Chapter 1 Environment and Theoretical Structure of Financial Accounting
75. Surefeet Corporation changed its inventory valuation method. Which characteristic is
jeopardized by this change?
a. Comparability.
b. Representational faithfulness.
c. Consistency.
d. Feedback value.
76. Elements of financial statements do not include:
a. Monetary unit.
b. Investments by owners.
c. Comprehensive income.
d. Losses.
77. The primary objective of financial accounting information is to provide useful information to:
a. Management.
b. Capital providers.
c. Regulators.
d. Academicians.
78. Of the following, the most important objective for financial reporting is to provide information
useful for:
a. Making decisions.
b. Determining taxable income.
c. Providing accountability.
d. Increasing future profits.
79. A constraint on qualitative characteristics of accounting information is:
a. Timeliness.
b. Going concern.
c. Neutrality.
d. Cost-effectiveness.
80. According to the conceptual framework, verifiability implies:
a. Legal evidence.
b. Logic.
c. Consensus.
d. Legal verdict.
81. Maltec Corporation has started placing its quarterly financial statements on its web page,
thereby reducing by 10 days the time to get information to investors and creditors. The
qualitative concept improved is:
a. Comparability.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
b. Consistency.
c. Timeliness.
d. Faithful representation.
82. Recognizing expected losses immediately, but deferring expected gains, is an example of:
a. Materiality.
b. Conservatism.
c. Cost-effectiveness.
d. Timeliness.
83. Change in equity from nonowner sources is:
a. Comprehensive income.
b. Revenues.
c. Expenses.
d. Gains and losses.
84. Which of the following Statements of Financial Accounting Concepts defines the 10 elements
of financial statements?
a. SFAC 4.
b. SFAC 3.
c. SFAC 5.
d. SFAC 6.
85. Primecoat Corporation could disseminate its annual financial statements two days earlier if it
shifted substantial human resources from other operations to the annual report project.
Management decided the value of the earlier report was not worth the added commitment of
resources. The concept demonstrated is:
a. Timeliness.
b. Materiality.
c. Relevance.
d. Cost-effectiveness.
86. Mega Loan Company has very stringent credit requirements and, accordingly, has negligible
losses from uncollectible accounts. The company’s independent accountants did not protest
when, contrary to GAAP, the company recorded bad debt expense only when specific
accounts were determined to be uncollectible, rather than use an allowance for uncollectible
accounts. The concept demonstrated is:
a. Comparability.
b. Faithful representation.
c. Cost-effectiveness.
d. Materiality.
87. Four different competent accountants independently agree on the amount and method of
reporting an economic event. The concept demonstrated is:
a. Reliability.
b. Comparability.
c. Completeness.
d. Verifiability.
88. An important argument in support of historical cost information is:
a. Relevance.
b. Predictive quality for future cash flows.
c. Materiality.
d. Verifiability.
89. The conceptual framework’s recognition and measurement concepts recognize which one of
the following as an assumption?
a. Going concern.
b. Historical cost.
c. Full disclosure.
d. Realization.
90. The assumption that in the absence of contrary information a business entity will continue
indefinitely is the:
a. Periodicity assumption.
b. Entity assumption.
c. Going concern assumption.
d. Historical cost assumption.
91. If a company has declared bankruptcy, its financial statements likely violate:
a. The fair value measurement approach.
b. The present value measurement approach.
c. The stable monetary unit assumption.
d. The going concern assumption.
92. Which of the following is typically characterized as a principle, rather than an assumption?
a. Periodicity.
b. Monetary unit.
c. Conservatism.
d. Full disclosure.
93. Which of the following is not an identified valuation technique in GAAP regarding fair value
measurement?
a. Cost approach.
b. Market approach.
c. Cost-benefit approach.
d. Income approach.
94. Disclosure notes to a company’s financial statements:
a. Are relatively unimportant facts that don’t belong in the basic financial statements.
b. Document the source of financial statement facts, like literary footnotes.
c. Are an integral part of a company’s financial statements.
d. Are irrelevant facts that are immaterial in amount.
95. A cause-and-effect relationship is implicit in the:
a. Realization principle.
b. Historical cost principle.
c. Matching principle.
d. Going concern assumption.
96. The full disclosure principle requires a balance between:
a. Comparability and consistency.
b. Relevance and cost-effectiveness.
c. Reliability and neutrality.
d. Timeliness and predictive value.
97. The recognition of which of the following expenses exemplifies the application of matching
expenses with the revenues they produced?
a. President’s salary.
b. Research and development.
c. Cost of goods sold.
d. Advertising.
98. Land was acquired in 2016 for a future building site at a cost of $40,000. The assessed
valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a
recent firm offer for the land was for a cash payment of $46,000. The land should be reported
in the financial statements at:
a. $40,000.
b. $27,000.
c. $46,000.
d. $48,000.
99. Revenue should not be recognized until:
a. The seller has transferred goods or services to a customer.
b. Contracts have been signed and payment has been received.
c. Work has been performed and customer has been billed.
d. Collection has been made and warrantees have expired.
100. Which of the following best demonstrates the full disclosure principle?
a. The multi-step income statement.
b. The auditors’ report.
c. The company’s tax return.
d. Disclosure notes to financial statements.
101. The matching principle is:
a. A valuation method.
b. An expense recognition accounting principle.
c. A cash basis reporting principle.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
d. An asset classification procedure.
102. Which of the following best describes the additional information that companies use to meet
the requirements of full disclosure in financial statements?
a. Parenthetical comments or modifying comments placed on the face of the financial
statements.
b. Disclosure notes conveying additional insights about company operations, accounting
principles, contractual agreements, and pending litigation.
c. Supplemental schedules and tables that report more detailed information than is shown in
the primary financial statements.
d. Comments on the face of the financial statements, and schedules, tables, and narrative
disclosures in notes to the financial statements.
