Answer the following multiple-choice questions.
1. GAAP stands for:
(a) Governmental auditing and accounting practices.
(b) Generally accepted attest principles.
(c) Government audit and attest policies.
2. Accounting standard-setters use the following process in establishing accounting standards:
(a) Research, exposure draft, discussion paper, standard.
(b) Discussion paper, research, exposure draft, standard.
(c) Research, preliminary views, discussion paper, standard.
(d) Research, discussion paper, exposure draft, standard.
3. GAAP is comprised of:
(a) FASB standards, interpretations, and concepts statements.
(b) FASB financial standards.
(c) FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations.
(d) any accounting guidance included in the FASB Codification.
4. The authoritative status of the conceptual framework is as follows.
(a) It is used when there is no standard or interpretation related to the reporting issues under consideration.
(b) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue.
(c) It takes precedence over all other authoritative literature.
(d) It has no authoritative status.
5. The objective of financial reporting places most emphasis on:
(a) Reporting to capital providers.
(b) Reporting on stewardship.
(c) Providing specific guidance related to specific needs.
(d) Providing information to individuals who are experts in the field.
6. General-purpose financial statements are prepared primarily for:
(a) Internal users.
(b) External users.
(d) Government regulators.
7. Economic consequences of accounting standard-setting means:
(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.
(b) standard-setters must ensure that no new costs are incurred when a new standard is issued.
(c) The objective of financial reporting should be politically motivated to ensure acceptance by the general public.
(d) Accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.
8. The expectations gap is:
(a) What financial information management provides and what users want.
(b) What the public thinks accountants should do and what accountants think they can do.
(c) What the governmental agencies want from standard-setting and what the standard-setters provide.
(d) What the users of financial statements want from the government and what is provided.
> Prepare the following adjusting entries at August 31 for Walgreens. (a) Interest on notes payable of $300 is accrued. (b) Services performed but unbilled total $1,400. (c) Salaries and wages earned by employees of $700 have not been recorded. (d) B
> Transactions for Mehta Company for the month of May are presented below. Prepare journal entries for each of these transactions. (You may omit explanations.) May 1 B.D. Mehta invests $4,000 cash in exchange for common stock in a small welding corporat
> Do the following events represent business transactions? Explain your answer in each case. (a) A computer is purchased on account. (b) A customer returns merchandise and is given credit on account. (c) A prospective employee is interviewed. (d) The o
> What are reversing entries, and why are they used?
> List two types of transactions that would receive different accounting treatment using (a) strict cash-basis accounting, and (b) a modified cash basis.
> When salaries and wages expense for the year is computed, why are beginning accrued salaries and wages subtracted from, and ending accrued salaries and wages added to, salaries and wages paid during the year?
> Distinguish between cash-basis accounting and accrual basis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?
> Jay Hawk, maintenance supervisor for Boston Insurance Co., has purchased a riding lawnmower and accessories to be used in maintaining the grounds around corporate headquarters. He has sent the following information to the accounting department. C
> What are closing entries and why are they necessary?
> What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts? (a) Accounts Payable. (b) Expense accounts. (c) Revenue accounts. (d) Retained Earnings account. (e) Ca
> (a) How are the components of revenues and expenses different for a merchandising company? (b) Explain the income measurement process of a merchandising company.
> Is it necessary that a trial balance be taken periodically? What purpose does it serve?
> Why are revenue and expense accounts called temporary or nominal accounts?
> What are adjusting entries and why are they necessary?
> What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts? (a) Accounts Payable. (b) Expense accounts. (c) Revenue accounts. (d) Retained Earnings account. (e) Cash.
> For what purposes did the AICPA in 1959 create the Accounting Principles Board?
> What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
> In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
> What is the likely limitation of “general-purpose financial statements”?
> Describe the procedures for providing feedback.
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marks-and-Spencer-Annual-report-and-financial-statements-2012.
> As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the IASB’s Framework for the Preparation and Presentation of Financial S
> Briefly explain the meaning of decision-usefulness in the context of financial reporting.
> The following comments were made at an Annual Conference of the Financial Executives Institute (FEI). There is an irreversible movement toward the harmonization of financial reporting throughout the world. The international capital markets require an end
> Who are the two key international players in the development of international accounting standards? Explain their role.
> Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recogni
> The following letter was sent to the SEC and the FASB by leaders of the business community. Dear Sirs: The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new app
> Presented below is abbreviated testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is testifying in hopes of receiving no prison time when he is ul
> The U.S. Securities and Exchange Commission (SEC) were created in 1934 and consist of five commissioners and a large professional staff. The SEC professional staff is organized into five divisions and several principal offices. The primary objective of t
> Presented below are three models for setting GAAP. 1. The purely political approach, where national legislative action decrees GAAP. 2. The private, professional approach, where GAAP is set and enforced by private professional actions only. 3. The public
> A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees) “. . . will become the established authority for setting ac
> One of the major groups that has been involved in the standard setting process is the American Institute of Certified Public Accountants. Initially, it was the primary organization that established accounting principles in the United States. Subsequently
> Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an
> What is the objective of financial reporting?
