Chapter 2: Financial Reporting: Its Conceptual Framework
60. Which of the following is a phase of the joint FASB and IASB conceptual framework project?
a.
going-concern assumption
b.
mixed attribute measurement
c.
elements and recognition
d.
period of time assumption
c
1
Moderate
ACCT.WHAL.16.2.6 –
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Chapter 2: Financial Reporting: Its Conceptual Framework
61. A list of statements follows:
a.
Standards are applications of__________and __________ to differing types of
transactions.
b.
__________are specific implementation procedures.
c.
The intent of the__________ is to establish objectives and fundamental concepts that
are the basis for development of financial accounting and reporting guidance.
d.
__________are the methods and practices that U.S. companies are required to use in
preparing and reporting accounting information in financial statement used by external
stakeholders.
e.
Statement of Financial Accounting Concepts No. 8 describes the relations between
__________and decision-useful information.
f.
__________ is the ultimate objective of accounting information.
g.
The fundamental characteristics of decision-useful information are__________ and
__________.
h.
Information is relevant if it has __________, __________,and __________.
i.
Accounting information is a faithful representation of the underlying situation if it has
__________,_________, and__________.
j.
Enhancing characteristics include__________, __________, __________, and
__________.
Required:
Fill in the words necessary to complete the statements.
b.
d.
g.
h.
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ACCT.WHAL.16.2.1 – LO: 2.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Chapter 2: Financial Reporting: Its Conceptual Framework
62. The primary objective if financial reporting is to provide information that is useful to external decision makers. The
following is a list of types of information that are helpful in assessing expected future cash flows and statements
describing those types of information..
a.
Liquidity
b.
Operating capability
c.
Risk
d.
Return on investment
e.
Financial Flexibility
______
1.
The uncertainty of the future profitability of a company
______
2.
The ability of a company to use its financial resources to adapt to change.
______
3.
The ability of a company to efficiently produce goods and services for
customers.
______
4.
Refers to how quickly a company can convert assets into cash.
______
5.
A measure of overall company performance for equity shareholders.
______
6.
Comes from a company’s ability to raise new capital.
______
7.
Caused by factors such as technological, political, and economic change.
______
8.
Indicated by the productive capacity of long-lived assets.
______
9.
Negatively related to risk.
Required:
Match each type of information with the appropriate statement by placing the appropriate letter in the space provided.
ANSWER:
1.
c
2.
e
3.
b
4.
a
5.
d
6.
e
7.
c
8.
b
9.
a
1
Challenging
ACCT.WHAL.16.2.1 – LO: 2.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
63. A list of statements follows:
a.
The Conceptual Framework establishes ____________________ of financial reporting.
b.
Financial reporting should, above all, provide information that is ____________________
to external decision makers.
c.
Accounting information is a ____________________ if it is complete, neutral, and free
from error.
d.
___________of accounting information enables users to identify similarities and
differences between two sets of facts, while __________ means that accounting methods
are applied in the same way from period to period.
e.
A specific objective of financial reporting is to provide information about a company’s
economic ___________ and ________ against the company..
Required:
Fill in the words necessary to complete the statements.
b.
faithful representation
d.
e.
64. A list of statements follows:
a.
____________________ on ____________________ provides a measure of overall
company performance for equity shareholders..
b.
____________________ is the uncertainty or unpredictability of the future results of a
company.
c.
____________________ ____________________ is the ability of a company to take
effective actions to change the amounts and timing of cash flows.
d.
____________________ is the term used to describe how quickly a company can convert
its assets into cash to pay a liability.
e.
____________________ ____________________ refers to the ability of a company to
maintain a given physical level of operations.
Required:
Fill in the words necessary to complete the statements.
b.
d.
Chapter 2: Financial Reporting: Its Conceptual Framework
65. A list of statements follows:
a.
GAAP states that the two primary qualitative characteristics that make accounting
information useful for decision-making purposes are ____________________ and
____________________.
b.
Corporations prepare quarterly financial statements in order to help achieve
____________________, an ingredient of the primary quality of relevance.
c.
Expensing the purchase of waste paper baskets that have a three-year estimated useful life
at the date of acquisition is a permissible procedure according to the
____________________ constraint.
d.
The three components of relevance are ____________________, ____________________,
and ____________________ ____________________.
e.
____________________ ____________________ is the overall qualitative characteristic
to be used in judging the quality of accounting information.
Required:
Fill in the words necessary to complete the statements.
b.
d.
66. Below is a list of the qualitative characteristics identified by GAAP. Following the list is a series of descriptive
phrases.
a.
feedback value
g.
verifiability
b.
relevance
h.
consistency
c.
decision usefulness
i.
representational faithfulness
d.
reliability
j.
timeliness
e.
comparability
k.
neutrality
f.
predictive value
____
1.
