Chapter 2 Flashcards

Terms Definitions
T or FComprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners
True
T or FRevenues, gains, and distributions to owners all increase equity.
False
T or FThe conceptual framework for accounting has been discovered through empirical research.
False
T or FThe expense recognition principle states that debits must equal credits in each transaction.
False
T or FThe IASB has issued a conceptual framework that is broadly consistent with that of the United States.
True
T or FUsers of financial statements are assumed to have no knowledge of business and financial accounting matters by financial statement preparers
False
According to Statement of Financial Accounting Concepts No. 2, verifiability is an ingredient of the primary quality of
Relevance, No; Reliability, Yes
According to the FASB conceptual framework, earnings
exclude certain gains and losses that are included in comprehensive income.
All of the following represent costs of providing financial information except
accessing capital.
During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
Periodicity assumption
A soundly developed conceptual framework of concepts and objectives should
A. increase financial statement users' understanding of and confidence in financial reporting. B. enhance comparability among companies' financial statements. C. allow new and emerging practical problems to be more quickly solved. D. all of these.
In classifying the elements of financial statements, the primary distinction between revenues and gains is
the nature of the activities that gave rise to the transactions involved.
One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to
revenues minus expenses plus gains minus losses. B. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners. C. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities. D. none of these.
The accounting principle of matching is best demonstrated by
associating effort (expense) with accomplishment (revenue).
The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the
conservatism constraint.
The two primary qualities that make accounting information useful for decision making are
relevance and reliability
Under current GAAP, inflation is ignored in accounting due to the
monetary unit assumption
What is a primary objective of financial reporting as indicated in the conceptual framework?
provide information that is useful to those making investing and credit decisions.
What is a purpose of having a conceptual framework?
To enable the profession to more quickly solve emerging practical problems. B. To provide a foundation from which to build more useful standards.
When should an expenditure be recorded as an asset rather than an expense
When future benefit exits
Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company's stock pri
Full disclosure.
Which of the following is not a basic element of financial statements?
Balance sheet.
Which of the following is an implication of the going concern assumption?
The historical cost principle is credible. B. Depreciation and amortization policies are justifiable and appropriate. C. The current-noncurrent classification of assets and liabilities is justifiable and signify-cant. D. All of these.
Which of the following are the two components of the revenue recognition principle?
Recognition occurs when earned and realized or realizable.
Which of the following statements concerning the cost-benefit relationship is not true?
If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.
Which of the following is an ingredient of relevance?
Timeliness.
T or FAlthough the FASB intends to develop a conceptual framework, no Statements of Financial Accounting Concepts have been issued to date.
False
T or FRelevance and reliability are the two primary qualities that make accounting information useful for decision making.
True
T or FThe conceptual framework for accounting has been discovered through empirical research.
False
T or FThe first level of the conceptual framework identifies the recognition and measurement concepts used in establishing accounting standards.
False
T or FThe IASB has issued a conceptual framework that is broadly consistent with that of the United States.
True
T or FUsers of financial statements are assumed to have no knowledge of business and financial accounting matters by financial statement preparers
False
According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of the primary quality of
Relevance, Yes; Reliability, No
Accounting information is considered to be relevant when it
is capable of making a difference in a decision
Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between
timeliness and verifiability.
During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
Periodicity assumption
Financial information exhibits the characteristic of consistency when
accounting entities give accountable events the same accounting treatment from period to period
Information about different entities and about different periods of the same entity can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives?
Comparability, Entities; Consistency; Periods
Issuance of common stock for cash affects which basic element of financial statements?
Equity.
The accounting principle of matching is best demonstrated by
associating effort (expense) with accomplishment (revenue).
The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the
matching principle.
The two primary qualities that make accounting information useful for decision making are
relevance and reliability.
Trade-offs between the characteristics that make information useful may be necessary or beneficial. Issuance of interim financial statements is an example of a trade-off between
relevance and reliability
Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability?
Cost-benefit constraint
What is a purpose of having a conceptual framework?
A. To enable the profession to more quickly solve emerging practical problems. B. To provide a foundation from which to build more useful standards.
When should an expenditure be recorded as an asset rather than an expense?
When future benefit exits.
Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company's stock pri
Full disclosure.
Which of the following (a-c) are not true concerning a conceptual framework in account-ing?
It should be based on fundamental truths that are derived from the laws of nature.
Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?
Monetary unit assumption.
Which of the following serves as the justification for the periodic recording of depreciation expense?
Systematic and rational allocation of cost over the periods benefited
Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?
President's letter to shareholders.
Which of the following elements of financial statements is not a component of compre-hensive income?
Distributions to owners
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