53. Which of the following people outside the company do not demand financial
statement information as a key input?
a. Suppliers and Lenders.
b. Government and Regulatory Agencies.
c. Competitors.
d. Customers.
54. Which item below does not describe a politically vulnerable firm?
a. The firm has contracts controlled by the government.
b. The firm may face antitrust litigation or loss of protective import quotas.
c. The firm is in a highly visible industry such as oil & gas or pharmaceuticals.
d. The firm may be attacked in the financial and popular press for generating high
earnings.
55. Which of the following are primary qualitative characteristics of accounting
information?
a. Relevance and Timeliness.
b. Relevance and Faithful Representation.
c. Comparability and Timeliness.
d. Verifiability and Understandability.
56. To achieve Faithful Representation, accounting information presented must
meet which of the following requirements?
a. It must be comparable so that analysts can use it.
b. It must have predictive and confirmatory value.
c. It must depict the underlying economic event, be complete, neutral, and free
from material error.
d. It must meet a materiality threshold.
57. The amounts of executive compensation and bonuses are often determined by
a. auditor’s recommendations.
b. evaluations by subordinates.
c. company compensation contracts.
d. industry guidelines.
58. Whose responsibility is it to ensure that the company’s financial information is
properly assembled, classified, characterized, and presented clearly and concisely in
order to make it understandable?
a. The public accounting firm performing the audit.
b. The SEC by enforcing reporting standards.
c. Management of the company publishing the statements.
d. FASB when drafting generally accepted accounting principles.
59. Which of the following is not an action taken by shareholders when the
earnings and share price fall below acceptable levels?
a. Letters to management and outside directors.
b. Phone calls to management and outside directors.
c. Launching a proxy contest.
d. Filing a lawsuit for the lost value of the share price.
60. Employees demand financial statement information because the firm’s performance is often
linked to all of the following except
a. negotiated wage increases in union contracts.
b. social security benefits.
c. pension plan benefits.
d. employee profit sharing.
61. When a borrower violates a loan covenant that requires minimum achievement of an
accounting measure in the financial statements, the lender can
a. immediately seize the loan collateral.
b. fire the chief operating officer of the borrower.
c. report the borrower to the IRS.
d. call for immediate repayment of the loan.
62. Investors and analysts must have certain capabilities regarding financial reporting which
include
a. an understanding of current financial reporting standards.
b. recognition that management selects the financial reporting standards used.
c. an ability to recognize that financial statement information reported is grounded in judgment
as well as facts.
d. all of these answer choices are correct.
63. The goal of generally accepted accounting principles is to ensure that a company’s financial
statements
a. do not contain any representation that could jeopardize management.
b. provide stockholders all of the information they need to assess management’s performance.
c. are accurate and free from fraud.
d. clearly represent its economic condition and performance of the company.
64. Timeliness is a qualitative characteristic of accounting information that indicates that
information should be provided to users
a. within one month after the close of the books.
b. before it loses its capacity to influence their decisions.
c. before statutory deadlines.
d. every month.
65. Which one of the following types of disclosure costs is the cost of disclosing the company’s
pricing strategies?
a. Political cost
b. Litigation cost
c. Competitive disadvantage cost
d. Information collection, processing, and dissemination cost
66. If the financial reporting environment were unregulated, disclosure would occur voluntarily
a. as long as other companies in the reporting company’s industry voluntarily disclosed financial
information.
b. only to analysts that the company believes will report favorably on the company’s prospects.
c. only when managers wanted to raise additional capital.
d. as long as the incremental benefits to the company from supplying financial information
exceeded the incremental costs of providing the information.
67. Companies offering higher risk securities have incentives to mask their true condition by
a. supplying overly optimistic financial information.
b. not having their financial statements audited.
c. listing on foreign exchanges where reporting requirements are less stringent than those in the
U.S.
d. including testimonials from well known executives in their financial statements.
