Test Bank For Intermediate Accounting, 5th Edition

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1True / False Questions1. The primary function of financial accounting is to provide relevant financial information toparties external to business enterprises.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 1Level of Learning: 12. Accrual accounting attempts to measure revenues and expenses that occurred duringaccounting periods so they equal net operating cash flow.FALSEAACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 2Level of Learning: 13. The FASB is currently the public sector organization responsible for setting accountingstandards in the U.S.FALSEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 14. The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed theentity responsible for setting auditing standards in the United States.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-25. A rules-based approach to standard setting stresses professional judgment as opposed tofollowing a list of rules.FALSEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 16. Under federal securities laws, the SEC has the authority to set accounting standards in theU.S.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 17. The primary responsibility for properly applying GAAP when communicating withinvestors and creditors through financial statements lies with a firm's auditors.FALSEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 18. Auditors play an important role in the resource allocation process by adding credibility tofinancial statements.TRUEAACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 6Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-39. Materiality can be affected by the dollar amount of an item, the nature of the item, or both.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 110. Conservatism is a desired qualitative characteristic of accounting information.FALSEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 111. Equity is a residual amount representing the owner's interest in the assets of the business.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 112. Revenues are inflows or other enhancements of assets or settlements of liabilities fromactivities that constitute the entity's ongoing operations.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-413. Gains or losses result, respectively, from the disposition of business assets for greaterthan, or less than, their book values.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 114. Comprehensive income is another term for net income.FALSEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 6Level of Learning: 115. Determining fair value by calculating the present value of future cash flows is a level 1type of input.FALSEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 8Level of Learning: 116.SFAC No. 157doesn't change the situations in which fair value is used under currentGAAP.TRUEAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 8Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-5Essay QuestionsListed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. Comprehensive incomeB. Distribution to ownersC. Feedback valueD. GainE. MaterialityF. Predictive valueG. RelevanceH. ReliabilityI. Representational faithfulnessJ. Timeliness17. ____Information is useful in projecting cash flows.FAACSB: Reflective thinkingBlooms: Comprehension18. ____Pertinent to the decision at hand.GAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-619. ____Information is available prior to the decision.JAACSB: Reflective thinkingBlooms: Comprehension20. ____Decrease in equity due to transfers to owners.BAACSB: Reflective thinkingBlooms: Comprehension21. ____Information confirms expectations.CAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-7Listed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. Comprehensive incomeB. Distribution to ownersC. Feedback valueD. GainE. MaterialityF. Predictive valueG. RelevanceH. ReliabilityI. Representational faithfulnessJ. Timeliness22. ____Along with relevance, a primary decision-specific quality.HAACSB: Reflective thinkingBlooms: Comprehension23. ____Results if an asset is sold for more than book value.DAACSB: Reflective thinkingBlooms: Comprehension24. ____Agreement between a measure and what it purports to represent.IAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-825. ____The change in equity from nonowner transactions.AAACSB: Reflective thinkingBlooms: Comprehension26. ____Concerns the decision making impact of both the amount and nature of an item.EAACSB: Reflective thinkingBlooms: ComprehensionListed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term with their phrases by placing the letterdesignating the best term in the space provided by the phrase.Terms:A. ComparabilityB. ConsistencyC. Cost effectivenessD. Economic entity assumptionE. Going concern assumptionF. Monetary unit assumptionG. NeutralityH. Periodicity assumptionI. RecognitionJ. Verifiability27. ____Important in analysis between firms.AAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-928. ____Accounting information should be unbiased.GAACSB: Reflective thinkingBlooms: Comprehension29. ____The process of including data in financial statements.IAACSB: Reflective thinkingBlooms: Comprehension30. ____Applying the same accounting practices over time.BAACSB: Reflective thinkingBlooms: Comprehension31. ____Considers the value of using information relative to cost of providing it.CAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-10Listed below are ten terms are followed by a list of phrases that describe or characterize fiveof the terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. ComparabilityB. ConsistencyC. Cost effectivenessD. Economic entity assumptionE. Going concern assumptionF. Monetary unit assumptionG. NeutralityH. Periodicity assumptionI. RecognitionJ. Verifiability32. ____Implies consensus among different observers.JAACSB: Reflective thinkingBlooms: Comprehension33. ____Assumes all transactions can be identified with a particular entity.DAACSB: Reflective thinkingBlooms: Comprehension34. ____Assumes an entity will continue to operate indefinitely.EAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1135. ____Requires reporting the financial life of an entity in discrete time frames.HAACSB: Reflective thinkingBlooms: Comprehension36. ____Ignores the possibility of inflation.FAACSB: Reflective thinkingBlooms: ComprehensionListed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. Accounting Principles BoardB. AICPAC. ConservatismD. Financial Accounting Standards BoardE. Full-disclosure principleF. Historical cost principleG. Matching principleH. MaterialityI. Realization principleJ. Securities and Exchange Commission37. ____Basis of measurement for fixed assets.FAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1238. ____Recognition of revenue only after certain criteria are satisfied.IAACSB: Reflective thinkingBlooms: Comprehension39. ____Guide to expense recognition.GAACSB: Reflective thinkingBlooms: Comprehension40. ____Reporting of all information that could affect decisions.EAACSB: Reflective thinkingBlooms: Comprehension41. ____Application of GAAP sometimes avoided under this constraint.HAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-13Listed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. Accounting Principles BoardB. AICPAC. ConservatismD. Financial Accounting Standards BoardE. Full-disclosure principleF. Historical cost principleG. Matching principleH. MaterialityI. Realization principleJ. Securities and Exchange Commission42. ____It is a practical justification for choosing among alternative accounting methods.CAACSB: Reflective thinkingBlooms: Comprehension43. ____Its pronouncements are still GAAP unless superseded by the FASB.AAACSB: Reflective thinkingBlooms: Comprehension44. ____ItsEITF Issuesare considered part of GAAP.DAACSB: Reflective thinkingBlooms: Comprehension

