Chapter 1 Environment and Theoretical Structure of Financial Accounting
True/False Questions
1. The primary function of financial accounting is to provide relevant financial information to
parties external to business enterprises.
2. Accrual accounting attempts to measure revenues and expenses that occurred during
accounting periods so they equal net operating cash flow.
3. The FASB is currently the public-sector organization responsible for setting accounting
standards in the United States.
4. The FASB’s due process invites various interested parties to indicate their opinions about
whether financial accounting standards should be changed.
5. Accounting for stock-based compensation is an area in which the FASB has received little
political interference.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
6. The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity
responsible for setting auditing standards in the United States.
7. A rules-based approach to standard-setting stresses professional judgment as opposed to
following a list of rules.
8. Under federal securities laws, the SEC has the authority to set accounting standards in the
United States.
9. The primary responsibility for properly applying GAAP when communicating with investors
and creditors through financial statements lies with a firm’s auditors.
10. Auditors play an important role in the resource allocation process by adding credibility to
financial statements.
11. The purpose of the conceptual framework is to provide a structure and framework for a
consistent set of GAAP.
12. In the United States the conceptual framework indicates GAAP when a more specific
accounting standard does not apply.
13. Materiality can be affected by the dollar amount of an item, the nature of the item, or both.
14. According to the FASB’s Statements of Financial Accounting Concepts, conservatism is a
Chapter 1 Environment and Theoretical Structure of Financial Accounting
desired qualitative characteristic of accounting information.
15. Equity is a residual amount representing the owner’s interest in the assets of the business.
16. Revenues are inflows or other enhancements of assets or settlements of liabilities from
activities that constitute the entity’s ongoing operations.
17. Gains or losses result, respectively, from the disposition of business assets for greater than, or
less than, their book values.
18. Comprehensive income is another term for net income.
19. The FASB’s conceptual framework lists relevance and timeliness as the two fundamental
qualitative characteristics of decision useful information.
20. The monetary unit assumption requires that items in financial statements be measured in a
particular monetary unit.
21. The periodicity assumption requires that present value calculations take into account the
number of compounding periods in each year.
22. Determining fair value by calculating the present value of future cash flows is a level 1 type of
input.
23. The FASB’s framework for measuring fair value doesn’t change the situations in which fair
Chapter 1 Environment and Theoretical Structure of Financial Accounting
value is used under current GAAP.
24. The revenue/expense approach emphasizes determining the appropriate amounts of revenue
and expense in each reporting period.
25. The asset/liability approach emphasizes matching to determine what assets and liabilities
should be reflected on the balance sheet.
26. In IFRS, the conceptual framework indicates appropriate accounting when a more specific
accounting standard does not apply.
27. The funding of the standard-setting bodies that promulgate IFRS is as independent as that
underlying U.S. GAAP.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Multiple Choice Questions
28. External decision makers would not look primarily to financial accounting information to
assist them in making decisions on:
a. Granting credit.
b. Capital budgeting.
c. Selecting stocks.
d. Mergers and acquisitions.
29. Corporations issue their shares to the investing public in the:
Primary market
Secondary market
a.
Yes
Yes
b.
No
Yes
c.
Yes
No
d.
No
No
30. The primary focus for financial accounting information is to provide information useful for:
Investing decisions
Credit decisions
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
31. Which of the following groups is not among the external users for whom financial statements
are prepared?
a. Customers.
b. Suppliers.
c. Employees.
d. Customers, suppliers, and employees are all external users of financial statements.
32. Which of the following is not true about net operating cash flow?
a. It is the difference between cash receipts and cash disbursements from providing goods
and services.
b. It is a measure used in accrual accounting and is recognized as the best predictor of future
operating cash flows.
c. Over short periods, it may not be indicative of long-run cash-generating ability.
d. It is easy to understand and all information required to measure it is factual.
33. Which of the following groups is not among financial intermediaries?
a. Mutual fund managers.
b. Financial analysts.
c. CPAs.
d. Credit rating organizations.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
34. Which of the following was the first private-sector entity that set accounting standards in the
United States?
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. Financial Accounting Standards Board.
d. AICPA.
35. Which of the following does not apply to secondary markets?
a. Transactions are important to the efficient allocation of resources in our economy.
b. New resources are provided when shares of stock are sold by the corporation to the initial
owners.
c. Transactions help to establish market prices for additional shares that may be issued in the
future.
d. Many investors might be unwilling to provide resources to corporations if there is no
available mechanism for the future sale of their stocks and bonds to others.
