CHAPTER 2: FINANCIAL REPORTING: ITS CONCEPTUAL FRAMEWORK
1. Accounting principles are theories, truths, and propositions that service as the basis for financial accounting and
reporting.
a.
True
b.
False
True
1
Easy
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2. The rules for accounting are based upon concepts, and principles which broad and subject to an interpretation.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.2.1 – LO: 2.1
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3. Information is communicated to external users by the management of the company. Those users cannot dictate desired
financial results to the company.
a.
True
b.
False
True
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
4. The primary purpose of financial reporting is to provide useful and relevant information to the internal stakeholder’s of
the company.
a.
True
b.
False
False
1
Easy
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5. Management’s stewardship is to provide information about how a company’s cash flows cause changes in the
company’s resources and claim’s.
a.
True
b.
False
False
1
Easy
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6. Liquidity is positively related to financial flexibility but negatively related to risk and return on investments.
a.
True
b.
False
True
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
7. Relevance and faithful representation are the ultimate objectives of accounting information.
a.
True
b.
False
False
1
Easy
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8. To measure assets, liabilities, revenues, expenses, and other elements of the financial statements with the most relevant
and faithful measurement available is the mixed attribute measurement model.
a.
True
b.
False
True
1
Easy
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9. Oil and gas reserves information would be included within the financial statements.
a.
True
b.
False
False
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
10. Management discussion and analysis would be included in the supplementary information to the financial statements.
a.
True
b.
False
False
1
Easy
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11. The eight phases of the joint FASB and IASB framework project are: 1) objective and qualitative characteristics, 2)
elements and recognition, 3) presentation and disclosure, 4) reporting entity, 5) measurement, 6) framework for
GAAP hierarchy, 7) applicability to the not-for-profit sector, and 8) any remaining issues needing to be addressed.
a.
True
b.
False
True
1
Moderate
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12. Three phases of the convergence project were put on hold they were elements and recognition, measurement, and
presentation and disclosure.
a.
True
b.
False
False
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
13. Which of the following statements is not true with regard to the benefits derived from the FASB‘s conceptual
framework of accounting?
a.
It serves as a guide in establishing standards for the FASB.
b.
The Statements of Financial Accounting Concepts is the primary source of GAAP for accountants.
c.
It establishes the objectives of financial reporting.
d.
It enhances comparability between different company’s financial statements.
b
1
Easy
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14. Which of the following items is NOT included in FASB‘s conceptual framework of accounting theory?
a.
qualities of useful accounting information
b.
fundamental principles and assumptions that guide financial accounting and reporting
c.
objectives of financial reporting
d.
All of these choices are included in the conceptual framework
d
1
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15. The first part of the conceptual framework project had to do with establishing which projects?
a.
elements
b.
objectives
c.
qualitative characteristics
d.
recognition and measurement
b
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
16. The accounting projects portion of the FASB’s conceptual framework project deals with
a.
which accounting elements should be reported and how they should be measured
b.
which accounting elements should be reported and where the information should be reported
c.
how the accounting elements should be measured and how information should be displayed in financial
reports
d.
when accounting elements should be recognized and how information should be displayed in financial reports
a
1
Moderate
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17. The accounting projects portion of the FASB’s conceptual framework project deals with all of the following except
a.
how elements should be measured
b.
when various elements should be reported
c.
which accounting elements should be reported
d.
how financial reports should be displayed
d
1
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18. What is the goal of FASB and IASB in the creation of the conceptual framework?
a.
To develop standards that are internally consistent.
b.
To develop standards that are internationally converged.
c.
To develop standards that lead to financial reporting that provides clear consistent information to capital
providers.
d.
