Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 20
89. The measurement principle includes the
a. fair value principle only.
b. historical cost principle only.
c. revenue recognition principle and expense recognition principle.
d. historical cost principle and the fair value principle.
90. Which of the following is commonly referred to as the matching principle?
a. Revenue recognition principle
b. Measurement principle
c. Expense recognition principle
d. Full disclosure principle
91. Product costs include each of the following except
a. overhead.
b. officer’s salaries.
c. material.
d. labor.
92. Recognizing expenses not when a company pays wages, but when the work actually
contributes to revenue in in accordance with the
a. consistency characteristic.
b. expense recognition principle.
c. materiality characteristics.
d. revenue recognition principle.
93. The accounting principle of expense recognition is best demonstrated by
a. not recognizing any expense unless some revenue is realized.
b. matching effort (expense) with accomplishment (revenue).
c. recognizing prepaid rent received as revenue.
d. establishing an Appropriation for Contingencies account.
94. Which of the following serves as the justification for the periodic recording of depreciation
expense?
a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability
95. Application of the full disclosure principle
a. is theoretically desirable but not practical because the costs of complete disclosure
exceed the benefits.
b. is violated when important financial information is buried in the notes to the financial
statements.
c. is demonstrated by the use of supplementary information explaining the effects of
financing arrangements.
d. requires that the financial statements be consistent and comparable.
96. Which of the following is an argument against using historical cost in accounting?
a. Fair values are more relevant.
b. Historical costs are based on an exchange transaction.
c. Historical costs are reliable.
d. Fair values are subjective.
97. When is revenue generally recognized?
a. When cash is received
b. When the warranty expires
c. When production is completed
d. When the company satisfies the performance obligation
98. Which of the following is a component of the revenue recognition principle?
a. Cash is received and the amount is material.
b. Recognition occurs when the performance obligation is satisfied.
c. Production is complete and there is an active market for the product.
d. Cash is realized or realizable and production is complete.
99. A company has a performance obligation when it agrees to
a. perform a service for a customer and receives cash payment.
b. sell a product to a customer after receiving payment.
c. perform a service or sell a product to a customer.
d. None of the answer choices are correct.
100. Which of the following is not a required component of financial statements prepared in
accordance with generally accepted accounting principles?
a. President’s letter to shareholders.
b. Balance sheet.
c. Income statement.
d. Notes to financial statements.
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 22
101. What is the general approach as to when product costs are recognized as expenses?
a. In the period when the expenses are paid
b. In the period when the expenses are incurred
c. In the period when the vendor invoice is received
d. In the period when the related revenue is recognized
102. Not adjusting the amounts reported in the financial statements for inflation is an example
of which basic assumption or principle of accounting?
a. Economic entity
b. Going concern
c. Monetary unit
d. Full disclosure
103. Recognition of amortization of an intangible asset illustrates which principle of
accounting?
a. Expense recognition
b. Full disclosure
c. Revenue recognition
d. Historical cost
104. When should an expenditure be recorded as an asset rather than an expense?
a. Never
b. Always
c. If the amount is material
d. When future benefit exists
105. Which accounting assumption or principle is being violated if a company reports its
corporate headquarter building at its fair value on the balance sheet?
a. Going concern
b. Monetary unit
c. Historical cost
d. Full disclosure
106. Which accounting assumption or principle is being violated if a company is a party to
major litigation that it may lose and decides not to include the information in the financial
statements because it may have a negative impact on the company’s stock price?
a. Full disclosure.
b. Going concern.
c. Historical cost.
d. Expense recognition.
Conceptual Framework Underlying Financial Accounting
2 – 23
107. Which assumption or principle requires that all information significant enough to affect
decisions of reasonably informed users should be reported in the financial statements?
a. Matching.
b. Going concern.
c. Historical cost.
d. Full disclosure.
