Test Bank Chapter 2 The Pursuit of the Conceptual Framework

Chapter 2

Multiple Choice

• 1. Which early accounting theorist was among the first to express the view that all changes in the value of assets and liabilities should be reflected in the financial statements?
  2. A. C. Littleton
  3. John Canning
  4. William Paton
  5. DR Scott
  6. Which of the following economists most influenced the views of DR Scott?

1. Thorstein Veblen
2. John Hicks
3. Karl Marx
4. John Smith
   1. Which of the following is not one of DR Scott’s hierarchy of accounting postulates and principles?
5. Orientation postulate.
6. The principles of truth and fairness.
7. The materiality principle
8. The principles of adaptability and consistency.
   1. Which of the following organizations published the monograph titled A Tentative Statement of Accounting Principles Affecting Annual Corporate Reports?
   2. SEC
   3. AAA
   4. AIA
   5. NAA
   6. Which of the following organizations published the monograph titled A Statement of Accounting Principles?
9. SEC
10. AAA
11. AIA
12. NAA
    1. Who was the author of Accounting Research Study No. 1, The Basic Postulates of Accounting?
       • • 1. Robert Sprouse
           2. Maurice Moonitz
           3. Alvin Jennings\
           4. Thomas Hatfield
    2. Which of the following is not an approach to accounting theory as categorized by Statement on Accounting Theory and Theory Acceptance?

Classical,

Neoclassical

Decision usefulness

Information economics.

8. What is the objective of financial reporting?

a. Provide information that is useful to management in making decisions.

b. Provide information that clearly portrays nonfinancial transactions.

c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

d. Provide information that excludes claims to the resources.

• 1. Under Statement of Financial Accounting Concepts No. 8, confirmatory value is an ingredient of the primary quality of

Relevance Faithful representation

• • • • 1. No No
        2. No Yes

c. Yes Yes

d. Yes No

1. Which of the following is considered a constraint by Statement of Financial Accounting Concepts No. 8?
   1. Cost
   2. Conservatism
   3. Timeliness
   4. Verifiability
2. Under Statement of Financial Accounting Concepts No. 8, which of the following is an ingredient of the primary quality of relevance?
   1. Neutrality
   2. Materiality
   3. Understandability
   4. Verifiability
3. Under Statement of Financial Accounting Concepts No. 8, which of the following is an ingredient of the primary quality of faithful representation?
   1. Understandability
   2. Completeness
   3. Predictive value
   4. Materiality
4. Under Statement of Financial Accounting Concepts No. 8, the ability through consensus of measures to ensure that information represents what it purports to represent is an example of the concept of
   1. Relevance
   2. Verifiability
   3. Faithful representation
   4. Feedback value
5. Under Statement of Financial Accounting Concepts No. 8, which of the following relates to both relevance and faithful representation?
   1. Timeliness
   2. Materiality
   3. Predictive value
   4. Neutrality

15. Under Statement of Financial Accounting Concepts No. 8, which of the following is not a qualitative characteristic associated with faithful representation?

a. Completeness

b. Free from error

c. Neutrality

d. Predictive value

16. What is meant by comparability when discussing financial accounting information?

a. Information has predictive or confirmatory value.

b. Information is reasonably free from error.

c. Information that is measured and reported in a similar fashion across companies.

d. Information is timely.

17. What is meant by consistency when discussing financial accounting information?

a. Information that is measured and reported in a similar fashion across points in time.

b. Information is timely.

c. Information is measured similarly across the industry.

d. Information is verifiable

18. An item is considered material if

a. It doesn’t cost a lot of money.

b. It is of a tangible good.

c. It is likely to influence the decision of an investor or creditor.

d. The cost of reporting the item is greater than its benefits

1. If the FASB’s proposed definition of materiality as a legal concept is adopted the most likely outcome is
   1. It will have little impact on the number of items classified as material
   2. It will lower the threshold for recognizing event and transactions as material
   3. It will raise the threshold for recognizing event and transactions as material
   4. Its impact cannot be determined

20. Which of the following is not a topic being currently studied by the FASB as in conjunction with its effort on Chapter 8 of SFAC No. 8?

a. Fair value measurement

b. Defined benefit pension plans

c. Leases

d. Income taxes

21. The purpose of Statements of Financial Accounting Concepts is to

a. Form a conceptual framework for solving existing and emerging problems.

b. Determine the need for FASB involvement in an emerging issue.

c. Establish GAAP.

d. Modify or extend an existing FASB Accounting Standards Update.

Essay

• • • 1. Discuss the contributions of Paton and Canning to the development of accounting theory.
      2. Discuss the contribution DR Scott to the development of accounting theory.
      3. Discuss DR Scott’s hierarchy of postulates and principles.

1. Orientation Postulate. —Accounting is based on a broad consideration of the current social, political, and economic environment.
2. The Pervasive Principle of Justice. —The second level in Scott’s conceptual framework was justice, which was seen as developing accounting rules that offer equitable treatment to all users of financial statements.
3. The Principles of Truth and Fairness. —Scott’s third level contained the principles of truth and fairness. Truth was seen as an accurate portrayal of the information presented. Fairness was viewed as containing the attributes of objectivity, freedom from bias, and impartiality.
4. The Principles of Adaptability and Consistency. —The fourth level of the hierarchy contained two subordinate principles, adaptability and consistency. Adaptability was viewed as necessary because society and economic conditions change; consequently, accounting must also change. However, Scott indicated a need to balance adaptability with consistency by stating that accounting rules should not be changed to serve the temporary purposes of management.
   • • 1. Discuss the contributions of the works by Sanders Hatfield and More, and Paton and Littleton to accounting theory.
       2. Discuss accounting Research Study No. 1.
       3. How did ASOBAT define accounting and what two new ideas arose from this monograph?
       4. Discuss the objectives of accounting as outlined by the Trueblood Committee.
5. Making decisions concerning the use of limited resources
6. Effectively directing and controlling organizations
7. Maintaining and reporting on the custodianship of resources
8. Facilitating social functions and controls
9. The basic objective of financial statements is to provide information useful for making economic decisions.
10. An objective of financial statements is to serve primarily those users who have limited authority, ability, or resources to obtain information and who rely on financial statements as their principal source of information about an enterprise’s economic activities.
11. An objective of financial statements is to provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows in terms of amount, timing, and related uncertainty.
12. An objective of financial statements is to provide users with information for predicting, comparing, and evaluating enterprise earning power.
13. An objective of financial statements is to supply information useful in judging management’s ability to use enterprise resources effectively in achieving its primary enterprise goal.
14. An objective of financial statements is to provide factual and interpretative information about transactions and other events that is useful for predicting, comparing, and evaluating enterprise earning power. Basic underlying assumptions with respect to matters subject to interpretation, evaluation, prediction, or estimation should be disclosed.
15. An objective is to provide a statement of financial position useful for predicting, comparing, and evaluating enterprise earning power.
16. An objective is to provide a statement of periodic earnings useful for predicting, comparing, and evaluating enterprise earning power.
17. Another objective is to provide a statement of financial activities useful for predicting, comparing, and evaluating enterprise earning power. This statement should report mainly on factual aspects of enterprise transactions having or expecting to have significant cash consequences. This statement should report data that require minimal judgment and interpretation by the preparer.
18. An objective of financial statements is to provide information useful for the predicting process. Financial forecasts should be provided when they will enhance the reliability of the users’ predictions.
19. An objective of financial statements for governmental and not-for-profit organizations is to provide information useful for evaluating the effectiveness of the management of resources in achieving the organization’s goals. Performance measures should be quantified in terms of identified goals.
20. An objective of financial statements is to report on the enterprise’s activities affecting society that can be determined and described or measured and that are important to the role of the enterprise in its social environment. This objective was an attempt to draw attention to those enterprise activities that require sacrifices from members of society who do not benefit from those activities.
    • • 1. What were the approaches to accounting theory identified by SATTA?
        2. According to Kuhn, how dies scientific progress occur?
21. Acceptance of a paradigm.
22. Working with that paradigm by doing normal science.
23. Becoming dissatisfied with that paradigm.
24. Search for a new paradigm.
25. Accepting a new paradigm.
    • • 1. What is the purpose of the conceptual framework?
26. Selecting the transactions, events, and circumstances to be accounted for
27. Determining how the selected transactions, events, and transactions should be measured
28. Determining how to summarize and report the results of events, transactions, and circumstances.
    • • 1. Define the following terms:
29. Comprehensive income
30. Relevance
31. Faithful representation
    • • 1. According to SFAC No. 5, what should a full set of financial statements for a period show?
32. Financial position at the end of the period.
33. Earnings for the period.
34. Comprehensive income for the period.
35. Cash flows during the period.
36. Investments by and distributions to owners during the period.
    • • 1. What is the purpose of SFAC No. 7: “Using Cash Flow Information and Present Value in Accounting Measurements?
37. An asset with a certain, fixed contractual cash flow due in one day of $25,000.
38. An asset with a certain, fixed contractual cash flow due in ten years of $25,000.
39. An asset with a certain, fixed contractual cash flow due in one day of $25,000. The actual amount to be received may be less but not more than $25,000.
40. An asset with a certain, fixed contractual cash flow due in ten years of $25,000. The actual amount to be received may be less but not more than $25,000.
41. An asset with expected cash flow of $25,000 in ten years with a range of $20,000 to $30,000.
    1. An estimate of future cash flows
    2. Expectations about variations in the timing of those cash flows
    3. The time value of money represented by the risk-free rate of interest
    4. The price for bearing the uncertainty
    5. Other, sometimes unidentifiable, factors including illiquidity and market imperfections
       • 1. What two approaches to present value were discussed in SFAS No. 7?

• Traditional. A single cash flow and a single interest rate as in a 12 percent bond due in ten years. Cases a and b above are examples of the use of the traditional approach.
• Expected cash flow. A range of possible cash flows with a range of likelihoods. Cases c, d, and e above are examples of the expected cash flow approach.

1. Discuss the qualitative characteristics of accounting information as outlined in SFAC No. 8
   • • 1. Discuss the issue of principles based vs. rule-based accounting standards.
       2. Discuss how the FASB and the IASC acted to improve comparability under the Norwalk Agreement.
       3. Discuss the Statement of Financial Accounting Concepts No. 8—Conceptual Framework for Financial Reporting: Chapter 8: “Notes to Financial Statements.”
          1. Provides a decision-making framework for the FASB to follow when determining required disclosures in standards-level projects
          2. Summarizes the types of information and certain limitations on that information that should be considered by the Board for determining the information to be included in the notes to the financial statements
          3. Includes a list of decision questions to assist the Board and the FASB staff in developing potential disclosure requirements