CHAPTER 1—INTRODUCTION TO FINANCIAL REPORTING

MULTIPLE CHOICE 1. Charging off equipment that cost less than $20 would be an example of the application of: a. going concern b. cost c. matching d. materiality e. realization ANS: D 2. The going concern assumption: a. is applicable to all financial statements b. primarily involves periodic income measurement c. allows for the statements to be prepared under generally accepted accounting principles d. requires that accounting procedures be the same from period to period e. none of the answers are correct ANS: C 3. Understating assets and revenues is justified based on: a. realization assumption b. matching c. consistency d. realization e. none of the answers are correct ANS: E 4. The assumption that enables us to prepare periodic statements between the time that a business commences operations and the time it goes out of business is: a. time period b. business entity c. historical cost d. transaction e. none of the answers are correct ANS: A 5. Valuing assets at their liquidation values is not consistent with: a. conservatism b. materiality c. going concern d. time period e. none of the answers are correct ANS: C

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none of the answers are correct ANS: C 7. a fiscal year c. a calendar year b. time period assumption b. Valuing inventory at the lower of cost or market is an application of the: a. business entity assumption d. going concern e. monetary unit b. time period d. time period assumption b. matching c. The principle that assumes the reader of the financial statements is not interested in the liquidation values is: a. none of the answers are correct ANS: C 9. the end of production b. The accounting principle that assumes that inflation will not take place or will be immaterial is: a. realization d. conservatism b. during production c. conservatism principle e. the point of sale e. an operating year e. historical cost c. the receipt of cash d. none of the answers are correct ANS: D 11. realization e. none of the answers are correct ANS: A 10. realization principle c. none of the answers are correct ANS: E 8. going concern principle d. going concern assumption c. realization assumption e. the natural business year d. none of the answers are correct ANS: D . The business being separate and distinct from the owners is an integral part of the: a. An accounting period that ends when operations are at a low ebb is: a.6. The realization principle leads accountants to usually recognize revenue at: a.

d.12. The assumption that deals with when to recognize the costs that are associated with the revenue that is being recognized is: a. The Accounting Principles Board issued Opinions between: a. Select the one that is not a difference. conservatism c. e. New York Stock Exchange b. 1939-1959 c. ANS: D 16. The FASB is independent of the AICPA. The FASB has broader representation. c. The FASB is the primary board for the development of generally accepted accounting principles. Accounting Research Studies d. 1966-1976 e. a. going concern c. The most significant current source of generally accepted accounting principles is the: a. The size of the board is much smaller. All but one of the following statements indicates a difference between the Financial Accounting Standards Board (FASB) and prior approaches. none of the answers are correct ANS: A 14. none of the answers are correct ANS: D 13. Accounting Principles Board c. The comment that “items that are not material may be recorded in the financial statements in the most economical and expedient manner possible” is representative of: a. AICPA committee on Accounting Procedure e. matching b. realization d. 1959-1973 b. materiality e. Financial Accounting Standards Board ANS: E 15. materiality e. Members of the FASB serve on a full-time basis. 1973-present d. b. consistency d. matching b. none of the answers are correct ANS: A 1-3 .

1966-1976 e. The organization that has by federal law the responsibility to adopt auditing standards is the: a. Accounting Principles Board d. 1939-1959 c. time period c. business entity d. Financial Accounting Standards Board ANS: D 21. AICPA Committee on Accounting Procedure ANS: B 20. Securities and Exchange Commission e. because of incomplete information about the future. conservatism b. 1973-present d. 1960-1973 b. Accountants face a problem of when to recognize revenue. in exchange for more timely reporting is: a. Financial Accounting Standards Board e. materiality e. The Financial Accounting Standards Board has issued statements between: a. none of the answers are correct ANS: C 18. point of sale b. New York Stock Exchange b. Accounting Principles Board d. revenue recognized during production ANS: B 19.17. receipt of cash e. point of order acceptance c. The assumption that allows accountants to accept some inaccuracy. end of production d. By law. the setting of accounting standards is the responsibility of the: a. New York Stock Exchange c. realization ANS: B . Public Company Accounting Oversight Board c. AICPA Committee on Accounting Procedure b. Which of the following methods of recognizing revenue is not used in practice? a.

Understating expenses is justified based on: a. The PCAOB is to adopt auditing standards e. time period assumption b. historical cost ANS: C 25.22. In addition to appointing the five members of the PCAOB. the SEC is responsible for the oversight and enforcement authority over the Board c. matching assumption e. time period c. The PCAOB is to adopt accounting standards ANS: E 23. current market value d. none of the answers are correct ANS: E 26. conservatism d. none of the answers are correct ANS: E 24. relevant cost c. Which of the following does not relate to The Public Company Accounting Oversight Board (PCAOB)? a. materiality c. Accountants provide for inflation using which of the following accounting principles? a. present value ANS: B 1-5 . This entry is an application of which accounting principle? a. materiality e. realization e. historical cost b. materiality assumption d. The PCAOB consists of five members appointed by the SEC d. matching d. Which of these measurement attributes is not currently used in practice? a. Two members of the board must be CPAs b. an adjusting entry is made that increases salaries payable and increases salaries expense. current cost e. full disclosure b. conservatism assumption c. At the end of the fiscal year. going concern b.

