Accounting 301 Ch. 2 – Flashcards
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The FASB's Conceptual Framework establishes _______ establishing consistent, high-quality financial accounting standards
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a theoretical foundation for
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The Conceptual Framework is expected to do all of the following except:
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Ensure that CPAs act ethically in discharging their stewardship role
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What is the most general objective of financial reporting?
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To provide information that is useful in making decisions about providing resources to the entity
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Information that would be useful to existing and potential investors in making decisions about buying, selling, or holding equity instruments is specifically covered by which of the following? 1. Conceptual Framework 2. Objective: Useful Information for Expected Returns to Investors, Lenders, and Other Creditors 3. Accounting Standards Codification
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2 only
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Information that would be useful to existing and potential investors to help them assess the amount, timing, and uncertainty of the prospects for future net cash inflows to the company is specifically covered by which of the following?
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Objective: Useful information about Net Cash Inflows to the Company
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External stakeholders use information about a company's comprehensive income and it's components to:
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Assess the return a company has earned on its economic resources and form expectations about its future performance
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Information about a company's financial performance helps users to understand how:
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Well management satisfies responsibilities to efficiently and effectively use resources
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What are the two primary qualities of the overall qualitative characteristic of useful accounting information?
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Relevance and faithful representation
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Characteristics of relevant accounting information include:
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Information helps users form expectations about the future Information provides feedback to confirm or correct prior predictions and expectations
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A company may decided not to disclose certain information because:
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The user has no need for the information The amount is too small to make a difference
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The characteristic of faithful representation of accounting information does not include:
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Material
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identifies and explains the similarities and differences between two or more sets of economic facts
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Comparability of accounting information
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applies accounting methods in a similar manner from period to period
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Consistency of accounting information
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means the FASB must have reasonable assurance that the costs of implementing a standard will not exceed the benefits
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Cost Constraint
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For corporations the reporting entity _______ the common equity shareholders who own the company. In sole proprietorships, the transactions and events of the business are reported ______ the proprietor's personal transactions.
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Distinct from Separately
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A violation of the going concern assumption
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May prevent a company from recognizing assets that represent future economic benefits
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______ an item must meet the definition of an element; be measurable; be relevant; and, be representationally faithful.
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Recognized
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The objective to appropriately measure financial position and financial performance each period
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Accrual Accounting
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Which principles may a company use to determine which expenses to recognize in a particular period?
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Cause and effect Systematic and rational allocation Immediate consumption
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A practical approach to avoid misleading investors, lenders and other creditors when valuations are uncertain
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Conservatism
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Under GAAP, the financial statements should include:
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Notes to explain the methods and estimates the company used. Required supplementary information
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To be relevant an earnings report is expected to have:
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Predictive value confirmatory value
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Which characteristic states that accounting information should be supported by sufficient evidence to allow two or more qualified individuals to arrive at similar measures and conclusions
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Verifiability
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Which characteristic enhances decision-useful information
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timeliness
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Which of the following means the process of formally recording and reporting an item in the financial statements of a company
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Recognition
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Accruing net losses on obsolete inventory is an example of the accounting concept of?
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Conservatism
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An expense that has been incurred but not paid
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Accrued
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What is a characteristic of faithful representation
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neutrality
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Management discussion and analysis would be included in the supplementary information to the financial statements
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False
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The FASB and IASB concluded that most general objective of financial reporting is to
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provide information useful in the decisions made by external users
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The joint IASB and FASB boards identified several "enhancing" decision useful characteristics of financial information including
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Comparability verifiability timeliness materiality
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Primary user groups of financial information
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Capital providers equity investors lenders
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According to the FASB hierarchy of fundamental qualitative characteristics, the two primary qualities that make accounting information useful
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relevance and faithful representation
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Accrual accounting relates the financial effects of a company's transactions
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To the period in which they occur rather than to when the cash receipts or payments occur.
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To measure assets, liabilities, revenues, expenses, and other elements of the financial statements with the most relevant and faithful measurement available
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Mixed Attribute Model
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What is the ultimate objective of accounting information
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Decision Usefulness
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Which of the following statements is not true with regard to the benefits derived from the FASB's conceptual framework of accounting?