68. One financial disclosure cost is the possibility that competitors may use the information to
harm the company providing the disclosure. All of the following disclosures might create a
competitive disadvantage except
a. detailed information about company operations, such as sales and cost figures for individual
product lines.
b. information about the company’s technological and managerial innovations.
c. information showing the company’s amount of spending on research and development.
d. details about the company’s strategies, plans and tactics.
69. It is common for shareholders to initiate litigation when
a. the company reports record profits, but does not declare dividends.
b. there is a sudden drop in stock price shortly after the company released new financial
information.
c. the company introduces new products that are found to be harmful to the environment.
d. rumors about the company appear in the media that, if true, would result in slower growth in
future profits.
70. When comparing U.S. GAAP and IFRS standards, which of the following is
not correct?
a. IFRS is principles-based while U.S. GAAP is rules-based.
b. U.S. GAAP standards provide too many scope exceptions.
c. IFRS provides more detailed guidance than U.S. GAAP.
d. U.S. GAAP provides more detailed guidance than IFRS.
71. Using the same accounting methods to record and report similar events from period to
period demonstrates
a. consistency.
b. comparability.
c. neutrality.
d. faithful representation.
72. Which one of the following has statutory authority to determine accounting rules for
companies whose securities are owned by the general public?
a. American Institute of Certified Public Accountants
b. State Boards of Accountancy
c. Securities and Exchange Commission
d. Financial Accounting Standards Board
73. Which of the following does not describe how FASB endeavors to draft
pronouncements?
a. Provide enough implementation guidance for consistent application.
b. Explain the accounting principles being applied.
c. Clearly define bright-line rules.
d. Avoid bright line rules.
74. The growth of global investing has spurred development of worldwide accounting standards
that are written by the
a. American Institute of Certified Public Accountants.
b. Institute of Global Auditors.
c. Global Committee on Accounting Standards.
d. International Accounting Standards Board.
75. The organization responsible for establishing auditing standards and inspecting and
investigating auditing practices of public accounting firms is
a. Congress under the authority of the Sarbanes-Oxley Act (SOX).
b. the American Institute of Certified Public Accountants (AICPA).
c. the Securities and Exchange Commission (SEC).
d. the Public Company Accounting Oversight Board (PCAOB).
76. The only authoritative source of U.S. GAAP is created by FASB and exists in a single
database known as
a. the accounting standards database.
b. FASB financial reporting standards.
c. the converged accounting standards.
d. the accounting standards codification.
77. The ASC uses a structure in which the FASB’s authoritative accounting guidance is
organized into all of the following except
a. chapters.
b. topics.
c. sections.
d. paragraphs.
78. ASC content is organized
a. alphabetically by topic.
b. in chronological order based on the issue date of the major pronouncement on which the
content is based.
c. without numerical reference to the original standard from which the content was derived.
d. in the manner prescribed by the IASB.
79. GAAP’s flexibility in its reporting standards allows companies to
a. smooth reported earnings over several reporting periods.
b. change accounting estimates to meet target sales or earnings.
c. change accounting principles to improve reported earnings.
d. avoid adopting specific accounting techniques and reporting procedures.
80. Financial statements follow
a. rigid guidelines that require specific adherence to regulated procedures.
b. generally accepted guidelines that allow management a degree of flexibility in choices
c. general guidelines with little choice among different procedures.
d. legal requirements for uniform presentation and disclosure.
81. A company manages a large portfolio of marketable securities and sells only stocks with
substantial gains in poor income years or sells only stocks with substantial losses in good income
years. This strategy is an indication of
a. securities fraud.
b. unstable portfolio management.
c. income smoothing.
d. violating security trading laws.
82. Identify the correct order of the three steps constituting the FASB’s “due process”
procedure.
a. Public-hearing stage, exposure-draft stage, and voting stage.
b. Discussion-memorandum stage, public-hearing stage, and voting stage.
c. Exposure-draft stage, discussion-memorandum stage, and voting stage.
d. Discussion-memorandum stage, exposure-draft stage, and voting stage.
