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Materiality characteristic. Completeness characteristic. Neutrality characteristic. Definition of verifiability. Quality of predictive value. Quality of free from error.

Comparability and consistency. Elements of financial statements. Distinction between revenues and gains. Definition of a loss. Definition of comprehensive income. Components of comprehensive income. Earnings vs. Reporting financial statement elements. Basic element of financial statements. Definition of gains. Historical cost assumption. Periodicity assumption. Monetary unit assumption. Implications of going concern assumption. Historical cost principle. Revenue recognition principle.

Measurement principle. Product costs. Expense recognition. Full-disclosure principle. Argument against historical cost. Recognition of revenue. Definition of performance obligation. Required components of financial statements. Recognition of expenses. Expense recognition principle example. Recording expenditure as asset. Historical cost principle violation. Full disclosure principle violation. Full disclosure principle. Industry practice constraint.

Costs of providing financial information. Benefits of providing financial information. Use of materiality. Example of materiality constraint.

Constraints to limit the cost of reporting. Cost-benefit relationship. Pervasive constraints. Prudence or conservatism.

Conceptual framework second level a Trade-offs between characteristics of accounting information. P c Description a Classification of gains and losses. Earnings concept. Definition of recognition.

S Note: these questions also appear in the Study Guide. BE Accounting concepts—identification. E Accounting concepts—fill in the blanks. E Basic assumptions.

E Historical cost principle. E Matching concept. Describe the usefulness of a conceptual framework. Understand the objective of financial reporting. Identify the qualitative characteristics of accounting information. Define the basic elements of financial statements. Describe the basic assumptions of accounting. Explain the application of the basic principles of accounting. Describe the impact that the cost constraint has on reporting accounting information. TF MC BE Learning Objective 2 3.

E Learning Objective 3 P 6. BE Learning Objective 4 8. BE Learning Objective 5 S MC P MC S MC Learning Objective 6 S BE E Learning Objective 7 BE Learning Objective 8 BE P SA A soundly developed conceptual framework enables the FASB to issue more useful and consistent pronouncements over time.

A conceptual framework is a coherent system of concepts that flow from an objective. The first level of the conceptual framework identifies the recognition, measurement, and disclosure concepts used in establishing accounting standards.

The objective of financial reporting is the foundation of the conceptual framework. Users of financial statements are assumed to need no knowledge of business and financial accounting matters to understand information contained in financial statements.

Relevance and faithful representation are the two primary qualities that make accounting information useful for decision making. The idea of consistency does not mean that companies cannot switch from one accounting method to another. Timeliness and neutrality are two ingredients of relevance.

Verifiability and predictive value are two ingredients of faithful representation. Revenues, gains, and distributions to owners all increase equity. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The historical cost principle would be of limited usefulness if not for the going concern assumption.

The economic entity assumption means that economic activity can be identified with a particular legal entity. The expense recognition principle states that debits must equal credits in each transaction. Revenues are recognized in the accounting period in which the performance obligation is satisfied. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.

In order to justify requiring a particular measurement or disclosure, the benefits to be derived from it must equal the costs associated with it.

Prudence or conservatism means when in doubt, choose the solution that will be least likely to overstate liabilities or expenses. Item Ans. Generally accepted accounting principles a. A soundly developed conceptual framework of concepts and objectives should a.

All of these answer choices are correct. Which of the following is not true concerning a conceptual framework in accounting? It should be a basis for standard-setting. It should allow practical problems to be solved more quickly by reference to it.

It should be based on fundamental truths that are derived from the laws of nature. All of these answer choices are true. What is a purpose of having a conceptual framework?

To enable the profession to more quickly solve emerging practical problems. To provide a foundation from which to build more useful standards. Neither a nor b. To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards.

A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. Practical problems should be more quickly solvable by reference to an existing conceptual framework.

A coherent set of accounting standards and rules should result. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply. In the conceptual framework for financial reporting, what provides "the why"--the purpose of accounting? Recognition, measurement, and disclosure concepts such as assumptions, principles, and constraints b.

Qualitative characteristics of accounting information c. Elements of financial statements d. Objective of financial reporting The underlying theme of the conceptual framework is a. The objective of general-purpose financial reporting is to provide financial information about a reporting entity to each of the following except a. All of these answers are correct. What is the primary objective of financial reporting as indicated in the conceptual framework?

Provide information that is useful to those making investing and credit decisions. Provide information that is useful to management. Provide information about those investing in the entity.

If the LIFO inventory method was used last period, it should be used for the current and following periods because of a. What is the following is a characteristic describing the primary quality of relevance? Predictive value. Which of the following is a fundamental quality of useful accounting information? Which of the following is a primary quality of useful accounting information? What is meant by comparability when discussing financial accounting information?

Information has predictive or confirmatory value. Information is reasonably free from error. Information that is measured and reported in a similar fashion across companies. Information is timely. What is meant by consistency when discussing financial accounting information? Information that is measured and reported in a similar fashion across points in time.

Information is measured similarly across the industry. Information is verifiable. Which of the following is an ingredient of relevance? Which of the following is an ingredient of faithful representation?

Confirmatory value. Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic of accounting information? Company A issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information? What is the quality of information that is capable of making a difference in a decision? Neutrality is an ingredient of which fundamental quality of information?

If the FIFO inventory method was used last period, it should be used for the current and following periods because of a. The pervasive criterion by which accounting information can be judged is that of a. The two fundamental qualities that make accounting information useful for decision making are a. Accounting information is considered to be relevant when it a.

The quality of information that means the numbers and descriptions match what really existed or happened is a. Which of the following does not relate to relevance? Materiality b. Predictive value c. Confirmatory value d. All of these answer choices relate to relevance. Yes Yes b. No Yes c. Yes No d. No No Yes No b. Yes Yes c. No No d. No Yes Neutrality means that information a. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is a.

Financial information demonstrates consistency when a. None of these answer choices are correct. Financial information exhibits the characteristic of consistency when a. Information about different companies and about different periods of the same company can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives? Comparability Consistency a. Companies Companies b. Companies Periods c. Periods Companies d.

Periods Periods When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of a. The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners' a. In classifying the elements of financial statements, the primary distinction between revenues and gains is a.

A decrease in net assets arising from peripheral or incidental transactions is called a n a. One of the elements of financial statements is comprehensive income. Which of the following elements of financial statements is not a component of comprehensive income? Revenues b. Distributions to owners c. Losses d. Expenses P The calculation of comprehensive income includes which of the following? Operating Income Distributions to Owners a. No No c. No Yes d. Yes No S According to the FASB conceptual framework, which of the following elements describes transactions or events that affect a company during a period of time?

Which of the following is not a basic element of financial statements? Balance sheet. Which of the following basic elements of financial statements is more associated with the balance sheet than the income statement? Issuance of common stock for cash affects which basic element of financial statements? Which basic element of financial statements arises from peripheral or incidental transactions?

Which of the following is not a basic assumption underlying the financial accounting structure? Which basic assumption is illustrated when a firm reports financial results on an annual basis? Which basic assumption may not be followed when a firm in bankruptcy reports financial results?

Which accounting assumption or principle is being violated if a company provides financial reports only when it introduces a new product? Economic entity. Revenue recognition. Full disclosure. Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?

Going-concern assumption. During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of Relevance Periodicity a. No No b. Yes No c. Yes Yes Under current GAAP, inflation is ignored in accounting due to the a. The economic entity assumption a. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the a.

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? Cost constraint b. Periodicity assumption c. Conservatism constraint d. Expense recognition principle What accounting concept justifies the usage of depreciation and amortization policies?

Going concern assumption b. Fair value principle c. Full disclosure principle d. The assumption that a company will not be sold or liquidated in the near future is known as the a. Which of the following is an implication of the going concern assumption? The historical cost principle is credible.

Depreciation and amortization policies are justifiable and appropriate. The current-noncurrent classification of assets and liabilities is justifiable and significant. All of these. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more a. Valuing assets at their liquidation values rather than their cost is inconsistent with the a.

Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the a. Generally, revenue from sales should be recognized at a point when a. Revenue generally should be recognized a. The measurement principle includes the a. Which of the following is commonly referred to as the matching principle? Revenue recognition principle b. Measurement principle c. Expense recognition principle d. Full disclosure principle Product costs include each of the following except a.

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the a. The accounting principle of expense recognition is best demonstrated by a. Which of the following serves as the justification for the periodic recording of depreciation expense? Association of efforts expense with accomplishments revenue b. Systematic and rational allocation of cost over the periods benefited c.

Immediate recognition of an expense d. Minimization of income tax liability Application of the full disclosure principle a. Which of the following is an argument against using historical cost in accounting? Fair values are more relevant. Historical costs are based on an exchange transaction. Historical costs are reliable. Fair values are subjective. When is revenue generally recognized? When cash is received. When the warranty expires. When production is completed. When the company satisfies the performance obligation.

Which of the following is a component of the revenue recognition principle? Cash is received and the amount is material. Recognition occurs when the performance obligation is satisfied. Production is complete and there is an active market for the product. Cash is realized or realizable and production is complete. A company has a performance obligation when it agrees to a. These reports, including the most recent, are available in our Reference Library by quarter.

Wanted: Academic Research on Key Standards The FASB seeks research papers on the effectiveness of the revenue recognition, leases, and credit losses standards for upcoming academic conference. Why the FASB? Who Uses It? Reference Rate Reform Reference rate reform refers to the global transition away from referencing the LIBOR—and other interbank offered rates—and toward new reference rates that are more observable or transaction-based.

Also includes specific implementation guidance for new major standards.