$50. 2008? a.000 c. The following data relate to Swift Company for the year ended December 31.000 150. The following data relate to Rocket Company for the year ended December 31. $30.000 140. Sales on credit Cost of inventory sold on credit Collections from customers Purchase of inventory on credit Payment for purchases Selling expenses (accrual basis) Payment for selling expenses $180.000 Which of the following amounts represents income for Rocket Company for the year ended December 31. Swift Company uses the accrual basis.000 loss c.000 40.000 170.000 b.000 e.000 25.000 ANS: C 28. $50. $35. Rocket Company uses the cash basis. $5. 2008? a.000 45. $60. $40.000 d.000 150. Sales on credit Cost of inventory sold on credit Collections from customers Purchase of inventory on credit Payment for purchases Selling expenses (accrual basis) Payment for selling expenses $250.000 130.000 b.000 140.000 ANS: B .000 20.000 d. 2008.000 e. $30. 2008. $40. $45.000 220.000 170.000 Which of the following amounts represents income for Swift Company for the year ended December 31.27.

000 b. none of the answers are correct ANS: C 30.000 Which of the following amounts represents income for Falcon Company for the year ended December 31.000 60.000 c. The following data relate to Falcon Company for the year ended December 31. Gorr Company uses the accrual basis.000 50.000 d. $180. $90. $185.000 e.000 190.000 d. $60.000 e.000 70. January b. the most popular month for fiscal year-end is: a.000 180. Other than December. 2008. $70. Sales for cash Sales for credit Cost of inventory sold Collections from customers Purchases of inventory on credit Payment for purchases Selling expenses (accrual basis) Payment for selling expenses $180.000 60.000 180. September e.000 190. October ANS: D 1-7 .000 Which of the following represents income for Gorr Company for the year ended December 31.000 210.000 300.29. $200.000 220. Falcon Company uses the cash basis. Sales for cash Sales for credit Cost of inventory sold Collections from customers Purchases of inventory on credit Payment for purchases Selling expenses (accrual basis) Payment for selling expenses $200. $190.000 350. June d. 2008? a. none of the answers are correct ANS: D 31. The following data relate to Gorr Company for the year ended December 31.000 b. $80. March c. 2008. 2008? a.000 220.000 200.000 c.

It would always be conservative to value inventory at market. we should view it as separate from the other resources that are owned by this individual. historical cost also represents the fair market value. ANS: F 11. Accountants normally recognize revenue when cash is received. To the extent that money does not remain stable. ANS: T 9. ANS: T 6. ANS: T 5. The 1933 and 1934 U. ANS: F 4.S. federal securities laws virtually gave the Securities and Exchange Commission (SEC) authority and responsibility for the development of generally accepted accounting principles. it loses its usefulness as the standard for measuring financial transactions.TRUE/FALSE 1. ANS: T 7. The most accurate way to account for the success or failure of an entity is to accumulate all transactions from the opening of business until the business eventually liquidates. ANS: T 2. ANS: T 8. ANS: T 3. In order to determine the economic success of a grocery store. The going concern assumption does not influence the classification of assets and liabilities. ANS: F 10. A loss in value of money is called inflation. An entity usually cannot reasonably account for the profits related to inventory until that inventory is sold in the normal course of business. ANS: T . Many of our present financial statement figures would be misleading if it were not for the going concern assumption. At the time of originally recording a transaction.

short of its complete life span. ANS: F 1-9 . ANS: T 18. ANS: F 15. Performance indicators for nonbusiness organizations are usually formal budgets and donor restrictions. the financial statements are prepared separate and distinct from the owners of the entity. ANS: F 20. ANS: T 17. Financial Accounting Concepts establish generally accepted accounting principles. with understandability and usefulness for decision making of most importance. According to the second Financial Accounting Concept. Reasonable inaccuracies of accounting for an entity. and timeliness are ingredients needed to ensure that the information is reliable. Eventually. Relevance and reliability are two primary qualities that make accounting information useful for decision making.12. those characteristics of information that make it a desirable commodity can be viewed as a hierarchy of qualities. ANS: T 13. The time period assumption indicates that the entity will remain in business for an indefinite period time. the Financial Accounting Standards Board intends to evaluate current principles in terms of the concepts established in the Financial Accounting Concepts. ANS: T 14. are accepted. ANS: T 16. ANS: T 19. ANS: T 22. feedback value. Timeliness is a pervasive constraint imposed upon financial accounting information. Predictive value. Using the business entity assumption. ANS: F 21. The Statements of Financial Accounting Concepts are intended to provide the Financial Accounting Standards Board with a common foundation and the basic underlying reasoning on which to consider the merits of various alternative accounting principles.

