Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
Accounting Theory: 9th edition Page 1 of 12
TRUE/FALSE
1. 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.
2. The SEC was created by Congress to replace the AICPA’s standard-setting group.
3. The SEC is legally empowered to regulate accounting principles.
4. Most of the responsibility for establishing accounting principles has remained with the private
sector rather than the SEC.
5. The Securities Act of 1933 and the Securities and Exchange Act of 1934 were the first national
securities legislations in the United States.
6. The Journal of Accountancy was founded by the American Association of Public Accountants in
1905.
7. The American Accounting Association was originally called the American Society of Certified
Public Accountants.
8. The Committee on Accounting Procedures (CAP) used a formalized deductive approach to
develop a comprehensive accounting theory.
9. The Committee on Accounting Procedures (CAP) represented the profession’s first sustained
attempt to develop workable financial accounting rules.
10. APB Opinions were originally expected to be based on in-depth research studies.
11. The Trueblood Study Group formed the FASB and called for significant changes in the
establishment of financial accounting standards.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
12. The responsibility of the Financial Accounting Foundation is to elect the board of trustees, which
selects FASB members, funds the board’s activities, and performs the oversight role.
13. The FASB has made more extensive use of research than did its predecessors.
14. FASB statements have resulted in a more conservative balance sheet and immediate recognition
of events on the income statement.
15. The Accounting Standards Executive Committee of the AICPA (ASEC) and the Emerging Issues
Task Force (EITF) were established to solve the problems of particular industries as well as
narrow technical issues.
16. A normal four-to-three majority vote is required for passing new accounting standards.
17. The Federal Litigation Reform Act of 1995 replaced the previous proportionate liability
requirement with joint and several liability for damages suffered by third parties who rely on the
financial statement of firms attested to by CPAs.
18. The AICPA has exclusive authority in the private sector for promulgating auditing rules.
19. Congress has recently been concerned with the laxity of auditors in detecting and disclosing
fraud.
20. An important role of the AICPA is to curb “shopping for accounting principles.”
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
21. An annual report to stockholders prepared using FASB accounting standards generally has more
disclosure of nonfinancial statement information than does the typical annual report filed with the
SEC.
22. The Litigation Reform Act of 1995 requires that an audit include procedures designed to
guarantee that illegal acts that would materially affect financial statements will be detected.
23. The importance of the auditing function relative to the management consulting function is
declining in major auditing firms.
24. A problem with the increased importance of the management consulting function in auditing
firms is the possible erosion of the integrity of the auditing function.
25. The AICPA has developed an electronic filing of financial data called EDGAR.
26. FASB lost a significant amount of independence from the SEC due to Sarbanes-Oxley’s passage.
27. The International Accounting Standards Board’s role in establishing standards has decreased
significantly since 2002.
MULTIPLE CHOICE
1. Which of the following characteristics does not apply to accounting practices and procedures in
the United States prior to 1930?
a. They were applied uniformly among companies.
b. They were considered confidential by the companies applying them.
c. They met the needs of creditors to a greater extent than they met the needs of shareholders.
d. They emphasized the disclosure of cash and near-cash resources.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
2. Which of the following was an accomplishment of the American Association of Public
Accountants?
a. The passage of a law in 1896 that created the professional designation of “Certified Public
Accountant”
b. The founding of The Journal of Accountancy in 1905
c. The development of a list of terms and definitions in 1915
d. All of the above
3. In 1918, the American Institute of Accountants (AIA) worked with which of the following
organizations to publish minimum standards for conducting a balance sheet audit?
a. The Federal Trade Commission (FTC)
b. The Securities and Exchange Commission (SEC)
c. The American Society of Certified Public Accountants
d. The New York Stock Exchange (NYSE)
4. Which state passed the law that first created the designation “Certified Public Accountant”?
a. Massachusetts
b. California
c. Ohio
d. New York
e. Iowa
5. Which of the following factors led to significant changes in accounting practices?
a. The Great Depression of 1929
b. The election of Franklin D. Roosevelt to the presidency in 1932
c. The enactment of the New Deal legislation
d. All of the above
6. 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.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
7. Which of the following is true regarding the Committee on Accounting Procedures (CAP)?
a. It developed a comprehensive statement of accounting principles.
b. It adopted a policy of attacking specific problems and recommending preferred methods of
accounting when possible.
c. It was formed by the SEC in 1936.
d. It eliminated the use of alternative accounting practices by establishing an underlying
accounting theory.
8. The Committee on Accounting Procedures (CAP) was immediately succeeded by:
a. the Financial Accounting Standards Board (FASB).
b. the Accounting Principles Board (APB).
c. the Accounting Research Board (ARB).
d. the Financial Accounting Foundation (FAF).
9. Which of the following was a controversial issue faced by the Accounting Principles Board
(APB)?
a. The investment tax credit
b. Income tax allocation
c. Business combinations and goodwill
d. All of the above
10. What was the purpose of APB Statement 4, Basic Concepts and Accounting Principles
Underlying Financial Statements of Business Enterprises?
a. To provide a foundation for evaluating existing accounting practices
b. To assist in solving accounting problems and to guide the future development of financial
accounting
c. To enhance understanding of the purposes of financial accounting
d. All of the above
11. Criticism of the standard-setting process under the APB included:
a. exposure for tentative opinions was too limited and occurred too late in the process.
b. the standard-setting process was too long and subject to too many outside pressures.
c. both a and b.
d. none of the above.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
12. In which of the following ways did the charge to the Financial Accounting Standards Board
(FASB) differ from that given to the Accounting Principles Board (APB)?
a. The FASB was to establish standards of financial accounting and reporting in the most
efficient and complete manner possible.
b. The FASB was to work toward standard setting with a two-pronged approach.
c. The FASB was expected to stipulate principles of accounting as an underlying framework.
d. The accounting standards established by the FASB were to be advisory rather than
mandatory.
