question

What is a conceptual framework for financial reporting?

answer

A coherent system of concepts and ideas that flow from an objective.

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The conceptual framework

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Act as a guide to help FASB develop and maintain standards used as the basis for GAAP.

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Why the need of a Conceptual Framework?

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To develop a coherent set of standards and rules. GAAP will be more consistent and useful. To solve new and emerging practical problems(Emerging Issues)

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Generally accepted accounting principles

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Derive their credibility and authority from general recognition and acceptance by the accounting profession.

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Which of the following are not true concerning a conceptual framework in accounting?

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It should be based on fundamental truths that are derived from the laws of nature.

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All of the following statements about the conceptual framework are correct except it:

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Pescribes the nature, function, and limits of financial accounting and financial statements. Icreases financial statement users' understanding of and confidence in financial reporting. I a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. ALL ARE CORRECT

question

In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting?

answer

Objective of financial reporting (First level of Conceptual Framework)

question

Which level of the conceptual framework is devoted to recognition and measurement concepts?

answer

3rd, sets forth fundamental recognition and measurement criteria and guidance on what informaiton should be formally incorporated into financial statements and when. (The How) Concepts include: assumptions, principles, and constraints.

question

The first level of the conceptual framework is the:

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objective of financial reporting., Presents the goals and purposes of accounting. (The Why)

question

All of the following statements are false regarding the IASB and FASB convergence efforts except:

answer

*****The FASB framework does not identify accrual accounting as an assumption.***** Te FASB framework extensively discusses and assumes that reporting entities are going concerns. Te IASB and FASB have not been able to agree on qualitative characteristics, so that part of the project was scrapped. Tere is a need to change many aspects of existing frameworks.

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Who develop the Conceptual Framework?

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In 1976, the FASB began to develop a conceptual framework that would be a basis for setting accounting rules and for resolving financial reporting controversies.

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FASB has since issued 7 Statements of Financial Accounting Concepts that relate to Financial reporting for business enterprises.

answer

1.Objectives of Financial Reporting 2.Qualitative Characteristics of Accounting Info. 3.Elements of Financial Statements. 5.Recognition and Measurement in Financial Statements. 6.Elements of Financial Statements

question

The objective of the joint project of the IASB and the FASB is to develop a conceptual framework to replace the going concern concept.

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False

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The Three levels of Conceptual Framework

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1. Basic Objectives (The Why)(Purpose of Acct.) 2. Qualitatives Characteristics (Makes accounting useful) and Elements of financial statements (Assets, liabilities, revenues, exp.) 3. Recognitions, Measurements, and Disclousure Concepts. (The How)

question

The Second level of the conceptual framework is the:

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The second level forms a bridge between the Why and the How. It divides into two main categories: Qualitative Characteristics and Basis Elements.

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The third level of the Conceptual Framework for Financial Reporting is

answer

Recognition, Measurement , and Disclousure Concepts

question

What are the Statements of Financial Accounting Concepts intended to establish?

answer

The objectives and concepts for use in developing standards of Financial Accounting and Reporting

question

According to FASB Conceptual Framework, the objectives of Financial Reporting for business enterprises are based on?

answer

The needs of the users of the informaiton.

question

Qualitative Characteristics:Second Level Second Level of Conceptual Framework, Fundamental Quality-Relevance

answer

To be Relevant, accounting information must be capable of making a difference in a decision. Relevance is one of the two fundamental qualities that make accounting information useful for decision - making.

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Qualitative Characteristics:Second Level Fundamental Quality-Relevance(Predictive Value)

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Financial Information has predictive value if it has values as an input to predictive processes used by investors to form their own expectations about the future.

question

Financial Information

answer

is capable of making a difference when it has predictive value, confirmatory value or both.

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Qualitative Characteristics:Second Level Fundamental Quality-Relevance(Confirmatory Value)

answer

Relevant information also helps users confirm or correct prior expectations.

question

Qualitative Characteristics:Second Level Fundamental Quality-Relevance (Materiality)

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Information is material if ommitting it or misstating it could influence decisions that users make on the basis of the reported financial information. Companies must consider both quantitative and qualitative factors in determining whether an item is MATERIAL

question

The underlying theme of the conceptual framework is

answer

Decision usefulness.

question

Enhancing qualities include all of the following except

answer

verifiability. timeliness. comparability. ****materiality.*****

question

In order to be relevant, financial information must have all of the following ingredients of fundamental qualities except

answer

have predictive value. have confirmatory value. ****be free from error.***** be material.

question

Accounting information is considered to be relevant when it

answer

is capable of making a difference in a decision.

question

Which of the following is an ingredient of the fundamental quality of faithful representation?

answer

freedom from error.

question

Qualitative Characteristics:Second Level Fundamental Quality-Faithful Representation

answer

Completeness, Naturality, Free from Error. Faithful Representation means that the numbers and descriptions match what really existed or happened.

question

Fundamental Quality- Faithful Representation (Completeness)

answer

Means that all the information that is necessary for faithful representation is provided.

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Fundamental Quality-Faithful Representation (Neutrality)

answer

Means that a company cannot select information to favor one set of interested parties over another.

