Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso -Test Bank

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Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso -Test Bank

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WITH ANSWERS
Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso -Test Bank

CHAPTER 2

 

CONCEPTUAL FRAMEWORK UNDERLYING

FINANCIAL REPORTING

 

CHAPTER STUDY OBJECTIVES

 

  1. Indicate the usefulness and describe the main components of a conceptual framework for financial reporting. A conceptual framework is needed to (1) create standards that build on an established body of concepts and objectives, (2) provide a framework for solving new and emerging practical problems, (3) increase financial statement users understanding of and confidence in financial reporting, and (4) enhance comparability among different companies financial statements.

The first level deals with the objective of financial reporting. The second level includes the qualitative characteristics of useful information and elements of financial statements. The third level includes foundational principles and conventions.

 

 

  1. 2. Identify the qualitative characteristics of accounting information. The overriding criterion by which accounting choices can be judged is decision usefulness; that is, the goal is to provide the information that is the most useful for decision making. Fundamental characteristics include relevance and faithful representation. These two characteristics must be present. Enhancing characteristics include comparability, verifiability, timeliness, and understandability. There may be trade-offs.

 

 

  1. 3. Define the basic elements of financial statements. The basic elements of financial statements are (1) assets, (2) liabilities, (3) equity, (4) revenues, (5) expenses, (6) gains, and (7) losses.

 

 

  1. Describe the foundational principles of accounting. (1) Economic entity: the assumption that the activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. (2) Control: the entity has the power to make decisions and reap the benefits or be exposed to the losses (which are variable). (3) Revenue recognition: revenue is generally recognized when it is (a) earned, (b) measurable, and (c) collectible (realizable). (4) Matching assists in the measurement of income by ensuring that costs (relating to long-lived assets) incurred in earning revenues are booked in the same period as the revenues earned. (5) Periodicity: the assumption that an enterprises economic activities can be divided into artificial time periods to facilitate timely reporting. (6) Monetary unit: the assumption that money is the common denominator by which economic activity is conducted, and that the monetary unit gives an appropriate basis for measurement and analysis. (7) Going concern: the assumption that the business enterprise will have a long life. (8) Historical cost principle: existing GAAP requires that many assets and liabilities be accounted for and reported based on their acquisition price. Many assets are later revalued. (9) Fair value principle: assets and liabilities are valued at fair valuethat is, an exit priceand viewed from a market participant perspective. (10) Full disclosure principle: accountants follow the general practice of providing information that is important enough to influence an informed users judgement and decisions.

 

 

  1. Explain the factors that contribute to choice and/or bias in financial reporting decisions. Choice is the result of many things, including principles-based standards, measurement uncertainty, and increasingly complex business transactions. The conceptual framework is the foundation that GAAP is built on. If there is no primary source of GAAP for a specific decision, then professional judgement must be used, making sure that the accounting policies chosen are consistent with the primary sources of GAAP and the conceptual framework.

Financial engineering is the process of legally structuring a business arrangement or transaction so that it meets the companys financial reporting objective. This is a dangerous practice since it often results in biased information.

Fraudulent financial reporting often results from pressures on individuals or the company. These pressures may come from various sources, including worsening company, industry, or economic conditions; unrealistic internal budgets; and financial statement focal points related to contractual, regulatory, or capital market expectations. Weak internal controls and governance also contribute to fraudulent financial reporting.

 

 

  1. Discuss current trends in standard setting for the conceptual framework. The IASB was in the stages of issuing a new conceptual framework, which was expected to be issued in final form in 2016. It was also working on projects relating to disclosure and materiality.

