Intermediate Accounting Kieso 16e Test Bank 2
TRUE-FALSE—Conceptual
1. A soundly developed conceptual framework enables the FASB to issue more useful and consistent pronouncements over time.
2. A conceptual framework is a coherent system of concepts that flow from an objective.
3. The first level of the conceptual framework identifies the recognition, measurement, and disclosure concepts used in establishing accounting standards.
4. The second level of the conceptual framework provides the qualitative characteristics that make accounting information useful and the elements of financial statements.
5. Although the FASB has developed a conceptual framework, no Statements of Financial Accounting Concepts have been issued to date.
6. The objective of financial reporting is the foundation of the conceptual framework.
7. Users of financial statements are assumed to need no knowledge of business and financial accounting matters to understand information contained in financial statements.
8. Relevance and faithful representation are the two fundamental qualities that make accounting information useful for decision making.
9. The idea of consistency does not mean that companies cannot switch from one accounting method to another.
10. Timeliness and neutrality are two ingredients of relevance.
11. Verifiability and predictive value are two ingredients of faithful representation.
12. Revenues, gains, and distributions to owners all increase equity.
13. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
14. The historical cost principle would be of limited usefulness if not for the going concern assumption.
15. The economic entity assumption means that economic activity can be identified with a particular legal entity.
16. The expense recognition principle states that debits must equal credits in each transaction.
17. Revenues are recognized in the accounting period in which the performance obligation is satisfied.
18. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.
19. In order to justify requiring a particular measurement or disclosure, the benefits to be derived from it must equal the costs associated with it.
20. In cost-benefit analysis, costs are generally more difficult to quantify than are benefits.
MULTIPLE CHOICE—Conceptual
21. Generally accepted accounting principles
a. are fundamental truths or axioms that can be derived from laws of nature.
b. derive their authority from legal court proceedings.
c. derive their credibility and authority from general recognition and acceptance by the accounting profession.
d. have been specified in detail in the FASB conceptual framework.
22. A soundly developed conceptual framework of concepts and objectives should
a. increase financial statement users' understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly solved.
d. All of these answer choices are correct.
23. Which of the following is not true concerning a conceptual framework in accounting?
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of nature.
d. All of these answer choices are true.
24. What is a purpose of having a conceptual framework?
a. To make sure that economic activity can be identified with a particular legal entity.
b. To segregate activities among different companies.
c. To provide comparable information for different companies.
d. To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards.
S25. Which of the following is not a benefit associated with the FASB Conceptual Framework Project?
a. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing conceptual framework.
c. A coherent set of accounting standards and rules should result.
d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
26. In the conceptual framework for financial reporting, what provides "the why"--the purpose of accounting?
a. Recognition, measurement, and disclosure concepts such as assumptions, principles, and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objective of financial reporting
27. The underlying theme of the conceptual framework is
a. decision usefulness.
b. understandability.
c. faithful representation.
d. comparability.
28. The objective of general-purpose financial reporting is to provide financial information about a reporting entity to each of the following except
a. potential equity investors.
b. potential lenders.
c. present investors.
d. All of these answers are correct.
29. The objective of general-purpose financial reporting is?
a. to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers
b. to provide companies with the option to select information that favors one set of interested parties over another
c. to provide users with financial information that implies total freedom from error.
d. to provide a metric for financial information used to determine when the boundary between two or more entities should be disregarded and the entities considered to be a licensing arrangement.
P30. If the LIFO inventory method was used last period, it should be used for the current and following periods because of
a. consistency.
b. materiality.
c. timeliness.
d. verifiability.
S31. Which of the following is a characteristic describing the fundamental quality of relevance?
a. Predictive value.
b. Neutrality.
c. Verifiability.
d. Understandability.
32. Which of the following is a fundamental quality of useful accounting information?
a. Comparability
b. Relevance
c. Neutrality
d. Materiality
33. Which of the following is a fundamental quality of useful accounting information?
a. Conservatism
b. Comparability
c. Faithful representation
d. Consistency
34. What is meant by comparability when discussing financial accounting information?
a. Information has predictive or confirmatory value.
b. Information is reasonably free from error.
c. Information is measured and reported in a similar fashion across companies.
d. Information is timely.
35. What is meant by consistency when discussing financial accounting information?
a. Information presented by a company applies the same accounting treatment to similar events, from period to period.
b. Information is timely.
c. Information is classified, characterized, and presented clearly and concisely.
d. Information is verifiable.
