Deductive reasoning analyzes empirical data to make inferences about a population.
In ASR 190, the SEC reinforced its long-standing position of forbidding the
presentation of information other than historical cost.
The legal form of a lease is an executory, or unperformed, contract.
The fair value system of SFAS No.157 is an exit value system.
Financial statement preparers strongly opposed OPEB recognition.
The Impossibility Theorem implies that once the free market pricing system is
abandoned, there is no way of determining aggregate social preferences.
Currently accepted alternative depreciation methods illustrate that accounting is closer
to an art than a science.
Benefits in a defined benefit plan may be paid either as a single lump sum amount at
retirement or as a life annuity.
SFAS No. 87 achieved greater uniformity in measuring accrued pension expense by
mandating use of one actuarial method, the accumulated benefit method.
To be useful, inductive research must be kept value-free.
Residual income refers to income in excess of a charge for the capital that is employed
to generate that income.
If OPEB levels are based on wages, they should reflect those in effect at the current
time rather than an estimate of expected future wage levels.
FASB statements have resulted in a more conservative balance sheet and immediate
recognition of events on the income statement.
The Committee on Accounting Procedures (CAP) used a formalized deductive
approach to develop a comprehensive accounting theory.
In the sources section of the statement of changes in financial position, transactions are
subclassified into those affecting liquid assets and those affecting other accounts.
The cash flow statement is the statement of financial position with funds defined as
cash.
Consistency appears to dictate that neither tax liabilities nor deferred credits, under
either the comprehensive or partial allocation approaches, should be discounted.
The expense recognition model based on historical cost, as well as the model based on
current value, must allocate the costs incurred.
Under which of the following theories would the accounting equation be Total Assets –
Total Liabilities = Owners’ Equities?
a. Residual equity theory
b. Proprietary theory
c. Entity theory
d. Commander theory
Agency theory studies are a special case of:
a. Capital markets research.
b. The decision-model approach.
c. Critical accounting.
d. Behavioral research.
Which of the following is a definition of expenses that clearly represents an
asset-liability approach?
a. Expenses are outflows or other using up of assets or incurrence of liabilities (or a
combination of both) during a period from delivering or producing goods, rendering
services, or carrying out other activities that constitute the entity’s major or central
operations.
b. Expenses are costs directly associated with the revenue of the period.
c. Expenses are gross decreases in assets or gross increases in liabilities recognized and
measured in conformity with generally accepted accounting principles that result from
those types of profit-directed activities of an enterprise.
d. Expenses in the broadest sense include all expired costs which are deductible from
revenues.
Which of the following is not one of the criteria that have been suggested for lease
capitalization?
a. Lessee builds up a material equity in the leased property.
b. Lessee pays costs normally incident to ownership.
c. Lease is between related parties.
d. Lease agreement is cancelable.
Which of the following is not true regarding Accounting Series Release No. 4?
a. It stated that financial statements filed with the SEC and prepared in accordance with
accounting principles for which there is no substantial authoritative support would be
presumed to be misleading.
b. It implied that the SEC might in the future determine acceptable accounting practices
and mandate methods to be used in reports filed with it.
c. It established an authoritative body for the development of accounting standards.
d. It indicated that the SEC was growing impatient with the accounting profession.
Which of the following types of research can realistically examine only rather narrowly
defined questions and problems?
a. Inductive research
b. Normative research
c. Deductive research
d. Nonempirical research
The quality of being capable of “making a difference in a decision by helping users to
form predictions about the outcomes of past, present, and future events or to confirm or
correct expectations” is referred to in the conceptual framework as:
a. Reliability.
b. Relevance.
c. Representational faithfulness.
d. Understandability.
Which of the following is true regarding ‘unobservable inputs’?
a. They pertain to level 1 prices in the fair value pricing hierarchy
b. They do not appear on the fair value pricing hierarchy.
c. They are higher in verifiability than level two inputs.
d. They are inputs for which there is little market activity.
Which of the following is not a possible cause of post-earnings-announcement drift?
a. Financial analysts overreact to fundamental signals stemming from securities.
b. Shareholders do not distinguish well between the cash flow portions and the accrual
portions of earnings.
c. Financial analysts’ forecast errors lead to incomplete security price adjustments.
d. Transaction costs are too high relative to the potential gain that can be earned from
the mispricing of the securities.
Which of the following does not apply to SFAS No. 13?
a. It changed capitalization criteria.
b. Noncancellability and material equity were abandoned in favor of broader tests
representing substantive transfers of ownership benefits and risks.
c. It is intended to capitalize fewer leases than previous standards.
d. It provides that the lessee use the lessor’s implicit rate in the lease if it is obtainable
and if the implicit rate is lower than the lessee’s incremental borrowing rate.
Which of the following is not true regarding accounting theory?
a. It includes concepts, valuation models, and hypotheses.
b. It is developed and refined by the process of accounting research.
c. It is concerned with improving financial accounting and statement presentation.
d. It is concerned with insuring that managers and investors are in agreement on how to
improve financial statements.
Which of the following is a finding of previous capital market research studies?
a. The market is not fooled by arbitrary accounting numbers.
b. The direction of change in reported accounting earning is inversely correlated with
security price movements.
c. The market is affected by alternative accounting income numbers that do not affect
cash flow, such as those related to a change from deferral to recognition of unrealized
holding gains on marketable securities.
d. Security prices are affected by a change from the deferral to flow-through method of
accounting for the investment credit.
Which of the following documents expressed the opinion that a choice among
accounting valuation systems could not be made because of the diversity of users?
a. “Objectives of Financial Statements” (Trueblood Committee Report)
b. “Basic Concepts and Accounting Principles Underlying Financial Statements of
Business Enterprises” (APB Statement 4)
c. “A Statement of Basic Accounting Theory” (ASOBAT)
d. “Statement of Accounting Theory and Theory Acceptance” (SATTA)
Under which of the following methods is income tax expense equal to the income tax
liability?
a. Comprehensive allocation
b. The net-of-tax method
c. Partial allocation
d. The new form of equities method
What is the most common thread running through various documents, reports, and
monographs discussed in the text?
a. The historical cost method of income measurement is as good a predictor of itself as
other methods.
b. Financial statements should be relevant to users for decision-making purposes.
c. Earning-power measurements are essential to the prediction of future cash flows.
d. The same valuation base should be used for all assets and all liabilities.
Which of the following is a true statement?
a. There is more variety in liability groups than in asset groups.
b. Most liabilities are noncontractual in nature.
c. There are natural subclassifications of liabilities and assets that can be inferred from
the balance sheet.
d. Liabilities are measured at amounts established in the transaction, usually amounts to
be paid in the future, sometimes discounted.
What are the there levels for securing prices in the fair value pricing hierarchy of SFAS
157?
Explain why tax allocation is necessary.
What is post-earnings-announcement drift, and what are possible causes for this
phenomenon?
What are the arguments favoring regulation of financial reporting?
How does lease accounting under the IASB differ from lease accounting under FAS?
What is the pro forma earnings approach, and what problem does it present. Also,
explain how pro forma earnings differs form the G4+1 income statement proposal.
List arguments for and arguments against the use of historical cost, general price-level
adjustment, exit value (net realizable value) and replacement cost (entry value). Explain
why the discounted cash flow method is virtually impossible to apply in a real situation.