 

 

Multiple Choice QUESTIONS

 

Answer           No.      Description

c                 1.       Conceptual framework

d                 2.       Objectives of financial reporting

d                 3.       Conceptual framework

a                 4.       Conceptual framework

c                 5.       Fundamental qualitative characteristics

b                 6.       Relevance

b                 7.       Relevance

c                 8.       Materiality

c                 9.       Understandability

d               10.       Representational faithfulness

a               11.       Criterion for accounting information

c               12.       Enhancing qualitative characteristics

d               13.       Comparability

a               14.       Timeliness

a               15.       Comparability

c               16.       Timeliness

c               17.       Costs of providing useful information

b               18.       Common characteristic of assets and liabilities

b               19.       Asset characteristics

c               20.       Liabilities

c               21.       Equitable obligations

a               22.       Items included in equity under IFRS

d               23.       Definition of gains

b               24.       Other comprehensive income

c               25.       Statements prepared using ASPE

b               26.       Components of comprehensive income

d               27.       Economic entity assumption

c               28.       Timing of revenue recognition

a               29.       Example of full disclosure

d               30.       Economic entity assumption

c               31.       Recognition and measurement

b               32.       Periodicity assumption

d               33.       Going concern assumption

b               34.       Historical cost principle

b               35.       Matching principle

a               36.       Use of allowance for doubtful accounts

b               37.       Historical cost principle

a               38.       Economic entity assumption

b               39.       Matching principle

d               40        Recording of depreciation

c               41.       Fair value of an asset

c               42.       Full disclosure principle

b               43.       Measurement uncertainty

b               44.       Full disclosure principle

c               45.       Management Discussion and Analysis

c               46.       Inflation

b               47.       Bankruptcy

Answer           No.      Description

a               48.       Items included in MD&A

c               49.       Matching

b               50.       Financial reporting

b               51.       Principles-based GAAP

c               52.       Financial engineering

d               53.       Fraudulent financial reporting

c               54.       Accounting policies

d               55.       IASB Exposure Draft

a               56.       IASB research project

 

 

Exercises

 

Item                 Description

E2-57              Conceptual framework

E2-58              Levels of the conceptual framework

E2-59              Moral hazard

E2-60              Materiality

E2-61              Enhancing Qualitative Characteristics

E2-62              Accounting terminology fill in the blanks

E2-63              Equitable obligations

E2-64              Constructive Obligations

E2-65              Comprehensive Income

E2-66              Foundational principles

E2-67              Identification of foundational accounting principles

E2-68              Identification of foundational accounting principles and qualitative characteristics

E2-69              Foundational accounting principles and qualitative characteristics matching

E2-70              Fair value measurement

E2-71              Matching concept

E2-72              Forms of business organization

E2-73              Control and the economic entity assumption

E2-74              Principles vs. rules-based GAAP

E2-75              Financial engineering

E2-76              Fraudulent financial reporting

E2-77              Fraudulent financial reporting and the accountants role

E2-78              Financial reporting pressures caused by budgets


MULTIPLE CHOICE QUESTIONS

 

 

  1. Which of the following is NOT part of the conceptual framework for financial reporting?
  2. a) elements of financial statements
  3. b) qualitative characteristics of accounting information
  4. c) notes to financial statements
  5. d) foundational principles

 

Answer: c

 

Difficulty: Easy

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following is NOT an objective of financial reporting?
  2. a) to provide information about an entitys economic resources, obligations and equity/net assets
  3. b) to provide information that is useful to investors and creditors and other users in making resource allocation decisions and/or assessing management stewardship
  4. c) to provide information that is useful in assessing the economic performance of the entity
  5. d) to provide the most useful information possible even if the costs exceed the benefits

 

Answer: d

 

Difficulty: Easy

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following is NOT a component of a conceptual framework for financial reporting?
  2. a) accountings goals and purposes
  3. b) qualitative characteristics of accounting information
  4. c) foundational principles
  5. d) All of the above are components of a conceptual framework.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following best describes why a conceptual framework is necessary?
  2. a) to build all standards and rules upon a common foundation and increase financial statement users understanding and confidence
  3. b) to make financial statement preparation an automated process requiring no human intervention
  4. c) to completely eliminate the potential for companies to exercise professional judgement in preparation of financial information
  5. d) to decrease the comparability of different companies financial statements

 

Answer: a

 