36. Which of the following is an ingredient of relevance?
a. Completeness
b. Neutrality
c. Timeliness
d. Materiality
37. Which of the following is an ingredient of faithful representation?
a. Predictive value
b. Materiality
c. Neutrality
d. Confirmatory value
38. Changing the method of inventory valuation should be reported in the financial statements because of which qualitative characteristic of accounting information?
a. Consistency
b. Verifiability
c. Timeliness
d. Comparability
39. A company issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information?
a. Comparability
b. Timeliness
c. Understandability
d. Verifiability
40. What is the quality of information that is capable of making a difference in a decision?
a. Faithful representation
b. Materiality
c. Timeliness
d. Relevance
41. Neutrality is an ingredient of which fundamental quality of information?
a. Faithful representation
b. Comparability
c. Relevance
d. Understandability
42. If the FIFO inventory method was used last period, it should be used for the current and following periods because of
a. relevance.
b. neutrality.
c. understandability.
d. consistency.
43. The pervasive criterion by which accounting information can be judged is that of
a. decision usefulness.
b. freedom from bias.
c. timeliness.
d. comparability.
44. The two fundamental qualities that make accounting information useful for decision making are
a. comparability and timeliness.
b. materiality and neutrality.
c. relevance and faithful representation.
d. faithful representation and comparability.
45. Accounting information is considered to be relevant when it
a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
46. The quality of information that means the numbers and descriptions match what really existed or happened is
a. relevance.
b. faithful representation.
c. completeness.
d. neutrality.
47. Which of the following does not relate to relevance?
a. Materiality
b. Predictive value
c. Confirmatory value
d. All of these answer choices relate to relevance.
48. According to Statement of Financial Accounting Concepts No. 8, materiality is an ingredient of the fundamental quality(ies) of:
Relevance Faithful Representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No
49. According to Statement of Financial Accounting Concepts No. 8, completeness is an ingredient of the fundamental quality(ies) of:
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No No
d. No Yes
50. According to Statement of Financial Accounting Concepts No. 8, neutrality is an ingredient of the fundamental quality(ies) of:
Relevance Faithful Representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No
51. Neutrality means that information
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time.
c. would have no impact on a decision maker.
d. cannot favor one set of interested parties over another.
52. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.
53. According to Statement of Financial Accounting Concepts No. 8, predictive value is an ingredient of the fundamental quality(ies) of:
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No No
d. No Yes
54. Under Statement of Financial Accounting Concepts No. 2, free from error is an ingredient of the fundamental quality of
Faithful Representation Relevance
a. Yes Yes
b. No Yes
c. Yes No
d. No No
55. Financial information demonstrates consistency when
a. firms in the same industry use different accounting methods to account for the same type of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the value of the measuring unit.
d. None of these answer choices are correct.
56. Financial information exhibits the characteristic of consistency when
a. expenses are reported as charges against revenue in the period in which they are paid.
b. a company applies the same accounting treatment to similar events, from period to period.
c. extraordinary gains and losses are not included on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.
57. Information about different companies and about different periods of the same company can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives?
Comparability Consistency
a. Companies Companies
b. Companies Periods
c. Periods Companies
d. Periods Periods
58. When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of
a. relevance.
b. faithful representation.
c. consistency.
d. None of these answer choices are correct.
59. The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners'
a. transfers of assets to the entity.
b. rendering services to the entity.
c. satisfaction of liabilities of the entity.
d. All of these answer choices are correct.
60. In classifying the elements of financial statements, the primary distinction between revenues and gains is
a. the materiality of the amounts involved.
b. the likelihood that the transactions involved will recur in the future.
c. the nature of the activities that gave rise to the transactions involved.
d. the costs versus the benefits of the alternative methods of disclosing the transactions involved.
61. A decrease in net assets arising from peripheral or incidental transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.
62. One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to
a. revenues minus expenses plus gains minus losses.
b. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners.
c. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities.
d. None of these answer choices are correct.
63. Which of the following elements of financial statements is not a component of comprehensive income?
a. Revenues
b. Distributions to owners
c. Losses
d. Expenses
P64. The calculation of comprehensive income includes which of the following?
Operating Income Distributions to Owners
a. Yes Yes
b. No No
c. No Yes
d. Yes No
S65. According to the FASB conceptual framework, which of the following elements describes transactions or events that affect a company during a period of time?
a. Assets.
b. Expenses.
c. Equity.
d. Liabilities.
