Intermediate Accounting Chapter 02

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1. The conceptual 4. A. is an objectively Although many objections have been

framework for determinable amount. raised about the "cost" principle, it is
financial reporting still widely
consists of how supported for financial reporting
many levels? because it
A. is an objectively determinable
amount.
B. is a good measure of current
value.
C. facilitates comparisons between
years.
D. takes into account price-level
adjusted information.

3 levels- the Why, the Bridge, and the 5. A. is the residual According to the FASB conceptual
How interest in the assets framework, equity
of an entity that A. is the residual interest in the assets
2. A. a company satisfies its performance Under the revenue
remains after of an entity that remains after
obligations. recognition
deducting its deducting its liabilities.
principle, revenue is
liabilities. B. is the same thing as
generally
comprehensive income.
recognized when:
C. is the net gains less the net loses
A. a company
for a period of time.
satisfies its
D. is the net revenues and expenses
performance
for a period of time.
obligations.
B. the merchandise 6. A. Monetary unit Which of the following basic
has been ordered. assumption. accounting assumptions is
C. all expenses threatened by the existence of severe
have been inflation in the economy?
identified. A. Monetary unit assumption.
D. the accounting B. Periodicity assumption.
process is virtually C. Going-concern assumption.
complete. D. Economic entity assumption.