108. A company has a factory building that originally cost the company $250,000. The current
fair value of the factory building is $3 million. The president would like to report the
difference as a gain. The write-up would represent a violation of which accounting
assumption or principle?
a. Revenue recognition
b. Going concern
c. Historical cost
d. Monetary unit
109. Which of the following is a constraint in presenting financial information?
a. Cost
b. Full disclosure
c. Relevance
d. Consistency
110. All of the following represent costs of providing financial information except
a. processing/preparing.
b. disseminating.
c. accessing capital.
d. auditing.
111. Which of the following is a benefit of providing financial information?
a. Potential litigation
b. Auditing
c. Disclosure to competition
d. Improved allocation of resources
112. Materiality is used in all of the following situations of providing financial information,
except
a. where an amount is of relative large size and importance.
b. where it would impact the judgment of a reasonable person.
c. where it would not make a difference in the actions of a decision maker.
d. where omission of the information would result in bias.
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 24
113. What is prudence or conservatism?
a. Understating assets and net income
b. When in doubt, recognizing the option that is least likely to overstate assets and
income
c. Recognizing the option that is least likely to overstate assets and liabilities
d. Recognizing revenue when earned and realized
114. Expensing the cost of copy paper when the paper is acquired is an example
a. materiality.
b. expense recognition.
c. conservatism.
d. industry practices.
115. Which of the following statements concerning the cost-benefit relationship is not true?
a. Business reporting should exclude information outside of management’s expertise.
b. Management should not be required to report information that would significantly harm
the company’s competitive position.
c. Management should not be required to provide forecasted financial information.
d. If needed by financial statement users, management should gather information not
included in the financial statements that would not otherwise be gathered for internal
use.
116. Which of the following relates to both relevance and faithful representation?
a. Cost constraint
b. Predictive value
c. Verifiability
d. Neutrality
117. Expensing the cost of a wastebasket with an estimated useful life of 10 years when
purchased is an example of the application of the
a. consistency characteristic.
b. expense recognition principle.
c. materiality ingredient.
d. historical cost principle.
118. Which of the following statements about materiality is correct?
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment
of a reasonable person.
d. All of these answers are correct.
Conceptual Framework Underlying Financial Accounting
2 – 25
119. Which of the following is considered a pervasive constraint by Statement of Financial
Accounting Concepts No. 8?
a. Comparability
b. Timeliness
c. Verifiability
d. Cost constraint
120. The cost constraint is also referred to as the
a. cost-benefit relationship.
b. materiality quality.
c. monetary unit assumption.
d. measurement principle.
121. The second level of the conceptual framework includes each of the following except
a. elements.
b. principles.
c. enhancing qualities.
d. fundamental qualities.
122. Trade-offs between the characteristics that make information useful may be necessary or
beneficial. Issuance of interim financial statements is an example of a trade–off between
a. relevance and faithful representation.
b. faithful representation and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.
123. Allowing firms to estimate rather than physically count inventory at interim (quarterly)
periods is an example of a trade-off between
a. verifiability and faithful representation.
b. faithful representation and comparability.
c. timeliness and verifiability.
d. neutrality and consistency.
P124. The third level of the conceptual framework does not include
a. assumptions.
b. constraint.
c. elements.
d. principles.
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 26
Solutions to those Multiple Choice questions for which the answer is “none of these answer
choices are correct.”
Conceptual Framework Underlying Financial Accounting
2 – 27
MULTIPLE CHOICE—CPA Adapted
125. According to the FASB’s conceptual framework, predictive value is an ingredient of
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No Yes
d. No No
126. According to the FASB’s conceptual framework, which of the following relates to both
relevance and faithful representation?
Comparability Neutrality
a. Yes Yes
b. Yes No
c. No Yes
d. No No
127. The FASB’s conceptual framework classifies gains and losses based on whether they are
related to an entity’s major ongoing or central operations. These gains or losses may be
classified as
Nonoperating Operating
a. Yes No
b. Yes Yes
c. No Yes
d. No No
128. According to the FASB’s conceptual framework, which of the following enhances
information that is relevant and faithfully represented?
a. Neutrality.
b. Comparability.
c. Confirmatory value.
d. Materiality.