Difficulty: Easy

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Fundamental qualitative characteristics include
  2. a) relevance and comparability.
  3. b) representational faithfulness and timeliness.
  4. c) relevance and representational faithfulness.
  5. d) verifiability and relevance.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following does NOT relate to the concept of relevance?
  2. a) The information must be capable of making a difference in a decision.
  3. b) Both material and immaterial information is important.
  4. c) The information has predictive value.
  5. d) The information has feedback/confirmatory value.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Accounting information is considered to be relevant when it
  2. a) can be depended on to represent the economic conditions and events that it is intended to represent.
  3. b) is capable of making a difference in a decision.
  4. c) is understandable by reasonably informed users of accounting information.
  5. d) is verifiable and neutral.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Materiality refers to
  2. a) the tangible nature of an item.
  3. b) representational faithfulness.
  4. c) the decision-making relevance of a piece of information.
  5. d) None of these describe materiality.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following is true about understandability as a qualitative characteristic of financial statements?
  2. a) The onus to prepare understandable statements and to be able to understand them lies with the preparer.
  3. b) Where the underlying transactions or economic events are more complex, the user is expected to understand them without the assistance of an advisor.
  4. c) The onus to prepare understandable statements and to be able to understand them lies with the preparer and the user.
  5. d) Users with no knowledge of business and financial accounting matters are expected to understand the financial statements.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

  1. Representational faithfulness includes
  2. a) completeness, neutrality and comparability.
  3. b) neutrality, completeness, and understandability.
  4. c) relevance, completeness and freedom from material error.
  5. d) neutrality, completeness and freedom from material error.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The overriding criterion by which accounting information can be judged is that of
  2. a) usefulness for decision making.
  3. b) freedom from bias.
  4. c) timeliness.
  5. d) comparability.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which statement is correct regarding enhancing qualitative characteristics?
  2. a) Full discussion of the information presented is a substitute for comparable information.
  3. b) Numbers that are easily verifiable with a reasonable degree of accuracy are called soft numbers.
  4. c) Information must be available before it loses its ability to influence users decisions.
  5. d) Financial information must be of sufficient quality and clarity that even uninformed readers can understand it.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Comparability allows any financial statement user to
  2. a) make timely decisions.
  3. b) understand all the information presented.
  4. c) verify all the data provided.
  5. d) identify the real similarities and differences in economic phenomena.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Timeliness is increased by
  2. a) quarterly reporting.
  3. b) comparative financial statements.
  4. c) representational faithfulness.
  5. d) annual reporting.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Burton Ltd. operates in both Canada and the United States. The company wants to improve the qualitative characteristics of its financial statements. Which of the following would most likely improve the comparability of Burtons financial statements?
  2. a) the restatement of its financial statements from Canadian GAAP to US GAAP for its American investors
  3. b) the preparation of monthly financial statements
  4. c) the introduction of a policy that specifies how Sunburys capital assets should be depreciated
  5. d) the use of U.S.-trained accountants

 

Answer: a

 

Difficulty: Hard

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. You want to improve the qualitative characteristics of your firms financial statements. Which of the following options would most likely improve the timeliness of your companys financial statements?
  2. a) increasing the number of disclosures
  3. b) changing the timing of when revenues are recognized
  4. c) increasing the frequency of statements from annually to quarterly
  5. d) decreasing the useful life of property, plant and equipment from ten years to five

 

Answer: c

 