3. A. Cost. What is the 7. A. Yes No According to the FASB Conceptual

constraint that Framework, the elements-assets,
supports liabilities, and equity-describe
considering that the amounts of resources and claims to
benefits of the resources at/during a
information 1. Moment in Time 2. Period of Time
outweigh A. Yes No
the sacrifices to B. Yes Yes
provide the C. No Yes
information? D. No No
A. Cost. 8. A. Yes Yes Yes Ingredients of faithful representation
B. Prudence. are:
C. Consistency. 1. Completeness 2. Neutrality 3. Free
D. Conservatism. from Error
A. Yes Yes Yes
B. Yes No Yes
C. No No No
D. No Yes No
9. B. Financial statements Which of the following violates
included buildings with a the concept of faithful
carrying amount representation?
estimated by A. The management report refers
management. to new discoveries and
inventions made, but the financial
statements never report the
results.
B. Financial statements included
buildings with a carrying amount
estimated by management.
C. Financial statements were
issued one year late.
D. All of the choices violate
faithful representation.
14.
10. B. Predictive value. Which of the following is a
characteristic describing the
primary quality of relevance?
A. Materiality.
B. Predictive value.
C. Verifiability.
D. Understandability.
11. B. promote comparability The major objective of the
between financial quality of comparability is to:
statements of different A. provide timely financial
accounting periods. information for statement users.
B. promote comparability
between financial statements of
different accounting periods.
C. enable users to identify the
real similarities and differences in
economic events between
companies.
D. be sure the same information
is disclosed in each accounting
period.
12. B. those resulting from Comprehensive income includes
15.
investments by or all changes in equity during a
distribution to owners. period except:
A. sale of assets other than
inventory.
B. those resulting from
investments by or distribution to
owners.
C. sales to a particular entity
where ultimate payment by the
entity is doubtful.
D. those resulting from revenue
generated by a totally owned
subsidiary.
13. Change in equity (net Comprehensive Income
assets) of an entity
during a period from
transactions and
other events and
circumstances from
nonowner sources. It
includes all changes in
equity during a
period, except those
resulting from
investments by owners
and distributions to
owners.
C. Information that is of In complying with the full
sufficient importance to disclosure principle, an
influence the judgment accountant must determine the
and decisions of an amount of
informed user. disclosure necessary. How much
disclosure is enough?
A. Information sufficient for a
person without any knowledge of
accounting to understand
the statements.
B. All information that might be
of interest to an owner of a
business enterprise.
C. Information that is of sufficient
importance to influence the
judgment and decisions of an
informed user.
D. Information sufficient to permit
most persons coming in contact
with the statements to
reach an accurate decision about
the financial condition of the
enterprise.
C. No Yes During the lifetime of an entity
accountants produce financial
statements at artificial points in
time in accordance with the
concept of:
1. Objectivity 2. Periodicity
A. No No
B. Yes No
C. No Yes
D. Yes Yes
16. C. No Yes Continuation 21. C. The activity of a The economic entity
of an business enterprise can be assumption in accounting is
accounting kept separate and distinct best reflected by which of the
entity in the from its owners and any following statements?
absence of other business unit. A. When a parent and
evidence to subsidiary company are
the contrary is merged for accounting and
an example of reporting purposes the
the basic economic entity assumption is
concept of violated.
1. Consistency B. The best way to truly
2. Going measure the results of
Concern enterprise activity is to
A. No No measure them at the time the
B. Yes No enterprise is liquidated.
C. No Yes C. The activity of a business
D. Yes Yes enterprise can be kept
separate and distinct from its
17. Comparability and verifiability. Enhancing
owners and any other business
It also includes timeliness and qualities of
unit.
understandability. accounting
D. A business enterprise is in
information
business to enhance the
include:
economic well being of its
18. Comprehensive income. The change in owners.
net assets
22. D. a faithful representation. If accounting information is
during a
complete, free from error, and
period from
neutral, it can be considered:
transactions
A. relevant
and other
B. timely.
events and
C. comparable.
circumstances
D. a faithful representation.
from non-
owner sources 23. D. all of the above. In accounting an economic
is called entity may be defined as:
A. a business enterprise.
19. Confirmatory or predictive value. In order to be
B. an individual.
Relevant information has predictive value relevant,
C. a division within a business
or confirmatory value (or both), and is financial
enterprise.
material. information
D. all of the above.
must have
20. The Cost Constraint (or cost-benefit Cost
relationship) relates to the notion that the Constraint
benefits to be derived from providing
certain accounting information should
exceed the costs of providing that
information. The difficulty in cost-benefit
analysis is that the costs and especially
the benefits are not always evident or
measurable.
24. D. All of the choices are
correct.
25. D. Business entities will need
far less assistance from
accountants because the
financial reporting process
will be quite easy to apply.
26. Decision Usefulness
Which of the following is a
correct statement regarding
the expense recognition
principle?
A. Expenses are recognized
when they make a
contribution to revenue.
B. Costs can be charged to
the current period as an
expense simply because no
connection with revenue can
be determined.
C. In recognizing expenses,
accountants attempt to
follow the approach of let
the expense follow the
revenue.
D. All of the choices are
correct.
Which of the following is
not a benefit associated
with the FASB Conceptual
Framework
Project?
A. A conceptual framework
should increase financial
statement users'
understanding of and
confidence in financial
reporting.
B. Practical problems
should be more quickly
solvable by reference to an
existing conceptual
framework.
C. A coherent set of
accounting standards and
rules should result.
D. Business entities will
need far less assistance
from accountants because
the financial reporting
process will be quite easy
to apply.
The underlying theme of the
conceptual framework is?
27. Decrease in equity (net assets) Losses
from peripheral or incidental
transactions of an entity from all
other transactions and other
events and circumstances
affecting the entity during a
period except those
that result from expenses or
distributions to owners.
28. Decreases in net assets of a Distributions to Owners
particular enterprise that result
from transferring
assets, performing services, or
incurring liabilities by the
enterprise to owners.
Distributions to owners
decrease ownership interests (or
equity) in an enterprise.
29. D. that where possible the The concept referred to
expenses to be included in the by the "expense
income statement were incurred recognition" principle is
to produce the revenues. A. that current liabilities
have the same period of
existence as the current
assets.
B. that all cash
disbursements for a
period be matched to
cash receipts for the
period.
C. that net income
should be reported on a
quarterly basis.
D. that where possible
the expenses to be
included in the income
statement were incurred
to produce the revenues.
30. The economic activities of an Economic Entity
entity can be accumulated and Assumption
reported in
a manner that assumes the
entity is separate and distinct
from its owners or other
business units.
31. Fair value is a market-based Which of the following
measure. statements about the fair
Fair value is more relevant, more value principle is true?
subjective, and GAAP gives
companies the option of using
fair value for financial assets and
financial liabilities.
32. False True or False Period costs such as officer salaries and 42. False Both GAAP and IFRS are
administrative expenses attach to the product and are Both GAAP and IFRS increasing the use of fair value to
carried into future periods if the revenue from the are increasing the use report assets, but at this point
product is recognized in subsequent periods. of fair value to report GAAP has adopted it more
assets, but at this point broadly.
33. False True or False The notes to financial statements
IFRS has adopted it
generally summarize the items presented in the main
more broadly.
body of the statements.
43. False For information to be relevant, it
34. False True or False If Company A wishes to acquire an asset
For information to be needs to have predictive value
owned by Company B, the cost principle would
relevant, it needs to and confirmatory value.
require Company A to record the asset at the original
have predictive value or
cost to Company B.
confirmatory value or
35. False True or False The economic entity assumption is useful both
only when the entity referred to is a profit-seeking
44. False The difficulty in cost-benefit
business enterprise.
The difficulty in cost- analysis is that the benefits are
36. False True or False The three elements: assets, liabilities, and benefit analysis is that usually evident and easily
equity describe transactions, events, and the costs and especially measurable, while the costs are
circumstances that affect an enterprise during a the benefits are not not always evident or
period of time. always evident or measurable.
37. False True or False When an amount is determined by the measurable.
accountant to be immaterial in relation to other 45. False The existing conceptual
amounts reported in the financial statements, that The existing conceptual frameworks underlying IFRS and
amount may be deleted from the financial frameworks underlying GAAP are strikingly different and
statements. IFRS and GAAP are the FASB and IASB will likely
38. False True or False Adherence to the concept of consistency very similar and there is change many aspects of each of
requires that the same accounting principles be no need to change the frameworks in order to create
applied to similar transactions for a minimum of five many aspects of the a common conceptual framework.
years before any change in principle is adopted. existing frameworks.

