CHAPTER 11

FINANCIAL REPORTING CONCEPTS

CHAPTER STUDY OBJECTIVES

1. Explain the importance of having a conceptual framework of accounting, and list the key components. The conceptual framework ensures that there is a consistent and coherent set of accounting standards. Key components of the conceptual framework are the: (1) objective of financial reporting; (2) elements of the financial statements; (3) qualitative characteristics; (4) recognition and measurement concepts; and (5) foundational concepts, assumptions, and constraints.

2. Explain the objective of financial reporting, and define the elements of the financial statements. The objective of financial reporting is to provide useful information for investors and creditors in making decisions in their capacity as capital providers. The elements are assets, liabilities, equity, revenue, and expense. Each element has a specific definition. The definitions provide important guidance on when an element should be recognized.

3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. The fundamental qualitative characteristics are relevance and faithful representation. Financial information has relevance if it makes a difference in a decision. Materiality is an important component of relevance. An item is material when it is likely to influence the decision of a reasonably careful investor or creditor. Information is faithfully represented when it shows the economic reality and is complete, neutral, and free from material error.

The enhancing qualitative characteristics are comparability, verifiability, timeliness, and understandability. Comparability enables users to identify the similarities and differences between companies. The consistent use of accounting policies from year to year is part of the comparability characteristic. Information is verifiable if two knowledgeable and independent people would generally agree that it faithfully represents the economic reality. Timeliness means that financial information is provided when it is still highly useful for decision-making. Understandability enables reasonably informed users to interpret and comprehend the meaning of the information provided in the financial statements.

4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. General recognition criteria require that elements be recognized in the financial statements when it is probable that any economic benefit associated with the item will flow to or from the business and the item has a cost or value that can be measured or estimated with a reasonable amount of reliability. There are two approaches to revenue recognition: (1) contract-based and (2) earnings. The contract-based approach requires that revenue be recognized when promised goods or services are transferred and the amount reflects the consideration the business expects to receive. The earnings approach requires that revenue be recognized when the earnings process is complete, the risks and rewards of ownership have been transferred, and the amount can be reliably measured. Expenses are recognized when there is a decrease in an asset or increase in a liability, excluding transactions with owners, which result in a decrease in owners’ equity. Four measurements used in accounting are (1) historical cost, (2) current cost, (3) realizable value, and (4) present value. Incorrect application of the basic recognition and measurement concepts can lead to material misstatements in the financial statements. Incorrect application can be due to error or intentional misstatement.

5. Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. The foundational concepts, assumptions, and constraints form the bedrock of accounting and are used to achieve the objective of financial reporting. The reporting entity concept requires that accounting for a reporting entity’s activities be kept separate and distinct from the accounting for the activities of its owner and all other reporting entities. The going concern assumption assumes that the company will continue operating for the foreseeable future. The monetary unit concept means that money is the common denominator of economic activity. The periodicity concept guides businesses in dividing up their economic activities into distinct time periods. The cost constraint is a pervasive constraint that ensures the value of the information provided is greater than the cost of providing it. The full disclosure concept requires companies to fully disclose circumstances and events that make a difference to financial statement users.

TRUE-FALSE STATEMENTS

1. Not every country uses the same conceptual framework or set of accounting standards.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

2. IFRS will be the standard for all Canadian companies.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

3. Going forward, there will be two sets of accounting standards for Canadian for-profit companies.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

4. The conceptual framework will not be able to guide decisions about what to present in the financial statements.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

5. A conceptual framework ensures we have a coherent set of standards.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

6. The conceptual framework ensures that existing standards and practices are clear and consistent.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

7. Canadian and International standards are based on specific rules for accounting.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

8. Canadian accounting standards are based mainly on principles rather than rules because it is impossible to create a rule for every situation.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

9. Revenues are decreases in assets or increases in liabilities that result in a decrease in equity, other than those relating to contributions by owners.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

10. The elements of financial statements are the key ratios that a company will use to manage its business.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

11. The main objective of financial reporting is to provide useful information for decision-making.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

12. The main users of financial reporting are the employees of a company.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

13. Capital providers are some of the main users of financial reporting.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

14. To make decisions about allocating capital, users look for information in the financial statements about a company’s ability to maintain relationships with key customers.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

15. Claims on economic resources are defined as assets.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

16. An error is considered to be a material error if the error in the accounting information could have an impact on an investor’s or creditor’s decision.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

17. Under IFRS, a company can never change its accounting policies.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

18. In order for information to be useful in decision-making, the information must demonstrate relevance and faithful representation.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

