Chapter 7—THE FASB’S CONCEPTUAL FRAMEWORK
TRUE/FALSE
1. The conceptual framework is an attempt to provide a metatheoretical structure for financial
accounting.
2. The most important new issue brought up in the discussion memorandum that preceded the
conceptual framework was predictive ability.
3. The discussion memorandum that preceded the conceptual framework was perhaps the most
extensive ever published by the FASB.
4. The eight (8) statements making up the conceptual framework establish generally accepted
accounting principles.
5. SFAC No. 1 maintains that financial statements should be geared toward specific needs of
particular user groups.
6. The conceptual framework maintains that accounting reports should become the only relevant
source of information about enterprises.
7. SFAC No. 1 takes the position that users of financial statements must be assumed to be
knowledgeable about financial information and reporting.
8. With regard to users, SFAC No. 1 established that financial statements should be aimed at a
common core of similar information users.
9. The quality of understandability is a characteristic influenced by both users and preparers of
accounting information.
10. The benefits of accounting information pertain to how useful the accounting information is
relative to the capital maintenance and accountability objectives.
11. Competitive disadvantage is an indirect cost of published information.
12. The indirect costs of information pertain to gathering, preparation, and dissemination of
information.
13. There is a conflict between timeliness and the other aspects of relevance.
14. According to SFAC No. 4, “earnings” is the indicator of a nonbusiness organization’s
performance that is comparable to “income” in the profit sector.
15. SFAC No. 5 makes clear that the concepts discussed in the conceptual framework apply to other
means of disclosure in addition to financial statements.
16. SFAC No. 5 appears to deny one of the main tenets of the efficient-markets hypothesis.
17. The definitions of SFAC No. 6 are virtually identical to those in SFAC No. 3 except that they are
extended to nonbusiness organizations.
18. Comprehensive income as defined by SFAC No. 6 includes all changes in equity during a period.
19. Relevance and reliability are the primary characteristics that standard setters should be concerned
with.
20. Timeliness and predictive value are the two main aspect of relevance.
21. “Economic consequences” is not part of the conceptual framework.
22. SFAC No. 8 included the true and fair view in the qualitative characteristics of accounting.
Accounting Theory: 8th edition Page 3 of 11
23. Timeliness is an enhancing qualitative characteristic of information about economic
phenomenon.
24. Codification is a justification of the standard-setting process itself rather than of the individual
standards that result from that process.
25. The jurisprudential view of the FASB is concerned with the theory embodied in the conceptual
framework.
26. Opinion is virtually unanimous that SFAC No. 5 on recognition and measurement is the low
point of the conceptual framework.
MULTIPLE CHOICE
1. Which of the following is not true regarding the FASB’s conceptual framework?
a.
It is supposed to embody a system of interrelated objectives.
b.
It is an attempt to provide a metatheoretical structure for financial accounting.
c.
It establishes generally accepted accounting principles.
d.
It includes seven statements of financial accounting concepts.
2. Which of the following is not true regarding the discussion memorandum that preceded the
conceptual framework?
a.
It represented the end product of the FASB’s deliberations related to the conceptual
framework project.
b.
The most important new issue brought up in the document was capital maintenance.
c.
It brought up three views of financial accounting and financial statements.
d.
It presented various definitions for basic accounting terms.
3. Which statement in the conceptual framework deals with qualitative characteristics of accounting
information? Note that SFAC No. 8 replaces this older SFAC.
a.
SFAC No. 1
b.
SFAC No. 2
c.
SFAC No. 3
d.
SFAC No. 5
4. Which statement in the conceptual framework is concerned with the objectives of business
financial reporting? Note that SFAC 8 replaces this SFAC.
a.
SFAC No. 1
b.
SFAC No. 2
c.
SFAC No. 3
d.
SFAC No. 5
5. The qualitative characteristics of accounting information detailed in the conceptual framework
proceeded directly from which of the following documents?
a.
The Trueblood Report
b.
SATTA
c.
APB Statement 4
d.
ASOBAT
6. The objectives of business financial reporting detailed in the conceptual framework proceeded
directly from which of the following documents?
a.
The Trueblood Report
b.
SATTA
c.
APB Statement 4
d.
ASOBAT
7. Which of the following is a value judgment found in SFAC No. 1?
a.
Accounting reports should become the only relevant source of information about
enterprises.
b.
Cash basis accounting is extremely useful in assessing and predicting earning power and
cash flows of an enterprise.
c.
Information is not costless to provide, so benefits of usage should exceed costs of
production.
d.
Users of accounting information have limited ability regarding financial information and
reporting.
8. The qualitative characteristics of accounting on which the conceptual framework is centered
come under the general heading of:
a.
Relevance.
b.
Materiality.
c.
Representational faithfulness.
d.
Decision usefulness.
9. Which of the following is a pervasive constraint under the “original” qualitative characteristics of
accounting, pre-SFAC No. 8? It is an entity-specific constraint post SFAC No. 8.
a.
Decision usefulness
b.
Understandability
c.
Materiality
d.
Neutrality
10. Under SFAC No. 8, which of the following are aspects of relevance?
a.
Comparability and understandability
b.
Timeliness and comparability
c.
Representational faithfulness and decision usefulness
d.
Predictive value and confirmatory value
11. Which component of the conceptual framework is perhaps the most difficult to apply in practice?
a.