S66. According to the FASB Conceptual Framework, the elementsassets, liabilities, and equitydescribe amounts of resources and claims to resources at/during a
Moment in Time Period of Time
a. Yes No
b. Yes Yes
c. No Yes
d. No No
67. Which of the following is not a basic element of financial statements?
a. Assets
b. Balance sheet c. Losses
d. Revenue
68. Which of the following basic elements of financial statements is more associated with the balance sheet than the income statement?
a. Equity
b. Revenue
c. Gains
d. Expenses
69. Issuance of common stock for cash affects which basic element of financial statements?
a. Revenues
b. Losses
c. Liabilities
d. Equity
70. Which of these basic elements of financial statements arises from peripheral or incidental transactions?
a. Assets
b. Liabilities
c. Gains
d. Expenses
71. Which of the following is not a basic assumption underlying the financial accounting structure?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Historical cost assumption
72. Which basic assumption is illustrated when a firm reports financial results on an annual basis?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Monetary unit assumption
73. Which basic assumption may not be followed when a firm in bankruptcy reports financial results?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Monetary unit assumption
74. Which accounting assumption or principle is being violated if a company provides financial reports only when it introduces a new product?
a. Economic entity
b. Periodicity
c. Revenue recognition
d. Full disclosure
S75. Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?
a. Monetary unit assumption
b. Periodicity assumption
c. Going-concern assumption
d. Economic entity assumption
S76. During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of
Relevance Periodicity
a. No No
b. Yes No
c. No Yes
d. Yes Yes
77. Under current GAAP, inflation is ignored in accounting due to the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. periodicity assumption.
78. The economic entity assumption
a. is inapplicable to unincorporated businesses.
b. recognizes the legal aspects of business organizations.
c. requires periodic income measurement.
d. is applicable to all forms of business organizations.
79. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the
a. economic entity assumption.
b. relevance characteristic.
c. comparability characteristic.
d. neutrality characteristic.
80. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
a. Cost constraint
b. Periodicity assumption
c. Conservatism
d. Expense recognition principle
81. What accounting concept justifies the usage of depreciation and amortization policies?
a. Going concern assumption
b. Fair value principle
c. Full disclosure principle
d. Monetary unit assumption
82. The assumption that a company will not be sold or liquidated in the near future is known as the
a. economic entity assumption.
b. monetary unit assumption.
c. periodicity assumption.
d. None of these answer choices are correct.
83. Which of the following is an implication of the going concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and significant.
d. All of these.
84. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more
a. verifiable.
b. relevant.
c. indicative of the entity's purchasing power.
d. conservative.
85. Valuing assets at liquidation values rather than cost is inconsistent with the
a. periodicity assumption.
b. expense recognition principle.
c. materiality constraint.
d. historical cost principle.
86. Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the
a. consistency characteristic.
b. expense recognition principle.
c. revenue recognition principle.
d. relevance characteristic.
87. Generally, revenue from sales should be recognized at a point when
a. management decides it is appropriate to do so.
b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer and there remains no further warranty liability.
d. None of these answer choices are correct.
88. Revenue generally should be recognized
a. at the end of production.
b. at the time of cash collection.
c. when realized.
d. when the performance obligation is satisfied.
89. The measurement principle includes the
a. fair value principle only.
b. historical cost principle only.
c. revenue recognition principle and expense recognition principle.
d. historical cost principle and the fair value principle.
90. Which of the following is commonly referred to as the matching principle?
a. Revenue recognition principle
b. Measurement principle
c. Expense recognition principle
d. Full disclosure principle
91. Product costs include each of the following except
a. overhead.
b. officer’s salaries.
c. material.
d. labor.
92. Recognizing expenses not when a company pays wages, but when the work actually contributes to revenue in in accordance with the
a. consistency characteristic.
b. expense recognition principle.
c. materiality characteristics.
d. revenue recognition principle.
93. The accounting principle of expense recognition is best demonstrated by
a. not recognizing any expense unless some revenue is realized.
b. matching effort (expense) with accomplishment (revenue).
c. recognizing prepaid rent received as revenue.
d. establishing an Appropriation for Contingencies account.