19. Accounting information has relevance if it makes a difference in a decision.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

20. Predictive value confirms or corrects prior expectations.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

21. Confirmatory value helps users forecast future events.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

22. Accounting information is complete if it includes all information necessary to show the economic reality of the transaction.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

23. Accounting information is neutral if it makes a difference in a decision.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

24. Comparability means that a company uses the same accounting principles and methods from year to year.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

25. Consistency occurs when companies with similar circumstances use the same accounting principles.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

26. Information is verifiable if two knowledgeable and independent people would generally agree that it faithfully represents the economic reality.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

27. Timeliness means that accounting information is provided when it is still highly useful for decision-making.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

28. Understandability enables users to have timely information that is useful for decision makers.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

29. Understandability is greater when the information is classified, characterized, and presented clearly and concisely.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

30. The qualitative characteristic that should be first applied is that of relevance.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

31. The enhancing qualitative characteristics, such as comparability and timeliness, must be applied first before the characteristic of relevance in order to provide the most usefulness to the decision makers.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

32. Full disclosure means that the financial statements must be accompanied by notes to the financial statements.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

33. Faithful representation means that accounting information reports on the economic reality of a transaction, not its legal form.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

34. In the year of a change in an accounting policy, the change and its impact must be disclosed in the notes to the financial statements.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

35. Relevance and faithful representation are the two fundamental characteristics that financial information must have in order to be considered useful.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

36. Using the contract-based approach to revenue recognition, the entity will record revenue at the amount that it expects to receive.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

37. Revenue recognition criteria state that revenue is recognized at the same time that a decrease in an asset is recognized or an increase in a liability is recognized for profit-generating activities.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

38. One of the conditions of recognizing revenue from the sale of goods is that costs relating to the sale of the goods can be reliably measured.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

39. If goods are shipped FOB destination, the selling company can recognize revenue when the goods are shipped.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

40. If goods are shipped FOB shipping point, the selling company cannot recognize the revenue until the goods are received at their destination.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

41. Revenue can be recognized before the service has been fully provided.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

42. One of the conditions that must be met for revenue to be recognized is that the amount of the revenue can be reliably measured.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

43. If a company provides refunds to customers for goods returned, revenue is recognized at the time of the return of the goods.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

44. Using the contract-based approach to revenue recognition in right of return situations, the entity would record revenue at the amount that it expects to receive.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

45. Using the earnings approach to revenue recognition, the entity would record a credit to the “refund liability” account for the estimated amount of returned goods.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

46. Under the contract-based approach, a company can recognize revenue when it has transferred a promised good or service to a customer.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

47. A contractor fixing an overhead door and replacing several parts including springs and tracks is an example of multiple performance obligations.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

48. The expense-recognition criteria states that expenses are recognized when there is an increase in an asset or decrease in a liability, excluding transactions with owners.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

49. There is a direct association between cost of goods sold and sales revenue.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

50. If it is not possible to determine the future benefits arising from expenditures, then the costs will be capitalized.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

51. When an asset ceases to have future value it should be expensed.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

52. The cost model to report property, plant, and equipment is where the carrying value on the balance sheet is the fair value less accumulated depreciation.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

53. Fair value is the amount of cash expected to be collected if the asset is sold.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

54. Management bonuses based on profit may encourage management to overstate profits.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

55. When estimating amounts for accruals, it is not important that the estimate is supportable or verifiable because it is just an estimate.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

56. If a company is not a going concern, then its assets will be presented at their net realizable value.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

57. If the company is a going concern, the classification of assets and liabilities as current and noncurrent would not matter.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

58. It is an underlying assumption that financial statements are prepared as if the company is not a going concern.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

59. The cost constraint exists to ensure that the value of the information is more than the cost of providing it.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

60. An item is material when it is unlikely to influence the decision of a reasonably careful investor or creditor.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

61. The conceptual framework of accounting

a) ensures that existing standards and practices are clear and consistent.

b) makes it possible to respond quickly to new issues.

c) increases the usefulness of the financial information presented in financial reports.

d) all of the above

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

62. The conceptual framework does not include

a) the objective of financial reporting.

b) elements of financial statements.

c) recognition and measurement criteria.

d) specific standards to be followed in preparing financial statements.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

63. Canadian accountants rely on ______ to help them apply the conceptual framework to specific situations.

a) the Canada Business Corporations Act

b) identifiable rules

c) the rules of the Income Tax Act

d) professional judgement

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

64. The organization that is working toward uniformity in accounting practices throughout the world is the

a) World Bank.

