Chapter 2 Questions

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

All are correct: is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards, prescribes the nature, function, and limits of financial accounting and financial statements, increases financial statement users' understanding of and confidence in financial reporting.

The first level of the conceptual framework is the:

objectives of financial reporting

The objectives of financial reporting include all of the following except to provide information that is:

used in establishing and applying accounting standards.

All of the following are ingredients of relevance except:

Verifiability

Secondary qualities of accounting information are:

comparability and consistency

Which of the following statements about comprehensive income is incorrect?

It includes all changes in equity during a period except net income

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

Gains

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

going concern assumption.

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

periodicity assumption

Generally, revenue should be recognized:

At the time of sale

Generally, expenses are recognized when the:

work or product actually makes its contribution to revenue.

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

full disclosure principle.

In providing information with the qualitative characteristics that make it useful, two overriding constraints that must be considered are:

cost-benefit relationship and materiality.

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

Net Income

Which constraint states, when in doubt, choose the solution that will be least likely to overstate assets and net income?

Conservatism

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

the FASB framework does not identify accrual accounting as an assumption

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

False

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

False

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.

False

The pervasive criterion of accounting information is decision usefulness.

True

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

True

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

False

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

True

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

False

Certain financial instruments are reported at fair value rather than historical cost

True

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

True

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

False

The conceptual framework contains how many Statements of Financial Accounting Concepts that related to financial reporting for business enterprises?

7

The conceptual framework for financial reporting consists of how many levels?

3

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

Third

The primary qualities of accounting information are:

relevance and faithful representation

All of the following are ingredients of reliability, except:

feedback value

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?

Comprehensive income

The assumption that allows the merging of a parent company and its subsidiaries for financial reporting purposes is the:

economic entity assumption

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

Going concern assumption

Which of the following is an important advantage of using cost over other possible valuations?

Reliability, Relevance, Comparable

Which of the following is not a constraint?

Periodicity

All of the following statements are true regarding the convergence project by the FASB and IASB except:

The IASB framework makes three assumptions.