94. Which of the following serves as the justification for the periodic recording of depreciation expense?
a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability
95. Application of the full disclosure principle
a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b. is violated when important financial information is buried in the notes to the financial statements.
c. is demonstrated by the use of supplementary information explaining the effects of financing arrangements.
d. requires that the financial statements be consistent and comparable.
96. Which of the following is an argument against using historical cost in accounting?
a. Fair values are more relevant.
b. Historical costs are based on an exchange transaction.
c. Historical costs are reliable.
d. Fair values are subjective.
97. When is revenue generally recognized?
a. When cash is received
b. When the warranty expires
c. When production is completed
d. When the company satisfies the performance obligation
98. Which of the following is a component of the revenue recognition principle?
a. Cash is received and the amount is material.
b. Recognition occurs when the performance obligation is satisfied.
c. Production is complete and there is an active market for the product.
d. Cash is realized or realizable and production is complete.
99. A company has a performance obligation when it agrees to
a. perform a service for a customer and receives cash payment.
b. sell a product to a customer after receiving payment.
c. perform a service or sell a product to a customer.
d. None of the answer choices are correct.
100. Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?
a. President's letter to shareholders.
b. Balance sheet.
c. Income statement.
d. Notes to financial statements.
101. What is the general approach as to when product costs are recognized as expenses?
a. In the period when the expenses are paid
b. In the period when the expenses are incurred
c. In the period when the vendor invoice is received
d. In the period when the related revenue is recognized
102. Not adjusting the amounts reported in the financial statements for inflation is an example of which basic assumption or principle of accounting?
a. Economic entity
b. Going concern
c. Monetary unit
d. Full disclosure
103. Recognition of amortization of an intangible asset illustrates which principle of accounting?
a. Expense recognition
b. Full disclosure
c. Revenue recognition
d. Historical cost
104. When should an expenditure be recorded as an asset rather than an expense?
a. Never
b. Always
c. If the amount is material
d. When future benefit exists
105. Which accounting assumption or principle is being violated if a company reports its corporate headquarter building at its fair value on the balance sheet?
a. Going concern
b. Monetary unit
c. Historical cost
d. Full disclosure
106. Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company's stock price?
a. Full disclosure.
b. Going concern.
c. Historical cost.
d. Expense recognition.
107. Which assumption or principle requires that all information significant enough to affect decisions of reasonably informed users should be reported in the financial statements?
a. Matching.
b. Going concern.
c. Historical cost.
d. Full disclosure.
108. A company has a factory building that originally cost the company $250,000. The current fair value of the factory building is $3 million. The president would like to report the difference as a gain. The write-up would represent a violation of which accounting assumption or principle?
a. Revenue recognition
b. Going concern
c. Historical cost
d. Monetary unit
109. Which of the following is a constraint in presenting financial information?
a. Cost
b. Full disclosure
c. Relevance
d. Consistency
110. All of the following represent costs of providing financial information except
a. processing/preparing.
b. disseminating.
c. accessing capital.
d. auditing.
111. Which of the following is a benefit of providing financial information?
a. Potential litigation
b. Auditing
c. Disclosure to competition
d. Improved allocation of resources
112. Materiality is used in all of the following situations of providing financial information, except
a. where an amount is of relative large size and importance.
b. where it would impact the judgment of a reasonable person.
c. where it would not make a difference in the actions of a decision maker.
d. where omission of the information would result in bias.
113. What is prudence or conservatism?
a. Understating assets and net income
b. When in doubt, recognizing the option that is least likely to overstate assets and income
c. Recognizing the option that is least likely to overstate assets and income
d. Recognizing revenue when earned and realized
114. Expensing the cost of copy paper when the paper is acquired is an example
a. materiality.
b. expense recognition.
c. conservatism.
d. industry practices.
115. Which of the following statements concerning the cost-benefit relationship is not true?
a. Business reporting should exclude information outside of management's expertise.
b. Management should not be required to report information that would significantly harm the company's competitive position.
c. Management should not be required to provide forecasted financial information.
d. If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.
116. Which of the following relates to both relevance and faithful representation?
a. Cost constraint
b. Predictive value
c. Verifiability
d. Neutrality
117. Expensing the cost of a wastebasket with an estimated useful life of 10 years when purchased is an example of the application of the
a. consistency characteristic.
b. expense recognition principle.
c. materiality ingredient.
d. historical cost principle.
118. Which of the following statements about materiality is correct?
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
d. All of these answers are correct.
