Question 1–1
Financial accounting is concerned with providing relevant financial information
Question 1–2
Resources are efficiently allocated if they are given to enterprises that will use
Question 1–3
Two extremely important variables that must be considered in any investment
Question 1–4
In the long run, a company will be able to provide investors and creditors with a
Question 1–5
The primary objective of financial accounting is to provide investors and
Question 1–6
Net operating cash flows are the difference between cash receipts and cash
Chapter 1 Environment and Theoretical Structure of
Financial Accounting
QUESTIONS FOR REVIEW OF KEY TOPICS
Answers to Questions (continued)
Question 1–7
GAAP (generally accepted accounting principles) are a dynamic set of both
Question 1–8
In 1934, Congress created the SEC and gave it the job of setting accounting and
Question 1–9
Auditors are independent, professional accountants who examine financial
Answers to Questions (continued)
Question 1–10
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The most dramatic change to federal securities laws since the 1930s, the Act
radically redesigns federal regulation of public company corporate governance and
reporting obligations. It also significantly tightens accountability standards for
directors and officers, auditors, securities analysts, and legal counsel. Student opinions
Question 1–11
New accounting standards, or changes in standards, can have significant
Question 1–12
The FASB undertakes a series of elaborate information gathering steps before
Question 1–13
The purpose of the conceptual framework is to guide the Board in developing
Answers to Questions (continued)
Question 1–14
Relevance and faithful representation are the primary qualitative characteristics
Question 1–15
The components of relevant information are predictive value, confirmatory value
Question 1–16
The benefit from providing accounting information is increased decision
Question 1–17
Information is material if it is deemed to have an effect on a decision made by a
Answers to Questions (continued)
Question 1–18
1. Assets are probable future economic benefits obtained or controlled by a
particular entity as a result of past transactions or events.
5. Distributions to owners are decreases in equity resulting from transfers to owners.
6. Revenues are inflows of assets or settlements of liabilities from delivering or
producing goods, rendering services, or other activities that constitute the entity’s
ongoing major or central operations.
Question 1–19
The four basic assumptions underlying GAAP are (1) the economic entity
Question 1–20
The going concern assumption means that, in the absence of information to the
1–6 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 1–21
The periodicity assumption relates to needs of external users to receive timely
Question 1–22
Four accounting practices, often referred to as principles, that guide accounting
Question 1–23
Two advantages to basing valuation on historical cost are (1) historical cost
possesses a high degree of verifiability.
Question 1–24
Companies recognize revenue when goods or services are transferred to
customers. However, no revenue is recognized if it isn’t probable that the seller will
Answers to Questions (continued)
Question 1–25
The four different approaches to implementing expense recognition are:
1. Recognizing an expense based on an exact cause-and-effect relationship
between a revenue and expense event. Cost of goods sold is an example of an
Question 1–26
In addition to the financial statement elements arrayed in the basic financial
Question 1–27
GAAP prioritizes the inputs companies should use when determining fair value.
The highest and most desirable inputs, Level 1, are quoted market prices in active
Question 1–28
Common measurement attributes are historical cost, net realizable value, current
cost, present value, and fair value.
1–8 Intermediate Accounting, 8/e
Answers to Questions (concluded)
Question 1–29
Under the revenue/expense approach, revenues and expenses are considered
Question 1–30
Under IFRS, the conceptual framework provides guidance to accounting standard
Question 1–31
The International Accounting Standards Board (IASB) is responsible for
Question 1–32
The SEC staff’s Final Staff Report concludes that it is not feasible for the U.S. to
BRIEF EXERCISES
Brief Exercise 1–1
Revenues ($340,000 + 60,000) $400,000
Brief Exercise 1–2
(1) Liabilities
Brief Exercise 1–3
1. The periodicity assumption
Brief Exercise 1–4
1. Expense recognition
Brief Exercise 1–5
1. Disagree — The full disclosure principle
Brief Exercise 1–6
1. Obtains funding for the IFRS standard setting process: International Accounting
Standards Committee Foundation (IASCF)
2. Determines IFRS: International Accounting Standards Board (IASB)
Exercise 1–1
Requirement 1
Pete, Pete, and Roy
Operating Cash Flow
Year 1
Year 2
Cash collected
$160,000
$190,000
Cash disbursements:
Requirement 2
Pete, Pete, and Roy
Income Statements
Year 1
Year 2
$170,000
$220,000
Expenses:
Requirement 3
Year 1: Amount billed to customers $170,000
Less: Cash collected (160,000)
Ending accounts receivable $ 10,000
EXERCISES
1–12 Intermediate Accounting, 8/e
Exercise 1–2
Requirement 1
Year 2
Year 3
Revenues
$350,000
$450,000
Expenses:
Requirement 2
Amount owed at the end of year one $ 5,000
Advertising costs incurred in year two 25,000
30,000
Exercise 1–3
Requirement 1
FASB ASC 820: “Fair Value Measurements and Disclosures”
Requirement 2
The specific citation that describes the information that companies must disclose
Requirement 3
The disclosure requirements are:
a. The fair value measurements at the reporting date
b. The level within the fair value hierarchy in which the fair value measurements
in their entirety fall, segregating fair value measurements using any of the
following:
c. For fair value measurements using significant unobservable inputs (Level 3), a
reconciliation of the beginning and ending balances, separately presenting
changes during the period attributable to any of the following:
1. Total gains and losses for the period (realized and unrealized), segregating
the observability of significant inputs).
d. The amount of the total gains or losses for the period in (c)(1) included in
earnings (or changes in net assets) that are attributable to the change in
unrealized gains and losses relating to those assets and liabilities still held at the
Exercise 1–4
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific
citation for each of the following items is:
2. The topic number for related-party disclosures:
FASB ASC 850: “Related Party Disclosures.”
3. The topic, subtopic, and section number for the initial measurement
of internal-use software:
Exercise 1–5
Organization Group
1. Securities and Exchange Commission Users
Exercise 1–6
1. Liability
2. Distribution to owners
3. Revenue
1–16 Intermediate Accounting, 8/e
Exercise 1–7
List A List B
o 1. Predictive value a. Decreases in equity resulting from transfers to
owners.
h 2. Relevance b. Requires consideration of the costs and value of
n 7. Gain g. Information is available prior to the decision.
f 8. Faithful representation h. Pertinent to the decision at hand.
k 9. Comprehensive income i. Implies consensus among different measurers.
Exercise 1–8
1. Materiality
2. Neutrality
Exercise 1–9
List A List B
d 1. Expense recognition a. The enterprise is separate from its owners and other
entities.
g 2. Periodicity b. A common denominator is the dollar.
Exercise 1–10
1. The economic entity assumption
2. The periodicity assumption
1–18 Intermediate Accounting, 8/e
Exercise 1–11
1. The historical cost (original transaction value) principle
Exercise 1–12
1. Disagree — Monetary unit assumption
2. Disagree — Full disclosure principle
Exercise 1–13
1. Disagree — This is a violation of the historical cost (original
transaction value) principle.