36. Porite Company recognizes revenue in the period in which it records an asset for the related
account receivable, rather than in the period in which the account receivable is collected in
cash. Porite’s practice is an example of:
a. Cash basis accounting.
b. Accrual accounting.
c. The matching principle.
d. Economic entity.
37. Which of the following is not a potential benefit of accrual accounting, compared to cash-
basis accounting?
Chapter 1 Environment and Theoretical Structure of Financial Accounting
a. Timeliness.
b. Better reflecting economic activity.
c. Periodicity.
d. Better matching of revenues and expenses.
38. In a recent annual report, Apple Computer reported the following in one of its disclosure
notes: “Warranty Expense: The Company provides currently for the estimated cost for product
warranties at the time the related revenue is recognized.” This note exemplifies Apple’s use of:
a. Conservatism.
b. The matching principle.
c. Realization principle.
d. Economic entity.
39. GAAP is an abbreviation for:
a. Generally authorized accounting procedures.
b. Generally applied accounting procedures.
c. Generally accepted auditing practices.
d. Generally accepted accounting principles.
40. The FASB issues accounting standards in the form of:
a. Accounting Research Bulletins.
b. Accounting Standards Updates.
c. Financial Accounting Standards.
d. Financial Technical Bulletins.
41. Pronouncements issued by the Committee on Accounting Procedures:
a. Dealt with specific accounting and reporting problems.
b. Were based on exposure drafts and public comment letters.
c. Originated from congressional studies and SEC directives.
d. Were the outcome of research studies and a theoretical framework.
42. The FASB’s standard-setting process includes, in the correct order:
a. Exposure draft, research, discussion paper, Accounting Standards Update.
b. Research, exposure draft, discussion paper, Accounting Standards Update.
c. Research, discussion paper, exposure draft, Accounting Standards Update.
d. Discussion paper, research, exposure draft, Accounting Standards Update.
43. Which of the following is not a provision of the Public Company Accounting Reform and
Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act:
a. Changed the entity responsible for setting auditing standards.
b. Increased corporate executive responsibility for financial statements.
c. Limited nonaudit services that can be performed by auditors for audit clients.
d. Changed the entity responsible for setting accounting standards.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
44. CPAs are licensed by:
a. The AICPA.
b. The SEC.
c. The federal government.
d. State governments.
45. Which of the following has the statutory authority to set accounting standards in the United
States?
a. FASB.
b. IRS.
c. SEC.
d. AICPA.
46. When a registrant company submits its annual filing to the SEC, it uses:
a. Form 10-A.
b. Form 10-K.
c. Form 10-Q.
d. Form S-1.
47. The most likely important flaw leading to the demise of the APB was the perceived lack of:
a. Confidence.
b. Competence.
c. Independence.
d. Importance.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
48. Accounting standard-setting has been characterized as:
a. A political process.
b. Using the scientific method.
c. Pure deductive reasoning.
d. Pure inductive reasoning.
49. The International Accounting Standards Board:
a. Was the predecessor to the IASC.
b. Can overrule the FASB when their policies disagree.
c. Promotes the use of high-quality, understandable global accounting standards.
d. Has its headquarters in Geneva.
50. Which of the following is not a provision of the Public Company Accounting Reform and
Investor Protection Act of 2002?
a. Corporate executive accountability.
b. Auditor rotation.
c. Retention of work papers.
d. All of the above are provisions of the Act.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
51. The primary professional organization for those accountants working in industry is the:
a. AAA.
b. AICPA.
c. IIA.
d. IMA.
52. In the Norwalk Agreement, the FASB and IASB pledged to:
a. Combine their organizations to form the BUSYB.
b. Make progress on specific MOU projects.
c. Achieve convergence by the year 2015.
d. Remove existing differences between their standards.
53. Which of the following is not a concern expressed by the SEC regarding IFRS adoption by the
U.S.?
a. Need for the U.S. to have strong influence on the standard-setting process and ensure that
standards meet U.S. needs.
b. The language barriers associated with cooperation among many countries in developing
IFRS.
c. The high costs to companies of converting to IFRS.
d. The fact that many laws, regulations and private contracts reference U.S. GAAP.