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The Statement of Financial Accounting Concepts is the primary source of GAAP for accountants
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How many Statements of Financial Accounting Concepts have been issued?
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7
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The first part of the conceptual framework project had to do with
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Objectives
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The accounting projects portion of the FASB's conceptual framework project deals with
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which accounting elements should be reported and how they should be measured
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The FASB divided its conceptual framework activities into several projects. Which of the following was not one of those projects?
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Financial reporting Project
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The accounting projects portion of the FASB's conceptual framework project deals with all of the following except
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How financial reports should be displayed
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The FASB has determined that the primary focus of financial reporting about entity's performance is information on
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comprehensive income its components
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The FASB concluded that the most general objective of financial reporting is to
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provide information useful in the decisions made by external users
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According to GAAP, which is not a specific objective?
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to provide information that is useful to present to a potential investors, creditors and other users in making rational investment, credit, and similar decisions
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Information about comprehensive income is useful to external users for all of the following purposes except
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examining cash flows for the current period
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In its "Objectives of Financial Reporting by Business Enterprises" the FASB identified a variety of primary users including all of the following except
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internal management
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GAAP emphasizes the importance of full disclosure by management including all of the following enhancements except
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outlines of internal control procedures
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Which of the following is a specific objective of financial reporting?
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provide information about a company's economic resources, obligations, and owner's equity
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A primary focus of financial reporting about a company's performance during an accounting period is information related to the company's
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comprehensive income
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Accrual accounting relates the financial effects of a company's transactions
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to the period in which they occur rather than to when the cash receipts or payments occurs
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Which of the following statements regarding financial flexibility is true?
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It is the ability of a company to take effective actions to change the amounts and timing of cash flows
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Which of the following types of information was specifically identified by the FASB as being useful in assessing the amounts, timing, and uncertainty of a company's future cash flows?
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liquidity
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When investors and creditors make investment and credit decisions, they need information to assist them in assessing future cash receipts. Their focus is on assessing the potential of generating
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both a return of and a return on investment of capital
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Which qualitative characteristic is an ingredient of relevance
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timeliness
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According to the FASB hierarchy of qualitative characteristics, the two primary qualities making accounting information useful are
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relevance and reliability
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Which qualitative characteristic is an ingredient of reliability?
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Neutrality
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According to GAAP, verifiability is an ingredient of reliability
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Reliability
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In order to be relevant, accounting information should have
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timeliness
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Which of the following qualitative characteristics may have to be sacrificed in order to achieve timeliness
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reliability
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Representational faithfulness is a relationship between the reported accounting measurements or descriptions and the economic resources, obligations, and the transactions and events causing changes in these items. This is important because the
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Bias associated with financial measurements can be reduced
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Which of the following are considered secondary characteristics of accounting information?
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Comparability and consistency
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Two constraints mentioned by GAAP on qualitative characteristics are
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benefits greater than costs and materiality
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Which of the following items would most likely be a violation of the materiality constraint?
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A $25,000 illegal bribe by an executive of the company to a foreign official was not separately disclosed in the annual report.
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Intracompany comparability would be violated if
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a company changed its bad debt expense estimate from 1% to 2%
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In the FASB hierarchy of qualitative characteristics, understandability is acharacteristic that is
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a user-specific quality
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The materiality of an item of financial information refers to the likelihood that its omission or misstatement would affect the judgments of those relying on that information. This concept most closely relates to the
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financial magnitude of the item
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Which is not one of the four recognition criteria identified by the FASB?
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Understandability
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All of the following items are classified as accounting assumptions and conventions except for
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Timeliness
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The city of Fairbanks sold land for its appraised value to the Big Oil Company on June 1, 2010, that originally cost the city $1,000,000. On June 1, 2010, the land was appraised at a value of $1,250,000, and on December 31, 2010, the land's value was estimated to be $1,400,000. On Big Oil Company's balance sheet at December 31, 2010, the land should be valued at
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$1,250,000
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According to the recognition criteria established for revenue, revenue is normally recognized
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at the point of sale
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For fixed-price construction contracts that require more than one accounting period to complete and for which the costs can be reasonably estimated, revenue should be recognized
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during production
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If collectibility of the revenue is highly uncertain, an appropriate method that should be used to recognize revenue would be
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the installment method
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Using the straight-line method to amortize patents is an application of expense recognition using
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a systematic and rational allocation method
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Using an allowance method of accounting to recognize uncollectible accounts receivable is an application of which accounting convention?