> Hardly a day goes by without an article appearing on the crises affecting many of our financial institutions in the United States. It is estimated that the savings and loan (S&L) debacle of the 1980s, for example, ended up costing $500 billion ($2,00
> Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month foll
> Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company’s response to a current Preliminary Views published by the
> Omar Morena has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting. Instructions (a) Differentiate between financial accounting a
> Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false. 1. The objective of financial statements emphasizes a stewardship approach for reporting financial information. 2. The pur
> Presented below are four statements which you are to identify astrue or false. If false, explain why the statement is false. 1. GAAP is the term used to indicate the whole body of FASB authoritative literature. 2. Any company claiming compliance wi
> How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?
> What are some of the major challenges facing the accounting profession?
> The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?
> What is the “expectations gap”? What is the profession doing to try to close this gap?
> Differentiate between “financial statements” and “financial reporting.”
> What are the five steps used to determine the proper time to recognize revenue?
> One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?
> What are the primary advantages of having a Codification of generally accepted accounting principles?
> What is the difference between the Codification and the Codification Research System?
> Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.
> The chairman of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and lawyers rely less on
> What is Rule 203 of the Code of Professional Conduct?
> Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.
> How are FASB preliminary views and FASB exposure drafts related to FASB “statements”?
> In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
> If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
> What is a performance obligation, and how is it used to determine when revenue should be recognized?
> Differentiate broadly between financial accounting and managerial accounting.
> What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?
> The life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period. (a) This practice is based on the accounting assump
> Revenues, gains, and investments by owners are all increases in net assets. What are the distinctions among them?
> Why is it necessary to develop a definitional framework for the basic elements of accounting?
> Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material. (a) Legal fees paid in connection with the purchase of land are $1,500. (b) Eduardo, Inc. paves the driveway
> What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below? (a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements. (b) Target alloca
> If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in the financial statements for the following items. (a) Land. (b) Unamortized bond premium. (c) Depreciation expense on equipment. (d) In
> Vande Velde Company made three investments during 2014. (1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model. (2) It purchased 2,000 sha
> Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected. (b) Yaho
> Explain the revenue recognition principle.
> Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does n
> For each item below, indicate to which category of elements of financial statements it belongs. (a) Retained earnings (e) Depreciation (h) Dividends (b) Sales (f) Loss on sale of equipment (i) Gain on sale of investment (c) Additiona
> Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material. (a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces
> Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.) (a) The annual reports of Best Buy Co. are audited by certified public accountants. (b) Bl
> According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial
> Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material.) (a) The company changed its inventory method to FIFO from weighted-average,
> Match the qualitative characteristics below with the following statements. 1. Timeliness 5. Faithful representation 2. Completeness 6. Relevance 3. Free from error 7. Neutrality 4. Understandability 8. Confirmatory value (a) Quality of inform
> Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quali
> Access the glossary (“Master Glossary”) at the FASB Codification website to answer the following. (a) What is the definition of fair value? (b) What is the definition of revenue? (c) What is the definition of comprehensive income?
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marks-and-Spencer-Annual-report-and-financial-statements-20
> Briefly describe the fair value hierarchy.
> Your aunt recently received the annual report for a company in which she has invested. The report notes that the statements have been prepared in accordance with IFRS. She has also heard that certain terms have special meanings in accounting relative to
> Do the IASB and FASB conceptual frameworks differ in terms of the role of financial reporting? Explain.
> What two assumptions are central to the IASB conceptual framework?
> The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting. 1. Business reporting should exclude information outside of management’s expertise or for which management is not the best sour
> Anderson Nuclear Power Plant will be “mothballed” at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be matched to revenue. Accountants Ana Alicia and Ed Bradley a
> How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?
> Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the “ground floor&rdquo
> Daniel Barenboim sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding, and ceiling joists. Shell houses are sold chiefly to customers
> Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs and revenues requires that costs resulting fr
> An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time pe
> What is the fair value option? Explain how use of the fair value option reflects application of the fair value principle.
> After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the reve
> Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting
> The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective a
> Presented below is information related to Cramer, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Cramer, Inc. (a) Depreciation expense on the building for the year was $60,000. Because the building was
> Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.InstructionsIn each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.(
> Presented below are a number of facts related to Weller, Inc. Assume that no mention of these facts was made in the financial statements and the related notes. Instructions Assume that you are the auditor of Weller, Inc. and that you have been ask
> Briefly describe the two fundamental qualities of useful accounting information.
> Presented below are a number of operational guidelines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (a) Fair value ch
> Presented below are the assumptions, principles, and constraint used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption 5. Measurement principle (historical cost
> Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Instructions Identify the element or elements associated with the 12 items below.(a) Arises from peripheral