When information can make a difference in a decision.
____
2.
Making information available when it is needed.
____
3.
When accounting policies and procedures are unchanged from period to period.
____
4.
When information is verifiable and neutral.
____
5.
Occurs when the measurement results can be duplicated.
____
6.
The overall qualitative characteristic accounting information should possess.
____
7.
When information enables decision makers to confirm prior expectations.
____
8.
When accounting information is reported the same way by different companies.
____
9.
Accounting information should help users form expectations about the future.
____
10.
Does not give the appearance of biased information.
____
11.
The information must be complete and free from errors.
1.
b
7.
a
2.
j
8.
e
3.
h
9.
f
4.
d
10.
k
5.
g
11.
i
6.
c
Required:
Match each characteristic with the appropriate phrase.
Chapter 2: Financial Reporting: Its Conceptual Framework
67. List of principles and assumptions followed by a series of descriptions of inappropriate accounting procedures.
a.
full disclosure
b.
historical cost
c.
revenue recognition
d.
conservatism
e.
monetary-unit assumption
f.
matching principle
g.
period of time
____
1.
The company signs a contract to produce four machines according to the
customer’s specifications. On the date of the contract, the customer pays one half
of the total contract price, and the company records the cash receipt as a sale. The
machines will be manufactured and delivered during the next year.
____
2.
The company delayed issuing its annual financial statements in order to include a
large sale expected early in the next year.
____
3.
The market value of the company’s inventory declined sharply. The president,
optimistically predicting a rise in value, insisted that the inventory be reported at
its historical cost.
____
4.
The market value of the company’s large inventory rose sharply. The inventory
was reported on the balance sheet at current market value.
____
5.
Although the company can estimate its uncollectible accounts receivable, it does
not recognize the bad debts expense until it determines that an account receivable
is uncollectible.
1.
2.
3.
4.
5.
Required:
Indicate which item (or items) on the list was (were) violated in each description by placing the appropriate letter(s) in
the space provided.
Chapter 2: Financial Reporting: Its Conceptual Framework
68. Below is a list of accounting assumptions, and principles followed by a series of descriptive statements.
a.
reporting entity assumption
b.
historical cost principle
c.
going-concern assumption
d.
conservatism
e.
monetary-unit assumption
f.
matching principle
g.
realization
h.
recognition
____
1.
A company records sales on account when providing a service.
____
2.
A company recognizes as expense the portion of its prepaid rent that has expired.
____
3.
A company purchased land in 1990 for $500,000 and reports the land at the same amount on its 2016
balance sheet.
____
4.
A company reports its inventories on the balance sheet at the lower of cost or market.
____
5.
An entity is preparing its five-year strategic plan.
____
6.
A company amortizes its patent, an intangible asset, over
its useful life.
____
7.
All financial statements are prepared without the assumption of inflation.
____
8.
The financial statements of the company are prepared separate from the owners.
____
9.
Revenue is recognized at the time the product is sold, shipped, or delivered.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Required:
Match each item in the list with its descriptive statement by placing the appropriate letter(s) in the space provided.
69. Presented below are five inappropriate accounting procedures that are being used by the Playground Equipment
Corporation.
a.
On the year-end balance sheet, Playground Equipment Corporation reported its inventory
at market value, which was greater than cost. As a result of this procedure, a gain was
recognized on the company’s income statement.
b.
Mrs. Devlin, the president of the company, purchased an automobile for her son using the
company’s money. The company’s accountant recorded the expenditure as salaries expense.
c.
Playground Equipment Corporation reported income from operations of $5,000,000 for the
current year. During the year, Devlin settled and paid a $5,000,000 class action lawsuit
against the company resulting from damages incurred from the sale of defective products.
The settlement was reported as a miscellaneous expense with no footnotes provided.
d.
Playground Equipment is going to issue additional common stock next year. In order to
improve its income, the company switched from the LIFO inventory cost flow method to
FIFO. The company did not disclose the accounting change. Comparative financial
statements were prepared.
e.
The company made $3,000,000 of expenditures to expand a building that originally cost
$5,000,000. The expenditures are expected to benefit operations over the building’s
remaining useful life of ten years. The expenditures were expensed as maintenance.
Required:
For each of the above items, list the accounting assumption(s), or principle(s) that is (are) being violated.
b.
d.
70. Below are the sources of information used in external decision making.
a.
Financial Statements
b.
Notes to Financial Statements
c.
Supplementary Information
d.
Other means of financial reporting
e.
Other Information
_____
1.
Changing prices disclosures
_____
2.
Letters to stockholders
_____
3.