129. Under SFAC No.6, interrelated elements of financial statements that are directly related to
measuring the performance and status of an enterprise include
Owners Distributions to Notes to Financial Statements
a. Yes No
b. Yes Yes
c. No Yes
d. No No
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 28
130. According to the FASB’s conceptual framework, the calculation of comprehensive income
includes which of the following?
Income from Distributions
Continuing Operations to Owners
a. No No
b. Yes No
c. Yes Yes
d. No Yes
131. According to the FASB’s conceptual framework, what does the concept of faithful
representation include?
a. Verifiability
b. Predictive value
c. Materiality
d. Neutrality
132. According to the FASB’s conceptual framework, which of the following is an essential
characteristic of an asset?
a. The claims to an asset’s benefits are legally enforceable.
b. An asset is tangible.
c. An asset is obtained at a cost.
d. An asset provides future benefits.
133. Which of the following is an application of rational and systematic allocation?
a. Amortization of intangible assets.
b. Sales commissions.
c. Research and development costs.
d. Officers’ salaries.
Multiple Choice Answers—CPA Adapted
Conceptual Framework Underlying Financial Accounting
2 – 29
BRIEF EXERCISES
BE. 2–134—Qualitative Characteristics.
Accounting information provides useful information about business transactions and events.
Those who provide and use financial reports must often select and evaluate accounting
alternatives. The FASB statement on qualitative characteristics of accounting information
examines the characteristics of accounting information that make it useful for decision-making. It
also points out that various limitations inherent in the measurement and reporting process may
necessitate trade-offs or sacrifices among the characteristics of useful information.
Instructions.
(a) Describe briefly the following characteristics of useful accounting information.
(1) Relevance (4) Comparability
(2) Faithful representation (5) Consistency
(3) Understandability
(b) For each of the following pairs of information characteristics, give an example of a situation in
which one of the characteristics may be sacrificed in return for a gain in the other.
(1) Relevance and faithful representation. (3) Comparability and consistency.
(2) Relevance and consistency. (4) Relevance and understandability.
(c) What criterion should be used to evaluate trade-offs between information characteristics?
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 30
Solution 2-134.
Conceptual Framework Underlying Financial Accounting
2 – 31
BE. 2–135—Accounting concepts—identification.
State the accounting assumption, principle, or constraint that is most applicable in the following
cases.
1. All payments less than $25 are expensed as incurred.
2. The company employs the same inventory valuation method from period to period.
3. A patent is capitalized and amortized over the periods benefited.
4. Assuming that dollars today will buy as much as ten years ago.
5. Rent paid in advance is recorded as prepaid rent.
6. Financial statements are prepared each year.
7. All significant post-balance sheet events are reported.
8. Personal transactions of the proprietor are distinguished from business transactions.
BE. 2–136—Accounting concepts—identification.
Presented below are a number of accounting procedures and practices at Ramirez Corp. For
each of these items, list the assumption, principle, quality, or modifying convention that is
violated.
1. Because the company’s income is low this year, a switch from accelerated depreciation to
straight-line depreciation is made this year.
2. The president of Ramirez Corp. believes it is foolish to report financial information on a yearly
basis. Instead, the president believes that financial information should be disclosed only when
significant new information is available related to the company’s operations.
3. Ramirez Corp. decides to establish a large loss and related liability this year because of the
possibility that it may lose a pending patent infringement lawsuit. The possibility of loss is
considered remote by its attorneys.
4. An officer of Ramirez Corp. purchased a new home computer for personal use with company
money, charging miscellaneous expense.
5. A machine, that cost $40,000, is reported at its current market value of $45,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 32
Solution 2-136
Conceptual Framework Underlying Financial Accounting
2 – 33
EXERCISES
Ex. 2-137—Accounting concepts—matching.
Listed below are several information characteristics and accounting principles and assumptions.
