QUESTIONS Exam 1 University of Utah Accounting 5110
1. What is meant by the phrase efficient allocation of resources? What mech- anism fosters the
efficient allocation of resources in the United States?: Re- sources are efficiently allocated if they
are given to enterprises that will use them to provide goods and services desired by society and
not to enterprises that will waste them. The capital markets are the mechanism that fosters this
efficient allocation of resources.
2. What is the primary objective of financial accounting?: The primary objective of financial
accounting is to provide investors and creditors with information that will help them make
investment and credit decisions.
3. What is meant by GAAP? Why should all companies follow GAAP in report- ing to external users?:
GAAP (generally accepted accounting principles) are a dynamic set of both broad and specific
guidelines that a company should follow in measuring and reporting the information in their
financial statements and related notes. It is important that all companies follow GAAP so that
investors can compare financial information across companies to make their resource allocation
decisions.
4. Explain the roles of the SEC and the FASB in the setting of accounting standards.: In 1934,
Congress created the SEC and gave it the job of setting accounting and reporting standards for
companies whose securities are publicly traded. The SEC has retained the power, but has
delegated the task to private sector bodies. The current private sector body responsible for
setting accounting standards is the FASB.
5. List three key provisions of the Sarbanes-Oxley Act of 2002. Order your list from most important to
least important in terms of the likely long-term impact on the accounting profession and financial
reporting.: -Creation of an Oversight Board
-Corporate executive accountability
-Nonaudit services
6. What is the purpose of the FASB's conceptual framework?: The purpose of the conceptual
framework is to guide the Board in developing accounting standards by providing an underlying
foundation and basic reasoning on which to consider merits of alternatives. The framework does
not prescribe GAAP.
7. Discuss the terms relevance and faithful representation as they relate to financial accounting
information.: Relevance and faithful representation are the primary qualitative characteristics
that make information decision-useful. Relevant information will possess predictive and/or
confirmatory value. Faithful representation is the extent to which there is agreement between a
measure or description and the phenomenon it purports to represent.
8. What is meant by the term materiality in financial reporting?: Information is material if it is
deemed to have an effect on a decision made by a user. The
For assistance with assignments and revision materials contact
, QUESTIONS Exam 1 University of Utah Accounting 5110
threshold for materiality will depend principally on the relative dollar amount of the transaction
being considered. One consequence of materiality is that GAAP need not be followed in
measuring and reporting a transaction if that transaction is not material. The threshold for
materiality has been left to subjective judgment
9. What are the four basic assumptions underlying GAAP?: The four basic assumptions underlying
GAAP are (1) the economic entity assumption, (2) the going concern assumption, (3) the
periodicity assumption, and (4) the monetary unit assumption
10.Explain the difference between permanent accounts and temporary ac- counts. Why does an
accounting system include both types of accounts?: Per- manent accounts represent the financial
position of a company—assets, liabilities and owners' equity—at a particular point in time.
Temporary accounts represent the changes in shareholders' equity, the retained earnings
component of equity for a corporation, caused by revenue, expense, gain, and loss transactions.
It would be cumbersome to record revenue/expense, gain/loss transactions directly into the
permanent retained earnings account. Recording these transactions in temporary accounts
facilitates the preparation of the financial statements.
11.Describe how debits and credits affect assets, liabilities, and permanent owners' equity
accounts.: Assets are increased by debits and decreased by credits. Liabilities and equity
accounts are increased by credits and decreased by debits.
12.Describe how debits and credits affect temporary owners' equity ac- counts.: Revenues and
gains are increased by credits and decreased by debits. Expenses and losses are increased
by debits (thus causing owners' equity to decrease) and decreased by credits (thus causing
owners' equity to increase).
13.Define adjusting entries and discuss their purpose.: Adjusting entries record the effect on
financial position of internal events, those that do not involve an exchange transaction with
another entity. They must be recorded at the end of any period when financial statements are
prepared to properly reflect financial position and results of operations according to the accrual
accounting model.
14.Define prepaid expenses and provide at least two examples.: Prepaid ex- penses represent
assets recorded when a cash disbursement creates benefits beyond the current reporting
period. Examples are supplies on hand at the end of a period, prepaid rent, and the cost of plant
and equipment.
15.Define accrued liabilities. What adjusting journal entry is required to record accrued liabilities?:
Accrued liabilities are recorded when an expense has been incurred that will not be paid until a
subsequent reporting period. The adjusting entry required to record an accrued liability is a
debit to ane xpense and a credit to a liability.