Difficulty: Hard

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The costs of providing useful information do NOT include
  2. a) collecting, processing and distributing information.
  3. b) auditing financial statements.
  4. c) disclosure to competitors.
  5. d) users allocation of resources.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The common characteristic of both assets and liabilities is that they both
  2. a) provide an economic benefit.
  3. b) result from a past transaction or event.
  4. c) represent a present responsibility.
  5. d) represent contractual or other rights.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following does NOT represent an essential characteristic of an asset?
  2. a) There is some economic benefit to the entity.
  3. b) The entity is able to transfer the economic benefit if it so chooses.
  4. c) The entity has control over the economic benefit.
  5. d) The benefits result from a past transaction or event.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following statements regarding liabilities is true?
  2. a) They must arise through a contractual obligation.
  3. b) They may be attributable to a future transaction or event.
  4. c) The duty or responsibility obligates the entity.
  5. d) The entity often has reasonable discretion to avoid the obligation.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Equitable obligations arise due to
  2. a) statutory requirements.
  3. b) contractual obligations.
  4. c) moral or ethical considerations.
  5. d) union agreements.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Under IFRS, equity does NOT include
  2. a) long term leases.
  3. b) common and/or preferred shares.
  4. c) accumulated other comprehensive income.
  5. d) retained earnings.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Gains are defined as
  2. a) increases in economic resources resulting from an entitys ordinary activities.
  3. b) decreases in economic resources resulting from an entitys ordinary activities.
  4. c) the residual interest remaining after liabilities are deducted from assets.
  5. d) increases in equity resulting from an entitys peripheral or incidental transactions.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Under IFRS, other comprehensive income does NOT include
  2. a) unrealized holding gains and losses on certain securities.
  3. b) gains and losses on disposal of property, plant and equipment.
  4. c) gains and losses related to certain types of hedges.
  5. d) certain gains and losses related to foreign exchange transactions.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Financial statements prepared under ASPE include a
  2. a) statement of comprehensive income.
  3. b) statement of cash flows and a statement of changes in shareholders equity.
  4. c) balance sheet and a statement of retained earnings.
  5. d) statement of retained earnings and a statement of comprehensive income.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following elements of financial statements is NOT a component of comprehensive income?
  2. a) Revenues
  3. b) Distributions to owners
  4. c) Losses
  5. d) Expenses

 

Answer: b

 

Difficulty: Easy

Learning Objective: Define the basic elements of financial statements.

Section Reference: Elements of Financial Statements

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. A local businessman owns several different companies. His accountant prepares separate financial statements for each of these businesses. This is an application of the
  2. a) full disclosure principle.
  3. b) periodicity assumption.
  4. c) going concern assumption.
  5. d) economic entity assumption.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Generally, under ASPE, revenue from sales should be recognized at a point when
  2. a) management decides it is appropriate to do so.
  3. b) the product is available for sale.
  4. c) an exchange has taken place and the earnings process is substantially complete.
  5. d) the entire amount receivable has been collected from the customer and there remains no further warranty liability.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. During a major renovation project of its head office, a worker was seriously injured. While the company believes that it was not at fault, it does include the incident in the notes to its financial statements. This is consistent with the
  2. a) full disclosure principle.
  3. b) periodicity assumption.
  4. c) going concern assumption.
  5. d) economic entity assumption.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The economic entity assumption
  2. a) is inapplicable to unincorporated businesses.
  3. b) recognizes the legal aspects of business organizations.
  4. c) requires periodic income measurement.
  5. d) is applicable to all forms of business organizations.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. When deciding whether to recognize a financial statement element (or not), and how to measure it, the accountant should
  2. a) always use estimates.
  3. b) record hard numbers and ignore soft numbers.
  4. c) determine an acceptable level of uncertainty.
  5. d) recognize a financial statement element even if it cannot be measured.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with the
  2. a) full disclosure principle.
  3. b) periodicity assumption.
  4. c) going concern assumption.
  5. d) economic entity assumption.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the
  2. a) economic entity assumption.
  3. b) monetary unit assumption.
  4. c) fair value principle.
  5. d) going concern assumption.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Valuing assets at their liquidation values rather than their cost is inconsistent with the
  2. a) periodicity assumption.
  3. b) historical cost principle.
  4. c) matching principle.
  5. d) economic entity assumption.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following is NOT a good example of the matching principle?
  2. a) A machine that produces certain goods is depreciated over its useful life. The depreciation expense is matched with the proceeds from the sale of those goods.
  3. b) The entire amount of a two-year insurance premium is expensed in the first year.
  4. c) An uncollectible receivable is written off in the year that the sale was made.
  5. d) Recognition of revenue for which associated expenses cannot yet be determined is delayed until such determination can be made.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Use of an allowance for doubtful accounts is an application of the
  2. a) matching principle.
  3. b) revenue recognition principle.
  4. c) historical cost principle.
  5. d) full disclosure principle.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following statements does NOT apply to the historical cost principle?
  2. a) Historical cost represents a value at a point in time.
  3. b) The principle does not apply to financial instruments.
  4. c) Historical cost results from a reciprocal or two-way exchange.
  5. d) Over time, historical cost becomes irrelevant in terms of predictive value.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of
  2. a) the economic entity assumption.
  3. b) the matching principle.
  4. c) comparability.
  5. d) reliability.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The matching principle is best demonstrated by
  2. a) not recognizing any expense unless some revenue is realized.
  3. b) associating effort (expense) with accomplishment (revenue).
  4. c) recognizing prepaid rent received as revenue.
  5. d) measuring expenses correctly.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following serves as the justification for the periodic recording of depreciation expense?
  2. a) association of efforts (expense) with accomplishments (revenue)
  3. b) minimization of income tax liability
  4. c) immediate recognition of an expense
  5. d) systematic and rational allocation of cost over the periods benefited