All of these choices
d
1
Moderate
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Chapter 2: Financial Reporting: Its Conceptual Framework
19. The FASB and IASB concluded that the most general objective of financial reporting is to
a.
provide information useful in the decisions made by external users
b.
meet the needs of internal users
c.
provide information about an entity’s earnings
d.
provide information about an entity’s cash flows
a
1
Moderate
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20. According to GAAP, which is not a specific objective?
a.
to provide information about an enterprise’s cash flows
b.
to provide information that is useful to present to potential investors, creditors, and other users in making
rational investment, credit, and similar decisions
c.
to provide information about an enterprise’s comprehensive income and its components
d.
to provide information about an enterprise’s economic resources, obligations, and owners’ equity
b
1
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21. Information about comprehensive income is useful to external users for all of the following purposes except
a.
evaluating management’s performance
b.
examining cash flows for the current period
c.
predicting future income
d.
assessing the risk of lending to the company
b
1
Moderate
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Chapter 2: Financial Reporting: Its Conceptual Framework
22. In its “Objectives of Financial Reporting by Business Enterprises” the FASB identified a variety of primary users
including all of the following except
a.
internal management
b.
investors
c.
creditors
d.
security analysts
a
1
Easy
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23. Which of the following is a specific objective of financial reporting?
a.
provide information that is useful to investors in making investment decisions
b.
provide information useful in assessing the amounts, timing, and uncertainty of prospective cash receipts
c.
provide information useful in assessing the amounts, timing, and uncertainty of prospective cash inflows
d.
provide information about a company’s resources and the claims against the company
d
1
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24. Accrual accounting relates the financial effects of a company’s transactions
a.
so that the costs of nonoperational events are matched to the balance sheet in the period impacted
b.
to the period in which they occur rather than to when the cash receipts or payment occurs
c.
so that the revenue impact of every transaction in a period is properly reflected in the income statement
d.
so that the impact of every transaction is reflected in the statement of cash flows
b
1
Moderate
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Chapter 2: Financial Reporting: Its Conceptual Framework
25. Which of the following statements regarding financial flexibility is true?
a.
It is the ability of a company to provide a return on investment.
b.
It is the ability of a company to take effective actions to insure the return of capital to the company.
c.
It is the ability of a company to take adapt changes in the amounts and timing of cash flows.
d.
It is the ability of a company to maintain a given level of operations.
c
1
Moderate
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26. Which of the following types of information was specifically identified by the FASB as being useful in assessing the
amounts, timing, and uncertainty of a company’s future cash flows?
a.
liquidity
b.
return of investment
c.
financial capability
d.
credit standing
a
1
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27. When investors and creditors make investment and credit decisions, they need information to assist them in assessing
future cash receipts. Their focus is on assessing the potential of generating
a.
a return of investment of capital
b.
a return on investment of capital
c.
both a return of and a return on investment of capital
d.
neither a return of nor a return on investment of capital
c
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
28. Which qualitative characteristic is an ingredient of relevance?
a.
understandability
b.
materiality
c.
neutrality
d.
representational faithfulness
b
1
Easy
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29. According to the FASB hierarchy of fundamental qualitative characteristics, the two primary qualities making
accounting information useful are
a.
understandability and decision usefulness
b.
relevance and faithful representation
c.
verifiability and neutrality
d.
predictive value and feedback value
b
1
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30. Which fundamental characteristic is an ingredient of faithful representation?
a.
predictive value
b.
confirmatory value
c.
timeliness
d.
Neutrality
d
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
31. In order to be relevant, accounting information should have
a.
timeliness
b.
verifiability
c.
confirmatory value
d.
All of these choices
c
1
Easy
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32. Which of the following fundamental qualitative characteristics may have to be sacrificed in order to achieve
timeliness?
a.
relevance
b.
verifiability
c.
comparability
d.
predictive value
b
1
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33. What is the ultimate objective of accounting information?
a.
faithful representation
b.
decision usefulness
c.
relevance
d.
predictive value
b
1
Moderate
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Chapter 2: Financial Reporting: Its Conceptual Framework
34. Which of the following are considered enhancing characteristics of accounting information?
a.
verifiability and confirmatory value
b.
predictive value and timeliness
c.
comparability and consistency
d.
representational faithfulness and neutrality
c
1
Moderate
ACCT.WHAL.16.2.3 – LO: 2.3
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35. A constraint mentioned by GAAP on qualitative characteristics is
a.
understandability
b.
timeliness
c.
faithful representation
d.
benefits greater than costs
d
1
Moderate
ACCT.WHAL.16.2.3 – LO: 2.3
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36. Which of the following items would most likely be a violation of the materiality constraint?
a.
