CHAPTER 1: THE DEMAND FOR AND SUPPLY OF FINANCIAL
ACCOUNTING INFORMATION
1. A problem arising from equal information is called information asymmetry.
a.
True
b.
False
False
1
Easy
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2. The demand for relevant and reliable financial information stems from the needs of the internal and external
stakeholders.
a.
True
b.
False
True
1
Easy
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3. The mission of the Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient
markets, and assist in the formation of capital.
a.
True
b.
False
True
1
Easy
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4. The SEC uses its authority to establish accounting standards, while also enforcing regulations on companies,
exchanges, and investors.
a.
True
b.
False
False
1
Easy
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5. The Financial Accounting Standards Board (FASB) began in 1973 after the AICPA phased out the Accounting
Principles Board (APB).
a.
True
b.
False
True
1
Easy
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6. FASB’s Emerging Issues Task Force assists and advises the FASB by identifying and addressing timely but more
narrow and specific standard setting issues.
a.
True
b.
False
True
1
Easy
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7. The Codification is set up as a system of levels starting with sections, topics, and subtopics.
a.
True
b.
False
False
1
Easy
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8. The Codification was established to assist in reducing the time necessary to research an accounting issue and improve
the ability to utilize accounting information that conforms with GAAP.
a.
True
b.
False
True
1
Easy
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9. The convergence project between the IASB and GAAP was initiated in 2002 when the two boards entered into the
“Northward Agreement”.
a.
True
b.
False
False
1
Easy
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10. A potential issue facing the convergence project is that many companies have entered into contracts based upon U.S.
GAAP financial reporting; many of these contracts will have to be renegotiated using IFRS which potentially could
cause some companies more harm than good.
a.
True
b.
False
True
1
Easy
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11. The balance sheet is a snapshot of a company’s financial position at a particular date.
a.
True
b.
False
True
1
Easy
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12. The statement of shareholders’ equity reports the effects from the recognition or valuation of certain asset or liability
transactions that change Accumulated Other Comprehensive Income.
a.
True
b.
False
True
1
Easy
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13. “In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral
judgments in all their activities.” This is the Integrity Principle of the AICPA Code of Professional Conduct.
a.
True
b.
False
False
1
Easy
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14. “Members should act in a way that will service the public interest, honor the public trust, and demonstrate
commitment to professionalism.” This is the Public Interest Principle of the AICPA’s Code of Professional Conduct.
a.
True
b.
False
True
1
Easy
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15. Creditors’ information needs revolve around all of the following decisions, except
a.
extending credit
b.
maintaining a credit relationship
c.
not extending credit
d.
investing in credit instruments’
d
1
Easy
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16. Which of the following is an internal user of a company’s financial information?
a.
b.
c.
d.
a
1
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17. After formulating a strategic plan, a company will engage in what three types of activities?
a.
Planning, operating, and selling
b.
Investing, operating, and selling
c.
Financing, investing, and operating
d.
Operating, planning, and financing
c
1
Easy
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18. What is Financial Reporting?
a.
The process of communicating internal accounting information to existing and potential investors, creditors,
lenders, and other external decision makers.
b.
The process of communicating financial accounting information to existing and potential investors, creditors,
lenders, and other external decision makers.
c.
The process of preparing financial accounting information to existing and potential investors, managers, and
employees.
d.
The process of communicating the strategic plan to existing and potential investors, creditors, lenders, and
other external decision makers.
b
1
Easy
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19. When making decisions, equity investors are interested in assessing
a.
the company’s ability to generate cash flows.
b.
management’s ability to increase the capital providers’ investments.
c.
the company’s ability to pay dividends.
d.
All of these choices
d
1
Easy
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20. Which of the following is not a decision that external stakeholder’s of a company’s financial information would make?
a.
whether or not to extend credit to the company
b.
whether or not to hold the company’s stock
c.
whether or not the company should add a new product line
d.
whether or not to ask for an increase in employees’ benefits during union contract negotiations
c
1
Easy
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21. As a potential equity investor, what information about a company would you be least interested in prior to making an
investment decision?
a.
What differentiates them from their competition?
b.
Whether they are generating a profit?
c.
Whether they have positive cash flows?
d.
What are the employee benefits and compensation packages?
d
1
Easy
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22. The primary reason that financial accounting and managerial accounting have somewhat different objectives is
because they
a.
need information in different formats
b.
provide information for different decisions
c.
need information in different geographic locations
d.
need information at different times
b
1
Easy
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23. Information asymmetry may cause problems because management’s behavior
a.
may be to enhance the owners’ financial interests at the expense of their self-interests.
b.
will always follow classic agency law.
c.
may not always be in the best interests of the owners (shareholders).
d.
as agents will always be in the best interests of the owners (shareholders).
c
1
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24. Which of the following organizations has legal authority to prescribe accounting principles and reporting practices for
all corporations issuing publicly traded securities within the U.S. capital markets?
a.