Confirmatory value
b.
Understandability
c.
Benefits greater than costs
d.
Faithful representation
12. The quality of being capable of “making a difference in a decision by helping users to form
predictions about the outcomes of past, present, and future events or to confirm or correct
expectations” is referred to in the conceptual framework as:
a.
Reliability.
b.
Relevance.
c.
Representational faithfulness.
d.
Understandability.
13. The degree of consensus among measurers is referred to in the conceptual framework as:
a.
Reliability.
b.
Relevance.
c.
Representational faithfulness.
d.
Understandability.
14. The idea that a measurement should correspond with the phenomenon it is attempting to measure
is referred to in the conceptual framework as:
a.
Reliability.
b.
Relevance.
c.
Faithful representation.
d.
Understandability.
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15. Which of the following is a true statement regarding feedback value?
a.
It concerns confirming or correcting decision makers’ earlier expectations.
b.
It refers to assessing where the firm presently stands.
c.
It is closely related to accountability.
d.
All of the above
16. Pre-SFAC No. 8, the three components of reliability are:
a.
Predictive value, feedback value, timeliness.
b.
Verifiability, neutrality, representational faithfulness.
c.
Verifiability, predictive value, feedback value.
d.
Relevance, comparability, materiality.
17. Which qualitative characteristic pertains wholly to the attitude of board members as opposed to
being more directly concerned with specific aspects of information contained in the financial
statements?
a.
Representational faithfulness
b.
Verifiability
c.
Consistency
d.
Neutrality
18. Which of the following is not part of the conceptual framework?
a.
Conservatism
b.
Economic consequences
c.
Consistency
d.
None of the above are in the conceptual framework
19. SFAC designated which of the following as the term to indicate the comprehensive or total
change in net assets occurring during the period as a result of operations?
a.
Income
b.
Earnings
c.
Revenue
d.
Profits
20. Which of the following is a true statement?
a.
SFAC No. 5 makes clear that the concepts discussed in the conceptual framework apply to
other means of disclosure in addition to financial statements.
b.
SFAC No. 5 appears to deny one of the main tenets of the efficient-markets hypothesis,
that disclosure outside of the body of financial statements is as effective as disclosure
within statements themselves.
c.
SFAC No. 5 made a clear attempt to resolve the issues of recognition and measurement.
d.
SFAC No. 5 was successful because it addressed measurement prior to discussing
recognition.
21. Which of the following is a true statement?
a.
The eight SFACs that comprise the conceptual framework were not evolutionary because
they were derived from previous documents such as the Trueblood Report and ASOBAT.
b.
The definitions of SFAC No. 6 were basically a restatement of the definitions of APB
Statement 4.
c.
The Achilles’ heel of the document is SFAC No. 5, which reaffirmed historical cost as the
basic measurement system.
d.
The key document in the series of SFACs that comprise the conceptual framework is
SFAC No. 1.
22. Which of the following concepts was referred to as a convention in SFAC No. 2?
a.
Consistency
b.
Materiality
c.
Comparability
d.
Conservatism
23. Which of the following is not a true statement?
a.
SFAC No. 3 defines 10 elements of financial statements.
b.
SFAC No. 3 is a resolution of the definitions presented in the discussion memorandum for
the conceptual framework project.
c.
SFAC No. 3 was amended by SFAC No. 6.
d.
SFAC No. 3 discusses in detail the three views of financial accounting mentioned in the
discussion memorandum.
24. Which of the following is a true statement?
a.
Predictive value refers to usefulness of inputs for predictions rather than being an actual
prediction itself.
b.
Timeliness complements rather than conflicts with the other aspects of relevance because
information is more complete and accurate if it is timely.
c.
The conceptual framework stressed predictive value rather than the importance of decision
making by outside users.
d.
Timeliness and predictive value are the two main aspects of relevance.
25. Which of the following is not true regarding SFAC No. 7
a.
SFAC No. 7 requires that estimated future cash flows be used for asset measurement in
certain circumstances.
b.
SFAC No. 7 concerns specific measurement issues rather than conceptual-type issues.
c.
SFAC No. 7 applies only to initial recognition and not subsequent revaluations.
d.
SFAC No. 7 is divided into two parts: asset measurement and income measurement.
26. SFAC No. 8 replaces
a.
SFAC No. 1
b.
SFAC No. 2
c.
SFAC No. 3
d.
SFAC No. 1 and 2.
27. Effective with SFAC No. 8, the two primary decision-specific qualities include relevance and
a.
Reliability.
b.
Faithful representation
c.
Timeliness
d.
Predictive value.
ESSAY
1. Do the SFACs that constitute the conceptual framework establish generally accepted accounting
principles? What are the benefits and limitations of this approach?
2. Why might SFAC No. 5 be considered a “failure”?
3. Respond to the following:
a.
How is net income different from earnings in SFAC No. 5?
b.
What is comprehensive income?
would thus be a better indicator of current operating performance than net income.
adjustments.
4. Explain the hierarchy of accounting qualities identified in SFAC No. 2.
5. Define the elements of financial statements identified in SFAC No. 3 and SFAC No. 6.
6. Discuss the criticisms that of SFAC No. 6?
7. Explain the main key points regarding asset and liability measurement made in SFAC No. 7.