Some industry practices lead to accounting reports that do not conform to the general theory that underlies accounting. ANS: T 25. ANS: T 27. ANS: T 29. The accrual basis of accounting recognizes revenue when realized (realization concept) and expenses when incurred (matching concept). The Sarbanes-Oxley Act has far-reaching consequences for financial reporting and the CPA profession. the SEC requires that a report be filed annually on its internal control systems. Decision usefulness is a pervasive constraint imposed upon financial accounting information. ANS: T 26. ANS: F 33. ANS: T 31.23. All important events that influence the prospects for the entity are recorded and therefore are reflected in the financial statements. For a public company. The accountant records only the events that affect the financial position of the entity and that can be reasonably determined in monetary terms. ANS: T 30. ANS: F 28. ANS: T 32. ANS: T . The cash basis recognizes revenue when cash is received and expenses when cash is paid. Among the many responsibilities of the PCAOB is to adopt accounting standards. ANS: F 24. The SEC has the authority to determine generally accepted accounting principles and to regulate the accounting profession. Relevance is a quality requiring that the information be timely and that it also have predictive value or feedback value or both.

GAAP for nongovernmental entities. ANS: T 40. ANS: F 37. ANS: F 35. The Sarbanes-Oxley Act has materiality implications. we cannot tell if December 31 was selected because it represents a natural business year or if it was selected to represent a calendar year. The Sarbanes-Oxley Act has had an insignificant effect on the relationship between the company and the internal auditor. ANS: F 41. ANS: T 1-11 . Private companies are required to report under Sarbanes-Oxley. For many companies that use December 31 for the year-end. Reporting under Sarbanes-Oxley revealed that very few companies had material weaknesses in their controls and processes. Accounting standards codification TM addresses U. Some firms question the costs/benefits of implementing Sarbanes-Oxley. Accounting Trends & Techniques is a compilation of data obtained by a survey of 600 annual reports to stockholders undertaken for the purpose of analyzing the accounting information disclosed in such reports. ANS: T 44. ANS: T 38. ANS: T 42. Many companies are on a 51-52 week fiscal year. Web sites are not very useful when performing analysis. ANS: T 39.S. ANS: F 43.34. ANS: F 36. Accounting standards codification TM reorganizes the accounting pronouncements into approximately 90 accounting topics.

ANS: 1. Assumption that a business's financial statements are separate and distinct from the personal transactions of the owners. The assumption that the entity being accounted for will remain in business for an indefinite period of time. 7.PROBLEMS 1. Historical cost f. Directs that the measurement that has the least favorable effect on net income and financial position in the current period be selected. e. The primary value that is used for financial statements. Going concern c. 9. 4. 6. The decision is made to accept some inaccuracy because of incomplete information about the future in exchange for more timely reporting. Full disclosure j. 11. 9. Requires the accountant to adhere as closely as possible to verifiable data. 8. Match the letter of each with the appropriate statement. 5. 4. Time period d. Conservatism g. A reasonable summarization of financial information is required. 10. 2. Monetary unit 1. Verifiability k. 3. Required: Listed below are several accounting principles and assumptions. 3. 2. Materiality l. Involves the relative size and importance of an item to a firm. Business entity b. 5. 11. 8. Standard of measure for financial statements. 10. Industry practices Some industry practices lead to accounting reports that do not conform to the general theory that underlies accounting. 7. a. Requires the entity to give the same treatment to comparable transactions. Deals with the problem of when to recognize revenue. 12. l j h f c k i g e d b a . 6. 12. Consistency i. Realization h.

h. Current value of the land is $25. ANS: a. c. The company loses a major customer and does not record a loss.2. Land is recorded at $10. consistency time period realization full disclosure business entity historical cost going concern transaction approach 1-13 .000. All significant financial transactions are reported. f. b. which was the amount paid. b. d. Subscriptions paid in advance are recorded as unearned subscription income.000. Required: State the accounting principle or assumption that is most applicable: a. The accountants determine that the company is in danger of going bankrupt and therefore refuse to certify the statements as prepared according to generally accepted accounting principles. h. The company uses the same accounting principle from period to period. Financial statements are prepared periodically. Personal transactions of the stockholders are not recorded on the company's financial statements. e. g. c. f. g. d. e.

Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods. Listed below are ten interrelated elements that are directly related to measuring performance and status of an enterprise according to SFAC No. 8. The change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. rendering services. 3. Distribution to owners f. 6. Assets are most commonly received as investments by owners. 4. rendering services. but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. 5. or carrying out other activities that constitute the entity's ongoing major or central operations. 9. except those resulting from investments by owners and distributions to owners. It includes all changes in equity during a period. Revenues h. or engaging in other activities that constitute the entity's ongoing major or central operations. Gains j. or incurring liabilities by the enterprise to owners. except those that result from expenses or distributions to owners.3. . Increases in the equity of a particular business enterprise resulting from transfers to the enterprise from other entities of something of value to obtain or increase ownership interests (or equity) in it. Decreases in the equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period. 1. Liabilities c. Increases in the equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances from revenues or investments by owners. A decrease in the equity of a particular business enterprise resulting from transferring assets. Comprehensive income g. "Elements of Financial Statements. Expenses i. Assets b. The residual interest in the assets of an entity after deducting its liabilities. Losses Required: Match the letter with the appropriate definition. Decreases ownership interest (or equity) in an enterprise. 7. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. 2. Equity d. 6. rendering services. Outflows or other consumption or using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods. 10. Investments by owners e." a.

For this quality. subject to representational faithfulness. c. i. and neutral. 6. h. 2. k. 4. 8. SFAC No. Two primary qualities that make accounting information useful for decision making. j. g. Interacts with relevance and reliability to contribute to the usefulness of information. Two constraints included in the hierarchy. 3. 5. 7. 1-15 . 4. e. 5. m. a. understandability usefulness for decision making relevance reliability predictive feedback value timely verifiable representational faithfulness neutrality comparability materiality benefits of information should exceed its cost Required: Match the letter (or letters) that goes with each statement.ANS: 1. 9. f. the information needs to have these characteristics. the information must be verifiable. 2 indicates that to be reliable. For this quality. 6. 2. SFAC No. l. the information needs to have these characteristics. 10. These are the qualitative characteristics that are viewed as having the most importance. 3. b d e j h f a c g i 4. 7. Listed below are several qualitative characteristics. d. the information needs to have predictive and feedback value and be timely. 2 indicates that to be relevant. b. 8. 1.

A task force of representatives from the accounting profession created by the FASB to deal with emerging issues of financial reporting. 5. a. 6. e. Issued by the Accounting Standards Division of the AICPA to influence the development of accounting standards. j. 4. 9. Responsible for adopting auditing standards. 6. d. l. 10. and (4) Statements of Financial Accounting Concepts (SFAC). Generally Accepted Accounting Principles (GAAP) Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Accounting Principles Board (APB) Financial Accounting Standards Board (FASB) Statements of Financial Standards (SFAS) Discussion Memorandum (DM) Statements of Position (SOP) Emerging Issues Task Force (EITF) Financial Reporting Releases (FRRs) The Public Company Accounting Oversight Board (PCAOB) Required: Match the letter with the appropriate definition. . Issued official opinion on accounting standards between 1959-1973. (2) Interpretations. h. 4. 3. 8. j k c. 7. m c a. k. 7. i. Accounting principles that have substantial authoritative support. b. c. d d e. Issued by the SEC and give the SEC's official position on matters relating to financial reports. 1. g 5. issued by the FASB. Created by the Securities Exchange Act of 1934. Issued by the Financial Accounting Standards Board (FASB) and establish GAAP for specific accounting issues. g. Listed below are ten phrases with the appropriate abbreviation. (3) Technical Bulletins. 3. b h.ANS: 1. 8. i. This board issues four types of pronouncements: (1) Statements of Financial Accounting Standards (SFAS). 2. Presents all known facts and points of view on a topic. 2. 5. f. f. A professional accounting organization whose members are certified public accountants (CPAs). 11.

ANS: 1. 7. 3. 8. 10. 3. 1. Objectives of Financial Reporting by nonbusiness Elements of Financial Statements of Business Enterprises Qualitative Characteristics of Accounting Information Elements of Financial Statements (a replacement of No. c. a. 3. 6. f. 2. 4. 7. 6. e. 4 Statement of Financial Accounting Concepts No. 11. 7. b. 5. 2 Statement of Financial Accounting Concepts No. 6. 1 Statement of Financial Accounting Concepts No. 5. d. Listed below are Concept Statements. 5. 5 Statement of Financial Accounting Concepts No. Statement of Financial Accounting Concepts No. 6 Statement of Financial Accounting Concepts No. 2. 3) Objective of Financial Reporting by Business Enterprises Recognition and Measurement in Financial Statements of Business Enterprise Using Cash Flow Information in Accounting Measurements ANS: 1. d c b f a e g 1-17 . 4. j a i b h c d e g f k 6. 3 Statement of Financial Accounting Concepts No. g. 2. 4. 9. 7 Required: Match the letter that goes with each Concept Statement title.

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