 

Answer: d

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Fair value (of an asset) is
  2. a) an entry price.
  3. b) an entity-specific measure.
  4. c) an exit price.
  5. d) not used when following IFRS.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Application of the full disclosure principle
  2. a) is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
  3. b) is violated when important financial information is buried in the notes to the financial statements.
  4. c) is demonstrated by the inclusion of information such as information about contingencies.
  5. d) requires that the financial statements be consistent and comparable.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Where there is a significant uncertainty with respect to the measurement of an item,
  2. a) do not record anything in the financial statements.
  3. b) recognize the item in the financial statements and disclose the measurement uncertainty in the notes to the financial statements.
  4. c) do not record anything in the financial statements but disclose the measurement uncertainty in the notes to the financial statements.
  5. d) record the maximum amount in the financial statements.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The operations of a resource companys oil sands operations results in environmental damage. While the extent of the damage cannot be determined at this time, the situation is disclosed in its financial statements. This best demonstrates
  2. a) the application of professional judgement.
  3. b) the full disclosure principle.
  4. c) representational faithfulness.
  5. d) good management stewardship.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Management Discussion and Analysis (MD&A) is
  2. a) notes on meetings between management and auditors.
  3. b) internal documents not released to shareholders.
  4. c) supplementary information included in the annual report.
  5. d) supplementary information included in the notes to the financial statements.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Under GAAP, inflation has been historically ignored due to the
  2. a) economic entity assumption.
  3. b) going concern assumption.
  4. c) monetary unit assumption.
  5. d) periodicity assumption.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which basic assumption may NOT be followed when a firm in bankruptcy reports financial results?
  2. a) economic entity assumption
  3. b) going concern assumption
  4. c) periodicity assumption
  5. d) monetary unit assumption

 

Answer: b

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Management Discussion and Analysis (MD&A) does NOT include
  2. a) notes to the financial statements.
  3. b) key performance drivers.
  4. c) the companys vision and strategy.
  5. d) the companys capabilities (capital and other resources).

 

Answer: a

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The practice of matching
  2. a) dictates that efforts (expenditures) be matched with associated cash flow.
  3. b) requires arbitrary allocation of an assets contribution to a revenue stream.
  4. c) illustrates the cause and effect relationship between money spent to earn revenues and the revenues themselves.
  5. d) is required by GAAP to approximate an assets contribution to an entitys periodic cash flow.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Describe the foundational principles of accounting.

Section Reference: Foundational Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Financial reporting is
  2. a) independent of the environment in which it operates.
  3. b) the result of carefully applied professional judgement.
  4. c) influenced by the decisions of individuals who act in the interest of stakeholders at the expense of themselves.
  5. d) completely free of bias.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain the factors that contribute to choice and/or bias in financial reporting decisions.

Section Reference: Financial Reporting Issues

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

  1. Principles-based GAAP is sometimes criticized for being
  2. a) too inflexible.
  3. b) too flexible.
  4. c) too inconsistent.
  5. d) too difficult for the reader to understand.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Explain the factors that contribute to choice and/or bias in financial reporting decisions.