39. False True or False Accounting theory is developed without 46. False The periodicity assumption
consideration of the environment within which it The periodicity specifies that the most
exists. assumption suggests appropriate time periods for
that the economic life financial reporting are weekly, bi-
40. False True or False Use of a sound conceptual framework in
of a business can be monthly, and yearly.
the development of accounting principles will make
divided into artificial
financial statements of all entities comparable
time periods such as a
because alternative accounting methods for similar
month, quarter or year.
transactions will be eliminated.
47. Gain An increase in net assets arising
41. False True or False A conceptual framework underlying
from peripheral or incidental
financial accounting is necessary because future
transactions.
accounting practice problems can be solved by
reference to the conceptual framework and a formal 48. Generally accepted Derive their credibility and
standard-setting body will not be necessary. accounting principles authority from general recognition
and acceptance by the
accounting profession.
49. Going concern. Depreciation and amortization
policies are justifiable and
appropriate because of the:
50. The historical cost principle requires that Measurement 57. In the absence of contrary information, a Going Concern
companies account for and report many Principles business entity is assumed to have a long Assumption
assets and liabilities on the basis of life. The current relevance of the
acquisition price. historical cost principle is dependent on
the going concern assumption.
51. The IASB framework makes two Which
assumptions. statement is 58. In the preparation of financial statements, Full Disclosure
The IASB framework makes two assumptions true the accountant should include sufficient Principle
- accrual basis and going concern. The regarding the information to permit the knowledgeable
converged framework will be a single convergence reader to make an informed judgment
document, the existing frameworks are very project by about the financial condition of the
similar, and while the FASB framework the FASB and enterprise in question.
discusses accrual accounting, it does not IASB?
59. The life of an economic entity can be Periodicity
identify it as an assumption.
divided into artificial time periods for the Assumption
52. IFRS Who, more purpose of providing periodic reports on
broadly, has the economic activities of the entity.
adopted the
60. Materiality Which of the
use of fair
The ingredients of faithful representation following is
value to
include completeness, neutrality, and not among the
report
freedom from error. ingredients of
assets?
the
53. Increases in equity (net assets) from Gains fundamental
peripheral or incidental transactions of an quality of
entity and from all faithful
other transactions and other events and representation?
circumstances affecting the entity during a
61. Measurement and recognition concepts In the
period except those
such as assumptions, principles, and conceptual
that result from revenues or investments by
constraints. framework for
owners.
financial
54. Increases in net assets of a particular Investment reporting, what
enterprise resulting from transfers to it by Owners provides the
from other entities of something of value to "how" - the
obtain or increase ownership interests (or implementation
equity) in it. of accounting?
Assets are most commonly received as
62. Monetary unit assumption. Under current
investments by owners, but that which is
GAAP, inflation
received may include
is ignored in
services or satisfaction or conversion of
accounting due
liabilities of the enterprise.
to
55. Inflows or other enhancements of assets of Revenues
63. Money is the common denominator of Monetary Unit
an entity or settlement of its liabilities (or a
economic activity and provides an Assumption
combination of both) during a period from
appropriate basis for accounting
delivering or producing goods, performing
measurement and analysis. The monetary
services, or other
unit is assumed to remain relatively stable
activities that constitute the entity's
over the years in terms of purchasing
ongoing major or central operations.
power. In essence, this assumption
56. Information may be more useful for certain Fair Value disregards any inflation or deflation in the
types of assets and liabilities and in certain economy in which the entity operates.
industries.
64. Neutrality Enhancing 71. True True or False To be relevant, accounting information
Enhancing qualities include comparability, qualities of must be capable of making a difference in a decision.
verifiability, timeliness, and understandability. accounting
72. True True or False Relevance and reliability are the two
information
primary qualities that make accounting information
include all
useful for decision making.
of the
following 73. True. A contract is an agreement between two parties that
except: creates enforceable rights or obligations.

