A premise stating that accounting reports should be based on historical costs would
indicate a normative approach.
The proprietary theory approach largely coincides with the components of income
measurement as it is presently construed in historical cost-based systems.
Income tax allocation may be used by management to smooth income.
One reason ARS 1 and ARS 3 fell short of the goal of obtaining a framework for APB
accounting opinions is that the accounting profession refused to abandon historical cost.
Lev advocated restricting disclosures to “good news” items only.
All of the arguments supporting the case for unregulated markets relate to the incentives
for a firm to report information about itself to owners and to the capital market in
general.
Objectivity may be defined as the degree of consensus among measurers.
According to the “big bath theory,” when firms disclose bad news, there is a positive
response by the market because the firm has recognized in the financial statements that
a major problem exists and is moving to redress the problem.
The requirements of SFAS No. 13 represent conservatism because a higher interest rate
will cause a higher present value and could therefore result in lease capitalization.
Financial accounting refers to accounting information that is used by management for
decision-making purposes.
The “future service potential” of an asset may be realized as a direct market exchange
for another asset, or through conversion in a manufacturing operation for finished
goods.
Derivatives are financial instruments whose value is based upon other financial
instruments, stock indexes or interest rates, or interest rate indexes.
The accounting profession has been regulated by Congress since the 1880s when it
became clear that accounting was an important instrument in America for conducting
business.
The jurisprudential view of the FASB is concerned with the theory embodied in the
conceptual framework.
The purpose of SATTA was to provide a survey of the current financial accounting
literature and a statement of where the profession stood relative to accounting theory.
Prior to the existence of an accounting standard that addressed pensions, pension
expense was equated with cash contributions to pension funds.
In many SPE transactions, the tax benefits were likely to outweigh maintenance costs
associated with the SPE.
Which of the following concepts explains why firms have an incentive to report
voluntarily to the market even if there were no mandatory reporting requirements?
a. Signalling theory
b. Life-cycle theory
c. Information overload
d. Capture theory
Viewing each interim period as a separate period standing on its own is called:
a. The integral view.
b. The disjointed view.
c. The discrete view.
d. The linked view.
Which of the following is a true statement regarding owners’ equity?
a. APB Statement 4 and SFAC No. 6 both reflect the entity view of the firm.
b. Owners’ equity consists of only two components: contributed capital and retained
earnings.
c. In a sole proprietorship, there is no legal distinction between contributed capital and
earned capital.
d. Dividends are legally paid only out of retained earnings.
Which of the following statements regarding behavioral research is true?
a. It is a normative approach.
b. The main concern of this type of research is how users of accounting information
make decisions and what information they need.
c. Many studies have shown that there are no discrepancies between normative decision
models and the actual decision process of users.
d. Since behavioral research is positive in approach, it is impossible to reach a
conclusion regarding whether or not the usage of accounting data for decision-making
purposes could be improved upon.
Respond to the following:
a. What are the six guidelines that SFAS No. 52 provides for determining the functional
currency?
b. What were the findings of the FASB research report by Evan and Doupnik regarding
these six criteria?
Discuss the effect, if any, each of the following should have on the recognition of future
events:
a. The probabilistic nature of future events
b. Management intent
c. Conservatism
d. Future economic conditions
e. Future legal requirements
Which country has the closest approach to a uniform national accounting system?
a. The UK
b. The US
c. France
d. Germany
The 10-K report filed annually with the SEC is basically aimed toward which of the
following groups?
a. Shareholders
b. Professional financial analysts
c. Management
d. All of the above
Which of the following was required by SFAS No. 33 as the basis of primary financial
statements?
a. Historical cost
b. Current cost
c. Present value of future cash flows
d. Net realizable value
Which of the following documents defined accounting as a service activity whose
function is “to provide quantitative information… that is intended to be useful in making
economic decisions”?
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)
Which one of the following types of liabilities represents an existing situation involving
uncertainty as to possible gain or loss that will ultimately be resolved when one or more
future events occur or fail to occur?
a. Deferred credits
b. Constructive obligations
c. Equitable obligations
d. Contingent liabilities
Which of the following is not a possible outcome of postulate C-4, stability of the
monetary unit?
a. If purchasing power of the monetary unit is not stable, some form of inflation
accounting is appropriate.
b. If purchasing power of the monetary unit is not stable, historical cost is still justified.
c. If purchasing power of the monetary unit is stable, a system of current values is
justified.
d. If purchasing power of the monetary unit is stable, retention of historical cost is
justified.
Which of the following are true regarding the Financial Accounting Standards Board
(FASB)?
a. The FASB includes ten members, each serving a term of three years.
b. Each member of the FASB must be a Certified Public Accountant.
c. There must be no conflict between the FASB members’ private interest and the public
interest.
d. All of the above are true.
Which of the following statements does not apply to portfolio theory?
a. It is the foundation for the capital asset pricing model.
b. It is the foundation for capital market or security price research.
c. It holds that risk can be eliminated by holding a portfolio of investments.
d. It is a theory of rational investment choice and utility maximization.
In applying actuarial funding methods, actuaries make assumptions about all but which
of the following?
a. Future withdrawals from the plan
b. Acceptable levels of actuarial gains or losses
c. The effects of future salary levels on the value of expected retirement benefits
d. The rate of interest to be earned on pension fund investments
In which of the following ways has the Financial Executives Institute (FEI) become
involved in the accounting standard-setting process?
a. By funding research projects in accounting and related areas
b. By reviewing FASB discussion memorandums and exposure drafts and
communicating an official position to FASB.
c. By participating in FASB public hearings
d. All of the above
How should stock dividends be measured and accounted for? Is this treatment justified?
What is meant by relevant circumstances? Describe the two types of relevant
circumstances.
Distinguish between finite uniformity, rigid uniformity and flexibility. Also, explain
when each is appropriately used.
What were the major effects of SFAS No. 106 on reporting for post-retirement benefits
other than pensions?
Explain when a firm may recognize a deferred tax asset under SFAS No. 109. How
should deferred tax assets that are not expected to be realized be accounted for?
What were special purpose entities (SPEs) and what were their advantages?