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Fundamental Quality-Faithful Representation (Free from Error)

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An information that is free from error will be a more accurate faithful representation of a financial item.

question

All of the following are ingredients of relevance except:

answer

feedback value.(Confirmatory) predictive value. *****neutrality.**** materiality.

question

Enhancing qualities of accounting information include:

answer

comparability and verifiability, Timeliness, understandability

question

Companies and their auditors have adopted a general rule of thumb that anything under 5% of _______ is considered not material

answer

net income

question

The pervasive criterion of accounting information is decision usefulness.

answer

True

question

To be Faithful Representation:

answer

Information must be complete, neutral and free from Error.

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Information that has been measured and reported in a similar manner for different enterprises is considered comparable`

answer

True

question

For information to be relevant, it needs to have predictive or feedback value.

answer

True

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The FASB sometimes issues standards that have undesirable economic effects on an industry or company.

answer

Tue

question

The fundamental qualities of accounting information are:

answer

Relevance and faithful representation.

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Counting Inventory is referred to:

answer

Direct Verification

question

Basic Elements (2nd level)

answer

Assets, Liabilities, Equity, Investments by owner, distributions to owners, comprehnsive income, revenues, expenses, gains, and losses.

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Basic Elements Moment in time

answer

Assets, Liabilities, and Equity

question

Basic Elements Period in Time

answer

Investments by owners, distribution to owners, comprehensive income, revenues, expenses, gains and losses

question

According to the FASB conceptual framework, and entity's revenue may result from

answer

A decrease in a liability from primary operations.

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Third Level Recognition and Measurement Concepts

answer

This concepts explain how companies should recognize, measure, and report financial elements and events.

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According to SFAC (Statement of Financial Accounting Concepts)

answer

To recognize and item, transaction or event, must meet the definition of an "element of financial statements" and must be measurable.

question

Third level Recognition and Measurement Concepts

answer

Basic Assumptions, Basic Principles of Accounting, and Constraints.

question

Third Level Recognition and Measurement Concepts (Basic Assumptions)

answer

Economic Entity, Going Concern, Monetary Unit, and Periodicity

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Third Level Recognition and Measurement Concepts (Basic Principles)

answer

There are four basic principles: Measurement, revenue recognition, expense recognition, and full disclousure.

question

Third Level Recognition and Measurement Concepts (Constraints)

answer

...

question

A decrease in net assets arising from peripheral or incidental transactions is called a(n)

answer

loss.

question

Which of the following statements about comprehensive income is incorrect?

answer

Changes in equity of an entity during a period from transactions and other events from nonowner sources are included in comprehensive income. ****It includes all changes in equity during a period except net income.**** It is more inclusive than the traditional notion of net income. Unrealized holding gains on available-for-sale securities are included in comprehensive income.

question

Increases in equity from peripheral or incidental transactions of an entity are:

answer

gains.

question

Which of the following elements of financial statements is the result of transactions, events, or circumstances that affect an enterprise during a period of time?

answer

Comprehensive Income

question

Under current GAAP, inflation is ignored in accounting due to the

answer

monetary unit assumption.

question

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the

answer

economic entity assumption.

question

Depreciation and amortization policies are justifiable and appropriate because of the:

answer

going concern assumption.

question

The assumption that implies that the economic activities of an enterprise can be divided into artificial time periods is the:

answer

periodicity assumption.

question

The periodicity assumption specifies that the appropriate time period for financial reporting is the calendar year.

answer

False, becasuse it can be monthly, quarterly, or yearly

question

Which assumption makes the current - noncurrent classification of assets and liabilities on the balance sheet useful?

answer

Going concern assumption.

question

Revenue is generally recognized when realized or realizable and earned. This statement describes the

answer

revenue recognition principle.

question

"When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash" is a definition of

answer

realized revenue.

question

Expensing the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of applying the

answer

materiality quality.

question

Generally, revenue should be recognized:

answer

at the time of sale

question

Generally, expenses are recognized when the:

answer

work or product actually makes its contribution to revenue.

question

Providing information that is of sufficient importance to influence the judgment and decisions of an informed user is required by the

answer

full disclosure principle.

question

Which of the following statements about the fair value principle is not true?

answer

Fair value is generally more relevant than historical cost. Measurement based on fair value can increase subjectivity into financial reporting. *****GAAP requires the use of fair value for financial assets and financial liabilites.***** Fair value is a market-based measure.

question

The historical cost principle applies even when a firm is not a going concern.

answer

False, because if it is not a going concern liquidation will be appropiate

question

There are no exceptions to the revenue recognition rule that revenue is only recognized at the time of sale.

answer

False, revenue may be recognize during production, at the end or when cash is received

question

The full disclosure principle requires that all information that is of sufficient importance to influence the judgment and decisions of informed users be disclosed in the main body of the financial statements and in the notes to the financial statements.

answer

False, Disclosure may also be accomplished through supplementary information.

question

Costs are classified as period costs when a company cannot establish a direct relationship between the cost and revenues.

answer

True, Period costs, such as administrative salaries, are expensed in the period when incurred because there is no direct relationship between the cost and revenues.

question

Which of the following is a constraint recognized by the Conceptual Framework?

answer

Cost.

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