83. The Securities and Exchange Act of 1934 required all publicly traded firms to
a. purchase insurance against corporate bankruptcy.
b. register with an authorized stock exchange.
c. provide annual financial statements audited by independent accountants.
d. file balance sheets, income statements, and statements of cash flow with the SEC each year.
84. The Financial Accounting Standards Board has responsibility for the establishment of U. S.
accounting standards and
a. full statutory power to enforce compliance with GAAP.
b. authority from the SEC to enforce compliance with GAAP.
c. no authority or responsibility to enforce compliance with GAAP.
d. responsibility imposed by AICPA to enforce compliance with GAAP.
85. When financial information is measured and reported in a similar manner across different
companies in the same industry it is
a. consistent.
b. comparable.
c. neutral.
d. faithfully represented.
86. When a company changes from straight-line to the declining balance method of accounting
for depreciation, the financial statements lack
a. comparability.
b. consistency.
c. neutrality.
d. faithful representation.
87. The network of conventions, rules, guidelines, and procedures used by the accounting
profession is known as generally accepted
a. auditing standards.
b. accounting procedures.
c. accounting principles.
d. auditing principles.
88. Omissions or misstatements within a financial statement which could influence the decisions
of the user of the statement violates
a. neutrality.
b. consistency.
c. conservatism.
d. materiality.
89. Some countries’ philosophy of financial reporting differs from U.S. GAAP because their
financial reports are required to
a. be verifiable.
b. conform to tax and/or commercial law.
c. be reported and measured in a similar manner across companies.
d. use the same accounting methods for similar events period to period.
90. Differences between IFRS and U.S. GAAP include all of the following except
a. Reversal of inventory write-downs.
b. Carrying value of investment property.
c. Revenue recognition.
d. Research and development costs.
91. Financial reporting philosophies differ across countries. These philosophies evolve from
and reflect several factors including all of the following except
a. the language(s) spoken in the country.
b. the specific political institutions within the country.
c. the specific financial institutions within the country.
d. the country’s social customs.
92. Companies needing to access new and ever larger sources of capital in response to increased
international competitiveness face a severe disadvantage if their financial reporting
a. is in accordance with IFRS.
b. is in accordance with U.S. GAAP.
c. is based on a commercial and tax law approach.
d. is based on an economic performance approach.
93. International financial reporting standards are currently established by the
a. IASC.
b. IASB.
c. FASB.
d. PCAOB.
94. IFRS frequently
a. are automatically approved for any foreign listed company, as soon as a new standard is
issued.
b. permit only one accounting treatment for similar business transactions and events to promote
comparability.
c. allow firms less latitude when compared to U.S. GAAP.
d. follow a more generalized overview approach than do U.S. GAAP counterpart standards.
95. International Financial Reporting Standards (IFRS) are
a. built on broad principles.
b. rules-based.
c. narrowly defined, detailed standards.
d. seldom different than those issued by the FASB.
96. Which of the following statements regarding IFRS is incorrect?
a. All companies listed on the London Stock Exchange must use IFRS.
b. The SEC-required Form 20-F must be filed with the SEC by foreign issuers within 30 days.
c. The European Commission must “endorse” IFRS for required use by EU companies.
d. The SEC has expressed concern that transitioning to IFRS might be prohibitively expensive
and might lessen U.S. influence over standard setting.
97. Accounting information is heavily regulated
a. To increase reporting efficiency.
b. With the intention of preventing market failure.
c. To prevent abuse given that the incentives of information producers are not necessarily
aligned with those of users.
d. All of these answer choices are correct.
98. When is it permissible to issue financial statements that contain a material departure from
GAAP?
a. It is never permitted.
b. When it is a non-US corporation.
c. When the auditor can demonstrate that due to unusual circumstances the financial statements
would otherwise have been misleading.
d. When management does not like the GAAP results.