b) United Nations.

c) International Accounting Standards Board.

d) National Commission on Fraudulent Financial Reporting.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

65. Which statement below is not true?

a) The conceptual framework includes specific rules for every situation.

b) The conceptual framework ensures the existing standards and practices are clear and consistent.

c) The conceptual framework provides guidance in responding to new issues and developing new standards.

d) The conceptual framework increases financial statement users’ understanding of and confidence in the financial statements.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

66. Not every country uses the same conceptual framework. This lack of uniformity has arisen because

a) there are not enough members in the professional body.

b) no time is available to complete the framework.

c) there are differences in legal and governmental systems.

d) financial statements do not need to be comparable.

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

67. Which of the following is a reason for the lack of uniformity in accounting standards between countries?

a) differences in legal systems

b) differences in the process for developing standards

c) differences in governmental requirements

d) all of the above

Difficulty: Easy

Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components.

Section Reference: The Conceptual Framework of Accounting

CPA: Financial Reporting

AACSB: Analytic

68. Which one of the following is the main objective of financial reporting according to the conceptual framework?

a) to provide information that will increase the value of the company

b) to provide information in assessing future cash flows

c) to provide information about the company’s capital providers

d) to provide financial information that is useful to existing and potential investors and creditors in making decisions about a business

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

69. The objective of financial reporting is to provide information that is mainly useful to

a) governmental taxing bodies.

b) employees and labour unions.

c) investors and creditors.

d) internal and external auditors.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

70. The overriding criterion in evaluating the accounting information to be presented is

a) fairness.

b) legality.

c) management's goals.

d) decision usefulness.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

71. Financial statements are designed to provide information about all of the following except

a) the economic resources, obligations, and equity of the entity.

b) changes in economic resources, obligations, and equity of the entity.

c) management performance evaluations.

d) economic performance of the entity.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

72. In order to assess the financial performance of a company, the financial statements must

a) be prepared on a monthly basis.

b) provide information on management’s use of the company’s resources.

c) be audited annually.

d) provide information concerning changes in the company’s share price.

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

73. ______ play(s) a fundamental role in the efficient functioning of the economy by providing capital (cash) to businesses.

a) Managers

b) Employees

c) Capital providers

d) IASB

Difficulty: Easy

Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements.

Section Reference: The Objective of Financial Reporting

CPA: Financial Reporting

AACSB: Analytic

74. In the conceptual framework for IFRS, which one of the following is not a qualitative characteristic of useful accounting information?

a) relevance

b) faithful representation

c) conservatism

d) comparability

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

75. In order for accounting information to be relevant, it must

a) have very little cost.

b) have predictive or confirmatory value.

c) be comparable.

d) be used by a lot of different firms.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

76. If accounting information has confirmatory value, it

a) has been verified by an external audit.

b) is prepared on an annual basis.

c) confirms or corrects prior expectations.

d) is neutral in its representations.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

77. If accounting information has predictive value, it is useful in making predictions about

a) the economic environment the company operates in.

b) world events that impact the economy.

c) future interest rates and foreign currency exchange rates.

d) future events of a company.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

78. Relevant accounting information

a) is information that has been audited.

b) must be reported within one year.

c) has been objectively determined.

d) is information that is capable of making a difference in a decision.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

79. Which of the following is not a qualitative characteristic associated with faithful representation?

a) complete

b) comparability

c) neutrality

d) free from material error

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

80. A company can change to a new accounting principle if management can justify that the new principle results in

a) more relevant and faithful representation of the financial presentation in the statements.

b) a higher profit.

c) a lower profit for tax purposes.

d) less likelihood of clerical errors.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

81. Which is not necessary to ensure that faithful representation is achieved?

a) Accounting information is reported on a cash basis.

b) Accounting information is free from material error.

c) Accounting information is complete.

d) Accounting information is neutral.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

82. Which of the following statements is not true?

a) Consistency means using the same accounting principles from year to year within a company.

b) Faithful representation is the quality of information that gives assurance that all amounts reported are known with certainty.

c) Relevant accounting information must be capable of making a difference in a decision.

d) Accounting standards for private entities have four principal qualitative characteristics.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

83. Qualitative characteristics associated with relevant accounting information are

a) consistency, faithful representation, and timeliness.

b) predictive value, confirmatory value, and materiality.

c) neutrality, predictive value, and reliability.

d) going concern, cost principle, and materiality.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

84. An item is considered to be material if

a) the assets would be larger than the liabilities.

b) the information would change an investor’s mind.

c) the company has a loss.

d) the company has never paid a dividend.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

85. Accounting information is neutral if

a) it is free from bias.

b) the amount of assets equals the amount of liabilities.

c) the trial balance balances.

d) all of the information is present to show the economic reality of the transaction.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

86. The qualitative characteristics should be applied in which order?

a) relevance, comparability, and then faithful representation

b) faithful representation, relevance, and then comparability

c) timeliness, faithful representation, and then comparability

d) relevance, faithful representation, and then comparability

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

87. The summary of significant accounting policies footnoted in the financial statements would not normally discuss

a) depreciation methods.

b) board of directors’ salaries.

c) method of inventory costing.

d) revenue recognition policies.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

88. Notes to the financial statements are required because the most important objective of financial reporting is to

a) provide information to the taxing authorities.

b) obtain uniformity with foreign countries.

c) provide information useful for decision-making.

d) provide information about the board of directors.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

89. The information provided in the notes that accompany financial statements is required because of the

a) cost principle.

b) full disclosure principle.

c) matching principle.

d) revenue recognition principle.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

90. The level of disclosure contained in the notes to the financial statements is limited by the

a) cost versus the benefit of providing the disclosures.

b) accounting policies selected by the business.

c) time period assumption.

d) going concern assumption.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

91. Which of the following is an important component of relevance?

a) materiality

b) verifiability

c) consistency

d) comparability

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

92. Information that is prepared free from bias is considered

a) complete.

b) neutral.

c) comparable.

d) verifiable.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

93. Information is understandable when it is understood by users

a) who have a reasonable understanding of financial reporting.

b) who have a reasonable knowledge of business and economic activities.

c) because the information provided is classified, and presented clearly and concisely.

d) all of the above

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

94. In following the application of the qualitative characteristics, which characteristic would be immediately applied after the relevance characteristic?

a) faithful representation

b) comparability

c) timeliness

d) understandability

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

95. Under ASPE, the characteristic which ensures, that when preparing financial statements, accountants should choose the accounting treatment or estimate that will be least likely to overstate assets, revenues, and gains and the least likely to understate liabilities, expenses, and losses is

a) conservatism.

b) understandability.

c) comparability.

d) relevance.

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

96. Which of the following is a term that best describes the influence an item has on the decision of a reasonably careful investor or creditor?

a) verifiability

b) relevance

c) understandability

d) materiality

Difficulty: Easy

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Section Reference: Qualitative Characteristics of Useful Financial Information

CPA: Financial Reporting

AACSB: Analytic

97. Which of the following is not a component of five-step framework to the contract-based approach of revenue recognition?

a) Determining the transaction price in the overall contract.

b) Allocating the transaction price evenly through the contract.

c) Identifying the contract with a customer.

d) Identifying the performance obligations in the contract.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

98. Which of the following is not an indication that control over goods or services have transferred at a point in time?

a) Customer has accepted the goods or service.

b) Customer has legal title to the goods.

c) Identifying the contract with a customer.

d) Business has a right to payment.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

99. Which of the following is a situation indicating that control over goods or services transfers over a period of time?

a) Customer accepts delivery and installation of an alarm system.

b) Contractor constructing an office building.

c) Customer purchases a mattress and picks it up immediately.

d) Customer pays a contract plumber immediately after having their laundry connections fixed.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

100. Which revenue recognition method would most likely be used by a retailer?

a) point of sale

b) upon cash collection

c) during production

d) upon delivery

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

101. Retailers who sell a product with a warranty period can recognize revenue when

a) the warranty period has expired.

b) at the point of sale if the warranty amount can be estimated.

c) when cash is collected.

d) when the exact cost of the items sold is known.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

102. Which of the following is a situation indicating that control over goods or services have transferred at a point in time?

a) Customer accepts delivery and installation of an alarm system.

b) Contractor constructing an office building.

c) A warranty service that provides support for a period of two years.

d) Customer purchases season tickets to the Wolves football team.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

103. Which of the following would be an example of multiple performance obligations?

a) Customer accepts delivery for a new outdoor spa tub.

b) Contractor is hired to fix an overhead door and replaces several parts including springs and tracks.

c) Customer purchases a new gas range and two-year extended warranty.

d) Customer purchases a family pack of tickets to the Wolves football team that includes multiple tickets for the same game.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

104. Sam Baker enters into a contract with Pit Company to purchase a gas fireplace unit. The sale agreement is for a total price of $ 3,000 and includes delivery of the unit, installation, and a two-year warranty. Installation successfully occurred on November 1, 2021. Pit Company often sells this gas fireplace for $ 2,500 and offers installation and warranty services at $ 500 and $ 300, respectively. Using the stand-alone fair values, what amount would be recorded as revenue on November 1, 2021 under the contract-based approach to revenue recognition? Round to the nearest whole dollar.

a) $ 2,727

b) $ 2,500

c) $ 2,273

d) $ 3,000

Difficulty: Medium

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

105. One criterion for recognition of revenue is to recognize revenue when

a) cash is collected.

b) collection is not assured.

c) the seller does not have control over the goods.

d) all sales returns have been returned.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

106. At the time of acquisition, long-lived assets are recorded at

a) amortized cost.

b) lower of cost and market.

c) at fair market value.

d) at cost.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

107. There are several ways the recognition and measurement concepts can be violated. Which one of the following would not necessarily be considered a violation?

a) intentional misstatement of estimates

b) failure to record a revenue or expense

c) recognition of revenue or expense in the incorrect accounting period

d) a change in an accounting policy

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

108. Which of the following is not a criterion pertaining to revenue recognition for the sale of goods under the earnings approach?

a) Amount of returns is known with certainty.

b) Collection is reasonably assured.

c) Amount of the revenue can be reliably measured.

d) Significant risks and rewards of ownership have been transferred to the buyer.

Difficulty: Easy

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Section Reference: Recognition and Measurement Criteria

CPA: Financial Reporting

AACSB: Analytic

109. When a private company is reporting under ASPE, and under the going concern assumption, the company will be reporting their equipment assets at

a) original cost.

b) net realizable value.

c) original cost less accumulated depreciation.

d) undepreciated capital cost.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

110. The cost constraint

a) means that assets and revenues should be estimated at the lower end of their range.

b) means that assets and revenues should be estimated at the higher end of their range.

c) means the value of the information is not less than the cost to produce the information.

d) means the information would influence the decisions of a user of the financial information.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

111. Which of the following is a constraint in financial reporting?

a) cost

b) comparability

c) consistency

d) going concern

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

112. A common application of the cost constraint is
I. recording assets at cost.
II. not disclosing information that is immaterial and unnecessary in the notes.
III. use of the FIFO cost flow assumption for inventory valuation.

a) I

b) II

c) III

d) I and II

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

113. Financial statements are prepared for an economic business unit that is separate and distinct from its owners. This is referred to as

a) the going concern assumption.

b) the objective of financial reporting.

c) a cost constraint.

d) the economic entity concept.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

114. A persuasive constraint that ensures the value of the information provided is greater than the costs of providing it is the

a) financial reporting objective constraint.

b) cost constraint.

c) going concern constraint.

d) economic entity constraint.

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

115. Which of the following violates the monetary unit concept when measuring, recording, and reporting financial information?

a) Canadian dollar

b) U.S. dollar

c) customer loyalty

d) Euros

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

116. Canadian GAAP allows private companies the choice to adopt ASPE instead of IFRS since the cost to private companies of providing financial statements prepared under IFRS is often greater than the benefits. This statement is an example of which of the following concepts and constraints?

a) cost constraint

b) materiality constraint

c) full disclosure concept

d) reporting entity concept

Difficulty: Easy

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Section Reference: Foundational Concepts, Assumptions, and Constraints

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONs

117. Match the items below by entering the appropriate code letter in the space provided.

A. Relevance H. Cost benefit

B. Confirmatory value I. IASB

C. Comparability J. Revenue recognition criteria

D. Verifiability K. Revaluation model

E. Economic entity concept L. Complete

F. Going concern assumption M. Conceptual framework

G. Percentage-of-completion method

1. A coherent system of interrelated objectives and fundamentals that can lead to consistent standards

2. Standard-setting body that is responsible for developing IFRS

3. The carrying value of property, plant, and equipment is its fair value less accumulated depreciation less subsequent impairment losses.

4. Economic events can be identified with a particular business.

5. Appropriate for certain long-term construction contracts

6. Assumes a company will exist long enough to carry out its existing objectives and commitments

7. The cost of producing the information does not exceed the value of the information.

8. Information that has a bearing on a decision

9. Two knowledgeable and independent people would agree that information is faithfully represented.

10. When information confirms or corrects prior expectations

11. Different companies using the same accounting principles

12. Financial information includes all necessary information to show the economic reality of the underlying transactions or events.

13. This criterion allows revenue to be recognized when there is an increase in assets or decrease in liabilities from profit-generating activities.