119. Which of the following is considered a pervasive constraint by Statement of Financial Accounting Concepts No. 8?
a. Comparability
b. Timeliness
c. Verifiability
d. Cost constraint
120. The cost constraint is also referred to as the
a. cost-benefit relationship.
b. materiality quality.
c. monetary unit assumption.
d. measurement principle.
121. The second level of the conceptual framework includes each of the following except
a. elements.
b. principles.
c. enhancing qualities.
d. fundamental qualities.
122. Trade-offs between the characteristics that make information useful may be necessary or beneficial. Issuance of interim financial statements is an example of a trade-off between
a. relevance and faithful representation.
b. faithful representation and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.
123. Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between
a. verifiability and faithful representation.
b. faithful representation and comparability.
c. timeliness and verifiability.
d. neutrality and consistency.
P124. The third level of the conceptual framework does not include
a. assumptions.
b. constraint.
c. elements.
d. principles.
55. A company changes its inventory method every few years in order to maximize reported income (other answers are possible).
58. Comparability.
62. Change in equity of an entity during a period from transactions and other events and circumstances from nonowner sources.
82. Going concern assumption.
87. The performance obligation is satisfied.
MULTIPLE CHOICE—CPA Adapted
125. According to the FASB's conceptual framework, predictive value is an ingredient of
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No Yes
d. No No
126. According to the FASB's conceptual framework, which of the following relates to both relevance and faithful representation?
Comparability Neutrality
a. Yes Yes
b. Yes No
c. No Yes
d. No No
127. The FASB's conceptual framework classifies gains and losses based on whether they are related to an entity's major ongoing or central operations. These gains or losses may be classified as
Nonoperating Operating
a. Yes No
b. Yes Yes
c. No Yes
d. No No
128. According to the FASB's conceptual framework, which of the following enhances information that is relevant and faithfully represented?
a. Neutrality.
b. Comparability.
c. Confirmatory value.
d. Materiality.
129. Under SFAC No.6, interrelated elements of financial statements that are directly related to measuring the performance and status of an enterprise include
Owners Distributions to Notes to Financial Statements
a. Yes No
b. Yes Yes
c. No Yes
d. No No
130. According to the FASB's conceptual framework, the calculation of comprehensive income includes which of the following?
Income from Distributions
Continuing Operations to Owners
a. No No
b. Yes No
c. Yes Yes
d. No Yes
131. According to the FASB's conceptual framework, what does the concept of faithful representation include?
a. Verifiability
b. Predictive value
c. Materiality
d. Neutrality
132. According to the FASB’s conceptual framework, which of the following is an essential characteristic of an asset?
a. The claims to an asset’s benefits are legally enforceable.
b. An asset is tangible.
c. An asset is obtained at a cost.
d. An asset provides future benefits.
133. Which of the following is an application of rational and systematic allocation?
a. Amortization of intangible assets.
b. Sales commissions.
c. Research and development costs.
d. Officers’ salaries.
BRIEF EXERCISES
BE. 2-134—Qualitative Characteristics.
Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.
Instructions.
(a) Describe briefly the following characteristics of useful accounting information.
(1) Relevance (4) Comparability
(2) Faithful representation (5) Consistency
(3) Understandability
(b) For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other.
(1) Relevance and faithful representation. (3) Comparability and consistency.
(2) Relevance and consistency. (4) Relevance and understandability.
(c) What criterion should be used to evaluate trade-offs between information characteristics?
BE. 2-135—Accounting concepts—identification.
State the accounting assumption, principle, or constraint that is most applicable in the following cases.
1. All payments less than $25 are expensed as incurred.
2. The company employs the same inventory valuation method from period to period.
3. A patent is capitalized and amortized over the periods benefited.
4. Assuming that dollars today will buy as much as ten years ago.
5. Rent paid in advance is recorded as prepaid rent.
6. Financial statements are prepared each year.
7. All significant post-balance sheet events are reported.
8. Personal transactions of the proprietor are distinguished from business transactions.
BE. 2-136—Accounting concepts—identification.
Presented below are a number of accounting procedures and practices at Ramirez Corp. For each of these items, list the assumption, principle, quality, or modifying convention that is violated.
1. Because the company's income is low this year, a switch from accelerated depreciation to straight-line depreciation is made this year.
2. The president of Ramirez Corp. believes it is foolish to report financial information on a yearly basis. Instead, the president believes that financial information should be disclosed only when significant new information is available related to the company's operations.