Accounting Principles Board
b.
Securities and Exchange Commission
c.
Financial Accounting Standards Board
d.
Committee on Accounting Procedure
b
1
Easy
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25. Which organization has the most legal authority?
a.
Financial Accounting Standards Board
b.
Accounting Standards Executive Committee
c.
Governmental Accounting Standards Board
d.
Securities and Exchange Commission
d
1
Easy
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26. Three major organizations in the private and public sector develop U.S. and International Financial Reporting
Standards. They include all of the following except the
a.
EU (European Union).
b.
SEC (Securities and Exchange Commission).
c.
FASB (Financial Accounting Standards Board).
d.
IASB (International Accounting Standards Board).
a
1
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27. The Securities and Exchange Commission has the legal authority to prescribe accounting principles and reporting
practices for
a.
all companies issuing publicly traded securities
b.
all companies issuing any type of securities
c.
all companies
d.
all corporations
a
1
Easy
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28. Which of the following is not a major standard-setting body responsible for the establishment of U.S. and
International Financial Reporting Standards?
a.
SEC (Securities Exchange Commission)
b.
PCAOB (Public Company Accounting Oversight Board)
c.
FASB (Financial Accounting Standards Board)
d.
IASB (International Accounting Standards Board)
b
1
Easy
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29. While formally the SEC is charged with the responsibility for establishing accounting principles to be followed in the
preparation of SEC filings, the impact of the SEC generally has been
a.
in its assistance to Congress with the development of tax law.
b.
in guiding the development of stock exchanges.
c.
ineffective in controlling foreign corporations and investors.
d.
in its informal review and approval of standards developed in the private sector prior to their release.
d
1
Easy
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30. What is the relationship between the Securities and Exchange Commission and accounting standard setting in the
United States?
a.
The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.
b.
The SEC coordinates with the FASB in establishing accounting standards.
c.
The SEC has a mandate to establish accounting standards for corporations listed in the U.S. capital markets.
d.
The SEC reviews financial statements for compliance with U.S. GAAP or IFRS.
c
1
Moderate
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31. The Securities Exchange Act of 1934 established extensive reporting requirements for listed companies. Which is not
a commonly required report?
a.
Form 10-Q. An extensive quarterly report, including financial statements.
b.
Form S-2. A registration statement
c.
Form 10-K. An extensive annual report, including financial statements
d.
Form 8-K. A report used to describe significant events that may affect the company.
b
1
Moderate
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32. Which of the following statements regarding Standards contained in the FASB Accounting Standards Codification
(ASC) is true?
a.
They have the force of law, and failure to follow them can be prosecuted.
b.
They apply to financial reporting by all U.S. companies.
c.
They were created in 2009 when the ASC was created and did not exist prior to that time.
d.
They have to be approved by the SEC before they become effective.
b
1
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33. Which of the following statements is true?
a.
In order to remain impartial, the FASB discourages public input during development of standards.
b.
FASB accounting standards are the result of clearly defined objectives, an integrated body of theory, and the
known consequences of actions.
c.
The FASB deliberates and issues accounting standards only after receiving a formal letter of request from the
SEC.
d.
Accounting standards, which have economic and political consequences, are often the result of compromise.
d
1
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34. Beginning in 1938 and extending to the present, which is the correct sequence of accounting rule-making bodies?
a.
APB-CAP-FASB
b.
CAP-FASB-APB
c.
CAP-APB-FASB
d.
FASB-APB-CAP
c
1
Easy
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35. The Financial Accounting Foundation (FAF) is the parent organization of which of the following organizations?
a.
AICPA (American Institute of Certified Public Accountants)
b.
AAA (American Accounting Association)
c.
SIFMA (Securities Industry and Financial Markets Association)
d.
FASB (Financial Accounting Standards Board)
d
1
Easy
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36. How many FASB members currently make up the Board?
a.
5
b.
7
c.
21
d.
33
b
1
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37. Concerning FASB membership, which statement is not true?
a.
Not all members are CPAs from public practice.
b.
All members are full time and fully paid.
c.
All members are also members of the Financial Accounting Foundation.
d.
All members must sever organizational ties with their previous employer.
c
1
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38. Which of the following is not one of the stages used by the FASB process before issuing an Accounting Standards
Update?
a.
Conducting research
b.
Issuing an Exposure Draft
c.
Obtaining approval from the SEC for the new standard
d.
Holding public hearings
c
1
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39. Which of the following statements about the FASB Accounting Standards Codification is false?
a.
The Codification is currently the only authoritative source of U.S. GAAP.
b.
The purpose of creating the Codification was to simplify user access to authoritative U.S. GAAP.
c.
The framework of the Codification contains six levels, which are increasingly more specific.
d.