A company did not separately report an unusual gain of $100,000. Its income from operations was
$20,000,000.
b.
A company having reported total assets of $50,000,000 immediately expensed the purchase of 20 pencil
sharpeners that have an estimated useful life of three years.
c.
A $75,000 illegal bribe by an executive of the company to a foreign official was not separately disclosed in the
annual report.
d.
A $2,000 expenditure to improve a building that originally cost $10,000,000 was immediately expensed.
c
1
Challenging
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Chapter 2: Financial Reporting: Its Conceptual Framework
37. The IASB and FASB boards have agreed that the objective of general purpose financial reporting is to provide
a.
financial information about a company that is useful to investors, lenders and other creditors
b.
mainly cash flow information about a company that is useful to external users in making decisions in their
capacity as capital providers
c.
financial information about a company that is useful to internal users in making decisions in their capacity as
capital custodians
d.
financial information about a company that is used by government regulators for taxation
a
1
Easy
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38. Similar to the constraints in the FASB’s qualitative characteristics, the joint IASB/FASB boards have identified which
constraint
a.
consistency
b.
benefits that justify the costs
c.
materiality
d.
Objectivity
b
1
Easy
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39. Long Corporation has adopted the policy of charging to expense at the time of purchase all assets having a cost of less
than $200, regardless of the life expectancy of the asset. This policy is most closely related to the
a.
historical cost principle
b.
period-of-time assumption
c.
verifiability principle
d.
materiality principle
d
1
Moderate
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Chapter 2: Financial Reporting: Its Conceptual Framework
40. Intracompany comparability would be violated if
a.
a company used LIFO as its inventory cost method while other companies in the same industry used FIFO
b.
a company changed its bad debts expense estimate from one percent to two percent
c.
a bank did not classify its assets as current assets and noncurrent assets
d.
a company expenses all expenditures of less than $500 even if the expenditures result in probable future
economic benefit
b
1
Challenging
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41. Understandability is a characteristic that is
a.
a secondary and interactive quality
b.
a threshold for recognition
c.
an overall quality
d.
an enhancing quality
d
1
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42. The materiality of an item of financial information refers to the likelihood that its omission or misstatement would
affect the decisions of those relying on that information and thus make differing choices if the information had been
presented. This concept most closely relates to the
a.
financial magnitude of the item
b.
verifiability of the item
c.
neutrality of the item
d.
confirmatory value of the item
a
1
Moderate
ACCT.WHAL.16.2.3 – LO: 2.3
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Chapter 2: Financial Reporting: Its Conceptual Framework
43. All of the following items are classified as accounting assumptions and conventions except for
a.
going concern
b.
timeliness
c.
monetary unit
d.
reporting entity
b
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
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44. The city of Anchorage sold land for its appraised value to the Big Bear Oil Company on June 1, 2014, that originally
cost the city $950,000. On June 1, 2014, the land was appraised at a value of $1,400,000, and on December 31, 2014,
the land’s value was estimated to be $1,450,000. On Big Bear Oil Company’s balance sheet at December 31, 2014, the
land should be valued at
a.
$1,400,000
b.
$1,450,000
c.
$950,000
d.
