CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING CHAPTER LEARNING OBJECTIVES 1. Descri Describe be the usefu usefulnes lness s of a concept conceptual ual frame framewor work. k. 2. Describe Describe efforts efforts to to constr construct uct a conceptu conceptual al framew framework. ork. 3. Unders Understan tand d the object objective ive of fina financi ncial al report reporting ing.. 4. Identif Identif the the !ualitativ !ualitative e character characteristic istics s of accoun accounting ting inform information. ation. ". Define Define the the basic basic elements elements of financial financial statements statements.. #. Descri Describe be the basi basic c assump assumptio tions ns of accou accounti nting. ng. $. %&plain %&plain the application application of the the basic basic princip principles les of accounting. accounting. '. Describe Describe the impact impact that constr constraints aints have have on reportin reporting g accounting accounting information. information.
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TRUE*FALSE+C!n&e,t'a1. (he conceptual framework for accounting has been discovered through through empirical research. 2. ) conceptual conceptual framework framework is a coherent coherent sstem sstem of interrelated interrelated objectives objectives and fundamentals fundamentals that can lead to consistent standards. 3. (he Internationa Internationall )ccounting )ccounting *tandards *tandards +oard ,I)*+- uses a conceptual conceptual framework framework based on individual concepts developed b each member of the standardsetting bod. 4. ) soundl developed developed conceptual conceptual framework framework enables the International International )ccounting )ccounting *tandards *tandards +oard ,I)*+- to issue more useful and consistent pronouncements over time. ". ) soundl developed developed conceptual conceptual framework framework enables the International International )ccounting )ccounting *tandards *tandards +oard ,I)*+- to !uickl solve new and emerging practical problems b referencing basic theor. #. (he I)*+ has issued issued a concep conceptual tual framew framework ork that is broadl broadl consis consisten tentt with with that that of the United *tates. $. (he International International )ccounting )ccounting *tandards *tandards +oard/s ,I)*+/s,I)*+/s- 0onceptual 0onceptual ramework ramework includes supplementar information. '. (he International International )ccounting )ccounting *tandards *tandards +oard/s ,I)*+/s,I)*+/s- 0onceptual 0onceptual ramework ramework includes the elements of financial statements. . (he 2nd level of the I)*+/s conceptual framework provides the !ualitative characteristics that make accounting information useful and the elements of financial statements. 1. ne of the challenges challenges in developin developing g a common conceptual conceptual framew framework ork will be to agree on how the framework should be organi5ed since the )*+ and I)*+ conceptual frameworks are organi5ed in ver different was. 11. (he first level of the conceptu conceptual al framew framework ork identifie identifies s the recogniti recognition on and measurem measurement ent concepts used in establishing accounting standards. 12. Decision Decision usefulness usefulness is the underling underling theme of the conceptual conceptual framewor framework. k. 13. Users Users of financial statem statements ents are assumed assumed to have no knowledge knowledge of business business and financial accounting matters b financial statement preparers. 14. (he founda foundatio tion n of the Intern Internati ationa onall )ccount )ccounting ing *tanda *tandards rds +oard/ +oard/s s ,I)*+/ ,I)*+/ss- 0oncep 0onceptual tual ramew ramework ork is found found on the third level level of the ramew ramework ork and includ includes es assump assumptio tions6 ns6 principles6 and constraints. 1". 1". )n impl implic icit it assu assump mpti tion on of the the Inte Intern rnat ation ional al )cco )ccount untin ing g *tan *tandar dards ds +oar +oard/ d/s s ,I)* ,I)*+/ +/ss0onc 0oncep eptu tual al ram ramew ewor ork k is that that user users s need need to be e&pe e&pert rts s in busi busine ness ss and and fina financ ncial ial accounting matters to understand the information contained in financial statements. 1#. 7eleva 7elevance nce and reliabi reliabilit lit are the two primar primar !ualiti !ualities es that that make make accoun accountin ting g inform informati ation on useful for decision making.
0onceptual ramework Underling inancial )ccounting
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1$. (he idea idea of consis consisten tenc c does does n!t mean that companies cannot switch from one accounting method to another. 1'. (imeliness (imeliness and neutrali neutralit t are two ingredient ingredients s of relevance. relevance. 1. 8erifiabili 8erifiabilit t and predictive predictive value are two ingredients ingredients of reliabilit reliabilit. . 2. (he second level level of the Internation International al )ccounting )ccounting *tandards *tandards +oard/s ,I)*+/s,I)*+/s- 0onceptual 0onceptual ram ramew ewor ork k serv serves es as a bridg bridge e betw betwee een n the the 9wh 9wh:: of acco accoun unti ting ng and and the the 9how: 9how: of accounting. 21. 21. In the the Inte Intern rnati ationa onall )cco )ccoun unti ting ng *tand *tandar ards ds +oar +oard/ d/s s ,I)* ,I)*+/ +/ss- 0onc 0oncep eptu tual al ram ramew ewor ork6 k6 !ualitative characteristics are considered either relevant or prudent. 22. 22. In the the Inte Intern rnati ationa onall )cco )ccoun unti ting ng *tand *tandar ards ds +oar +oard/ d/s s ,I)* ,I)*+/ +/ss- 0onc 0oncep eptu tual al ram ramew ewor ork6 k6 !ualit !ualitati ative ve charac character terist istics ics distin distinguis guish h better better inform informati ation on from from inferio inferiorr inform informati ation on for decisionmaking purposes. 23. In the Intern Internati ational onal )ccount )ccounting ing *tanda *tandards rds +oard/s +oard/s ,I)*+/ ,I)*+/ss- 0oncep 0onceptua tuall ramew ramework ork66 an enhancing !ualitative characteristic is predictive value. 24. In the Intern Internati ational onal )ccount )ccounting ing *tanda *tandards rds +oard/s +oard/s ,I)*+/ ,I)*+/ss- 0oncep 0onceptua tuall ramew ramework ork66 an ingredient of a fundamental !ualitative characteristic is understandabilit. 2". (o be a faithf faithful ul repres represent entati ation on as descri described bed b the Intern Internati ationa onall )ccoun )ccountin ting g *tandar *tandards ds +oard/s ,I)*+/s- 0onceptual ramework6 information must be confirmator. 2#. )n enhanc enhancing ing !ualit !ualit as descri described bed b the Internat Internationa ionall )ccount )ccounting ing *tanda *tandards rds +oard/s +oard/s ,I)*+/s- 0onceptual ramework is comparabilit. 2$. ;oon6 Inc. Inc. applies different different accounting accounting treatments treatments to similar similar events from period period to period. ;oon6 Inc. is violating verifiabilit verifiabilit as described described b the International International )ccounting *tandards *tandards +oard/s ,I)*+/s- 0onceptual ramework. 2'. (he Internation International al )ccounting )ccounting *tandards +oard/s +oard/s ,I)*+- definition definition of retained retained earnings is 9the residual interest in the a ssets of the entit after deducting all its liabilities.: 2. (he histor historica icall cost cost principl principle e would would be of limited limited usefulne usefulness ss if n!t for the going concern assumption. 3. (he economic economic entit entit assump assumption tion means that economic economic activi activit t can be identi identifie fied d with with a particular legal entit. 31. 31. ;ate ;ateri riali alit t is one one of the the basi basic c assu assump mpti tions ons of acco accoun unti ting ng used used b the the Inte Intern rnat ation ional al )ccounting *tandards +oard ,I)*+-. 32. 32.