Section Reference: Financial Reporting Issues

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following situations does NOT demonstrate an attempt at financial engineering?
  2. a) creating complex legal arrangements and financial instruments
  3. b) structuring debt financing so that it meets the GAAP definition of equity rather than debt
  4. c) accounting for bona fide business transactions in a transparent manner
  5. d) aggressively interpreting GAAP so that the impact on critical ratios is minimized

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain the factors that contribute to choice and/or bias in financial reporting decisions.

Section Reference: Financial Reporting Issues

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Fraudulent financial reporting is a business reality. While it cannot be eliminated, the risk of fraudulent reporting can be decreased. Which of the following considerations is least likely to lessen that risk?
  2. a) an independent audit committee
  3. b) an internal audit function
  4. c) vigilant management
  5. d) an increased focus on tying bonuses to short-term company performance

 

Answer: d

 

Difficulty: Hard

Learning Objective: Explain the factors that contribute to choice and/or bias in financial reporting decisions.

Section Reference: Financial Reporting Issues

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. In the absence of specific GAAP guidance, an entity should adopt accounting policies that are
  2. consistent with specific GAAP guidance.
  3. consistent with the most conservative reporting choices.

iii. collaboratively developed with the assistance of all business units.

  1. developed through exercising professional judgement and applying the conceptual framework.
  2. a) i, ii, and iii
  3. b) i and iii
  4. c) i and iv
  5. d) ii and iv

 

Answer: c

 

Learning Objective: Explain the factors that contribute to choice and/or bias in financial reporting decisions.

Section Reference: Financial Reporting Issues

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. The IASB issued an Exposure Draft relating to the conceptual framework in 2015. Regarding presentation and disclosure, what change does this draft propose?
  2. a) renaming the balance sheet to the periodic statement of performance
  3. b) renaming the statement of profit or loss to the statement of income or deficit
  4. c) renaming the balance sheet to the statement of financial health
  5. d) renaming the statement of profit or loss to the statement of financial performance

 

Answer: d

 

Difficulty: Hard

Learning Objective: Discuss current trends in standard setting for the conceptual framework.

Section Reference: IFRS/ASPE Comparison

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Regarding the concept of materiality, what does the current IASB research project hope to accomplish?
  2. a) Augment IAS1 with a paragraph that sets out key characteristics of materiality.
  3. b) Develop a broadly applicable quantitative materiality threshold that all reporting entities will use.
  4. c) Identify and develop an IAS 25, a distinct section discussing the concept of materiality.
  5. d) A review of existing standards to identify conflicts, duplication, and overlaps.

 

Answer: a

 

Difficulty: Hard

Learning Objective: Discuss current trends in standard setting for the conceptual framework.

Section Reference: IFRS/ASPE Comparison

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Exercises

 

 

Ex. 2-57 Conceptual framework

Briefly describe the objectives of a soundly developed conceptual framework.

 

Solution 2-57

A soundly developed conceptual framework should

  1. increase financial statement users understanding of and confidence in financial reporting,
  2. enhance comparability among companies financial statements,
  3. allow new and emerging practical problems to be solved more quickly.

 

Difficulty: Medium

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 2-58 Levels of the conceptual framework

Provide a brief overview of the levels of a conceptual framework.

 

Solution 2-58

First Level: The why The conceptual frameworks building blocks. Objectives identifying accountings goals and purposes.

 

Second Level: Bridge between levels 1 and 3 Qualitative characteristics that make accounting information useful and elements of the financial statements (assets, liabilities, equity, revenues, expenses, gains, and losses)

 

Third Level: The how Foundational principles used in establishing and applying accounting standards.

 

A graphic similar to Illustration 2-1 may also be presented.

 

Difficulty: Medium

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 2-59 Moral hazard

In Chapter 1, the issue of information asymmetry, and the concept of moral hazard were introduced. Explain why the moral hazard issue is worse where some users (such as accountants and bankers) have expert knowledge.

