' '. Committee on &ccounting Proce'ure
b. &ccounting )tan'ar's ./ecutive Committee e. &ccounting Principles *oar'
c. T#e &0CP& f. Financial &ccounting )tan'ar's *oar'
1 & 1:
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
Solution 1&;:
1. ' 4. f $. f
2. a 5. e %. f
3. b . f
E>% 1&;;GF&)*.
T#e Financial &ccounting )tan'ar's *oar' 2as establis#e' because man- groups intereste' in
financial reporting believe' t#at t#e &ccounting Principles *oar' 2as not effective. Discuss t#e
apparent a'vantages t#at t#e F&)* s#oul' #ave over its earlier counterpartA t#e &P*.
Solution 1&;;
1. )maller members#ip. T#e F&)* is compose' of seven membersA replacing t#e relativel-
large 1%!member &P*.
2. Full!timeA remunerate' members#ip. F&)* members are 2ell!pai'A full!time membersA
appointe' for rene2able five!-ear terms. T#e &P* members 2ere unpai' an' part!time.
3. ,reater autonom-. T#e &P* 2as a senior committee of t#e &0CP&A 2#ereas t#e F&)* is not
part of an- single professional organi;ation. 0t is appointe' b- an' ans2erable onl- to t#e
Financial &ccounting Foun'ation.
4. 0ncrease' in'epen'ence. &P* members retaine' t#eir private positions 2it# firmsA
companiesA or institutions. F&)* members must sever all suc# ties.
5. *roa'er representation. &ll &P* members 2ere re?uire' to be CP&s an' members of t#e
&0CP&. Currentl-A it is not necessar- to be a CP& to be a member of t#e F&)*.
E>% 1&;<G.volution of a statement of financial accounting stan'ar's.
0n establis#ing financial accounting stan'ar'sA t2o basic premises of t#e F&)* are 617 T#e F&)*
s#oul' be responsive to t#e nee's an' vie2points of t#e entire economic communit-A not just t#e
accounting profession. 627 0t s#oul' operate in full vie2 of t#e public t#roug# a <'ue process<
s-stem t#at gives intereste' persons ample opportunit- to ma5e t#eir vie2s 5no2n. To ensure
ac#ievement of t#ese goalsA 2#at are t#e steps ta5en in t#e evolution of an F&)* )tatement of
Financial &ccounting )tan'ar'sD
Solution 1&;<
T#e steps in t#e evolution of an F&)* )tatement of Financial &ccounting )tan'ar's are>
a. Topics are i'entifie' an' place' on t#e *oar'Bs agen'a.
b. 1esearc# an' anal-sis are con'ucte' an' preliminar- vie2s of pros an' cons are issue'.
c. & public #earing on t#e propose' stan'ar' is #el'.
'. T#e *oar' evaluates t#e researc# an' public response an' issues an e/posure 'raft.
e. T#e *oar' evaluates t#e responses an' c#anges t#e e/posure 'raftA if necessar-. T#e final
stan'ar' is t#en issue'.
1 & 1;
Financial &ccounting an' &ccounting )tan'ar's
IFRS 5UESTIONS
True?False@
1. 0F1) inclu'es bot# 0nternational Financial 1eporting )tan'ar's an' 0nternational &ccounting
)tan'ar's.
2. 0nternational Financial 1eporting )tan'ar's prece'e' 0nternational &ccounting )tan'ar's
3. T#e stan'ar'!setting structure use' b- t#e 0nternational &ccounting )tan'ar's *oar' is ver-
similar to t#at use' b- t#e Financial &ccounting )tan'ar's *oar'.
4. T#e rules!base' stan'ar's of 0F1) are more 'etaile' t#an t#e simplerA principles!base'
stan'ar's of ".). ,&&P.
5. T#e 0nternational &ccounting )tan'ar's *oar' issues 0nternational Financial 1eporting
)tan'ar's.
. 0nternational &ccounting )tan'ar's are no longer consi'ere' part of 0F1) because t#e- #ave
been replace' b- 0nternational Financial 1eporting )tan'ar's.
Ans(ers to True?False questions@
1. True
2. False
3. True
4. False
5. True
. False
)ulti$le Coi#e@
1. &ut#oritative stan'ar's for 0F1) inclu'e>
a. 0nternational Financial 1eporting )tan'ar's onl-.
b. 0nternational Financial 1eporting )tan'ar's an' 0nternational &ccounting )tan'ar's onl-.
c. 0nternational Financial 1eporting )tan'ar'sA 0nternational &ccounting )tan'ar's an' ".).
,&&P onl-.
'. 0nternational Financial 1eporting )tan'ar'sA 0nternational &ccounting )tan'ar's an' an-
,&&P stan'ar' recogni;e' b- an organi;e' stoc5 e/c#ange.
1 & 1<
Test *an+ "or Inter,e!iate A##ountin-. Fourteent E!ition
2. C#ic# of t#ese statements regar'ing t#e 0F1) an' ".). ,&&P is correctD
a. ".). ,&&P is consi'ere' to be <principles!base'< an' more 'etaile' t#an 0F1).
b. ".). ,&&P is consi'ere' to be <rules!base'< an' less 'etaile' t#an 0F1).
c. 0F1) is consi'ere' to be <principles!base'< an' less 'etaile' t#an ".). ,&&P
'. *ot# ".). ,&&P an' 0F1) are consi'ere' to be <rules!base'<A but ".). ,&&P ten's to be
more comple/.
3. T#e 0&)*Bs stan'ar'!setting structure inclu'es all of t#e follo2ing e/cept
a. )tan'ing 0nterpretations Committee
b. )tan'ar's &'visor- Council
c. )tan'ar's Comparison Committee
'. Trustees
Ans(ers to )ulti$le Coi#e@
1. b
2. c
3. c
Sort Ans(er@
1. C#- 2oul' it be a'vantageous for ".). ,&&P an' 0nternational ,&&P to be t#e sameD
1. 1elevant an' reliable financial information is a necessit- for viable capital mar5ets.
"nfortunatel-A financial statements from companies outsi'e t#e "nite' )tates are often
prepare' using 'ifferent principles t#an ".). ,&&P. &s a resultA international companies
#ave to 'evelop financial information in 'ifferent 2a-s. *e-on' t#e a''itional costs t#ese
companies incurA users of financial statements are often force' to un'erstan' at least t2o
sets of ,&&P. 0t is not surprising t#at t#ere is a gro2ing 'eman' for one set of #ig# ?ualit-
international stan'ar's.
2. C#at is t#e 'ifference bet2een principles!base' an' rules!base' accounting rulesD 0s 0F1)
more principles!base' t#an ".). ,&&PD ./plain.
2. Principles!base' rules are consi'ere' to be base' on accounting principles to result in
financial statements t#at are presente'. 1ules!base' stan'ar's are generall- ?uite
'etaile'A an' in man- instances follo2 a 8c#ec5!bo/9 mentalit- t#at some conten' ma-
s#iel' au'itors an' companies from legal liabilit-. *ecause 0F1) ten's to be simpler an'
less stringent in its accounting an' 'isclosure re?uirementsA it is generall- consi'ere'
more principles!base' t#an ".). ,&&P.
1 & /=