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matching principle
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The state legislature is currently debating a bill that, if passed, would require the Sandiken Company to go out of business. Which of the following principles or assumptions related to the preparation of Sandiken's financial statements is most directly affected by this impending vote of the legislature?
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Going concern
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Under current GAAP, most resources of a business entity are to be valued in its financial statements at
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Historical Cost
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Revenue may be recognized by an entity at the completion of production during an accounting period
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where there is a fixed selling price, and there are no limitations on the amount that can be sold
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FASB suggests that the revenues are considered to be earned
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when the company is entitled to its benefits
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The principle of revenue recognition results in
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recording realized revenue when it is earned
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Solon Corporation has adopted the policy of charging to expense at the time of purchase all assets having a cost of less than $100, regardless of the life expectancy of the asset. This policy is most closely related to the
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materiality
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A company that uses accounting methods in preparing its tax returns that differ from the accounting methods used to prepare its financial statements is
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Not necessarily violating either the income tax laws or GAAP
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Of the following reporting assumptions or reporting principles, the one most widely criticized is the
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historical cost principle
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Which one of the following assumptions or principles most logically supports the preparation of a single set of consolidated financial statements that combines the financial information of several wholly owned but separately identifiable businesses?
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Entity
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Expenses are recognized and matched against revenues on the basis of three principles. Which of the following is not one of these principles?
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associating cash flows
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Which of the following sets includes only accounting assumptions and conventions?
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monetary unit, entity, going concern, and realization-recognition
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The use of the historical cost principle is justified because the resulting information has the primary quality ingredients of
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representational faithfulness and neutrality
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Which of the following transactions would be reported in the cash flows from investing activities section in the statement of cash flows for the Haleem Company?
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Haley sold a piece of land for $500,000
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Distributions that are paid to owners would affect both the
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balance sheet and statement on cash flows
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The financial statement that would be most useful in evaluating a company's financial flexibility
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Balance sheet
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The framework for the model of business reporting includes all of the following except
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independent analysis of the financial data
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The AICPA's Special Committee on Financial Reporting issued a report on a model for business reporting that addresses concerns about
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the relevance and usefulness of financial reports
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The model for business reporting is designed to fit the decision processes of users to
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make projections value companies assess the likelihood of loan repayments
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The AICPA's Special Committee on Financial Reporting issued a report on a model for business reporting. The "Financial Reporting" sources of information used in external decision making outlined in the model included all of the following except
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macroeconomic statistics
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The CFA's Comprehensive Business Reporting Model argues that certain key weaknesses in the current financial reporting model exist. The weaknesses include all of the following except
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current financial statements do not present sufficient information to investors to make effective decisions
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The goal of the boards of the IASB and FASB is to develop a joint conceptual framework project that is both complete and internally consistent. However, as a limitation the boards concluded that
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a comprehensive reconsideration of all concepts underlying financial reporting would not be an efficient use of their time
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The IASB and FASB boards have agreed that the objective of general purpose financial reporting is to provide
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inancial information about a company that is useful to external users in making decisions in their capacity as capital providers
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The IASB and FASB joint boards feel that financial reporting should
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be general purpose be useful in assessing a company's future cash flows provide information on an accrual basis
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One of the differences between the IASB/FASB joint conceptual framework and the FASB conceptual framework is that while the FASB identifies relevance and reliability as the primary decision-specific qualities, the tentative joint framework identifies the fundamental qualitative characteristics to be
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relevance and faithful representation
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Similar to the constraints in the FASB's qualitative characteristics, the joint IASB/FASB boards have identified two constraints including
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benefits that justify the costs and materiality
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The joint IASB/FASB qualitative characteristics Exposure Draft identifies a logical order in which to evaluate the qualities.
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relevance faithful representation enhancing characteristics