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34. (he periodi periodicit cit basic basic assump assumption tions s of account accounting ing ,used ,used b the Intern Internati ationa onall )ccoun )ccountin ting g *tandards +oard- makes depreciation and amorti5ation policies justifiable and appropriate. 3". (he I)*+ conceptual conceptual framework specificall identifies identifies accrual basis basis accounting as one of its fundamental assumptions. 3#. ne of two assumption assumptions s made b the I)*+ conceptual conceptual framewor framework k is that the reporting reporting entit is a going concern. 3$. (he e&pense recognition principle states that debits must e!ual credits in each transaction. transaction. 3'. 7evenues 7evenues are reali5able reali5able when assets assets received received or held are readil readil convertible convertible into into cash or claims to cash. 3. 3. *upp *upple leme ment ntar ar info inform rmat ation ion ma ma incl include ude deta details ils or amou amount nts s that that pres present ent a diff differ eren entt perspective from that adopted in the financial statements. 4. 0ompanies consider onl !uantitative factors in determining whether an item is material. 41. (he Internationa Internationall )ccounting )ccounting *tandards *tandards +oard has given companies companies the option option of using fair value to report financial liabilities. 42. Under Internation International al inancial inancial 7eporting *tandards *tandards ,I7*,I7*- product costs are charged charged off in the immediate period and period costs ma be carried into future periods. 43. Under Internation International al inancial inancial 7eporting *tandards *tandards ,I7*,I7*- notes to the financial financial statements statements must !ualif as an element. 44. Under Internationa Internationall inancial 7eporting 7eporting *tandards ,I7*,I7*- supplementar supplementar information information ma be information that is high in relevance but low in reliabilit. 4". (he costb costbene enefit fit constr constraint aint include included d in the Intern Internatio ational nal )ccoun )ccountin ting g *tanda *tandards rds +oard/s +oard/s conceptual framework states that financial information should be free from cost to users of the information. 4#. (he International )ccounting *tandards +oard/s ,I)*+- rule for materialit is an item under "= of net income is considered immaterial. 4$. (he Internationa Internationall )ccounting *tandards *tandards +oard/s +oard/s ,I)*+- conceptual conceptual framework framework includes the concept of prudence or conservatism which means when in doubt6 choose the solution that will be -east likel to overstate assets or income a nd>or understate liabilities or e&penses. 4'. Under Internation International al inancial 7eporting 7eporting *tandards *tandards ,I7*- companies companies must consider consider both !uantitative and !ualitative factors in determining whether a n item is material. 4. Under Under Intern Internatio ational nal inancia inanciall 7eport 7eporting ing *tanda *tandards rds ,I7*,I7*- compan companies ies need n!t report immaterial items within the bod of the financial statements6 but must disclose them in the notes or supplementar information that accompan the financial statements. ". (he conceptual framework underling U.*. ?))< is similar to that underling I7*.
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) soundl soundl develo developed ped concep conceptua tuall framewo framework rk of concep concepts ts and object objective ives s should should a. incr increas ease e finan financi cial al stat statem emen entt users users@@ under underst stand andin ing g of and conf confid iden ence ce in fina financ ncia iall reporting. b. enhance enhance comparabili comparabilit t among among companies companies@@ financial financial stateme statements. nts. c. allow new new and emerging emerging practic practical al problems problems to be be more !uickl !uickl solved. solved. d. all all of thes these. e.
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Ahic Ahich h of the the fol follo low wing ing ,a ,acc- are are n!t true concerning a conceptual framework in account ingB a. It shoul should d be a basis basis for stan standar dards dsett etting ing.. b. It should should allow practic practical al problems problems to be solved solved more more !uickl !uickl b reference reference to it. it. c. It should should be based on fundame fundamental ntal truths truths that are are derived derived from the laws laws of nature. nature. d. )ll of the above above ,ac,ac- are true. true.
"3.
Ahat Ahat is is a purpos purpose e of having having a conc concept eptual ual frame framewor workB kB a. (o enable enable the profession profession to to more !uickl !uickl solve solve emerging emerging practical practical problems problems.. b. (o provide provide a foundati foundation on from which to to build more more useful useful standards standards.. c. Ceit either her a nor nor b. b. d. +oth a and b. b.
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Ahic Ahich h of of the the foll follow owin ing g is is n!t a benefit associated with the )*+ 0onceptual ramework
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) soun soundl dl deve develo lope ped d conc concep eptu tual al fram framew ewor ork k enab enable les s the the Inte Intern rnat atio iona nall )c )cco coun unti ting ng *tandards +oard ,I)*+- to I. Issue Issue more more useful useful and consis consisten tentt pron pronoun ouncem cement ents s ove overr time time.. II. ;ore ;ore !uickl !uickl solve solve new new and and emerg emerging ing pract practica icall proble problems ms b refere referenci ncing ng basic basic theor. a. I onl. b. II onl. c. +oth I and and II II. d. Ceit Ceithe herr I nor nor II. II.
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In the concep conceptua tuall framewo framework rk for financ financial ial report reporting6 ing6 what what provid provides es the the wht whthe he goals goals and purposes of accountingB a. ;eas ;easur urem emen entt and reco recogn gnit ition ion conc concep epts ts such such as assu assump mpti tion ons6 s6 prin princi ciple ples6 s6 and and constraints b. Eualitative Eualitative character characteristic istics s of accounting accounting informatio information n c. %lemen %lements ts of financ financial ial statem statements ents d. bject bjective ive of fina financi ncial al repo reporti rting ng
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(he underl underling ing theme theme of the concep conceptual tual framew framework ork is a. deci decisi sion on usef useful ulne ness ss.. b. unde unders rsta tand ndabi abili lit t.. c. reli eliabi abilit lit.. d. comp compar arab abil ilit it. .
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Ahat is the the objectiv objective e of financial financial reportin reporting g as indicated indicated in the conceptual conceptual framework frameworkB B a. provide provide information information that that is useful useful to those those making invest investing ing and credit credit decisions. decisions. b. provide provide inform information ation that is useful useful to managem management. ent. c. provide provide informat information ion about about those those invest investing ing in the entit. entit. d. )ll )ll of of the the abo above ve..
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(he Internation International al )ccount )ccounting ing *tandar *tandards ds +oard/s +oard/s ,I)*+/s,I)*+/s- 0oncep 0onceptual tual ramework ramework includes includes all of the following e3&e,tF a. bject bjective ive of fina financi ncial al repor reportin ting. g. b. *upple *upplemen mentar tar inform informati ation on c. %lemen %lements ts of of fina financi ncial al stat stateme ements nts.. d. Eualitative Eualitative character characteristic istics s of accounting accounting informatio information. n.
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(he second second level level in the Inter Internat nationa ionall )ccount )ccounting ing *tanda *tandards rds +oard +oard/s /s ,I)*+/ ,I)*+/ss- 0oncept 0onceptual ual ramework a. Identifies Identifies the objective objective of financ financial ial reporti reporting. ng. b. Identifies Identifies recognit recognition6 ion6 measuremen measurement6 t6 and disclosure disclosure concepts concepts used used in establishing establishing and appling accounting standards. c.
0onceptual ramework Underling inancial )ccounting
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#1. #1.
(he (he obje object ctiv ive e of fina financ ncial ial repor reporti ting ng in the the Inte Intern rnati ationa onall )cco )ccount untin ing g *tand *tandar ards ds +oar +oard/ d/s s ,I)*+/s- 0onceptual ramework a. Is the the found foundati ation on for for the the ramew ramework ork.. b. Includes Includes the !ualitativ !ualitative e characterist characteristics ics that make make accounting accounting information information useful. useful. c. Is found found on the the third third level level of of the the rame ramewor work. k. d. )ll of the choices choices are are correct correct regarding regarding the objecti objective ve of financial financial reportin reporting. g.
#2. #2.
)n impl implic icit it assu assump mpti tion on of the the Inte Intern rnat ation ional al )cco )ccount untin ing g *tan *tandar dards ds +oard +oard/s /s ,I)* ,I)*+/ +/ss0onceptual ramework is that a. Information Information must must be decisionus decisionuseful eful to all potential potential users users of financial financial reporting. reporting. b. ?eneralpurp ?eneralpurpose ose financial financial reportin reporting g is the primar primar source source of informat information ion for users users of financial reporting. c. Users Users need reasonable reasonable knowled knowledge ge of business business and financia financiall accounting accounting matters matters to understand the information contained in financial statements. d. )ll of the the choic choices es are are corr correct ect..
#3.
(he overriding overriding criterion criterion b which which accounting accounting informatio information n can can be judged is that that of a. useful usefulnes ness s for for deci decisio sion n makin making. g. b. free freedo dom m fro from m bias bias.. c. timeliness. d. comp compar arab abil ilit it. .
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Ahich of the the followi following ng is a fundame fundamental ntal !ualit !ualit of useful useful account accounting ing inform informationB ationB a. 0omp 0ompar arab abil ilit it. . b. 7elevance. c. 0ons 0onsis isttenc enc.. d. ;ater ateriialit alit. .
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Ahich of the the followi following ng is a fundame fundamental ntal !ualit !ualit of useful useful account accounting ing inform informationB ationB a. 0ons 0onser erva vati tism sm.. b. 0omp 0ompar arab abil ilit it. . c. ait aithf hful ul repr repres esen enta tati tion on.. d. 0ons 0onsis isttenc enc..
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Ahat is meant meant b compara comparabilit bilit when when discus discussing sing financial financial account accounting ing inform informationB ationB a. Information Information has predictive predictive or feedback feedback value. b. Inform Informati ation on is reaso reasonab nabl l free free from erro error. r. c. Information Information that that is measured measured and reporte reported d in a similar similar fashion fashion across across companies. companies. d. Info Inform rmat ation ion is tim timel el. .
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Ahat is meant meant b consis consistenc tenc when discussin discussing g financial financial accounting accounting informationB informationB a. Information Information that that is measured measured and reporte reported d in a similar similar fashion fashion across across points points in time. b. Info Inform rmat ation ion is tim timel el. . c. Information Information is measur measured ed similarl similarl across across the industr. industr. d. Info Inform rmat ation ion is ver verif ifia iabl ble. e.
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Ahich Ahich of of the the foll followi owing ng is is an ingred ingredient ient of rele relevan vanceB ceB a. 0omp 0omple lete tene nes ss. b. 7epres 7epresent entati ationa onall faith faithful fulnes ness. s. c. Ceutr utralit alit . d.
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Ahich Ahich of the the follow following ing is an an ingredie ingredient nt of fait faithfu hfull repres represent entati ationB onB a.
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0ompan 0ompan ) issui issuing ng its annu annual al financ financial ial repor reports ts withi within n one month month of the the end of the ear ear is an e&le of which enhancing !ualit of accounting informationB a. Ceut eutralit alit . b. (imel imelin ines ess s. c.
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Ahat is is the !ualit !ualit of inform information ation that that enables enables users users to to better better forecas forecastt future future operations operationsB B a. 7elia eliabi bili lit t.. b. ;ater ateriialit alit. . c. 0omp 0ompar arab abil ilit it. . d. 7elevance.
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Ahic Ahich h of the follo ollow wing ing ingr ingred edie ient nts s of fund undamen amenttal !uali ualiti ties es is part art of fait faithf hful ul representationB a. Ceut eutralit alit . b.
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Decision Decision makers makers var widel in the the tpes tpes of decisions decisions the the make6 make6 the methods methods of decisi decision on making the emplo6 the information the alread possess or can obtain from other sources6 sources6 and their abilit to process process informatio information. n. 0onse!uentl 0onse!uentl6 6 for informatio information n to be useful there must be a linkage between these users and the decisions the make. (his link is a. relev levanc ance. b. reli eliabi abilit lit.. c. unde unders rsta tand ndab abil ilit it. . d. mater ateriialit alit .
0onceptual ramework Underling inancial )ccounting
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(he (he two two fund fundam amen enta tall !ual !ualit ities ies that make make acco accoun unti ting ng info inform rmat ation ion usefu usefull for for deci decisi sion on making are a. compar comparabil abilit it and consis consisten tenc. c. b. materi materialit alit and timeli timelines ness. s. c. releva relevance nce and and faithf faithful ul repre represen sentat tation ion.. d. reliab reliabili ilit t and compar comparabi abilit lit. .
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)ccount )ccounting ing info inform rmati ation on is consid considere ered d to be be relev relevant ant when when itit a. can can be depend depended ed on to repr repres esent ent the econom economic ic condit condition ions s and and even events ts that it is intended to represent. b. is capabl capable e of making making a differ differenc ence e in a decision decision.. c. is understan understandable dable b reasonabl reasonabl informe informed d users of of accountin accounting g information. information. d. is ver verif ifia iabl ble e and neu neutr tral. al.
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(he !ualit !ualit of informat information ion that that gives gives assurance assurance that that it is reasonab reasonabl l free free of error error and bias a. relev levanc ance. b. fait faithf hful ul repre represe sent ntat atio ion. n. c. veri verifi fiab abil ilit it. . d. neut neutrralit alit. .
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ina inanc ncia iall inf infor orma mati tion on does does n!t demonstrate consistenc when a. firms firms in the same same industr industr use differen differentt accounting accounting methods methods to account account for for the same same tpe of transaction. b. a compan compan changes changes its estimate estimate of the the salvage salvage value value of a fi&ed fi&ed asset. asset. c. a comp compan an fails fails to adjus adjustt its its fina financ ncia iall stat statem emen ents ts for chang changes es in the the valu value e of the measuring unit. d. none none of thes hese.
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Ahen Ahen inform informati ation on about about two diffe differen rentt enterpr enterprise ises s has been been prepare prepared d and presen presented ted in a similar manner6 the information e&hibits the characteristic of a. relev levanc ance. b. reli eliabil abilit it. . c. cons onsiste istenc nc. . d. none none of thes hese.
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(he second second level level of the Interna Internatio tional nal )ccou )ccounti nting ng *tandar *tandards ds +oard/s +oard/s ,I)*+/s ,I)*+/s-- 0onceptu 0onceptual al ramework a. provides provides conceptual conceptual building building blocks blocks that e&plain e&plain the !ualitati !ualitative ve characteris characteristics tics of accounting information. b. defines defines the the elemen elements ts of financial financial statement statements. s. c. serves serves as a bridge bridge between between the the 9wh: of accountin accounting g and the 9how: 9how: of accounting. accounting. d. all of the choice choices s are are corr correct ect..
'1. '1.
In the the Inte Intern rnat atio iona nall )cco )ccoun unti ting ng *tan *tanda dard rds s +oar +oard/ d/s s ,I)* ,I)*+/ +/ss- 0onc 0oncep eptu tual al ram ramew ewor ork6 k6 !ualitative characteristics a. )re considered considered either either fundam fundamental ental or enhanci enhancing. ng. b. 0ontribute 0ontribute to the the decisionus decisionusefulne efulness ss of financial financial reporti reporting ng informatio information. n. c. Distinguis Distinguish h better information information from inferior inferior informat information ion for decisionmak decisionmaking ing purposes. purposes. d. )ll of the the choic choices es are are corr correct ect..
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In the Intern Internati ational onal )ccou )ccounti nting ng *tandar *tandards ds +oard/s +oard/s ,I)*+ ,I)*+/s/s- 0oncep 0onceptua tuall ramewo ramework6 rk6 an enhancing !ualitative characteristic is a.
'3.
In the Intern Internati ational onal )ccou )ccounti nting ng *tandar *tandards ds +oard/s +oard/s ,I)*+ ,I)*+/s/s- 0oncep 0onceptua tuall ramewo ramework6 rk6 an ingredient of a fundamental !ua litative characteristic is a. Ceut eutralit alit . b. 8eri 8erifi fiab abil ilit it. . c. (imelin liness. d. Unde Unders rsta tand ndabi abili lit t..
'4. '4.
In the the Inte Intern rnati ation onal al )cco )ccount untin ing g *tand *tandar ards ds +oar +oard/s d/s ,I)* ,I)*+/ +/ss- 0onc 0oncep eptu tual al ram ramew ework ork66 a fundamental !ualitative characteristic is a. ;ater ateriialit alit. . b. ait aithf hful ul repres represen enta tati tion on.. c. Deci Decisi sion on usef useful ulne ness ss.. d. Ceut eutralit alit .
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(o be a faithful faithful repre represen sentat tation ion as descri described bed b the Inter Internat nation ional al )ccoun )ccountin ting g *tandard *tandards s +oard/s ,I)*+/s- 0onceptual ramework6 information must be all of the following e3&e,tF a. 0omplete. b. ree ree from from erro error. r. c. 0onf 0onfir irma mato torr. d. Ceutral.
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%nhan %nhanci cing ng !ual !ualit itie ies s as desc descri ribe bed d b the the Inte Intern rnat ation ional al )cco )ccoun unti ting ng *tan *tandar dards ds +oar +oard/ d/s s ,I)*+/s- 0onceptual ramework6 include all of the following e3&e,tF a. 0omp 0ompar arab abil ilit it. . b. Ceut eutralit alit . c. Unde Unders rsta tand ndab abil ilit it. . d. 8eri 8erifi fiab abil ilit it. .
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%rin %rin 0omp 0ompan an appli applies es the same same acco accoun unti ting ng treatm treatmen entt to simil similar ar events events from from peri period od to period. period. %rin 0ompan 0ompan is e&hibiting e&hibiting which of the following following !ualities !ualities as described described b the International )ccounting *tandards +oard/s ,I)*+/s- 0onceptual rameworkB a. 8eri 8erifi fiab abil ilit it. . b. 0ons 0onsis iste tenc nc. . c.
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)ccord )cco rdin ing g to the the I)*+ I)*+ 0onc 0oncep eptu tual al ram ramew ewor ork6 k6 the the elem elemen ents ts assets6 assets6 liabilities liabilities66 and e!uit describe amounts of resources and claims to resources at>during a a. b. c. d.
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Ahich Ahich of the the follow following ing is not not a basic basic eleme element nt of fina financi ncial al state statemen mentsB tsB a. )ssets. b. *tatem *tatement ent of finan financia ciall posit position ion.. c. %!uit. d. Income.
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Ahich Ahich of the follow following ing basi basic c elemen elements ts of financ financial ial stat stateme ements nts is is n!t associated with the statement of financial positionB a. Income. b. %!uit. c. Hiabi abilit. d. )sset.
1.
Issuance Issuance of common common stock stock for cash affec affects ts which which basic basic element element of of financial financial statement statementsB sB a. 7evenues ues. b. Hosses. c. Hiab Hiabil ilit itie ies s. d. %!uit.
2.
(he Intern International ational )ccounting )ccounting *tandards *tandards +oard +oard ,I)*+,I)*+- defines defines five five interre interrelated lated elements elements of of financial statements. statements. Ahich of the following is n!t one of those elementsB a. )sset. b. Income. c. %!uit. d. )ll of the choices choices are element elements s defined defined b b the I)*+.
3.
(he Inter Internat nationa ionall )ccount )ccounting ing *tand *tandard ards s +oard ,I)*+ ,I)*+-- defines defines one of the the " element elements s as followsF 9the residual interest in the assets of the entit after deducting all its liabilities: Ahich element matches this descriptionB a. 7eta 7etain ined ed earn earnin ings gs.. b. Income. c. %!uit. d. )ll of the choic choices es match match this this defi definit nition ion..
4.
Ahich of th the fol following is n!t a basic assumption underling the financial accounting structureB a. %conom %conomic ic entit entit assump assumption tion.. b. ?oin ?oing g conce concern rn assu assump mpti tion. on. c.
2 * 82
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
".
Ahich Ahich basic basic assump assumptio tion n is illustra illustrated ted when when a firm report reports s financi financial al results results on an annual annual basisB a. %conom %conomic ic entit entit assump assumption tion.. b. ?oin ?oing g conce concern rn assu assump mpti tion. on. c.
#. #.
Ahic Ahich h basi basic c assu assump mpti tion on ma n!t be followed when a firm in bankruptc reports financial resultsB a. %conom %conomic ic entit entit assump assumption tion.. b. ?oin ?oing g conce concern rn assu assump mpti tion. on. c.
$.
Ahich accounting accounting assum assumption ption or principl principle e is being being violate violated d if a compan compan provid provides es financia financiall reports in connection with a new product introductionB a. %c %con onom omic ic enti entit t.. b.
*
'.
Ahich Ahich of the foll followi owing ng basic basic accoun accountin ting g assumpt assumption ions s is threate threatened ned b the the e&isten e&istence ce of severe inflation in the economB a. ;one ;oneta tar r unit unit assu assump mpti tion. on. b.
*
.
During the lifetim lifetime e of an entit entit accountan accountants ts produce produce financial financial statem statements ents at artificial artificial points points in time in accordance with the concept of bjectivit a. Co b. Ges c. Co d. Ges
1. 1.
Under Under curre current nt I7*6 I7*6 infl inflati ation on is ignore ignored d in accou accounti nting ng due due to the the a. econom economic ic entit entit assump assumption tion.. b. goin going g conce concern rn assu assump mpti tion. on. c. mone monetar tar unit unit assu assump mpti tion. on. d. peri period odic icit it assum assumpt ptio ion. n.
11. 11.
(he (he econ econom omic ic enti entit t assu assump mpti tion on a. is inapplicable inapplicable to unincorporat unincorporated ed businesses businesses.. b. recogni5es recogni5es the legal aspects aspects of business business organi5 organi5ations ations.. c. re!uire re!uires s periodi periodic c income income meas measure uremen ment. t. d. is applicab applicable le to all forms forms of busines business s organi5at organi5ations. ions.
0onceptual ramework Underling inancial )ccounting
2 * 8.
12. 12.
13. 13.
Duri During ng the the life lifeti time me of an enti entit t66 acco accoun unta tant nts s produ produce ce fina financ ncia iall stat statem emen ents ts at arbit arbitra rar r points in time in accordance with which basic accounting conceptB a. 0ost 0ost>b >ben enef efit it const constra rain intt b.
14. 14.
(he (he assum assumpt ptio ion n that that a busin busines ess s enter enterpr pris ise e will will n!t be sold or li!uidated in the near future is known as the a. econom economic ic entit entit assump assumption tion.. b. mone monetar tar unit unit assum assumpt ption ion.. c. mate materi riali alit t ass assum umpt ption ion.. d. none none of thes hese.
1".
Ahich of the the followi following ng is an implica implication tion of the going going concer concern n assumpti assumptionB onB a. (he hist histori orical cal cost cost princ principle iple is cred credibl ible. e. b. Depreciati Depreciation on and amorti5ati amorti5ation on policies policies are justifiab justifiable le and appropriat appropriate. e. c. (he currentnon currentnoncurre current nt classificat classification ion of assets assets and liabilities liabilities is justifiable justifiable and signif signif cant. d. )ll )ll of thes these. e.
1#. 1#.
(he basic basic assump assumptio tions ns of account accounting ing used used b the Interna Internatio tional nal )ccount )ccounting ing *tanda *tandards rds +oard ,I)*+- include all of the following e3&e,tF a. ?oin ?oing g conc concer ern. n. b.
1$. 1$.
(he basic basic assump assumptio tions ns of account accounting ing used used b the Interna Internatio tional nal )ccount )ccounting ing *tanda *tandards rds +oard ,I)*+- include a. Ceut eutralit alit . b.
1'. 1'.
(he basic basic assump assumptio tions ns of account accounting ing used used b the Interna Internatio tional nal )ccount )ccounting ing *tanda *tandards rds +oard ,I)*+- include a. ;onet onetar ar unit unit.. b. Deci Decisi sion on usef useful ulne ness ss c. (imelin liness. d. )ll of the choices choices are basic basic assumpt assumptions ions of accounting accounting..
2 * 8/
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
1. 1.
Ahic Ahich h of the the foll follow owin ing g basi basic c assu assump mpti tion ons s of acco accoun unti ting ng ,use ,used d b the the Inte Intern rnat atio iona nall )ccounting *tandards +oard- makes depreciation and amorti5ation policies justifiable and appropriateB a.
11.
111. 111.
8aluin 8aluing g assets assets at at their their li!uid li!uidati ation on values values rath rather er than than their their cost cost is %n&!ns%stent with the a. peri period odic icit it assum assumpt ptio ion. n. b. matc matchin hing g prin princi cipl ple. e. c. mate materi riali alit t con const strai raint nt.. d. histor historica icall cost cost princi principle. ple.
112.
7evenue 7evenue is generall generall recogni5 recogni5ed ed when when a sale sale occurs. occurs. (his (his statem statement ent descri describes bes the the a. consis consisten tenc c charac character terist istic. ic. b. matc matchin hing g prin princi cipl ple. e. c. revenu revenue e recogni recognitio tion n princi principle ple.. d. releva relevance nce charac character terist istic. ic.
113. 113.
?enera ?enerall ll66 revenue revenue from from sales sales should should be reco recogni5 gni5ed ed at a point point when when a. managem management ent decid decides es it is appro appropri priate ate to do so. so. b. the product product is availabl available e for sale sale to the ultimat ultimate e consumer. consumer. c. the entire entire amount amount receivabl receivable e has been collec collected ted from the customer customer and and there there remains remains no further warrant liabilit. d. none none of thes hese.
114. 114.
7eve 7evenu nue e gene genera rall ll shoul should d be rec recog ogni5 ni5ed ed a. at the the end end of of prod produc ucti tion on.. b. at the the time time of cash cash collec collectio tion. n. c. when hen rea reali li5e 5ed. d. d. when when a sal sale e occu occurs rs..
11". 11".
Ahic Ahich h of of the the foll follow owin ing g is is n!t a time when revenue ma be recogni5edB a. )t time ime of of sal sale e b. )t rece receip iptt of of cas cash h c. Duri During ng prod produc ucti tion on d. )ll of these are possib possible le times times of revenue revenue recogniti recognition. on.
0onceptual ramework Underling inancial )ccounting
2 * 8
11#. 11#.
(he (he )llow )llowan ance ce for Doub Doubtf tful ul )ccount )ccounts6 s6 which which appears appears as a dedu deduct ctio ion n from from )ccoun )ccounts ts 7eceivable on a statement of financial position and which is based on an estimate of bad debts6 is an application of the a. consis consisten tenc c charac character terist istic. ic. b. e&pens e&pense e reco recogni gnition tion princi principle. ple. c. mate materi riali alit t con const stra rain int. t. d. revenu revenue e reco recogni gnitio tion n prin princip ciple. le.
11$. 11$.
(he accou accounti nting ng princi principle ple of e&pen e&pense se recogni recognitio tion n is best best demons demonstra trated ted b a. not recogni5 recogni5ing ing an e&pense e&pense unless unless some some revenue revenue is reali5ed. reali5ed. b. associating associating effort effort ,e&pense ,e&pense-- with accomplish accomplishment ment ,revenue ,revenue-. -. c. recogn recogni5in i5ing g prepaid prepaid rent rent receiv received ed as reven revenue. ue. d. establishin establishing g an )ppropriati )ppropriation on for 0ontingenci 0ontingencies es account. account.
11'. 11'.
)pplic )pplicati ation on of the full full disc disclos losure ure princ principle iple a. is theoreti theoretical call l desirable desirable but not practi practical cal because because the costs of comple complete te disclosu disclosure re e&ceed the benefits. b. is violated violated when when important important financial financial informa information tion is buried buried in the notes notes to the the financial financial statements. c. is demonstr demonstrate ated d b the use of suppleme supplementa ntar r informat information ion present presenting ing the effects effects of changing prices. d. re!uires re!uires that the financia financiall statements statements be consisten consistentt and comparabl comparable. e.
11.
Ahich of the the followin following g is an argument argument against against using using historic historical al cost cost in accountingB accountingB a. air air value values s are are more more relev relevant. ant. b. istorical istorical costs are based based on on an e&change e&change transac transaction. tion. c. istor istorica icall cost costs s are are reliab reliable. le. d. air air value values s are subjec subjectiv tive. e.
12. 12.
Ahen Ahen is is rev reven enue ue gen gener eral all l rec recogn ogni5 i5ed edB B a. Ahen Ahen cash cash is rece receiv ived ed.. b. Ahen Ahen the the war warra rant nt e&pi e&pire res. s. c. Ahen Ahen prod produc ucti tion on is comp comple lete ted. d. d. Ahen Ahen the the sale sale occu occurs rs..
121.
Ahich of the the followin following g are the two two componen components ts of the revenue revenue recogniti recognition on principle principleB B a. 0ash 0ash is receiv received ed and the the amount amount is is materi material. al. b. It is probable probable that that future future economic economic benefits benefits will will flow to to the compan compan and it is possible possible to reliabl measure the amount. c.
122. 122.
Ahic Ahich h of the the fol follo lowi wing ng pra prac ctice tices s ma ma n!t be an acceptable deviation from recogni5ing revenue at the point of saleB a. Upon Upon rece receipt ipt of cash cash.. b. Duri During ng prod produc ucti tion on.. c. Upon Upon rece receipt ipt of orde order. r. d. %nd %nd of prod produc ucti tion on..
2 * 84
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
123. 23.
Ahic Ahich h of of the the foll follow owin ing g is is n!t a re!uired component of financial statements prepared in accordance with generall accepted accounting principlesB a.
124.
Ahat is the the general general approac approach h as to when when product product costs costs are recogni5ed recogni5ed as e&pense e&pensesB sB a. In the the period period when when the e&pe e&pense nses s are paid. paid. b. In the the period period when when the the e&pens e&penses es are incu incurre rred. d. c. In the the period period when when the the vendor vendor invoi invoice ce is rece receive ived. d. d. In the the period period when when the the related related revenue revenue is recogni recogni5ed. 5ed.
12". 12".
Cot adjust adjusting ing the amoun amounts ts reporte reported d in the financial financial statem statement ents s for inflatio inflation n is an e&l e&le e of which basic principle of accountingB a. %c %con onom omic ic enti entit t.. b. ?oin ?oing g conc concer ern. n. c. ist istor oric ical al cost cost.. d. ull ull disc disclo losu sure re..
12#. 12#.
7ecogn 7ecogniti ition on of e&pense e&pense related related to amorti5 amorti5ati ation on of an intangibl intangible e asset asset illustra illustrates tes which which principle of accountingB a. %&pe %&pens nse e rec recogn ognit itio ion. n. b. ull ull disc disclo losu sure re.. c. 7eve 7evenue nue reco recogn gnit itio ion. n. d. ist istor oric ical al cos cost. t.
12$. 12$.
Ahen Ahen should should an e&pe e&pendi nditur ture e be record recorded ed as an asset asset rath rather er than than an e&pen e&penseB seB a. Cever. b. )lwas. c. If the the amoun amountt is mate materi rial. al. d. Ahen Ahen fut futur ure e bene benefi fitt e&it e&its. s.
12'. 12'.
Ahic Ahich h acco accoun unti ting ng assum assumpt ption ion or princi principl ple e is being being viola violate ted d if a comp compan an is a part part to major litigation that it ma lose and decides n!t to include the information in the financial statements because it ma have a negative impact on the compan@s stock priceB a. ull ull disc disclo losu sure re.. b. ?oin ?oing g conc concer ern. n. c. ist istor oric ical al cost cost.. d. ;atchin hing.
12. 12.
Ahich Ahich assump assumptio tion n or principle principle re!uir re!uires es that all all informat information ion signif significa icant nt enough enough to affect affect a decision of reasonabl informed users should be reported in the financial statementsB a. ;atchin hing. b. ?oin ?oing g conc concer ern. n. c. ist istor oric ical al cost cost.. d. ull ull disc disclo losu sure re..
0onceptual ramework Underling inancial )ccounting
2 * 85
13. 13.
(he basic basic princip principles les of accoun accountin ting g used b the Interna Internatio tional nal )ccoun )ccountin ting g *tandard *tandards s +oard include all of the following e3&e,t ) a. ;eas easurem uremen entt b. ull ull disc disclo losu sure re c. 7eve 7evenu nue e recog recogni niti tion on d. ?oin ?oing g con conc cern ern
131. 131.
(he Inter Internat nation ional al )ccoun )ccountin ting g *tandar *tandards ds +oard +oard has given given compan companies ies the optio option n of using fair value to report all of the following e3&e,tF a. 7ecei eceiv vable ables s b. Inves nvestm tmen ents ts c. ina inanc ncia iall liab liabil ilit itie ies s d. )ll of the choic choices es can can be valued valued at at fair fair value. value.
132.
Under Internation International al inanci inancial al 7eport 7eporting ing *tandard *tandards s ,I7*,I7*- revenue revenue ma ma be be recogni5ed recogni5ed a. )t the the poi point nt of sal sale. e. b. Duri During ng prod produc ucti tion on.. c. )t the the end end of of pro produ duct ctio ion. n. d. )ll of the the choices choices ma be be acceptable acceptable for for revenue revenue recognitio recognition n under I7*. I7*.
133. 133.
Under Under Interna Internatio tional nal inanc inancial ial 7eport 7eporting ing *tanda *tandards rds ,I7*,I7*- JJJJJJ JJJJJJJ J costs costs are charged charged off in the immediate period and JJJJJJJJ costs ma be carried into future periods. a.
134. 134.
Unde Underr Inte Intern rnat atio iona nall ina inanc ncia iall 7epo 7eport rtin ing g *tan *tanda dard rds s ,I7 ,I7**- note notes s to the the fina financ ncia iall statements a. ;ust ;ust be !uan !uanti tifi fiabl able. e. b. ;ust ;ust !ua !uali lif f as as an ele eleme ment nt.. c. )mplif )mplif or e&plain e&plain items items presented presented in the main main bod of the the financial financial statemen statements. ts. d. )ll of the choices choices are are correct correct regarding regarding notes notes to the financial financial statem statements. ents.
13".
Under Internation International al inanci inancial al 7eport 7eporting ing *tandard *tandards s ,I7*,I7*- supplement supplementar ar inform information ation a. ;a be inform information ation that that is high high in relevance relevance but but low in reliabilit reliabilit.. b. ;a include include e&planations e&planations of uncertain uncertainties ties and and continge contingencies. ncies. c. ;a include include description descriptions s of accoun accounting ting policie policies s and methods methods.. d. )ll of the the choices choices are correct correct regardin regarding g supplement supplementar ar informat information. ion.
13#.
Ahich of the the followi following ng is a constr constraint aint in presen presenting ting financi financial al informat informationB ionB a. ;ater ateriialit alit. . b. ull ull disc disclo losu sure re.. c. 7elevance. d. 0ons 0onsis isttenc enc..
2 * 86
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
13$. 13$.
)ll of the the follow following ing repre represen sentt costs costs of provi providin ding g financi financial al inform informati ation on e3&e,t a. preparin aring g. b. diss dissem emin inat atin ing. g. c. acce access ssin ing g capi capita tal. l. d. auditing.
13'. 13'.
Ahich Ahich of the the followi following ng are benef benefits its of prov providin iding g financ financial ial infor informat mation ionB B a.
13. 3.
Aher Ahere e is is mat mater eria iali lit t n!t used in providing financial informationB a. )ppli )ppling ng the reven revenue ue recognit recognition ion princ principle iple.. b. Determining Determining what what items items to include include in the financial financial statem statements. ents. c. )ppli )ppling ng the the going going conce concern rn assum assumpti ption. on. d. Determ Determinin ining g the leve levell of disc disclos losure ure..
14. 14.
%&pe %&pens nsin ing g the the cost cost of cop cop paper paper when when the paper paper is ac!uir ac!uired ed is an e&l e&le e of whic which h constraintB a. ;ater ateriialit alit. . b. 0os 0ostbe tbene nefi fit. t. c. 0ons 0onser erv vatis atism. m. d. Indu Indust str r prac practi tice ces. s.
141. 141.
0har 0hargi ging ng off the cost cost of a wast wasteb ebas aske kett with with an estima estimate ted d usef useful ul life life of 1 ears ears as an e&pense of the period when purchased is an e&le of the application of the a. consis consisten tenc c charac character terist istic. ic. b. matc matchin hing g prin princi cipl ple. e. c. mate materi riali alit t con const strai raint nt.. d. histor historica icall cost cost princi principle. ple.
142. 142.
Ahich Ahich of of the the follo followin wing g state statemen ments ts about about materi materiali alit t is is n!t correctB a. )n item item must must make make a differen difference ce or it need not not be disclos disclosed. ed. b. ;aterialit ;aterialit is a matter matter of relativ relative e si5e or importanc importance. e. c. )n item is material material if its inclusion inclusion or omissi omission on would influenc influence e or change change the judgment judgment of a reasonable person. d. )ll of these are correct correct statem statements ents about about materia materialit. lit.
143. 143.
(he Intern Internatio ational nal )ccount )ccounting ing *tandar *tandards ds +oard/s +oard/s concept conceptual ual framewo framework rk includes includes a cost benefit constraint. Ahich of the following best describes the costbenefit constraintB constraintB a. (he benefits benefits of the the informatio information n must be greater greater than than the costs costs of providing providing it. b. inancial inancial informat information ion should should be free from from cost to to users of the the information. information. c. 0osts 0osts of providing providing financial financial inform information ation are not not alwas alwas evident evident or measurable6 measurable6 but but must be considered. d. )ll of the the choi choices ces are correc correct. t.
0onceptual ramework Underling inancial )ccounting
2 * 87
144. 144.
(he Intern Internati ational onal )ccount )ccounting ing *tandar *tandards ds +oard/s +oard/s ,I)*+,I)*+- concept conceptual ual framewo framework rk include includes sa costbenefit constraint. Ahich of the following is true true regarding this constraintB a. +enefits +enefits are are more more difficult difficult to !uantif !uantif than than costs. costs. b. (he I)*+ I)*+ seeks seeks input on on costs costs and benefits benefits as part of their their due process process.. c. +enefits +enefits to preparer preparers s ma include include access access to to capital capital at a lower lower cost. cost. d. )ll of the the choic choices es are are corr correct ect..
14". 14".
(he Intern Internati ational onal )ccount )ccounting ing *tandar *tandards ds +oard/s +oard/s ,I)*+,I)*+- concept conceptual ual framewo framework rk include includes sa materialit constraint. Ahich of the following is true true regarding this constraintB a. (he I)*+/s I)*+/s rule for for materialit materialit is is an item under under "= of net net income is considered considered immaterial. b. ;aterialit ;aterialit factors factors into both both internal internal and e&ternal e&ternal accounting accounting decisi decisions. ons. c. )n item is immateri immaterial al if its inclusion inclusion or omissio omission n would influe influence nce or change change the the judgment of a reasonable person. d. )ll of the the choic choices es are are corr correct ect..
14#.
(he Internation International al )ccoun )ccounting ting *tandards *tandards +oard/s +oard/s ,I)*+,I)*+- conceptual conceptual framework framework a. Includes Includes the concept concept of prudenc prudence e or conservatis conservatism m which means means when in doubt6 doubt6 choose the solution that will be least likel to overstate assets or income and>or understate liabilities or e&penses. b. %&cludes %&cludes the concept concept of prudenc prudence e or conservatis conservatism m because because it is inconsis inconsistent tent with with neutralit6 which encompasses freedom from bias. c. Includes Includes the concep conceptt of prudence prudence or conserv conservatism atism which which means means when when in doubt6 doubt6 choose the solution that will be least likel to understate assets or income and>or overstate liabilities or e&penses. d. Includes Includes the concep conceptt of prudence prudence or conserv conservatism atism as a desirable6 desirable6 :'t n!t "e;'%"e$ 6 !ualit of financial reporting information.
14$. 14$.
(he Intern Internatio ational nal )ccoun )ccounting ting *tanda *tandards rds +oard/s +oard/s ,I)*+,I)*+- concept conceptual ual framewo framework rk include includes s which of the following constraintsB constraintsB a.
2 * 29
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
M'-t%,-e C
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d c d d c d a a b c a c a b c c
#$. #'. #. $. $1. $2. $3. $4. $". $#. $$. $'. $. '. '1. '2.
a c c d b d a c c b b d d d d c
'3. '4. '". '#. '$. ''. '. . 1. 2. 3. 4. ". #. $. '.
a b c b b a b a d d c d c b a a
. 1. 11. 12. 13. 14. 1". 1#. 1$. 1'. 1. 11. 111. 112. 113. 114.
c c d a b d d d b a d a d c d d
11". 11#. 11$. 11'. 11. 12. 121. 122. 123. 124. 12". 12#. 12$. 12'. 12. 13.
d b b c a d b c a d c a d a d d
131. 132. 133. 134. 13". 13#. 13$. 13'. 13. 14. 141. 142. 143. 144. 14". 14#.
d d a c a a c d c a c d a d b b
14$.
c
*olutions to those ;ultiple 0hoice !uestions for which the answer is 9none of these.: $'. a compan compan change changes s its inven inventor tor method method ever ever few ear ears s in order order to ma&imi ma&imi5e 5e report reported ed income ,other answers are possible-. $. comparabilit. 14. 14. goin going g con conce cern rn assu assump mpti tion on.. 113. 113. It is proba probable ble that that future future econom economic ic benefi benefits ts will will flow flow to the comp compan an and and it is possib possible le to reliabl measure the amount.
0onceptual ramework Underling inancial )ccounting
2 * 28
E=ERCISES E31 2*8/6L%&amination of the conceptual framework.
Users of financial statements can face different !uestions about the recognition and measurement of financial items. (o help develop the tpe of financial information that can be used to answer these !uestions financial accounting and reporting rules on a conceptual framework. Inst"'&t%!ns 1. Ahat are are the basic componen components ts of the concept conceptual ual framewor frameworkB kB 2. Ahat are are our views views about about the success success of the the conceptual conceptual framew frameworkB orkB
S!-'t%!n 2*8/6
1. (he basic basic componen components ts of the concept conceptual ual framewo framework rk areF areF a. bjective bjective provides provides the the foundation foundation for for the concept conceptual ual framewor framework. k. b. Eualitative Eualitative character characteristic isticsLthe sLthe characteri characteristic stics s that make accounting accounting information information useful. c. %lementsLpr %lementsLprovide ovide the definit definitions ions of the broad broad classific classifications ations of items items found found in financial financial statements. d. perational perational guidelines guidelines ,recogniti ,recognition on measurement measurement and disclosure disclosure concepts concepts-Lreco -Lrecommend mmend concepts to guide decisions concerning the displa and disclosure of information about income6 cash flows6 and financial position. (he operational guidelines are composed of three partsF ,1,1- +asi +asic c assu assump mpti tions ons.. ,2,2- )cco )ccoun unti ting ng prin princi ciple ples. s. ,3,3- 0ons 0onsttrain raints ts.. 2. In general6 general6 the success success of the conceptual conceptual framew framework ork will be determine determined d b its acceptance acceptance in practice. (he acceptance in practice will be based in large part upon the I)*+@s solution of practical problems on a timel basis. It is a matter of opinion and et to be seen whether or not the conceptual framework will bring about the following benefits. a. (he I)*+ should should be able able to issue issue more useful useful and consist consistent ent standards standards in the the future. future. b. Cew Cew prac practi tice ce prob proble lems ms shou should ld be solv solved ed more more rapi rapidl dl b refe refere renc nce e to an e&is e&isti ting ng framework. c. +etter +etter understa understandin nding g of and confid confidenc ence e in the financ financial ial reportin reporting g process process b financi financial al statement users should result. d. %nhanced %nhanced comparabilit comparabilit among among companies companies@@ financial financial statement statements s should result. result.
2 * 22
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
E31 2*8/7L)ccounting conceptsLidentification.
*tate the accounting assumption6 principle6 !ualitative characteristic6 or constraint that is most applicable in the following cases. 1. )ll paments paments less less than M2" are are e&pensed e&pensed as incurred. incurred. ,Do not not use conservat conservatism. ism.-2. (he compan compan emplos emplos the same same inventor inventor valuati valuation on method method from period period to period. period. 3. ) patent is capitali5e capitali5ed d and amorti5e amorti5ed d over the the periods periods benefited benefited.. 4. )ssuming )ssuming that dollars dollars toda toda will will bu as much much as ten ten ears ears ago. ". 7ent paid in advance advance is record recorded ed as prepaid prepaid rent. rent. #. inanc inancial ial state statemen ments ts are prepar prepared ed each ear. ear. $. )ll significan significantt poststate poststatement ment of financi financial al position position events events are reported. reported. '.
1. 2. 3. 4. ". #. $. '.
;ate ;ateri rial alit it constr constrain aint. t. 0ompar 0omparabil abilit it charac character terist istic. ic. %&pense %&pense recognition recognition principle principle or going concer concern n assumption. assumption. ;one ;oneta tar r unit unit assu assump mpti tion on.. %&pense %&pense recognition recognition principle principle or going concer concern n assumption. assumption.
E31 2*89L)ccounting conceptsLidentification.
S!-'t%!n 2*89
1. 2. 3. 4.
0omp 0ompar arab abil ilit it. .
0onceptual ramework Underling inancial )ccounting
2 * 2.
E31 2*88L)ccounting conceptsLmatching.
Histed Histed below are several several !ualitative !ualitative characteristic characteristics6 s6 accounting accounting principles principles and assumptions assumptions.. ;atch the letter of each with the appropriate phrase that states its application. ,Items a through k ma be used more than once or not at all.a. b. c. d. e. f.
%conomic entit assumption ?oing concern assumption ;onetar unit assumption
g. h. i. j. k.
%&pense recognition principle ull disclosure principle 7elevance aithful representation 0omparabilit
JJ JJJJJ 1.
*tabledollar assumption ,do not use historical cost principle-.
JJ JJJJJ 2.
It is probable that future economic economic benefits will flow to the compan and it is possible possible to reliabl measure the amount.
JJ JJJJJ 3.
JJ JJJJJ 4.
Gearl financial reports.
JJ JJJJJ ".
7ecording annual depreciation.
JJ JJJJJ #.
Useful standard measuring unit for for business transactions.
JJ JJJJJ $.
Cotes as part of necessar necessar information to a fair presentation. presentation.
JJ JJJJJ '.
)ffairs of the business distinguished distinguished from those of its owners.
JJ JJJJJ .
+usiness enterprise assumed to have a long life.
JJ JJJJJ 1.
8aluing assets at amounts originall originall paid for them.
JJ JJJJJ 11.
)pplication of the same accounting accounting principles as in the preceding ear.
JJ JJJJJ 12.
*ummari5ing significant accounting accounting policies.
JJ JJJJJ 13.
S!-'t%!n 2*88
1. c 2. f 3. j
4. d ". g #. c
$. h '. a . b
1. e 11. k 12. h
13. i
2 * 2/
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
E31 2*82L)ccounting conceptsLfill in the blanks.
ill ill in the blanks blanks below below with with the accounti accounting ng princi principle ple66 assump assumptio tion6 n6 or related related item that that completes the sentence.
best
1. JJJJJJJJJJJJ JJJJJJJJJJJJJJJJJJJ JJJJJJJJJJJJ JJJJJ and and JJJJJJJJJ JJJJJJJJJJJJJJJ JJJJJJJJJJJJJ JJJJJJJJ J are the two two primar primar !ualities that make accounting information useful for decision making. 2. Information Information that that helps helps users confirm confirm or correc correctt prior e&pectat e&pectations ions has JJJJJJJ JJJJJJJJJJJJJ JJJJJJJJJJ JJJJ JJJJJJJJJJJJJJJJJJJ. 3. JJJJJJJJJJJJ JJJJJJJJJJJJJJJJJJJ JJJJJJJJJJJJ JJJJJ enables enables users users to identif identif the the real similari similarities ties and differ differences ences in economic phenomena because the information has been measured and reported in a similar manner for different enterprises. 4. *ome *ome costs costs whic which h give give rise to futu future re benefi benefits ts cannot cannot be dire direct ctl l assoc associat iated ed with with the reve revenu nues es the the gene genera rate te.. *uch *uch cost costs s are are alloc allocat ated ed in a JJJJ JJJJJJ JJJJ JJJJ JJJJ JJJJ JJJJ JJJJ JJ and JJJJJJJJJJJJJJJJJ manner to the periods e&pected to benefit from from the cost.
". JJJJJJJJJJJJ JJJJJJJJJJJJJJJJJJJ JJJJJJJJJJJ JJJJ would would allow the e&pensi e&pensing ng of all repair repair tools tools when when purchased purchased66 even though the have an estimated life of 3 ears. #. JJJJJJJJJJJJ JJJJJJJJJJJJJJJJJJJ JJJJJJJJJJJJ JJJJJ is the the !ualit !ualit of informat information ion that lets reason reasonabl abl informed informed users see the link between information contained in the financial statements and the decisions the make. $. JJJJJJ JJJJJJJJJ JJJJJJ JJJJJJ JJJJJJJ JJJJJ J occurs occurs when independ independent ent measure measures s using using the same same method methods6 s6 obtain similar results. '.
S!-'t%!n 2*82
1. 2. 3. 4. ".
7elevanceK fai faithful rep representation confirmator value 0omparabilit rationalK sstematic (he materialit constraint
#. $. '. . 1.
Understandabilit 8erifiabilit full disclosure periodicit revenue recognition
0onceptual ramework Underling inancial )ccounting
2 * 2
E31 2*8.L+asic assumptions.
+riefl e&plain the five basic assumptions that underlie financial accounting.
S!-'t%!n 2*8.
1. (he (he econo economi mic c enti entit t assu assump mpti tion on state states s that that econo economi mic c acti activi vit t can can be iden identi tifie fied d with with a particular unit of accountabilit. 2. (he going concer concern n assumption assumption assumes assumes that that a business business enterprise enterprise will will have a long life. life. 3. (he monetar monetar unit unit assump assumptio tion n means means that mone mone is the common common denomin denominato atorr of econom economic ic activi activit t and provid provides es an appropr appropriat iate e basis basis for accoun accountin ting g measur measureme ement nt and anals analsis. is. In addition6 the monetar unit remains reasonabl stable. 4. (he periodicit periodicit assumpt assumption ion implies implies that the economic economic activit activities ies of an enterprise enterprise can be divided divided into artificial time periods. ". )ccr )ccrua uall basi basis s acco accoun unti ting ng means means that that trans transac acti tions ons that that chan change ge a comp compan an@ @s s fina financ ncia iall statements are recorded in the perio ds in which the events occur.
E31 2*8/L7evenue recognition.
7evenue 7evenue is generall recogni5e recogni5ed d at the point of sale. (here (here are three e&ceptions6 e&ceptions6 however. however. Came the time for each e&ception6 give two !ualifications or criteria for the use of each e&ception6 and give an e&le for each e&ception.
S!-'t%!n 2*8/
1. During product production. ion. (he revenue revenue is known known ,contract,contract- or dependabl dependabl estimab estimable. le. (otal (otal costs are are estimable or other means are available to estimate progress toward completion. %&les are longterm construction contracts and servicetpe transactions. 2. )t completion. completion. (here are !uoted prices. prices. Units are interchangeabl interchangeable. e. (here are no significan significantt distribution costs. %&les are precious metals or agricultural products. 3. )t collection. collection. (here (here is no reasonable reasonable basis for estimatin estimating g the degree of collectib collectibilit ilit.. 0osts of collection6 collection6 bad debts6 debts6 and repossessions repossessions are not estimable. estimable. %&les %&les are installment installment sales and cost recover method.
E31 2*8L0ost principle.
0ost as a basis of accounting for assets has been severel critici5ed. Ahat defense can ou build for cost as the basis for financial accountingB
S!-'t%!n 2*8
0ost is definite and verifiable and not a matter for conjecture or opinion. nce established6 cost is fi&ed as long as the asset remains the propert of the part that incurred the cost. 0ost is based on factK factK that is6 it is the result result of an arm@s arm@s length length transact transaction. ion. 0ost is also also measur measurable able or
2 * 24
Test Bank !" Inte"#e$%ate A&&!'nt%n() IFRS E$%t%!n
determinable. ver the ears6 accountants have found cost to be the most practical basis for record record keepin keeping. g. inanci inancial al statem statements ents prepare prepared d on a cost cost basis basis provid provide e busines business s enterp enterpris rise e information having a common6 accepted basis from which each reader can make inferences6 comparisons6 and analses.
E31 2*84L;atching concept.
) concept is a group of related ideas. ;atching could be considered a concept because it includes ideas related to both revenue recognition and e&pense recognition. +riefl e&plain the ideas in ,a- revenue recognition and ,b- e&pense recognition.
S!-'t%!n 2*84
,a- (he ideas in revenue revenue recognition recognition include include the three 7@s and earnedF earnedF 1. 7evenu 7evenues es are inflows inflows of net assets assets from delive deliverin ring g or produci producing ng goods or service services s or other earning activities that are the major operations of an enterprise during a period. 2. 7ecognition 7ecognition is is recording recording and and reporting reporting in the the financial financial statem statements. ents. 3. 7even evenue ues s are are realized when when goods or services are e&changed for cash or claims to cash. 4. 7even evenue ues s are are earned when when the earnings process is complete or virtuall complete. (he revenue recognition principle is that revenue is recogni5ed when it is probable that future economi economic c benefi benefits ts will will flow flow to the compan compan and reliabl reliable e measur measureme ement nt of the amount amount is possible. ,b- (he ideas in e&pense recognition recognition include include e&pense e&pense and matchingF matchingF 1. %&penses %&penses are outflows outflows of net assets assets during during a period from from deliverin delivering g or producing producing goods or services or other activities that are the major operations of the entit. 2. %&penses %&penses are recogni5ed recogni5ed when when the goods or or services services ,efforts,efforts- make make their contri contribution bution to to revenue. (he e&pense recognition principle is that e&penses are matched with revenues. %&penses are matched three wasF 1. Ahen Ahen there is an associ associati ation on with revenue6 revenue6 e&pens e&penses es are matched matched with revenue revenues s in the period the revenues are recogni5ed. 2. Ahen no associati association on with revenue revenue is evident6 evident6 e&penses e&penses are are allocated allocated on some sstem sstematic atic and rational basis. 3. Ahen Ahen no asso associ ciat atio ion n with with reve revenue nue is evid eviden entt and and no futu future re bene benefi fits ts are are e&pe e&pect cted ed66 e&penses are recogni5ed immediatel.