Statement of Shareholders’ Equity
_____
4.
Accounting policies
_____
5.
Management discussion and analysis
_____
6.
News article about the company
_____
7.
Statement of Financial Position
_____
8.
Inventory Methods
_____
9.
Number of shares of stock outstanding
_____
10.
Analyst reports
Required:
Match each element with the appropriate statement by placing the appropriate letter in the space provided.
1
c
2
d
3
a
4
b
5
d
6
e
7
a
8
b
9
b
10
e
1
Challenging
ACCT.WHAL.16.2.5 – LO: 2.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
71. Explain the difference between comparability and consistency.
72. Discuss the purpose of the Conceptual Framework.
73. Information about a company helps external users assess the return a company has earned on its economic resources
and form expectations about its future performance. In what ways is the information concerning the company’s net
income, comprehensive income and their components useful to external users?
74. What are five types of information that are helpful in accessing the amounts, timing, and uncertainty of future cash
flows?
75. Define the following terms as they relate to decision usefulness, the ultimate objective of accounting information.
a.
Relevance
b.
Predictive value
c.
Confirmatory value
d.
Materiality
decisions made by financial statement users.
b.
The ability to form expectations about the future.
about accounting information.
d.
The nature and magnitude of the inclusion or omissions of information in
regards to financial statements. This is an entity specific characteristic.
1
Moderate
ACCT.WHAL.16.2.3 – LO: 2.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
76. The FASB and IASB describe four characteristics that enhance the decision usefulness of information that is relevant
and faithfully represented. What are these characteristics and provide a brief explanation of each.
Comparability
Information must be able to be compared with similar
information from other companies.
Timeliness
Information is presented to users in time to make valid and
educated decisions.
Understandability
The information is comprehensible to users who have reasonable
knowledge of the business and its economic activities.
1
Challenging
ACCT.WHAL.16.2.3 – LO: 2.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Chapter 2: Financial Reporting: Its Conceptual Framework
77. List five of the important accounting assumptions that have had an impact on the development of generally accepted
accounting principles.
78. Describe the basic nature of the three expense recognition methods. Provide two examples of each.
79. The Framework of Financial Accounting Theory and Practice is made up based upon several objectives. Provide a
brief summary of one of these objectives.
80. Financial statements provide limited information for external users to ascertain the necessary information upon which
to base decisions. What are other sources in which companies can disclose financial information to external users?
81. At lunch recently, two accountants were discussing the merits of the FASB’s conceptual framework project, which
resulted in the publication of seven Statements of Financial Accounting Concepts and required more than ten years of
effort. One accountant thought the effort was a waste of resources, since accounting was unlike physics, chemistry,
and biology, where natural laws apply. The other accountant thought the effort was very valuable. He stated that
“accounting, like any other discipline, benefits from having a coherent theory.”
Required:
Write a brief essay that discusses the advantages that are derived from the existence of a conceptual framework for
financial accounting and reporting.
82. The task of developing the conceptual framework was so enormous that the FASB had to divide it into several
projects.
Required:
A specific objective of financial reporting is to provide information about a company’s economic resources and the claims
on the company. In what ways is this information useful to external users?
83. GAAP lists and describes the qualitative characteristics that make accounting information useful for decision-making
purposes. The FASB viewed the characteristics as a hierarchy of qualities that make accounting information useful.
The FASB stated that accounting information must possess both relevance and faithful representation qualities to be
useful, but it was noted that relevance and faithful representation may conflict with each other in some instances. For
example, to increase relevance, faithful representation may have to be sacrificed, or vice versa.
Required:
a.
Define “relevance” and “faithful representation” and list the components or “ingredients” of
each quality.
b.
Give an example in financial accounting that illustrates the following tradeoffs:
(1)
Relevance is sacrificed in order to make accounting information more reliable.
(2)
Faithful representation is sacrificed in order to make accounting information more
relevant.
and (3) free from error.
sacrifice of relevance for reliability. Historical cost is reliable information,
stock. The value is relevant, but might not be a faithful representation of
the stock’s actual value.
1
Challenging
ACCT.WHAL.16.2.3 – LO: 2.3
United States – BUSPROG: Communication
United States – OH – Default City – AICPA: FN-Decision Modeling
84. The Conceptual Framework includes two “fundamental qualitative characteristics” that must be present for financial
reporting information to be useful.
Required:
List and describe the two fundamental characteristics of usefulness.
85. Discuss the financial reporting model in the FASB Conceptual Framework.
86. Your CEO has told you that she has little use for accounting figures based on historical costs. She believes that fair
values are of far more significance to the board of directors than ” out-of-date costs.”
Required:
Present some arguments to convince her that accounting data should still be based on historical costs.