13. 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.
14. The establishment of which of the following groups has resulted in a challenge to the FASB’s
standard-setting powers?
a. The Governmental Accounting Standards Board (GASB)
b. The Emerging Issues Task Force (EITF)
c. The Accounting Standards Executive Committee (AcSEC)
d. All of the above
15. The liability concept that restricts liability to each defendant’s share of the damages based upon
the judge or jury’s assessment of their share of the damages is called:
a. proportionate liability.
b. compensatory liability.
c. joint and several liability.
d. disproportionate liability.
16. The liability concept that can result in one party having to pay for more than its proportionate
share of damages is called:
a. proportionate liability.
b. compensatory liability.
c. joint and several liability.
d. punitive liability.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
17. Post-SOX, the accounting/auditing standards setting function has been relegated to:
a. The FASB alone.
b. The FASB and the PCAOB.
c. The AICPA.
d. The IASB.
18.Which of the following professional associations has an interest in the accounting standard-setting
process?
a. The AICPA
b. The Financial Executives Institute (FEI)
c. The American Accounting Association (AAA)
d. All of the above
19. Which of the following events resulted in shareholders’ beginning to question whether
accounting and reporting practices were adequate to assess investments?
a. The stock market crash of 1929
b. The federal government’s lump-sum payments for the retirement of Liberty Bonds
c. The creation of the SEC in 1934
d. None of the above
20. In 1930, the AICPA began working with which of the following organizations to prepare “five
broad accounting principles,” one of the most important documents in the development of
accounting rule making?
a. The SEC
b. The NYSE
c. The AAA
d. The FTC
21. Which of the following represented the first formal attempt to develop “generally accepted
accounting principles”?
a. “Approved Methods for the Preparation of Balance Sheet Statements” in 1918
b. “Five broad accounting principles” in 1932
c. Accounting Research Bulletin (ARB) 43
d. The FASB’s conceptual framework project
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
22. Which of the following is a true statement?
a. The SEC initially required the accounting profession to consult with it before setting any
specific accounting principles.
b. The SEC was created by Congress to oversee the accounting profession.
c. The SEC was given authority to prescribe the form and content of financial information filed
with the SEC.
d. The SEC formed the Committee on Accounting Procedure to develop a comprehensive set of
accounting principles.
23. Which of the following is true regarding the Emerging Issues Task Force (EITF)?
a. It has formal authority to establish GAAP.
b. Members of this group consist of CEOs of six major corporations and the chief accountant of
the SEC.
c. It is concerned with highly technical issues, such as financial instruments, which may affect
firms in virtually every industry.
d. All of the above
24. Major complaints aimed at the FASB’s standard setting process include:
a. the cost of preparing standards is too high.
b. some standards are very difficult to understand.
c. both a and b
d. none of the above
25. Which of the following bodies was created to deal with municipal accounting issues?
a. GASB
b. FASB
c. FAF
d. EITF
26. 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
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
27. Which of the following are characteristics of the FASB?
a. It is part of the AICPA.
b. Members are part-time employees of the FASB.
c. A member must be a CPA.
d. It makes more extensive use of research than its predecessors.
28. The accounting standard-setting process begins with which of the following steps?
a. A problem is identified.
b. A task force is formed.
c. Public hearings are held.
d. An exposure draft is issued.
29. Which of the following is NOT true regarding the PCAOB?
a. The PCAOB is a governmental sector regulatory body.
b. The PCAOB is overseen by the SEC.
c. The PCAOB was established by the Sarbanes-Oxley Act.
d. The PCAOB has authority to set auditing standards.
30. Which of the following is NOT true regarding the passage of the Sarbanes-Oxley (SOX) Act?
a. SOX more clearly defined auditor independence.
b. SOX was intended to erode public confidence in the accounting profession due to recent
scandals.
c. SOX replaced peer review with inspection by the PCAOB.
d. SOX implementation became the immediate focus of public companies and CPA firms.
31 The Private Company Council (PCC):
a. sets accounting standards for private companies in the United States.
b. sets accounting standards for IASB private companies.
c. is funded by the SEC.
d. serves an advisory role to the FASB.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
ESSAY
1. Why did accounting and reporting practices in the U.S. prior to 1930 not meet the needs of
shareholder investors?
2. Compare and contrast the characteristics of the CAP, APB, and FASB.
3. Discuss the steps in the accounting standard-setting process and explain why it may not be
capable of dealing with the complex environment of the 2000s and beyond.
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
4. How has the Government Accounting Standards Board (GASB) challenged the FASB’s standard
setting powers?
5. Discuss what is meant by “the liability crisis in public accounting.” How did the Federal
Litigation Reform Act of 1995 address this issue?
6. Describe the controversy surrounding the issuance of APB Opinion No. 2, which addressed the
investment tax credit? How did the APB resolve this controversy and what was the resulting
effect on the board’s authority?
Chapter 3—DEVELOPMENT OF INSTITUTIONAL STRUCTURE OF FINANCIAL ACCOUNTING
7. Explain how Sarbanes-Oxley of 2002 significantly changes how the FASB will operate in the
future.
8. How and why did the AICPA’s role change under Sarbanes-Oxley?
9. How might the AICPA regain some of the power it has lost over the years? Are there any
disadvantages to these proposals?