Chapter 1 Environment and Theoretical Structure of Financial Accounting
True/False Questions
1. The primary function of financial accounting is to provide relevant financial information to
parties external to business enterprises.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-01
Topic Area: Environment of financial accounting and reporting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
2. Accrual accounting attempts to measure revenues and expenses that occurred during
accounting periods so they equal net operating cash flow.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-02
Topic Area: Cash versus accrual accounting
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
3. The FASB is currently the public-sector organization responsible for setting accounting
standards in the United States.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-03
Topic Area: Development of accounting and reporting standards
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
4. The FASB’s due process invites various interested parties to indicate their opinions about
whether financial accounting standards should be changed.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-04
Topic Area: GAAP―Standard-setting process
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
5. Accounting for stock-based compensation is an area in which the FASB has received little
political interference.
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–1
,Chapter 1 Environment and Theoretical Structure of Financial Accounting
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-04
Topic Area: GAAP―Standard-setting process
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
6. The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity
responsible for setting auditing standards in the United States.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
7. A rules-based approach to standard-setting stresses professional judgment as opposed to
following a list of rules.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
8. Under federal securities laws, the SEC has the authority to set accounting standards in the
United States.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-03
Topic Area: Development of accounting and reporting standards
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
9. The primary responsibility for properly applying GAAP when communicating with investors
and creditors through financial statements lies with a firm's auditors.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–2
,Chapter 1 Environment and Theoretical Structure of Financial Accounting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
10. Auditors play an important role in the resource allocation process by adding credibility to
financial statements.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
11. The purpose of the conceptual framework is to provide a structure and framework for a
consistent set of GAAP.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-06
Topic Area: Conceptual framework―Purpose
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
12. In the United States the conceptual framework indicates GAAP when a more specific
accounting standard does not apply.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-06
Topic Area: Conceptual framework―Purpose
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
13. Materiality can be affected by the dollar amount of an item, the nature of the item, or both.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Qualitative characteristics
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–3
, Chapter 1 Environment and Theoretical Structure of Financial Accounting
14. According to the FASB’s Statements of Financial Accounting Concepts, conservatism is a
desired qualitative characteristic of accounting information.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Qualitative characteristics
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
15. Equity is a residual amount representing the owner's interest in the assets of the business.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Elements of financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
16. Revenues are inflows or other enhancements of assets or settlements of liabilities from
activities that constitute the entity's ongoing operations.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Elements of financial statements s
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
17. Gains or losses result, respectively, from the disposition of business assets for greater than, or
less than, their book values.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Elements of financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
18. Comprehensive income is another term for net income.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-07
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–4
True/False Questions
1. The primary function of financial accounting is to provide relevant financial information to
parties external to business enterprises.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-01
Topic Area: Environment of financial accounting and reporting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
2. Accrual accounting attempts to measure revenues and expenses that occurred during
accounting periods so they equal net operating cash flow.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-02
Topic Area: Cash versus accrual accounting
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
3. The FASB is currently the public-sector organization responsible for setting accounting
standards in the United States.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-03
Topic Area: Development of accounting and reporting standards
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
4. The FASB’s due process invites various interested parties to indicate their opinions about
whether financial accounting standards should be changed.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-04
Topic Area: GAAP―Standard-setting process
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
5. Accounting for stock-based compensation is an area in which the FASB has received little
political interference.
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–1
,Chapter 1 Environment and Theoretical Structure of Financial Accounting
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-04
Topic Area: GAAP―Standard-setting process
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
6. The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity
responsible for setting auditing standards in the United States.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
7. A rules-based approach to standard-setting stresses professional judgment as opposed to
following a list of rules.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
8. Under federal securities laws, the SEC has the authority to set accounting standards in the
United States.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-03
Topic Area: Development of accounting and reporting standards
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Legal
9. The primary responsibility for properly applying GAAP when communicating with investors
and creditors through financial statements lies with a firm's auditors.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–2
,Chapter 1 Environment and Theoretical Structure of Financial Accounting
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
10. Auditors play an important role in the resource allocation process by adding credibility to
financial statements.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-05
Topic Area: Encouraging high-quality financial reporting
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
11. The purpose of the conceptual framework is to provide a structure and framework for a
consistent set of GAAP.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-06
Topic Area: Conceptual framework―Purpose
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
12. In the United States the conceptual framework indicates GAAP when a more specific
accounting standard does not apply.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-06
Topic Area: Conceptual framework―Purpose
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
13. Materiality can be affected by the dollar amount of an item, the nature of the item, or both.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Qualitative characteristics
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–3
, Chapter 1 Environment and Theoretical Structure of Financial Accounting
14. According to the FASB’s Statements of Financial Accounting Concepts, conservatism is a
desired qualitative characteristic of accounting information.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Qualitative characteristics
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
15. Equity is a residual amount representing the owner's interest in the assets of the business.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Elements of financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
16. Revenues are inflows or other enhancements of assets or settlements of liabilities from
activities that constitute the entity's ongoing operations.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Elements of financial statements s
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
17. Gains or losses result, respectively, from the disposition of business assets for greater than, or
less than, their book values.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 01-07
Topic Area: Concepts―Elements of financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
18. Comprehensive income is another term for net income.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 01-07
Intermediate Accounting, Ninth Edition, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education. 1–4