65. Outflows or other using up of assets or
incurrences of liabilities (or a combination of
both)
during a period from delivering or producing
goods, performing services, or carrying out
other
activities that constitute the entity's ongoing
major or central operations.
66. Performance obligation is satisfied.
When a company satisfies the performance
obligation to perform services or sell a
product, revenue is recognized.
67. Probable future economic benefits obtained
or controlled by a particular entity as a result
of past
transactions or events.
68. Probable future sacrifices of economic
benefits that arise 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.
69. Residual interest in the assets of an entity
that remains after deducting its liabilities. In a
business enterprise, the equity is the
ownership interest.
70. Revenue is recognized when a company
satisfies its performance obligations.
Recognition at the time of sale provides a
uniform and reasonable test. Certain
variations in the revenue recognition
principle include: certain long-term
construction contracts, end-of production
recognition, and recognition upon receipt of
cash.
Expenses 74. True True or False The fact that equity represents an
ownership interest and a residual claim against the net
assets of an enterprise means that in the event of
liquidation, creditors have a priority over owners in
the distribution of assets.
75. True True or False The basis for determining whether an
item is material is based on both quantitative and
qualitative factors.
Generally, 76. True True or False The difficulty in applying the cost
revenues constraint is that the costs and especially the benefits
are are not always evident or measurable.
recognized
77. True True or False A conceptual framework is a coherent
when the:
system of interrelated objectives and fundamentals
Asset that can lead to consistent standards and that
prescribes the nature, function, and limits of financial
accounting and financial statements.
78. True True or False Under the expense recognition principle,
Liabilities it is possible to have an expense reported on the
income statement in one period and the cash payment
for that expense reported in another period.
79. True True or False Recognition of revenue when cash is
collected is appropriate only when it is impossible to
establish the revenue figure at the time of sale because
of the uncertainty of collection.
Equity
80. True True or False Generally, confirmation of a sale to
independent interests is used to indicate the point at
which revenue is recognized.
81. True True or False The periodicity assumption is a result of
Revenue
the demands of various financial statement user
Recognition
groups for timely reporting of financial information.
Principle
82. True True or False The monetary unit assumption means
that money is the common denominator of economic
activity and provides an appropriate basis for
accounting measurement and analysis.
83. True True or False The going-concern assumption is
generally applicable in most business situations unless
liquidation appears imminent.
84. True True or False The full disclosure principle states that
information should be provided when it is of
sufficient importance to influence the judgment and
decisions of an informed user.
85. True1 True or False Information that
has been measured and
reported in a similar manner
for different enterprises
is considered comparable.
86. Using the matching principle accountants attempt to match expenses incurred while earning Expense Recognition Principle
revenues with the related revenues. Use of accrual accounting procedures assists the
accountant in allocating revenues and expenses properly among the fiscal periods that
compose the life of a business enterprise.