Match the letter of each with the appropriate phrase that states its application. (Items a through k
may be used more than once or not at all.)
a. Economic entity assumption g. Expense recognition principle
b. Going concern assumption h. Full disclosure principle
c. Monetary unit assumption i. Relevance characteristic
d. Periodicity assumption j. Faithful representation characteristic
e. Historical cost principle k. Consistency characteristic
f. Revenue recognition principle
____ 1. Stable-dollar assumption (do not use historical cost principle).
____ 2. The performance obligation is satisfied.
____ 3. Numbers and descriptions match what really existed or happened.
____ 4. Yearly financial reports.
____ 5. Accruals and deferrals in adjusting and closing process. (Do not use going concern.)
____ 6. Useful standard measuring unit for business transactions.
____ 7. Notes as part of necessary information to a fair presentation.
____ 8. Affairs of the business distinguished from those of its owners.
____ 9. Company assumed to have a long life.
____ 10. Valuing assets at amounts originally paid for them.
____ 11. Application of the same accounting principles as in the preceding year.
____ 12. Summarizing significant accounting policies.
____ 13. Presentation of timely information with predictive and confirmatory value.
Solution 2-137
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 34
Ex. 2-138—Accounting concepts—fill in the blanks.
Fill in the blanks below with the accounting principle, assumption, or related item that best
completes the sentence.
1. ________________________ and _______________________ are the two fundamental
qualities that make accounting information useful for decision making.
2. Information that helps users confirm or correct prior expectations has _________________
___________________.
3. ________________________ enables users to identify the real similarities and differences
in economic events between companies.
4. _________________ is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.
5. Information is _______________________ if omitting it or misstating it could influence
decisions that users make on the basis of the reported financial information.
6. The ________________________ characteristic requires that the same accounting method
be used from one accounting period to the next, unless it becomes evident that an
alternative method will bring about a better description of a firm’s financial situation.
7. ____________________ means that a company cannot select information to favor one set
of interested parties over another.
8. Providing information that is of sufficient importance to influence the judgement and
decisions of an informed user is referred to as _______________________.
9. Corporations must prepare accounting reports at least yearly due to the _______________
assumption.
10. _________________ occurs when the performance obligation is satisfied.
Solution 2-138
Ex. 2-139—Basic assumptions.
Briefly explain the four basic assumptions that underlie financial accounting.
Conceptual Framework Underlying Financial Accounting
2 – 35
Solution 2-139
Ex. 2-140—Historical cost principle.
Cost as a basis of accounting for assets has been severely criticized. What defense can you build
for cost as the basis for financial accounting?
Ex. 2-141—Expense recognition concept.
A concept is a group of related ideas. Matching could be considered a concept because it
includes ideas related to expense recognition. Briefly explain the ideas in expense recognition.
Test Bank for Intermediate Accounting, Seventeenth Edition
2 – 36
IFRS QUESTIONS
True / False
1. The IASB and the FASB are working on a joint project to develop a common conceptual
framework.
2. Under IFRS, expenses include losses that are not the result of ordinary activities.
3. Under IFRS, it is mandatory to report property, plant, and equipment at historical cost.
4. The number of financial statement elements in the IFRS conceptual framework is equal to
those in GAAP.
5. The existing conceptual frameworks underlying GAAP and IFRS are very similar.
6. It is unlikely that the basic concepts related to the existing conceptual framework will change.
7. The IASB is considering a proposal to provide expanded guidance on estimating fair values.
8. GAAP has a concept statement to guide estimation of fair values when market-related data is
not available.
9. The monetary unit assumption is a part of GAAP, but not IFRS.
10. A company incorporated in Japan uses the dollar as its unit of measurement.
Answers to True / False questions:
Conceptual Framework Underlying Financial Accounting
2 – 37
Multiple Choice:
11. The IASB and the FASB are working on a joint project that has an objective of developing a
conceptual framework that leads to standards that are:
a. rule-based and internally consistent.
b. principle-based and internally consistent.
c. rule-based and flexible in nature.
d. principle-based and rigid in nature.
12. Which of the following is an element of financial statements identified under IFRS?
a. Investment by owners
b. Losses
c. Comprehensive income
d. Equity
13. Under IFRS, a decrease in economic benefit that results in a decrease in equity is termed as
a(an):
a. Loss of economic benefit
b. Comprehensive loss
c. Expense
d. Distributions to owners
Answers to Multiple Choice: