Test Bank CHAPTER 1 FINANCIAL ACCOUNTING AND

FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS IFRS questions are available at the end of this chapter. TRUE-FALSE—Conceptual Answer No. Description F 1. Definition of financial accounting. T 2. Purpose of financial statements. T 3. Definition of financial accounting. T 4. Capital allocation process. F 5. Objective of financial reporting. T 6. Decision-Usefulness approach. T 7. Users of financial statements. F 8. Committee on Accounting Procedure. F 9. Passage of FASB standards. T 10. Financial Accounting Concepts. T 11. Creation of Accounting Principles Board. F 12. FASB Codification. T 13. Code of Professional Conduct. F 14. GAAP and political action. T 15. Public Company Accounting Oversight Board. T 16. Expectations gap. F 17. Financial reports. F 18. Fair value information. F 19. International Financial Reporting Standards. F 20. Ethical issues. MULTIPLE CHOICE—Conceptual Answer No. Description a 21. Financial accounting. d 22. Users of financial reports. d 23. Identify the major financial statements. a 24. Financial reporting entity. d 25. Differences between financial and managerial accounting. b 26. Financial reporting communication. b 27. Managerial accounting. a 28. Capital allocation process. d 29. Efficient use of resources. d 30. Capital allocation process. c 31. Financial statement information. c 32. Accounting profession challenge. c 33. Financial reporting objective. d 34. Financial statements primary users. c 35. Investor’s decision making. MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description b 36. Accrual accounting. c 37. Objective of financial reporting perspective. c 38. Meaning of “generally accepted.” b 39. Common set of standards and procedures. a 40. Limitation of general purpose financial statements. c 41. Securities and Exchange Commission and accounting standard setting. d 42. Due process in FASB standard setting. d 43. Organizations responsible for setting accounting standards. b 44. Reason for Accounting Principles Board creation b 45. Organization issuing Accounting Research Bulletins. a 46. Characteristic of GAAP. c 47. Characteristics of GAAP. d 48. FASB accounting standards. c 49. FASB standard passage. b 50. Purpose of Emerging Issues Task Force. a 51. AICPA role in standard setting. c 52. Role of SEC. c 53. Powers of the SEC. d 54. SEC enforcement. d 55. Creation of FASB. d 56. Appointment of FASB members. a 57. Purpose of the Financial Accounting Foundation. b 58. Characteristics of FASB. b 59. FASB and "due process" system. b 60. Publications of FASB. c 61. Purpose of FASB Technical Bulletins. d 62. Purpose of Emerging Issues Task Force. b 63. Role of the AICPA. b 64. Pronouncement issued by the APB. c 65. Standard setting organizations. d 66. Identification of standard setting organizations. c 67. Statements of financial accounting concepts. d P68. FASB members. d P69. FASB statement process. d 70. Nature of GAAP. d 71. Body which promulgates GAAP. d 72. Publications which are not GAAP. d 73. Publications which are not GAAP. b 74. Code for Professional Conduct Rule 203. c 75. Purpose of FASB staff position. c 76. Components of GAAP. a 77. Political environment of standard setting. c 78. International Accounting Standards Board. MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description d 79. Standard setting process pressure. a 80. Danger of politics in standard setting c 81. Definition of "expectation gap". b 82. Reason accounting standards differ across countries. d 83. Advantage of countries adopting same accounting standards. a 84. Ethical concern of accountants. P Note: these questions also appear in the Problem-Solving Survival Guide. EXERCISES Item Description E1-85 Objectives of financial reporting. E1-86 Development of accounting principles. E1-87 Publications and organizations. E1-88 FASB. E1-89 Evolution of a statement of financial accounting standards. CHAPTER LEARNING OBJECTIVES 1. Identify the major financial statements and other means of financial reporting. 2. Explain how accounting assists in the efficient use of scarce resources. 3. Identify the objectives of financial reporting. 4. Explain the need for accounting standards. 5. Identify the major policy-setting bodies and their role in the standard-setting process. 6. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. 7. Describe the impact of user groups on the rule-making process. 8. Describe some of the challenges facing financial reporting. 9. Understand issues related to ethics and financial accounting. SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1 1. TF 21. MC 23. MC 25. MC P27. MC 2. TF 22. MC 24. MC 26. MC Learning Objective 2 3. TF 4. TF 28. MC 29. MC 30. MC Learning Objective 3 5. TF 33. MC 35. MC 37. MC 6. TF 34. MC 36. MC 85. E Learning Objective 4 7. TF 38. MC 39. MC 40. MC 86. E Learning Objective 5 8. TF 43. MC 49. MC 55. MC 61. MC 67. MC 89. E 9. TF 44. MC 50. MC 56. MC 62. MC P68. MC 10. TF 45. MC 51. MC 57. MC 63. MC P69. MC 11. TF 46. MC 52. MC 58. MC 64. MC P86. E 41. MC 47. MC 53. MC 59. MC 65. MC 87. E 42. MC 48. MC 54. MC 60. MC 66. MC 88. E Learning Objective 6 12. TF 70. MC 72. MC 74. MC 76. MC 13. TF 71. MC 73. MC 75. MC Learning Objective 7 14. TF 16. TF 77. MC 79. MC 81. MC 83. E 15. TF 62. MC 78. MC 80. MC 82. MC Learning Objective 8 17. TF 18. TF 19. TF 31. MC 32. MC Learning Objective 9 20. TF 84. MC Note: TF = True-False MC = Multiple Choice E = Exercise TRUE-FALSE—Conceptual 1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control a company’s operations. 2. Financial statements are the principal means through which a company communicates its financial information to those outside it. 3. Users of financial reports provided by a company use that information to make their capital allocation decisions. 4. An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit. 5. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, but not to users who are not investors. 6. Investors are interested in financial reporting because it provides information that is useful for making decisions (decision-usefulness approach). 7. Users of financial accounting statements have both coinciding and conflicting needs for information of various types. 8. The Securities and Exchange Commission appointed the Committee on Accounting Procedure. 9. The passage of a new FASB Standards Statement requires the support of five of the seven board members. 10. Financial Accounting Concepts set forth fundamental objectives and concepts that are used in developing future standards of financial accounting and reporting. 11. The AICPA created the Accounting Principles Board in 1959. 12. The FASB’s Codification integrates existing GAAP, and creates new GAAP. 13. The AICPA’s Code of Professional Conduct requires that members prepare financial statements in accordance with generally accepted accounting principles. 14. GAAP is a product of careful logic or empirical findings and are not influenced by political action. 15. The Public Company Accounting Oversight Board has oversight and enforcement authority and establishes auditing and independence standards and rules. 16. The expectations gap is caused by what the public thinks accountants should do and what accountants think they can do. 17. Financial reports in the early 21st century did not provide any information about a company’s soft assets (intangibles). 18. Accounting standards are now less likely to require the recording or disclosure of fair value information. 19. U.S. companies that list overseas are required to use International Financial Reporting Standards, issued by the International Accounting Standards Board. 20. Ethical issues in financial accounting are governed by the AICPA. True-False Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. 1. F 6. T 11. T 16. T 2. T 7. T 12. F 17. F 3. T 8. F 13. T 18. F 4. T 9. F 14. F 19. F 5. F 10. T 15. T 20. F MULTIPLE CHOICE—Conceptual 21. General-purpose financial statements are the product of a. financial accounting. b. managerial accounting. c. both financial and managerial accounting. d. neither financial nor managerial accounting. 22. Users of financial reports include all of the following except a. creditors. b. government agencies. c. unions. d. All of these are users. 23. The financial statements most frequently provided include all of the following except the a. balance sheet. b. income statement. c. statement of cash flows. d. statement of retained earnings. 24. The information provided by financial reporting pertains to a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers. c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers. d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries. 25. All the following are differences between financial and managerial accounting in how accounting information is used except to a. plan and control company's operations. b. decide whether to invest in the company. c. evaluate borrowing capacity to determine the extent of a loan to grant. d. All the above. 26. Which of the following represents a form of communication through financial reporting but not through financial statements? a. Balance sheet. b. President's letter. c. Income statement. d. Notes to financial statements. P27. The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called a. financial accounting. b. managerial accounting. c. tax accounting. d. auditing. 28. How does accounting help the capital allocation process attract investment capital? a. Provides timely, relevant information. b. Encourages innovation. c. Promotes productivity. d. a and b above. 29. Whether a business is successful and thrives is determined by a. markets. b. free enterprise. c. competition. d. all of these. 30. An effective capital allocation process a. promotes productivity. b. encourages innovation. c. provides an efficient market for buying and selling securities. d. all of these. 31. Financial statements in the early 2000s provide information related to a. nonfinancial measurements. b. forward-looking data. c. hard assets (inventory and plant assets). d. none of these. 32. Which of the following is not a major challenge facing the accounting profession? a. Nonfinancial measurements. b. Timeliness. c. Accounting for hard assets. d. Forward-looking information. 33. What is the objective of financial reporting? a. Provide information that is useful to management in making decisions. b. Provide information that clearly portray nonfinancial transactions. c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors. d. Provide information that excludes claims to the resources. 34. Primary users for general-purpose financial statements include a. creditors. b. employees. c. investors. d. both creditors and investors. 35. When making decisions, investors are interested in assessing a. the company’s ability to generate net cash inflows. b. management’s ability to protect and enhance the capital providers’ investments. c. Both a and b. d. the company’s ability to generate net income. 36. Accrual accounting is used because a. cash flows are considered less important. b. it provides a better indication of ability to generate cash flows than the cash basis. c. it recognizes revenues when cash is received and expenses when cash is paid. d. none of the above. 37. Which perspective is adopted as part of the objective of general-purpose financial reporting? a. Decision-usefulness perspective. b. Proprietary perspective. c. Entity perspective. d. Financial reporting perspective. 38. Accounting principles are "generally accepted" only when a. an authoritative accounting rule-making body has established it in an official pro-nouncement. b. it has been accepted as appropriate because of its universal application. c. both a and b. d. neither a nor b. 39. A common set of accounting standards and procedures are called a. financial accounting standards. b. generally accepted accounting principles. c. objectives of financial reporting. d. statements of financial accounting concepts. 40. Which of the following is a general limitation of "general purpose financial statements"? a. General purpose financial statements may not be the most informative for a specific enterprise. b. General purpose financial statements are comparable. c. General purpose financial statements are assumed to present fairly the company's financial operations. d. None of the above. 41. What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States? a. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC. b. The SEC coordinates with the AICPA in establishing accounting standards. c. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction. d. The SEC reviews financial statements for compliance. 42. What is due process in the context of standard setting at the FASB? a. FASB operates in full view of the public. b. Public hearings are held on proposed accounting standards. c. Interested parties can make their views known. d. All of the above. 43. Which of the following organizations has been responsible for setting U.S. accounting standards? a. Accounting Principles Board. b. Committee on Accounting Procedure. c. Financial Accounting Standards Board. d. All of the above. 44. Why did the AICPA create the Accounting Principles Board? a. The SEC disbanded the previous standard setting organization. b. The previous standard setting organization did not provide a structured set of accounting principles. c. No such organization existed in the past. d. None of the above. 45. Which organization was responsible for issuing Accounting Research Bulletins? a. Accounting Principles Board. b. Committee on Accounting Procedure. c. The SEC. d. AICPA. 46. A characteristic of generally accepted accounting principles include the following: a. common set of standards and principles. b. standards and principles are based federal statutes. c. acceptance requires an affirmative vote of Certified Public Accountants. d. practices that become accepted for at least a year by all industry members. 47. Characteristics of generally accepted accounting principles include all of the following except a. authoritative accounting the rule-making body established a principle of reporting. b. standards are considered useful by the profession. c. each principle is approved by the SEC. d. practice has become universally accepted over time. 48. Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight? a. Smaller membership. b. FASB board members are well-paid. c. FASB board members must be CPAs. d. Due process. 49. The passage of a new FASB Standards Statement requires the support of a. all Board members. b. three Board members. c. four Board members. d. five Board members. 50. What is the purpose of Emerging Issues Task Force? a. Provide interpretation of existing standards. b. Provide a consensus on how to account for new and unusual financial transactions. c. Provide interpretive guidance. d. Provide timely guidance on select issues. 51. Which organization is responsible for issuing Emerging Issues Task Force Statements? a. FASB b. CAP c. APB d. SEC 52. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as a. consistently primary. b. consistently secondary. c. sometimes primary and sometimes secondary. d. non-existent. 53. The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the a. FASB. b. AICPA. c. SEC. d. APB. 54. Companies that are listed on a stock exchange are required to submit their financial statements to the a. AICPA. b. APB c. FASB. d. SEC. 55. The Financial Accounting Standards Board (FASB) was proposed by the a. American Institute of Certified Public Accountants. b. Accounting Principles Board. c. Study Group on the Objectives of Financial Statements. d. Special Study Group on establishment of Accounting Principles (Wheat Committee). 56. The Financial Accounting Standards Board a. has issued a series of pronouncements entitled Statements on Auditing Standards. b. was the forerunner of the current Accounting Principles Board. c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards. d. is appointed by the Financial Accounting Foundation. 57. The Financial Accounting Foundation a. oversees the operations of the FASB. b. oversees the operations of the AICPA. c. provides information to interested parties on financial reporting issues. d. works with the Financial Accounting Standards Advisory Council to provide informa-tion to interested parties on financial reporting issues. 58. The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is a. the FASB issues exposure drafts of proposed standards. b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions. c. all members of the FASB possess extensive experience in financial reporting. d. a majority of the members of the FASB are CPAs drawn from public practice. 59. The Financial Accounting Standards Board employs a "due process" system which a. is an efficient system for collecting dues from members. b. enables interested parties to express their views on issues under consideration. c. identifies the accounting issues that are the most important. d. requires that all accountants must receive a copy of financial standards. 60. Which of the following is not a publication of the FASB? a. Statements of Financial Accounting Concepts b. Accounting Research Bulletins c. Interpretations d. Technical Bulletins 61. FASB Technical Bulletins a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's Code of Professional Ethics. b. are issued monthly by the FASB to deal with current topics. c. are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with any broad fundamental accounting principle. d. were recently discontinued by the FASB because they dealt with specialized topics having little impact on financial reporting in general. 62. The purpose of the Emerging Issues Task Force is to a. develop a conceptual framework as a frame of reference for the solution of future problems. b. lobby the FASB on issues that affect a particular industry. c. do research on issues that relate to long-term accounting problems. d. issue statements which reflect a consensus on how to account for new and unusual financial transactions that need to be resolved quickly. 63. The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except a. developing and enforcing professional ethics. b. developing auditing standards. c. providing professional education programs. d. all of the above. P64. Which of the following pronouncements were issued by the Accounting Principles Board? a. Accounting Research Bulletins b. Opinions c. Statements of Position d. Statements of Financial Accounting Concepts 65. Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States? a. AICPA b. FASB c. IASB d. SEC 66. An organization that has not published accounting standards is the a. American Institute of Certified Public Accountants. b. Securities and Exchange Commission. c. Financial Accounting Standards Board. d. All of these have published accounting standards. 67. The purpose of Statements of Financial Accounting Concepts is to a. establish GAAP. b. modify or extend the existing FASB Standards Statement. c. form a conceptual framework for solving existing and emerging problems. d. determine the need for FASB involvement in an emerging issue. P68. Members of the Financial Accounting Standards Board are a. employed by the American Institute of Certified Public Accountants (AICPA). b. part-time employees. c. required to hold a CPA certificate. d. independent of any other organization. P69. The following are part of the "due process" system used by the FASB in the evolution of a typical FASB Statement of Financial Accounting Standards: 1. Exposure Draft 2. Statement of Financial Accounting Standards 3. Preliminary Views The chronological order in which these items are released is as follows: a. 1, 2, 3. b. 1, 3, 2. c. 2, 3, 1. d. 3, 1, 2. 70. Generally accepted accounting principles a. include detailed practices and procedures as well as broad guidelines of general application. b. are influenced by pronouncements of the SEC and IRS. c. change over time as the nature of the business environment changes. d. all of these. 71. The most significant current source of generally accepted accounting principles is the a. AICPA. b. SEC. c. APB. d. FASB. 72. Which of the following is not a part of generally accepted accounting principles? a. FASB Interpretations b. CAP Accounting Research Bulletins c. APB Opinions d. All of these are part of generally accepted accounting principles. 73. Which of the following publications does not qualify as a statement of generally accepted accounting principles? a. Statements of financial standards issued by the FASB b. Accounting interpretations issued by the FASB c. APB Opinions d. Accounting research studies issued by the AICPA 74. Rule 203 of the Code of Professional Conduct addresses: a. ethical requirements. b. financial statements should be based on generally accepted accounting principles. c. advertising to obtained clients. d. auditing financial statements. 75. What is the purpose of a FASB Staff Position? a. Provide interpretation of existing standards. b. Provide a consensus on how to account for new and unusual financial transactions. c. Provide interpretive guidance. d. Provide timely guidance on select issues. 76. Which of the following is not considered a component of generally accepted accounting principles? a. FASB Implementation Guides. b. Widely recognized industry practices. c. Articles published in CPA journals. d. AICPA Accounting Interpretations. 77. Financial accounting standard-setting in the United States a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. b. is based solely on research and empirical findings. c. is a legalistic process based on rules promulgated by governmental agencies. d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable. 78. The purpose of the International Accounting Standards Board is to a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. c. promote uniform accounting standards among countries of the world. d. arbitrate accounting disputes between auditors and international companies. 79. What is not a source of pressure that may influence the accounting standard setting process? a. Congress. b. Lobbyist. c. CPA firms. d. None of the above. 80. What is a possible danger if politics plays too big a role in accounting standard setting? a. Accounting standards that are not truly generally accepted. b. Individuals may influence the standards. c. User groups become active. d. The FASB delegates its authority to elected officials. 81. What is "expectation gap"? a. The difference between what the public thinks the accountant is not doing and what the accountant knows they don't do. b. The difference between what the public thinks the accountant is doing and what Congress says the accountant is doing. c. The difference between what the public thinks the accountant is doing and what the accountant thinks they can do. d. The difference between what the accountant is doing and what the Courts say the accountant should be doing. 82. What is not a reason that accounting standards may differ across countries? a. Governments. b. Language. c. Culture. d. Past Practice. 83. What would be an advantage of having all countries adopt and follow the same accounting standards? a. Consistency. b. Comparability. c. Lower preparation costs. d. b and c 84. Which of the following is an ethical concern of accountants? a. Earnings manipulation. b. Conservative accounting. c. Industry practices. d. None of the above. Multiple Choice Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. a 31. c 41. c 51. a 61. c 71. d 81. c 22. d 32. c 42. d 52. c 62. d 72. d 82. b 23. d 33. c 43. d 53. c 63. b 73. d 83. d 24. a 34. d 44. b 54. d 64. b 74. b 84. a 25. d 35. c 45. b 55. d 65. c 75. c 26. b 36. b 46. a 56. d 66. d 76. c 27. b 37. c 47. c 57. a 67. c 77. a 28. a 38. c 48. d 58. b 68. d 78. c 29. d 39. b 49. c 59. b 69. d 79. d 30. d 40. a 50. b 60. b 70. d 80. a EXERCISES Ex. 1-85—Objective of financial reporting. What is the objective of financial reporting? How do general-purpose financial statements help meet this objective. Solution 1-85 The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity. General-purpose financial statements provide financial reporting information to a wide variety of users. They help shareholders, creditors, employees, and regulators to better understand a company’s financial position and related performance. Ex. 1-86—Development of accounting principles. Presented below are three independent, unrelated statements regarding the formulation of generally accepted accounting principles. Each statement contains some incorrect or debatable statement(s). Statement I The users of financial accounting statements have coinciding and conflicting needs for statements of various types. To meet these needs, and to satisfy the financial reporting responsibility of management, accountants prepare different sets of financial statements for different users. Statement II The FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession. The FASB therefore will succeed because it will deal effectively with all interested groups. Statement III The Securities and Exchange Commission is very concerned about financial reporting and has formulated a committee called the Accounting Standards Executive Committee (AcSEC) to provide input to the FASB. In addition, after each FASB Statement is issued, the AcSEC issues Statements of Position stating its position on the FASB statement. Instructions Evaluate each of the independent statements and identify the areas of fallacious reasoning in each. Explain why the reasoning is incorrect. Complete your discussion of each statement before proceeding to the next statement.