For assistance with assignments and revision materials contact
1. What is meant by the phrase efficient allocation of resources? What mech- anism fosters the
efficient allocation of resources in the United States?: Re- sources are efficiently allocated if they
are given to enterprises that will use them to provide goods and services desired by society and
not to enterprises that will waste them. The capital markets are the mechanism that fosters this
efficient allocation of resources.
2. What is the primary objective of financial accounting?: The primary objective of financial
accounting is to provide investors and creditors with information that will help them make
investment and credit decisions.
3. What is meant by GAAP? Why should all companies follow GAAP in report- ing to external users?:
GAAP (generally accepted accounting principles) are a dynamic set of both broad and specific
guidelines that a company should follow in measuring and reporting the information in their
financial statements and related notes. It is important that all companies follow GAAP so that
investors can compare financial information across companies to make their resource allocation
decisions.
4. Explain the roles of the SEC and the FASB in the setting of accounting standards.: In 1934,
Congress created the SEC and gave it the job of setting accounting and reporting standards for
companies whose securities are publicly traded. The SEC has retained the power, but has
delegated the task to private sector bodies. The current private sector body responsible for
setting accounting standards is the FASB.
5. List three key provisions of the Sarbanes-Oxley Act of 2002. Order your list from most important to
least important in terms of the likely long-term impact on the accounting profession and financial
reporting.: -Creation of an Oversight Board
-Corporate executive accountability
-Nonaudit services
6. What is the purpose of the FASB's conceptual framework?: The purpose of the conceptual
framework is to guide the Board in developing accounting standards by providing an underlying
foundation and basic reasoning on which to consider merits of alternatives. The framework does
not prescribe GAAP.
7. Discuss the terms relevance and faithful representation as they relate to financial accounting
information.: Relevance and faithful representation are the primary qualitative characteristics
that make information decision-useful. Relevant information will possess predictive and/or
confirmatory value. Faithful representation is the extent to which there is agreement between a
measure or description and the phenomenon it purports to represent.
8. What is meant by the term materiality in financial reporting?: Information is material if it is
deemed to have an effect on a decision made by a user. The
For assistance with assignments and revision materials contact
, QUESTIONS Exam 1 University of Utah Accounting 5110
threshold for materiality will depend principally on the relative dollar amount of the transaction
being considered. One consequence of materiality is that GAAP need not be followed in
measuring and reporting a transaction if that transaction is not material. The threshold for
materiality has been left to subjective judgment
9. What are the four basic assumptions underlying GAAP?: The four basic assumptions underlying
GAAP are (1) the economic entity assumption, (2) the going concern assumption, (3) the
periodicity assumption, and (4) the monetary unit assumption
10.Explain the difference between permanent accounts and temporary ac- counts. Why does an
accounting system include both types of accounts?: Per- manent accounts represent the financial
position of a company—assets, liabilities and owners' equity—at a particular point in time.
Temporary accounts represent the changes in shareholders' equity, the retained earnings
component of equity for a corporation, caused by revenue, expense, gain, and loss transactions.
It would be cumbersome to record revenue/expense, gain/loss transactions directly into the
permanent retained earnings account. Recording these transactions in temporary accounts
facilitates the preparation of the financial statements.
11.Describe how debits and credits affect assets, liabilities, and permanent owners' equity
accounts.: Assets are increased by debits and decreased by credits. Liabilities and equity
accounts are increased by credits and decreased by debits.
12.Describe how debits and credits affect temporary owners' equity ac- counts.: Revenues and
gains are increased by credits and decreased by debits. Expenses and losses are increased
by debits (thus causing owners' equity to decrease) and decreased by credits (thus causing
owners' equity to increase).
13.Define adjusting entries and discuss their purpose.: Adjusting entries record the effect on
financial position of internal events, those that do not involve an exchange transaction with
another entity. They must be recorded at the end of any period when financial statements are
prepared to properly reflect financial position and results of operations according to the accrual
accounting model.
14.Define prepaid expenses and provide at least two examples.: Prepaid ex- penses represent
assets recorded when a cash disbursement creates benefits beyond the current reporting
period. Examples are supplies on hand at the end of a period, prepaid rent, and the cost of plant
and equipment.
15.Define accrued liabilities. What adjusting journal entry is required to record accrued liabilities?:
Accrued liabilities are recorded when an expense has been incurred that will not be paid until a
subsequent reporting period. The adjusting entry required to record an accrued liability is a
debit to ane xpense and a credit to a liability.
For assistance with assignments and revision materials contact