$0
a
1
Moderate
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45. Using the straight-line method to amortize patents is an application of expense recognition using
a.
cause and effect
b.
a systematic and rational allocation over time
c.
immediate consumption
d.
the percentage-of-completion method
b
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
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Chapter 2: Financial Reporting: Its Conceptual Framework
46. Using an allowance method of accounting to recognize uncollectible accounts receivable is an application of which
accounting convention?
a.
revenue recognition
b.
historical cost
c.
matching principle
d.
period of time
c
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
47. The state legislature is currently debating a bill that, if passed, would require the Roberts Company to go out of
business. Which of the following principles or assumptions related to the preparation of Roberts financial statements
is most directly affected by this impending vote of the legislature?
a.
going concern
b.
verifiability principle
c.
entity concept
d.
materiality concept
a
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
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48. A company that uses accounting methods in preparing its tax returns that differ from the accounting methods used to
prepare its financial statements is
a.
in violation of the consistency principle
b.
not necessarily violating either the income tax laws or generally accepted accounting principles
c.
probably guilty of tax evasion
d.
in violation of the relevance assumption
b
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
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Chapter 2: Financial Reporting: Its Conceptual Framework
49. Which one of the following assumptions or principles most logically supports the preparation of a single set of
consolidated financial statements that combines the financial information of several wholly owned but separately
identifiable businesses?
a.
historical cost
b.
industry practices
c.
reporting entity
d.
Materiality
c
1
Challenging
ACCT.WHAL.16.2.4 – LO: 2.4
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50. Expenses are recognized and matched against revenues on the basis of three principles. Which of the following is not
one of these principles?
a.
immediate consumption
b.
associating cash flows
c.
systematic and rational allocation over time
d.
cause and effect
b
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
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51. Which of the following sets includes only accounting assumptions and conventions?
a.
timeliness, prudence, historical cost, and neutrality
b.
matching, comparability, period of time, and faithful representation
c.
monetary unit, going concern, relevance, and materiality
d.
monetary unit, entity, going concern, and recognition
d
1
Challenging
ACCT.WHAL.16.2.4 – LO: 2.4
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Chapter 2: Financial Reporting: Its Conceptual Framework
52. The use of the historical cost principle is justified because the resulting information has the qualitative characteristics
of
a.
neutrality and materiality
b.
neutrality and verifiability
c.
timeliness and relevance
d.
verifiability and predictive value
b
1
Moderate
ACCT.WHAL.16.2.4 – LO: 2.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
53. What additional supplementary information should be included as part of the financial statements under GAAP?
a.
Economic statistics
b.
Notes to financial statements
c.
Letters to Stockholder’s
d.
Management Discussion and Analysis
b
1
ACCT.WHAL.16.2.5 – LO: 2.5
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54. FASB’s financial reporting model identifies which specific financial statements?
a.
Statement of Shareholder’s Equity
b.
Statements of Net Income and Comprehensive Income
c.
Statement of Financial Position
d.
All of these choices
d
1
Moderate
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Chapter 2: Financial Reporting: Its Conceptual Framework
55. What sources of information used by external decision making are directly affected by existing FASB standards?
a.
Accounting Policies
b.
Management Discussion and Analysis
c.
Economic Statistics
d.
Letters to Stockholders
a
1
Easy
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56. What three phases were active under the Joint FASB and IASB convergence project but were put on hold to focus on
other convergence topics?
a.
Reporting entity, measurement, and presentation and disclosure
b.
Framework for a GAAP hierarchy, elements and recognition , and objective and qualitative characteristics
c.
Elements and recognition, measurement, presentation and disclosure
d.
Measurement, reporting entity, and elements and recognition
d
1
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57. How many phases of the FASB / IASB convergence project are there?
a.
6
b.
8
c.
3
d.
over 10
b
1
Easy
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Chapter 2: Financial Reporting: Its Conceptual Framework
58. The IASB and FASB joint boards have identified the primary user groups of financial information as all of the
following except
a.
equity investors
b.
labor groups
c.
lenders
d.
other creditors (capital providers)
b
Easy
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59. The joint IASB and FASB boards identified several “enhancing” decision useful characteristics of financial
information including
a.
comparability, verifiability, timeliness, and understandability
b.
materiality, verifiability, timeliness, and understandability
c.
comparability, verifiability, timeliness, and materiality
d.
comparability, relevance, timeliness, and understandability
a
1
Moderate
ACCT.WHAL.16.2.6 –
LO: 2.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling