Which of the following is not a major challenge facing the accounting profession

FINANCIAL ACCOUNTING AND

ACCOUNTING STANDARDS

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

Answer No. Description

F 1. Definition of financial accounting. T 2. Purpose of financial statements. T 3. Definition of financial accounting. T 4. Capital allocation process. F 5. Objective of financial reporting. T 6. Decision-Usefulness approach. T 7. Users of financial statements. F 8. Committee on Accounting Procedure. F 9. Passage of FASB standards. T 10. Financial Accounting Concepts. T 11. Creation of Accounting Principles Board. F 12. FASB Codification. T 13. Code of Professional Conduct. F 14. GAAP and political action. T 15. Public Company Accounting Oversight Board. T 16. Expectations gap. F 17. Financial reports. F 18. Fair value information. F 19. International Financial Reporting Standards. F 20. Ethical issues.

MULTIPLE CHOICE—Conceptual

Answer No. Description

a 21. Financial accounting. d 22. Users of financial reports. d 23. Identify the major financial statements. a 24. Financial reporting entity. d 25. Differences between financial and managerial accounting. b 26. Financial reporting communication. b 27. Managerial accounting. a 28. Capital allocation process. d 29. Efficient use of resources. d 30. Capital allocation process. c 31. Financial statement information. c 32. Accounting profession challenge. c 33. Financial reporting objective. d 34. Financial statements primary users. c 35. Investor’s decision making.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 2

MULTIPLE CHOICE—Conceptual (cont.)

Answer No. Description

b 36. Accrual accounting. c 37. Objective of financial reporting perspective. c 38. Meaning of “generally accepted.” b 39. Common set of standards and procedures. a 40. Limitation of general purpose financial statements. c 41. Securities and Exchange Commission and accounting standard setting. d 42. Due process in FASB standard setting. d 43. Organizations responsible for setting accounting standards. b 44. Reason for Accounting Principles Board creation b 45. Organization issuing Accounting Research Bulletins. a 46. Characteristic of GAAP. c 47. Characteristics of GAAP. d 48. FASB accounting standards. c 49. FASB standard passage. b 50. Purpose of Emerging Issues Task Force. a 51. AICPA role in standard setting. c 52. Role of SEC. c 53. Powers of the SEC. d 54. SEC enforcement. d 55. Creation of FASB. d 56. Appointment of FASB members. a 57. Purpose of the Financial Accounting Foundation. b 58. Characteristics of FASB. b 59. FASB and "due process" system. b 60. Publications of FASB. c 61. Purpose of FASB Technical Bulletins. d 62. Purpose of Emerging Issues Task Force. b 63. Role of the AICPA. b 64. Pronouncement issued by the APB. c 65. Standard setting organizations. d 66. Identification of standard setting organizations. c 67. Statements of financial accounting concepts. d P68. FASB members. d P69. FASB statement process. d 70. Nature of GAAP. d 71. Body which promulgates GAAP. d 72. Publications which are not GAAP. d 73. Publications which are not GAAP. b 74. Code for Professional Conduct Rule 203. c 75. Purpose of FASB staff position. c 76. Components of GAAP. a 77. Political environment of standard setting. c 78. International Accounting Standards Board.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 4

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1

1. TF 21. MC 23. MC 25. MC P27. MC
2. TF 22. MC 24. MC 26. MC Learning Objective 2
3. TF 4. TF 28. MC 29. MC 30. MC Learning Objective 3
4. TF 33. MC 35. MC 37. MC
5. TF 34. MC 36. MC 85. E Learning Objective 4
6. TF 38. MC 39. MC 40. MC 86. E Learning Objective 5
7. TF 43. MC 49. MC 55. MC 61. MC 67. MC 89. E
8. TF 44. MC 50. MC 56. MC 62. MC P68. MC
9. TF 45. MC 51. MC 57. MC 63. MC P69. MC
10. TF 46. MC 52. MC 58. MC 64. MC P86. E
11. MC 47. MC 53. MC 59. MC 65. MC 87. E
12. MC 48. MC 54. MC 60. MC 66. MC 88. E Learning Objective 6
13. TF 70. MC 72. MC 74. MC 76. MC
14. TF 71. MC 73. MC 75. MC

Learning Objective 7 14. TF 16. TF 77. MC 79. MC 81. MC 83. E 15. TF 62. MC 78. MC 80. MC 82. MC Learning Objective 8 17. TF 18. TF 19. TF 31. MC 32. MC Learning Objective 9 20. TF 84. MC

Note: TF = True-False MC = Multiple Choice E = Exercise

Financial Accounting and Accounting Standards 1 - 5

TRUE-FALSE—Conceptual

1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control a company’s operations.

2. Financial statements are the principal means through which a company communicates its financial information to those outside it.

3. Users of financial reports provided by a company use that information to make their capital allocation decisions.

4. An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit.

5. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, but not to users who are not investors.

6. Investors are interested in financial reporting because it provides information that is useful for making decisions (decision-usefulness approach).

7. Users of financial accounting statements have both coinciding and conflicting needs for information of various types.

8. The Securities and Exchange Commission appointed the Committee on Accounting Procedure.

9. The passage of a new FASB Standards Statement requires the support of five of the seven board members.

10. Financial Accounting Concepts set forth fundamental objectives and concepts that are used in developing future standards of financial accounting and reporting.

11. The AICPA created the Accounting Principles Board in 1959.

12. The FASB’s Codification integrates existing GAAP, and creates new GAAP.

13. The AICPA’s Code of Professional Conduct requires that members prepare financial statements in accordance with generally accepted accounting principles.

14. GAAP is a product of careful logic or empirical findings and are not influenced by political action.

15. The Public Company Accounting Oversight Board has oversight and enforcement authority and establishes auditing and independence standards and rules.

16. The expectations gap is caused by what the public thinks accountants should do and what accountants think they can do.

Financial Accounting and Accounting Standards 1 - 7

1. All the following are differences between financial and managerial accounting in how accounting information is used except to a. plan and control company's operations. b. decide whether to invest in the company. c. evaluate borrowing capacity to determine the extent of a loan to grant. d. All the above.

2. Which of the following represents a form of communication through financial reporting but not through financial statements? a. Balance sheet. b. President's letter. c. Income statement. d. Notes to financial statements.

P27. The process of identifying, measuring, analyzing, and communicating financial information

needed by management to plan, evaluate, and control an organization’s operations is called a. financial accounting. b. managerial accounting. c. tax accounting. d. auditing.

1. How does accounting help the capital allocation process attract investment capital? a. Provides timely, relevant information. b. Encourages innovation. c. Promotes productivity. d. a and b above.

2. Whether a business is successful and thrives is determined by a. markets. b. free enterprise. c. competition. d. all of these.

3. An effective capital allocation process a. promotes productivity. b. encourages innovation. c. provides an efficient market for buying and selling securities. d. all of these.

4. Financial statements in the early 2000s provide information related to a. nonfinancial measurements. b. forward-looking data. c. hard assets (inventory and plant assets). d. none of these.

5. Which of the following is not a major challenge facing the accounting profession? a. Nonfinancial measurements. b. Timeliness. c. Accounting for hard assets. d. Forward-looking information.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 8

1. What is the objective of financial reporting? a. Provide information that is useful to management in making decisions. b. Provide information that clearly portray 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.

2. Primary users for general-purpose financial statements include a. creditors. b. employees. c. investors. d. both creditors and investors.

3. When making decisions, investors are interested in assessing a. the company’s ability to generate net cash inflows. b. management’s ability to protect and enhance the capital providers’ investments. c. Both a and b. d. the company’s ability to generate net income.

4. Accrual accounting is used because a. cash flows are considered less important. b. it provides a better indication of ability to generate cash flows than the cash basis. c. it recognizes revenues when cash is received and expenses when cash is paid. d. none of the above.

5. Which perspective is adopted as part of the objective of general-purpose financial reporting? a. Decision-usefulness perspective. b. Proprietary perspective. c. Entity perspective. d. Financial reporting perspective.

6. Accounting principles are "generally accepted" only when a. an authoritative accounting rule-making body has established it in an official pro- nouncement. b. it has been accepted as appropriate because of its universal application. c. both a and b. d. neither a nor b.

7. A common set of accounting standards and procedures are called a. financial accounting standards. b. generally accepted accounting principles. c. objectives of financial reporting. d. statements of financial accounting concepts.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 10

1. Characteristics of generally accepted accounting principles include all of the following except a. authoritative accounting the rule-making body established a principle of reporting. b. standards are considered useful by the profession. c. each principle is approved by the SEC. d. practice has become universally accepted over time.

2. Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight? a. Smaller membership. b. FASB board members are well-paid. c. FASB board members must be CPAs. d. Due process.

3. The passage of a new FASB Standards Statement requires the support of a. all Board members. b. three Board members. c. four Board members. d. five Board members.

4. What is the purpose of Emerging Issues Task Force? a. Provide interpretation of existing standards. b. Provide a consensus on how to account for new and unusual financial transactions. c. Provide interpretive guidance. d. Provide timely guidance on select issues.

5. Which organization is responsible for issuing Emerging Issues Task Force Statements? a. FASB b. CAP c. APB d. SEC

6. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as a. consistently primary. b. consistently secondary. c. sometimes primary and sometimes secondary. d. non-existent.

7. The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the a. FASB. b. AICPA. c. SEC. d. APB.

Financial Accounting and Accounting Standards 1 - 11

1. Companies that are listed on a stock exchange are required to submit their financial statements to the a. AICPA. b. APB c. FASB. d. SEC.

2. The Financial Accounting Standards Board (FASB) was proposed by the a. American Institute of Certified Public Accountants. b. Accounting Principles Board. c. Study Group on the Objectives of Financial Statements. d. Special Study Group on establishment of Accounting Principles (Wheat Committee).

3. The Financial Accounting Standards Board a. has issued a series of pronouncements entitled Statements on Auditing Standards. b. was the forerunner of the current Accounting Principles Board. c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards. d. is appointed by the Financial Accounting Foundation.

4. The Financial Accounting Foundation a. oversees the operations of the FASB. b. oversees the operations of the AICPA. c. provides information to interested parties on financial reporting issues. d. works with the Financial Accounting Standards Advisory Council to provide informa- tion to interested parties on financial reporting issues.

5. The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is a. the FASB issues exposure drafts of proposed standards. b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions. c. all members of the FASB possess extensive experience in financial reporting. d. a majority of the members of the FASB are CPAs drawn from public practice.

6. The Financial Accounting Standards Board employs a "due process" system which a. is an efficient system for collecting dues from members. b. enables interested parties to express their views on issues under consideration. c. identifies the accounting issues that are the most important. d. requires that all accountants must receive a copy of financial standards.

7. Which of the following is not a publication of the FASB? a. Statements of Financial Accounting Concepts b. Accounting Research Bulletins c. Interpretations d. Technical Bulletins

Financial Accounting and Accounting Standards 1 - 13

P68. Members of the Financial Accounting Standards Board are a. employed by the American Institute of Certified Public Accountants (AICPA). b. part-time employees. c. required to hold a CPA certificate. d. independent of any other organization.

P69. The following are part of the "due process" system used by the FASB in the evolution of a typical FASB Statement of Financial Accounting Standards: 1. Exposure Draft 2. Statement of Financial Accounting Standards 3. Preliminary Views The chronological order in which these items are released is as follows: a. 1, 2, 3. b. 1, 3, 2. c. 2, 3, 1. d. 3, 1, 2.

1. Generally accepted accounting principles a. include detailed practices and procedures as well as broad guidelines of general application. b. are influenced by pronouncements of the SEC and IRS. c. change over time as the nature of the business environment changes. d. all of these.

2. The most significant current source of generally accepted accounting principles is the a. AICPA. b. SEC. c. APB. d. FASB.

3. Which of the following is not a part of generally accepted accounting principles? a. FASB Interpretations b. CAP Accounting Research Bulletins c. APB Opinions d. All of these are part of generally accepted accounting principles.

4. Which of the following publications does not qualify as a statement of generally accepted accounting principles? a. Statements of financial standards issued by the FASB b. Accounting interpretations issued by the FASB c. APB Opinions d. Accounting research studies issued by the AICPA

5. Rule 203 of the Code of Professional Conduct addresses: a. ethical requirements. b. financial statements should be based on generally accepted accounting principles. c. advertising to obtained clients. d. auditing financial statements.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 14

1. What is the purpose of a FASB Staff Position? a. Provide interpretation of existing standards. b. Provide a consensus on how to account for new and unusual financial transactions. c. Provide interpretive guidance. d. Provide timely guidance on select issues.

2. Which of the following is not considered a component of generally accepted accounting principles? a. FASB Implementation Guides. b. Widely recognized industry practices. c. Articles published in CPA journals. d. AICPA Accounting Interpretations.

3. Financial accounting standard-setting in the United States a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. b. is based solely on research and empirical findings. c. is a legalistic process based on rules promulgated by governmental agencies. d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.

4. The purpose of the International Accounting Standards Board is to a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. b. develop a uniform currency in which the financial transactions of companies through- out the world would be measured. c. promote uniform accounting standards among countries of the world. d. arbitrate accounting disputes between auditors and international companies.

5. What is not a source of pressure that may influence the accounting standard setting process? a. Congress. b. Lobbyist. c. CPA firms. d. None of the above.

6. What is a possible danger if politics plays too big a role in accounting standard setting? a. Accounting standards that are not truly generally accepted. b. Individuals may influence the standards. c. User groups become active. d. The FASB delegates its authority to elected officials.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 16

EXERCISES

Ex. 1-85 —Objective of financial reporting.

What is the objective of financial reporting? How do general-purpose financial statements help meet this objective.

Solution 1-

The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity.

General-purpose financial statements provide financial reporting information to a wide variety of users. They help shareholders, creditors, employees, and regulators to better understand a company’s financial position and related performance.

Ex. 1-86 —Development of accounting principles.

Presented below are three independent, unrelated statements regarding the formulation of generally accepted accounting principles. Each statement contains some incorrect or debatable statement(s).

Statement I

The users of financial accounting statements have coinciding and conflicting needs for statements of various types. To meet these needs, and to satisfy the financial reporting responsibility of management, accountants prepare different sets of financial statements for different users. Statement II

The FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession. The FASB therefore will succeed because it will deal effectively with all interested groups.

Statement III

The Securities and Exchange Commission is very concerned about financial reporting and has formulated a committee called the Accounting Standards Executive Committee (AcSEC) to provide input to the FASB. In addition, after each FASB Statement is issued, the AcSEC issues Statements of Position stating its position on the FASB statement.

Instructions Evaluate each of the independent statements and identify the areas of fallacious reasoning in each. Explain why the reasoning is incorrect. Complete your discussion of each statement before proceeding to the next statement.

Financial Accounting and Accounting Standards 1 - 17

Solution 1-

Statement I

It is true that users of financial accounting statements have coinciding and conflicting needs for statements of various types. However, to meet these needs, accountants generally prepare a single set of general-purpose financial statements, rather than a number of different types of financial statements. It may be argued that accountants often do prepare special statements for particular purposes, but in general the accounting profession has relied on general purpose financial statements prepared in conformance with generally accepted accounting principles.

Statement II

It is true that the FASB should be responsive to the needs of the entire economic community, not just the public accounting profession. However, it is not clear whether the FASB will succeed. The FASB will have the best chance of survival if it deals with problems promptly, sets proper priorities, takes whatever action it thinks is right and in the public interest, and handles pressures responsibly without overreacting to them.

Statement III

The Accounting Standards Executive Committee (AcSEC) was established within the American Institute of Certified Public Accountants, not the Securities and Exchange Commission, to respond to pronouncements of the FASB. The AcSEC does issue Statements of Position, but issues them before the FASB sets standards on the issue.

Ex. 1-87 —Publications and organizations.

Significant accounting publications are listed below (1-8). Sources or sponsors of accounting publications are identified next by alphabetical character (a-f). Match the publications with their sources. Publications

____ 1. Accounting Research Bulletins (1953-1959) ____ 2. Statements on Auditing Standards ____ 3. Statements of Position (SOPs) ____ 4. Emerging Issues Task Force Statements ____ 5. Opinions (1962-1973) ____ 6. Technical Bulletins ____ 7. Statements of Financial Accounting Standards ____ 8. Statements of Financial Accounting Concepts

Sources/Sponsors

a. Auditing Standards Board d. Committee on Accounting Procedure b. Accounting Standards Executive Committee e. Accounting Principles Board c. The AICPA f. Financial Accounting Standards Board

Financial Accounting and Accounting Standards 1 - 19

IFRS QUESTIONS

True/False:

1. IFRS includes both International Financial Reporting Standards and International Accounting Standards.

2. International Financial Reporting Standards preceded International Accounting Standards

3. The standard-setting structure used by the International Accounting Standards Board is very similar to that used by the Financial Accounting Standards Board.

4. The rules-based standards of IFRS are more detailed than the simpler, principles-based standards of U. GAAP.

5. The International Accounting Standards Board issues International Financial Reporting Standards.

6. International Accounting Standards are no longer considered part of IFRS because they have been replaced by International Financial Reporting Standards.

Answers to True/False questions:

1. True
2. False
3. True
4. False
5. True
6. False

Multiple Choice:

1. Authoritative standards for IFRS include: a. International Financial Reporting Standards only. b. International Financial Reporting Standards and International Accounting Standards only. c. International Financial Reporting Standards, International Accounting Standards and U. GAAP only. d. International Financial Reporting Standards, International Accounting Standards and any GAAP standard recognized by an organized stock exchange.

Test Bank for Intermediate Accounting, Fourteenth Edition 1 - 20

1. Which of these statements regarding the IFRS and U. GAAP is correct? a. U. GAAP is considered to be "principles-based" and more detailed than IFRS. b. U. GAAP is considered to be "rules-based" and less detailed than IFRS. c. IFRS is considered to be "principles-based" and less detailed than U. GAAP d. Both U. GAAP and IFRS are considered to be "rules-based", but U. GAAP tends to be more complex.

2. The IASB's standard-setting structure includes all of the following except a. Standing Interpretations Committee b. Standards Advisory Council c. Standards Comparison Committee d. Trustees

Answers to Multiple Choice:

1. b
2. c
3. c

Short Answer:

1. Why would it be advantageous for U. GAAP and International GAAP to be the same?

2. Relevant and reliable financial information is a necessity for viable capital markets. Unfortunately, financial statements from companies outside the United States are often prepared using different principles than U. GAAP. As a result, international companies have to develop financial information in different ways. Beyond the additional costs these companies incur, users of financial statements are often forced to understand at least two sets of GAAP. It is not surprising that there is a growing demand for one set of high quality international standards.

3. What is the difference between principles-based and rules-based accounting rules? Is IFRS more principles-based than U. GAAP? Explain.

4. Principles-based rules are considered to be based on accounting principles to result in financial statements that are presented. Rules-based standards are generally quite detailed, and in many instances follow a “check-box” mentality that some contend may shield auditors and companies from legal liability. Because IFRS tends to be simpler and less stringent in its accounting and disclosure requirements, it is generally considered more principles-based than U. GAAP.

Which of the following is a major challenge facing the accounting profession?

What are some of the major challenges facing the accounting profession quizlet?

What are the 3 main categories of accounting as a profession?

Which of the following is not true about generally accepted accounting principles?