3. Ramirez Corp. decides to establish a large loss and related liability this year because of the possibility that it may lose a pending patent infringement lawsuit. The possibility of loss is considered remote by its attorneys.
4. An officer of Ramirez Corp. purchased a new home computer for personal use with company money, charging miscellaneous expense.
5. A machine, that cost $40,000, is reported at its current market value of $45,000.
EXERCISES
Ex. 2-137—Accounting concepts—matching.
Listed below are several information characteristics and accounting principles and assumptions. Match the letter of each with the appropriate phrase that states its application. (Items a through k may be used more than once or not at all.)
a. Economic entity assumption g. Expense recognition principle
b. Going concern assumption h. Full disclosure principle
c. Monetary unit assumption i. Relevance characteristic
d. Periodicity assumption j. Faithful representation characteristic
e. Historical cost principle k. Consistency characteristic
f. Revenue recognition principle
1. Stable-dollar assumption (do not use historical cost principle).
2. The performance obligation is satisfied.
3. Numbers and descriptions match what really existed or happened.
4. Yearly financial reports.
5. Accruals and deferrals in adjusting and closing process. (Do not use going concern.)
6. Useful standard measuring unit for business transactions.
7. Notes as part of necessary information to a fair presentation.
8. Affairs of the business distinguished from those of its owners.
9. Company assumed to have a long life.
10. Valuing assets at amounts originally paid for them.
11. Application of the same accounting principles as in the preceding year.
12. Summarizing significant accounting policies.
13. Presentation of timely information with predictive and confirmatory value.
Ex. 2-138—Accounting concepts—fill in the blanks.
Fill in the blanks below with the accounting principle, assumption, or related item that best completes the sentence.
1. ________________________ and _______________________ are the two fundamental qualities that make accounting information useful for decision making.
2. Information that helps users confirm or correct prior expectations has _________________
___________________.
3. ________________________ enables users to identify the real similarities and differences in economic events between companies.
4. _________________ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
5. Information is _______________________ if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.
6. The ________________________ characteristic requires that the same accounting method be used from one accounting period to the next, unless it becomes evident that an alternative method will bring about a better description of a firm's financial situation.
7. ____________________ means that a company cannot select information to favor one set of interested parties over another.
8. Providing information that is of sufficient importance to influence the judgement and decisions of an informed user is referred to as _______________________.
9. Corporations must prepare accounting reports at least yearly due to the _______________ assumption.
10. _________________ occurs when the performance obligation is satisfied.
Ex. 2-139—Basic assumptions.
Briefly explain the four basic assumptions that underlie financial accounting.
Ex. 2-140—Historical cost principle.
Cost as a basis of accounting for assets has been severely criticized. What defense can you build for cost as the basis for financial accounting?
Ex. 2-141—Expense recognition (matching) concept.
A concept is a group of related ideas. Matching could be considered a concept because it includes ideas related to expense recognition. Briefly explain the ideas in expense recognition.
IFRS QUESTIONS
True / False
1. The IASB and the FASB are working on a joint project to develop a common conceptual framework.
2. Under IFRS, expenses include losses that are not the result of ordinary activities.
3. Under IFRS, it is mandatory to report property, plant, and equipment at historical cost.
4. The number of financial statement elements in the IFRS conceptual framework is equal to those in GAAP.
5. The existing conceptual frameworks underlying GAAP and IFRS are very similar.
6. It is unlikely that the basic concepts related to the existing conceptual framework will change.
7. The IASB is considering a proposal to provide expanded guidance on estimating fair values.
8. GAAP has a concept statement to guide estimation of fair values when market-related data is not available.
9. The monetary unit assumption is a part of GAAP, but not IFRS.
10. A company incorporated in Japan uses the dollar as its unit of measurement.
Multiple Choice:
11. The IASB and the FASB are working on a joint project that has an objective of developing a conceptual framework that leads to standards that are:
a. rule-based and internally consistent.
b. principle-based and internally consistent.
c. rule-based and flexible in nature.
d. principle-based and rigid in nature.
12. Which of the following is an element of financial statements identified under IFRS?
a. Investment by owners
b. Losses
c. Comprehensive income
d. Equity
13. Under IFRS, a decrease in economic benefit that results in a decrease in equity is termed as a(an):
a. Loss of economic benefit
b. Comprehensive loss
c. Expense
d. Distributions to owners
14. What two assumptions are central to the IASB conceptual frame
work?