 

Solution 2-59

The moral hazard issue is worse where certain stakeholders such as accountants and bankers have expert knowledge that the rest of the capital marketplace does not as they may use their expertise to act in their own self-interest to the detriment of other capital marketplace participants such as investors.

 

Difficulty: Easy

Learning Objective: Indicate the usefulness and describe the main components of a conceptual framework for financial reporting.

Section Reference: Conceptual Framework

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 2-60 Materiality

The concept of materiality if extremely important to the process of financial statement preparation and audit. Briefly explain the benchmarking approach to arriving at a materiality figure. What other factors might be considered in deciding whether an item is material?

 

Ex. 2-60 Solution

Current auditing standards (CAS 320.A7) considers 5% of pre-tax income from continuing operations for manufacturing companies and 1% of revenues for not-for-profit entities to be material. This is not definitive and is a fairly simplistic view of materiality. The items impact on financial statement ratios and management compensation also needs to be considered. Materiality is also a function of qualitative factors such as illegal acts, failure to comply with regulations, or inadequate/inappropriate description of an accounting policy. The materiality constraint must be sensibly applied and also consider the cost/benefit to the company in providing detail of events and transactions relating to their operations.

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 2-61 Enhancing Qualitative Characteristics

Although fundamental qualitative characteristics of relevance and reliability are considered most important, financial statement preparers also place value upon certain enhancing qualitative characteristics. Briefly describe each of these characteristics and their contribution to providing decision-useful accounting information.

 

Solution 2-61

Enhancing qualitative characteristics include comparability, verifiability, timeliness, and understandability.

 

Comparability enables users to identify real similarities and differences in economic phenomena because they have not been obscured by accounting methods that cannot be compared.

 

Verifiability exists when knowledgeable, independent users can achieve similar results or reach consensus regarding the accounting for a particular transaction.

 

Timeliness means information is available to decision-makers before it loses its ability to influence their decisions.

 

Understandability means financial information is of sufficient quality and clarity that reasonable informed users will see its significance.

 

Difficulty: Medium

Learning Objective: Identify the qualitative characteristics of accounting information.

Section Reference: Qualitative Characteristics of Useful Information

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 2-62 Accounting terminology fill in the blanks

Fill in the blanks below with the accounting term(s) that best completes each sentence.

 

  1. A soundly developed conceptual framework is a ______ set of standards and rules. ______ and ______ are the fundamental qualitative characteristics that make accounting information useful for decision making.

 

  1. Enhancing qualitative characteristics are ______, ______, ______ and ______.

 

  1. Liabilities have three essential characteristics:
  2. They represent a ______, 2. the entity has a ______, and 3. ______.

 

  1. While consolidated financial statements are prepared from the perspective of the ______, taxes are paid from the perspective of the ______.

 

  1. Collectability is one of the three conditions of the revenue recognition principle. Assuming the other two conditions are met, revenue should only be recognized if collectability is ______.

 

  1. The ______ stipulates that anything that is relevant to decisions should be included in the financial statements.

 

  1. A companys Management Discussion and Analysis (MD&A) is an example of ______.

 

  1. A ______- based approach, as used in Canadian GAAP and IFRS, is sometimes criticized for being too ______.

 

  1. Under the ______ principle, ______ incurred during a particular period are matched with ______ earned during that same period.

 

  1. The ______ is based on the assumption that a business enterprise will continue to operate for the foreseeable future.

 

  1. One of the assumptions of the ______ is valuation at a particular point in time.

 

  1. ______ is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

  1. Standard setters have given companies the option to use ______ instead of historical costs.

 

Solution 2-62

  1. coherent, relevance, representational faithfulness

 

  1. comparability, verifiability, timeliness, understandability

 

  1. present duty or obligation, present enforceable obligation, the liability results from a past transaction or event

 

  1. economic entity, legal entity

 

  1. reasonably assured

 

  1. full disclosure principle

 

  1. supplementary information

 

  1. principles, flexible

 

  1. matching, expenses, revenues

 

  1. going concern assumption

 

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