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Chapter 1 Environment and Theoretical Structure of Financial Accounting
114. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the correct number code for the term.
TERM
PHRASE
Term number that
matches the
phrase.
1. Expenses
Net assets.
____
2. Equity
Outflows of resources to generate revenues.
____
3. Distributions to owners
Cash dividends.
____
4. Investments by owners
Claims of creditors against the assets of a
business.
____
5. Liabilities
Transfers of resources in exchange for common
and preferred stock.
____
Answer:
Chapter 1 Environment and Theoretical Structure of Financial Accounting
115. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the correct number code for the term.
TERM
PHRASE
Term number
that matches the
phrase.
1. Losses
Net outflows from peripheral transactions.
____
2. Assets
Increases in equity from the sale of goods and/or
services.
____
3. Revenues
Results if an asset is sold for more than book
value.
____
4. Comprehensive
income
All changes in equity except owner transactions.
____
5. Gains
Probable future economic benefits controlled by an
entity.
____
Answer:
116. Listed below are 10 organizations followed by a list of phrases that describe or characterize
the organizations. Match each phrase with the correct organization by placing the number
designating the best term in the space provided by the phrase.
TERM
PHRASE
Term number that
matches the phrase.
1. SEC
Establishes auditing standards in the U.S for public companies.
____
2. FASB
Primary national organization of accountants working in
industry.
____
3. IASB
Sets accounting standards in the United States.
____
4. AICPA
Provides timely responses to financial reporting issues.
____
5. EITF
The FASB's parent organization.
____
6. PCAO
B
Parent organization of the IASB.
____
7. IMA
FASB's predecessor.
____
8. IASC
Regulates the financial reporting for public companies.
____
9. APB
National organization of certified public accountants.
____
10. FAF
Sets global accounting standards.
____
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Problems
Use the following to answer questions 117 and 118:
Alpaca Corporation had revenues of $200,000 in its first year of operations. The company has not
collected on $20,000 of its sales and still owes $25,000 on $70,000 of merchandise it purchased. The
company had no inventory on hand at the end of the year. The company paid $15,000 in salaries.
Owners invested $20,000 in the business and $20,000 was borrowed on a five-year note. The company
paid $2,000 in interest that was the amount owed for the year, and paid $6,000 for a two-year
insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%.
117. Compute net income for the first year for Alpaca Corporation.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
118. Compute the cash balance at the end of the first year for Alpaca Corporation.
119. Compute net income for the first year for Tri Fecta.
120. Compute the cash balance at the end of the first year for Tri Fecta.
121. Compute Amazon's balance in cash at the beginning of the year.
122. Compute Amazon's total liabilities at the end of the year.
123. Compute Amazon’s cost of goods sold for the year.
124. Compute the income before income tax for Amazon.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
125. Compare net income (loss) for the year to net cash flow from operating activities. Why are
these amounts different? Briefly explain.
126. For each of the following situations, state whether you agree or disagree with the financial
reporting practice employed, and briefly explain the reason for your answer.
1. Cantor Corporation’s accountant increased the book value of a patent from its original
cost of $1 million to its recently appraised value of $6 million.
2. Stanton Corporation paid for the personal travel of its chief financial officer and charged
travel expense.
3. At the end of its 2016 fiscal year, Dower, Inc., received an order from a customer for
$60,000. The merchandise will ship early in 2017. Because the sale was made to a long-
time customer and the invoice was paid in 2016, the controller recorded the sale in 2016.
4. In the middle of its 2016 fiscal year, Sanguinetti, Inc. paid $12,000 to its insurance
company for one-year comprehensive insurance coverage. Sanguinetti recorded the entire
expenditure as an expense in 2016.
5. The Churchill Pharmaceutical Company included a note in its financial statements that
described a pending lawsuit against the company.
6. The Daily Corporation, a company whose securities are publicly traded, prepares
monthly, quarterly, and annual financial statements for internal use but disseminates to
external users only the annual financial statements.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Essay
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
127. Identify or define the following terms: economic entity, going concern.
128. List the four financial statements most frequently provided to external users.
129. Explain and show an example of how the FASB's conceptual framework is needed in
formulating standards on controversial topics.
130. What is the SEC and how is it involved with accounting standard-setting?
131. What is the EITF and what is its purpose?
132. Accounting standard-setting has been characterized as a political process. Discuss this
proposition giving an example.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
133. What are the key provisions of the Public Company Accounting Reform and Investor
Protection (Sarbanes-Oxley) Act of 2002?
134. With respect to the financial statements, what is the value of an audit?
135. What provisions did the Public Company Accounting Reform and Investor Protection
(Sarbanes-Oxley) Act of 2002 make for performance of nonaudit services by an audit firm?
Chapter 1 Environment and Theoretical Structure of Financial Accounting
136. Briefly describe how materiality is featured in the conceptual framework.
137. Give an example of a violation of the stable monetary unit assumption. How would it affect
the quality of financial statement information?
138. Identify or define the following terms: periodicity, monetary unit.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
139. Identify or define the following term: historical cost.
140. How does GAAP define fair value?
141. Over time, accounting standards have developed to reflect changes in the business world as
well as changes in our ability to account for such changes. Using the example of marking
assets and liabilities to their fair value, explain why you would expect accounting standards to
change.
142. List and briefly describe the five measurement attributes used commonly in current GAAP.
143. List and briefly describe the three levels of inputs described in the fair-value measurement
hierarchy.
144. Contrast the asset/liability and revenue/expense approaches to accounting standard setting.
145. Contrast the role of the conceptual framework in U.S. GAAP and IFRS.