103. Ford Motor Company purchases services from suppliers on account and sells its products to
distributors on short-term credit. As a result, do each of these events affect net income faster
than they affect net operating cash flows?
Purchase Services
Sell Products
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
104. The revenue/expense approach emphasizes:
Chapter 1 Environment and Theoretical Structure of Financial Accounting
a. Recognition of revenues.
b. Recognition of expenses.
c. The income statement.
d. All of the above are correct.
105. The asset/liability approach emphasizes:
a. Whether amounts on the balance sheet meet the definitions of assets and liabilities.
b. A close relation between the balance sheet and the statement of cash flows.
c. The distinction between net assets and gross assets.
d. All of the above are correct.
106. Under IFRS, the role of the conceptual framework:
a. Primarily involves guiding standard setters to make sure that standards are consistent with
each other.
b. Includes serving as a guide for practitioners when a specific standard does not apply.
c. Is less important than in U.S. GAAP.
d. Has resulted primarily from a convergence with U.S. GAAP.
107. Under IFRS, the conceptual framework:
a. Emphasizes the overarching concept of the financial statements providing a “true and fair
representation” of the company.
b. Is not designed to provide guidance to standard setters, but rather only to practitioners.
c. Is not designed to provide guidance to practitioners, but rather only to standard setters.
d. Specifies a set of rules that determine what constitutes a true IFRS standard.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Matching Pair Questions
108. 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. Predictive value
Information is useful in projecting cash flows.
____
2. Relevance
Pertinent to the decision at hand.
____
3. Distribution to owners
Information is available prior to the decision.
____
4. Confirmatory value
Decrease in equity due to transfers to owners.
____
5. Timeliness
Information confirms expectations.
____
Answer:
Term number that
matches the
phrase.
1. Predictive value
Information is useful in projecting cash flows.
2. Relevance
Pertinent to the decision at hand.
3. Distribution to owners
Information is available prior to the decision.
4. Confirmatory value
Decrease in equity due to transfers to owners.
5. Timeliness
Information confirms expectations.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
109. 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. Gain
Along with relevance, a fundamental decision–
specific quality.
____
2. Materiality
Results if an asset is sold for more than book
value.
____
3. Completeness
Contains all information necessary for faithful
representation.
____
4. Comprehensive income
The change in equity from nonowner
transactions.
____
5. Faithful representation
Concerns the decision-making impact of both the
amount and nature of an item.
____
1. Gain
Along with relevance, a fundamental decision–
specific quality.
2. Materiality
Results if an asset is sold for more than book
value.
5. Faithful representation
Concerns the decision-making impact of both the
amount and nature of an item.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
110. 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. Neutrality
Important in analysis between firms.
____
2. Comparability
Accounting information should be unbiased.
____
3. Consistency
The decision to include an amount in the financial
statements.
____
4. Cost-effectiveness
Applying the same accounting practices over time.
____
5. Recognition
Considers the value of using information relative to
cost of providing it.
____
1. Neutrality
Important in analysis between firms.
2. Comparability
Accounting information should be unbiased.
3. Consistency
The decision to include an amount in the financial
statements.
4. Cost-effectiveness
Applying the same accounting practices over time.
5. Recognition
Considers the value of using information relative to
cost of providing it.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
111. Listed below are five terms are followed by a list of phrases that describe or characterize five
of the terms. Match each phrase with the correct number code for the term.
TERM
PHRASE
Term number that
matches the phrase.
1. Monetary unit assumption
Implies consensus among different
observers.
____
2. Verifiability
Assumes all transactions can be identified
with a particular entity.
____
3. Economic entity assumption
Assumes an entity will continue to operate
indefinitely.
____
4. Going concern assumption
Requires reporting the financial life of an
entity in discrete time frames.
____
5. Periodicity assumption
Ignores the possibility of inflation.
____
1. Monetary unit assumption
Implies consensus among different
observers.
2. Verifiability
Assumes all transactions can be identified
with a particular entity.
indefinitely.
5. Periodicity assumption
Ignores the possibility of inflation.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
112. 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. Historical cost
Basis of measurement for fixed assets.
____
2. Materiality
Discounts future cash flows.
____
3. Revenue recognition
Occurs when goods or services are transferred to
the customer.
____
4. Full disclosure
Reporting of all information that could affect
decisions.
____
5. Present value
Application of GAAP sometimes avoided under
this constraint.
____
Answer:
1. Historical cost
Basis of measurement for fixed assets.
2. Materiality
Discounts future cash flows.
3. Revenue recognition
Occurs when goods or services are transferred to
the customer.
4. Full disclosure
Reporting of all information that could affect
decisions.
5. Present value
Application of GAAP sometimes avoided under
this constraint.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
113. 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. Financial Accounting
Standards Board
Undermines representational faithfulness by
being inconsistent with neutrality.
____
2. Accounting Principles
Board
It established GAAP before the FASB.
____
3. Conservatism
Its EITF Issues are GAAP when entered in the
Accounting Standards Codification.
____
4. AICPA
It has the authority to set U.S. accounting
standards.
____
5. Securities and Exchange
Commission
It is the national organization for CPAs in the
United States.
____
1. Financial Accounting
Standards Board
Undermines representational faithfulness by
being inconsistent with neutrality.
3. Conservatism
Its EITF Issues are GAAP when entered in the
Accounting Standards Codification.
4. AICPA
It has the authority to set U.S. accounting
standards.
5. Securities and Exchange
It is the national organization for CPAs in the
United States.