54. The most political issue in the FASB’s most recent deliberations and amendments to GAAP on
business combinations was:
a. The negative effects on subsequent earnings of amortizing goodwill if firms were required
Chapter 1 Environment and Theoretical Structure of Financial Accounting
to use the purchase method of accounting for the combination.
b. The negative effects on subsequent earnings of amortizing goodwill if firms were required
to use the pooling method of accounting for the combination.
c. The unrealistic balance sheet assets that would be created if firms were required to use the
purchase method of accounting for the combination.
d. The unrealistic balance sheet assets that would be created if firms were required to use the
pooling method of accounting for the combination.
55. The primary historical reason for the FASB reversing its positions when political pressures
occur is:
a. The cost of gathering data was prohibitive.
b. The difficulties in measurement were too great.
c. They have no authority in such situations.
d. The SEC did not support the FASB position.
56. The most recent example of the political process at work in standard-setting is the heated
debate that occurred on the issue of:
a. Pension plan accounting.
b. Accounting for postretirement benefits other than pensions.
c. Accounting for business combinations.
d. Accounting for stock-based compensation.
57. Independent auditors express an opinion on the:
a. Fairness of financial statements.
b. Accuracy of financial statements.
c. Soundness of a company’s future.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
d. Quality of a company’s management.
58. The possibility that the capital markets’ focus on periodic profits may tempt a company’s
management to bend or even break accounting rules to inflate reported net income is an
example of:
a. An ethical dilemma.
b. An accounting theory issue.
c. A technical accounting issue.
d. An auditor’s responsibility to inform the SEC.
59. One of the elements that many believe distinguishes a profession from other occupations is the
acceptance of responsibility by its members for the interests of those it serves, which is often
articulated in:
a. Its conceptual framework.
b. Its code of ethics.
c. Federal laws.
d. State laws.
60. SFAC 8 of the conceptual framework focuses on:
a. Objective and qualitative characteristics.
b. Presentation and disclosure.
c. Recognition and measurement.
d. Elements of financial statements.
61. The FASB’s conceptual framework’s qualitative characteristics of accounting information
include:
a. Historical cost.
b. Realization.
c. Faithful representation.
d. Full disclosure.
62. The FASB’s conceptual framework’s qualitative characteristics of accounting information
include:
a. Full disclosure.
b. Relevance.
c. Going concern.
d. Historical cost.
63. The conceptual framework’s qualitative characteristic of relevance includes:
a. Predictive value.
b. Verifiability.
c. Completeness.
d. Neutrality.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
64. The conceptual framework’s qualitative characteristic of faithful representation includes:
a. Predictive value.
b. Neutrality.
c. Confirmatory value.
d. Timeliness.
65. SFAC No.5 focuses on:
a. Objectives of financial reporting.
b. Qualitative characteristics of accounting information.
c. Recognition and measurement concepts in accounting.
d. Elements of financial statements.
66. The main issue in the debate over accounting for employee stock options was:
a. Which employees should receive options.
b. The amount of compensation expense that a company should recognize.
c. How many options should be granted to key executives.
d. The tax consequences of employee stock options.
67. A firm’s comprehensive income always:
a. Is the same as its net income.
b. Is greater than its net income.
c. Is less than its net income.
d. Could be greater than or less than net income.
68. Net income equals:
a. Assets minus liabilities.
b. Revenues minus cost of goods sold.
c. Revenues minus expenses.
d. Cash receipts minus cash payments.
69. Enhancing qualitative characteristics of accounting information include each of the following
except:
a. Timeliness.
b. Materiality.
c. Comparability.
d. Verifiability.
70. The enhancing qualitative characteristic of understandability means that information should be
understood by:
a. Those who are experts in the interpretation of financial information.
b. Those who have a reasonable understanding of business and economic activities.
c. Financial analysts.
d. CPAs.
Chapter 1 Environment and Theoretical Structure of Financial Accounting
71. Fundamental qualitative characteristics of accounting information are:
a. Relevance and comparability.
b. Comparability and consistency.
c. Faithful representation and relevance.
d. Neutrality and consistency.
72. Enhancing qualitative characteristics of accounting information include:
a. Relevance and comparability.
b. Comparability and timeliness.
c. Understandability and relevance.
d. Neutrality and consistency.
73. Gains are:
a. Inflows from selling a product or service to a customer.
b. Increases in equity resulting from transfers of assets to the company from owners.
c. Increases in equity from peripheral transactions of an entity.
d. None of the above is correct.
74. When there is agreement between a measure or description and the phenomenon it purports to
represent, information possesses which characteristic?
a. Verifiability.
b. Predictive value.
c. Faithful representation.
d. Timeliness.