The six levels contained within the Codification framework are hierarchical in nature, such that the higher
levels are considered to be more authoritative than the lower levels.
d
1
Easy
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40. Which of the following statements about the FASB Accounting Standards Codification is true?
a.
It only exists as an electronic database; paper copies are not available.
b.
When the Codification was adopted in 2009, it caused major changes in the contents of U.S. GAAP.
c.
It is reviewed and periodically updated by the SEC.
d.
It is only one of a large number of authoritative pronouncements that have been issued over time, all of which
comprise U.S GAAP.
a
1
Moderate
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41. The FASB Accounting Standards Codification is expected to provide all of the following benefits except
a.
to reduce the research time necessary to solve an accounting research issue.
b.
to codify authoritative support such as results of academic research.
c.
to provide real-time updates as new standards are issued.
d.
to improve the usability of the authoritative accounting literature.
b
1
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42. Which of the following statements regarding the requirement to follow U.S. GAAP in financial reporting is true?
a.
U.S. GAAP has been adopted as federal law, so failure to follow U.S. GAAP is prosecuted through the federal
court system.
b.
U.S. GAAP has been adopted as state law in all 50 states, so failure to follow U.S. GAAP is prosecuted
through the state court system.
c.
U.S. GAAP represents a set of professional standards, and the requirement to follow U.S. GAAP is enforced
through the AICPA Code of Professional Conduct.
d.
Compliance with U.S. GAAP is not enforced; it is a voluntary choice made by most companies and by most
professional accountants
c
1
Moderate
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43. Prior to 2009, which of the following types of FASB Pronouncements carried the highest authority within GAAP by
establishing the methods and procedures required on specific accounting issues?
a.
Staff Positions
b.
Statements of Financial Accounting Standards
c.
Statements of Financial Accounting Concepts
d.
Technical Bulletins
b
1
Moderate
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44. The FASB Accounting Standards Codification includes six levels or components. Which of the following is not one
of those levels?
a.
Area
b.
Topic
c.
Sub-paragraphs
d.
Paragraphs
c
1
Easy
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45. Which of the following documents includes all of the accounting standards?
a.
Regulation S-X
b.
The FASB Conceptual Framework
c.
Statements of Financial Accounting Standards
d.
none of these
d
1
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46. Conversion to IFRS reporting by all U.S. companies would be best accomplished with a transition plan for all of the
following reasons except
a.
it would have to be a multi-year process.
b.
it needs to be an orderly process with a minimum of cost and disruption to the participants.
c.
certain IFRS need further improvement through continued convergence efforts.
d.
careful planning would enable maximum manipulation of the IFRS for the financial benefit of the United
States.
d
1
Medium
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47. The agreement in 2002 by the FASB and IASB to develop high quality, compatible accounting standards that could be
used by both domestic and cross-border financial reporting was called the
a.
International Accounting Standards agreement
b.
Financial Accounting Standards Board Global agreement
c.
Norwalk agreement
d.
United GAAP agreement
c
1
Easy
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48. For foreign companies that issue securities in the United States to raise capital, the SEC
a.
requires these companies to file form 20-F which reconciles certain amounts reported in their financial
statements with US GAAP.
b.
accepts all financial statements that use IFRS.
c.
accepts only financial statements that are fully stated under US GAAP.
d.
accepts financial statements from foreign companies that use English-language IFRS without exception.
d
1
Easy
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49. What is the responsibility of the International Accounting Standards Board?
a.
IASB promotes uniform accounting standards among different countries.
b.
IASB settles accounting disputes between auditors and international companies.
c.
IASB issues standards which regulate the financial accounting and reporting of multinational corporations and
then enforces them through legal channels.
d.
IASB is to develop a uniform currency in which the financial transactions would be measured.
a
1
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50. U.S. companies that have subsidiaries in foreign countries can file their financial statements with the SEC by using?
a.
IFRS
b.
GAAP
c.
either IFRS or GAAP
d.
IFRS for their subsidiaries and GAAP for their holdings in the United States.
b
1
Easy
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51. Which of the following is not a major standard-setting body responsible for the establishment of U.S. and
international GAAP (Generally Accepted Accounting Principles)?
a.
SEC (Securities Exchange Commission)
b.
PCAOB (Public Company Accounting Oversight Board)
c.
FASB (Financial Accounting Standards Board)
d.
IASB (International Accounting Standards Board)
b
1
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52. Certain U.S. accounting standards have been, and will be, amended to aid in the international convergence process.
The process of changing these standards usually involves
a.
a short deliberation followed by a vote of the U.S. Congress.
b.
acceptance of the change by the Internal Revenue Service.
c.
rejecting all existing standards and developing an entirely new concept.
d.
selecting the best standard between existing U.S. and international standards.
d
1
Easy
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