Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
TRUE/FALSE
1. Financial accounting refers to accounting information that is used by management for decision-
making purposes.
2. Accounting theory includes the basic rules, definitions, and principles that underlie the drafting of
accounting standards and how they are derived.
3. Accounting theory includes conceptual frameworks, accounting legislation, valuation models,
and hypotheses and theories.
4. Hypotheses and theories are based on an informal method of investigation.
5. Replacement cost as a measure of asset value is generally more reliable than historical cost.
6. Accounting theory is developed and refined by the process of accounting research.
7. Indirect measures are usually preferable to direct measures because they are less costly to obtain.
8. Assessment measures are concerned with particular attributes of objects and are always direct
measurements.
9. When a direct assessment measure is used, there is always only one correct measure.
10. The simplest type of measuring system is the nominal scale.
11. A chart of accounts is an example of an ordinal classification.
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
12. Numerals assigned in ordinal rankings indicate an order of preference where the degree of
preference among ranks is the same.
13. In a ratio scale, the zero point implies “nothingness,” or the absence of the quality being
measured.
14. Using ratio scale, measurement is possible in accounting.
15. Objectivity may be defined as the degree of consensus among measurers.
16. Assessment measures are not concerned with particular attributes of objects.
17. Prediction measures are concerned with factors that may be indicative of future conditions.
18. Timeliness and cost are pertinent to assessment measures but are not pertinent to prediction
measures.
19. All accounting measurements are of either the assessment or the prediction variety.
20. The need for information on a timely basis may conflict with cost constraints in some situations.
21. The terms calculation and measurement both refer to the valuation of a real phenomena or
attribute.
22. Calculations attempt to simulate or come as close as possible to the measurement of real
phenomena or attributes.
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
23. FIFO and LIFO measures of cost of goods sold and inventories are examples of calculations
rather than measurements.
24. There are often trade-offs between objectivity and the usefulness of numbers generated by the
measurement process.
25. Measurement is an integral part of accounting theory.
26. Throughout the financial history of the United States, current value has been the accepted
valuation system for published financial statements.
27. The discounted cash flow approach can be used to determine an objective measurement for most
assets and liabilities.
28. A general price-level adjustment refers to the purchasing power of the monetary unitary unit
relative to all goods and services in the economy.
29. Both exit value and replacement cost are valuation systems that fall into the current value
category.
30. The principal argument used to justify the replacement cost system over exit values is that if the
great majority of the firm’s assets were not already owned, it would be economically justifiable
to acquire them.
MULTIPLE CHOICE
1. Which of the following methods of valuing an asset is based on the amount that a firm could
acquire by selling the asset?
a. Replacement cost
b. Entry value
c. Exit value
d. Both a and b
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
2. Which of the following methods of valuing an asset is based on the amount that would be paid
for it in markets where the asset would ordinarily be acquired?
a. Replacement cost
b. Entry value
c. Exit value
d. Both a and b
3. Which of the following would be considered a political factor relative to the financial accounting
policy function?
a. Auditors
b. Inflation
c. Taxes
d. Price changes
4. Which of the following groups carry out most accounting research?
a. Public accounting firms
b. Private industry
c. Accounting professors
d. Chartered Financial Analysts
5. If a number assigned to an object is an actual measurement of a property of the object, it is
referred to as a(n):
a. direct measurement.
b. biased measurement.
c. indirect measurement.
d. prediction measurement.
6. Which of the following factors is not listed in your text as affecting a direct assessment measure?
a. The measurer
b. The attribute being measured
c. Instruments available for the measuring task
d. The individual who will use the measure
7. The simplest type of measuring system is the:
a. interval scale.
b. ratio scale.
c. nominal scale.
d. ordinal scale.
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
8. Which measurement scale indicates an order of preference but not the degree of preference
among ranks?
a. Interval scale
b. Ratio scale
c. Nominal scale
d. Ordinal scale
9. The use of which of the following types of measurement scales in accounting allows meaningful
comparisons among similar accounting measurements for different firms?
a. Interval scale
b. Ratio scale
c. Nominal scale
d. Ordinal scale
10. For which measurement scale must the change in the attribute measured among assigned numbers
be equal?
a. Interval scale
b. Ratio scale
c. Ordinal scale
d. Both a and b
11. For which measurement scale must the change in the attribute measured among assigned numbers
be equal and the zero point imply the absence of the attribute measured?
a. Interval scale
b. Ratio scale
c. Ordinal scale
d. Both a and b
12. Which of the following is an example of a measurement rather than a calculation?
a. FIFO inventory valuation
b. Replacement cost of ending inventory
c. LIFO cost of goods sold
d. Historical cost depreciation
13. In an accounting context, which of the following represents the degree of consensus among
measurers in situations where a given group of measurers having similar instruments and
constraints group measures the same attribute of a given object?
a. Bias
b. Equality
c. Objectivity
d. Impartiality
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
14. In attempting to analyze the worth of an accounting measure, which of the following qualities is
not mentioned in the text as an important consideration?
a. Objectivity
b. Timeliness
c. Cost
d. Complexity
15. Which of the following is not a major input into the accounting standard-setting process?
a. Accounting theory
b. Political factors
c. Geographical constraints
d. Economic conditions
16. Which of the following specifically refers to the process of arriving at a pronouncement issued by
the FASB or SEC?
a. Standard setting
b. Accounting research
c. Policy determination
d. Accounting valuation measurement
17. 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.
18. Which of the following refers to accounting information that is used by investors, creditors, and
other outside parties for analyzing management performance and decision-making?
a. Managerial accounting
b. Financial accounting
c. Income tax accounting
d. Institutional accounting
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
19. Computations and comparisons of accounting ratios is possible because:
a. the zero point in accounting implies “nothingness” in terms of dollar amount.
b. accounting measures are on an interval scale.
c. assets and liabilities are listed in the order of liquidity in the balance sheet.
d. accounting is a basic classification system.
20. Which of the following is a measure of predictive ability?
a. Objectivity
b. Bias
c. Timeliness
d. Productivity
21. Which of the following has/have been the accepted valuation system for published financial
statements throughout the financial history of the United States?
a. Historical cost
b. Income tax valuation
c. Discounted cash flows
d. General price level
22. Which of the following valuation approaches has/have been defended as more suitable as a
means for distributing income because it is not based on hypothetical opportunity cost figures?
a. Income tax valuation
b. Discounted cash flows
c. Historical cost
d. Current value
23. Which of the following valuation approaches converts historical cost dollars by an index such as
the Consumer Price Index?
a. Current value
b. Discounted cash flows
c. Replacement cost
d. General price-level adjustment
24. Which of the following valuation methods is frequently referred to as a process of orderly
liquidation?
a. Exit valuation
b. Entry value
c. Replacement cost
d. Historical cost
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
25. Of the valuation systems discussed in your text, which one is purely theoretical, with virtually no
operable practicability on a statement-wide basis?
a. Current value
b. Discounted cash flows
c. General price-level adjustment
d. Historical cost
ESSAY
1. What is the policy function performed by bodies such as the FASB and the SEC? List and discuss
the three sources of inputs to the policy-making function.
2. Discuss the difference between direct measurement and indirect measurement. Give examples of
each in an accounting context.
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
3. List the four types of measurement scales in order of measurement rigor. Describe and give
examples of each type of scale.
4. Give at least three examples of how accounting numbers may affect social reality.
5. Identify four qualities that are pertinent to accounting measures.
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY
6. Explain how a firm might use a special purpose entity (SPE) to subvert the standard-setting
process.
7. 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.
Chapter 1—AN INTRODUCTION TO ACCOUNTING THEORY