Test Bank for Intermediate Accounting, 18th Edition by Donald E. Kieso (Full 1328 Page)

CHAPTER 1

THE ENVIRONMENT AND CONCEPTUAL FRAMEWORK

OF FINANCIAL REPORTING

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Financial statements are the principal means through which a company communicates its

financial information to those outside it.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

2. Users of financial reports of a company use the information provided by these reports to

make capital allocation decisions.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

3. An effective process of capital allocation provides an efficient market for buying and selling

securities and obtaining and granting credit.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

4. Investors are interested in financial reporting because it provides information that is useful

for making decisions.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

5. Users of financial accounting statements have both coinciding and conflicting needs for

information of various types.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

6. Although the FASB has developed a conceptual framework, no Statements of Financial

Accounting Concepts have been issued to date.

Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

7. The passage of a new FASB Accounting Standards Update requires the support of five of

the seven board members.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

8. Statements of Financial Accounting Concepts set forth fundamental objectives and

concepts that are used by the FASB in developing future standards of financial accounting

and reporting.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

9. The FASB’s Codification creates a new set of GAAP.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

Test Bank for Intermediate Accounting, Eighteenth Edition 1 - 2

10. The objective of financial reporting is to report the plans made by a company to improve the

productivity of its employees.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

11. A soundly developed conceptual framework enables the FASB to issue more useful and

consistent pronouncements over time.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

12. A conceptual framework is a coherent system of concepts that flow from an objective.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

13. The first level of the conceptual framework identifies the recognition, measurement, and

disclosure concepts used in establishing accounting standards.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

14. The objective of financial reporting serves as the foundation of the conceptual framework.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

15. Users of financial statements are assumed to need no knowledge of business and financial

accounting matters to understand the information contained in financial statements.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

16. Relevance and faithful representation are the two fundamental qualities that make

accounting information useful for decision-making.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

17. The idea of consistency does not mean that companies cannot switch from one accounting

method to another.

Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

18. Timeliness and neutrality are two ingredients of relevance.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

19. Verifiability and predictive value are two ingredients of faithful representation.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

20. Revenues, gains, and distributions to owners all increase equity.

Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,

AICPA PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None

21. Comprehensive income includes all changes in equity during a period except those

resulting from investments by owners and distributions to owners.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA

PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None

The Environment and Conceptual Framework of Financial Reporting 1 - 3

22. Accounting standards are now less likely to require the reporting or disclosure of fair value

information.

Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

23. The second level of the conceptual framework provides the qualitative characteristics that

make accounting information useful and the elements of financial statements.

Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

24. The historical cost principle would be of limited usefulness if not for the going concern

assumption.

Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

25. The economic entity assumption means that economic activity can be identified with a

particular legal entity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

26. The expense recognition principle states that debits must equal credits in each transaction.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA

PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None

27. Revenues are recognized in the accounting period in which the performance obligation is

satisfied.

Ans: T, LO: 3 Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA

PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None

28. Supplementary information may include details or amounts that present a different

perspective from that adopted in the financial statements.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

29. To justify requiring a particular measurement or disclosure, the benefits to be derived from it

must equal the costs associated with it.

Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

30. In cost-benefit analysis, costs are generally more difficult to quantify than are benefits.

Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

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

action.

Ans: F, LO: 4 Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

32. The Public Company Accounting Oversight Board has oversight and enforcement authority

and establishes auditing and independence standards and rules.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

Test Bank for Intermediate Accounting, Eighteenth Edition 1 - 4

33. The expectations gap is due to the difference between what the public thinks accountants

should do and what accountants think they can do.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

34. Traditional financial reports do not provide any information about a company’s soft assets

(intangibles).

Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

35. Ethical issues in financial accounting are governed by the AICPA.

Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Prof. Demeanor, IMA:

Reporting & Control: Financial Statement Preparation, IFRS: None

MULTIPLE CHOICE—Conceptual

36. General-purpose financial statements are the product of

a. financial accounting.

b. managerial accounting.

c. both financial and managerial accounting.

d. neither financial nor managerial accounting.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

37. Which of the following is not an external user of financial reports?

a. Creditors

b. Government agencies

c. Unions

d. Management

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

38. The financial statements most frequently provided include all of the following except the

a. balance sheet.

b. income statement.

c. statement of cash flows.

d. trial balance.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

39. All the following are ways in which accounting information is used by financial statement

users except to

a. buy, sell, hold equity, and debt instruments.

b. decide whether to invest in the company.

c. evaluate borrowing capacity to determine the extent of a loan to grant.

d. plan and control a company's operations.

Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis , IFRS: None

The Environment and Conceptual Framework of Financial Reporting 1 - 5

40. How does accounting help the capital allocation process allocate investment capital?

a. By providing relevant and reliable information

b. By encouraging innovation

c. By promoting productivity

d. By providing relevant and reliable information and by encouraging innovation

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

41. Which of the following is not related to an effective capital allocation?

a. Promoting productivity

b. Encouraging innovation

c. Providing an efficient market for buying and selling securities

d. Providing relevant and reliable information and encouraging innovation

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

42. What is the objective of financial reporting?

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

b. Provide information that portrays nonfinancial transactions

c. Provide information about the reporting entity that is useful to present and potential

equity investors, lenders, and other creditors

d. Provide information that excludes claims to the resources

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

43. Primary users for general-purpose financial statements include each of the following

except

a. creditors.

b. suppliers.

c. investors.

d. employees.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

44. Which of the following is of interest to investors’ decision-making?

a. Assessing the company’s ability to generate net cash inflows

b. Comparing income and assets of different companies

c. Both assessing the company’s ability to generate net cash inflows and comparing

income and assets of different companies

d. Assessing the company’s ability to collect debts

Ans: c, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

45. Which of the following is a requirement for an accounting principle to be considered

"generally accepted"?

a. An authoritative accounting rule-making body has established it in an official

pronouncement.

b. The principle has been accepted as appropriate because of its universal application.

c. An authoritative accounting rule-making body has established it and it has been

accepted because of its universal application.

d. Each company develops its own standards.

Ans: c, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

Test Bank for Intermediate Accounting, Eighteenth Edition 1 - 6

46. A common set of accounting standards and procedures is called

a. financial accounting standards.

b. generally accepted accounting principles.

c. objectives of financial reporting.

d. statements of financial accounting concepts.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

47. Which of the following is a limitation of "general-purpose financial statements"?

a. General purpose financial statements may not be the most informative for a specific

enterprise.

b. General purpose financial statements are not comparable.

c. General purpose financial statements do not fairly present a company's financial

operations.

d. General purpose financial statements provide financial reporting information to a wide

variety of users.

Ans: a, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Preparation, IFRS: None

48. What is the relationship between the Securities and Exchange Commission and

accounting standard setting in the United States?

a. The SEC requires all companies listed on an exchange to submit their financial

statements to the SEC.

b. The SEC coordinates with the AICPA in establishing accounting standards.

c. The SEC has a mandate to establish accounting standards for enterprises under its

jurisdiction.

d. The SEC reviews financial statements for compliance.

Ans: c, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

49. What is not due process in the context of standard setting at the FASB?

a. The FASB operates in full view of the public.

b. Public hearings are held on proposed accounting standards.

c. Interested parties can make their views known.

d. No public hearings are held on proposed accounting standards.

Ans: d, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &

Control: Financial Statement Analysis, IFRS: None

50. A characteristic of generally accepted accounting principles includes

a. a common set of standards and procedures.

b. standards and principles are based on federal statutes.

c. acceptance requires an affirmative vote of Certified Public Accountants.

d. practices that become accepted for at least a year by all industry members.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:

Financial Statement Analysis, IFRS: NoneKnowledge

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