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1445. ____It has the authority to set U.S. accounting standards.JAACSB: Reflective thinkingBlooms: Comprehension46. ____It is the national organization for CPAs in the U.S.BAACSB: Reflective thinkingBlooms: ComprehensionListed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. AssetsB. Comprehensive incomeC. Distributions to ownersD. EquityE. ExpensesF. GainsG. Investments by ownersH. LiabilitiesI. LossesJ. Revenues47. ____Net assets.DAACSB: Reflective thinkingBlooms: Knowledge

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1548. ____Outflows of resources to generate revenues.EAACSB: Reflective thinkingBlooms: Knowledge49. ____Cash dividends.CAACSB: Reflective thinkingBlooms: Knowledge50. ____Claims of creditors against the assets of a business.HAACSB: Reflective thinkingBlooms: Knowledge51. ____Transfers of resources in exchange for common and preferred stock.GAACSB: Reflective thinkingBlooms: Knowledge

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-16Listed below are ten terms followed by a list of phrases that describe or characterize five ofthe terms. Match each phrase with the correct term by placing the letter designating the bestterm in the space provided by the phrase.Terms:A. AssetsB. Comprehensive incomeC. Distributions to ownersD. EquityE. ExpensesF. GainsG. Investments by ownersH. LiabilitiesI. LossesJ. Revenues52. ____Net outflows from peripheral transactions.IAACSB: Reflective thinkingBlooms: Knowledge53. ____Increases in equity from the sale of goods and/or services.JAACSB: Reflective thinkingBlooms: Knowledge54. ____Net inflows generally reported as part of nonoperating income.FAACSB: Reflective thinkingBlooms: Knowledge

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1755. ____All changes in equity except owner transactions.BAACSB: Reflective thinkingBlooms: Knowledge56. ____Probable future economic benefits controlled by an entity.AAACSB: Reflective thinkingBlooms: KnowledgeListed below are ten organizations followed by a list of phrases that describe or characterizethe organizations. Match each phrases with the correct organization by placing the letterdesignating the best term in the space provided by the phrase.Organization:A. IASBB. FASBC. IASCD. SECE. APBF. EITFG. AICPAH. FAFI. PCAOBJ. IMA57. ____ Responsible for establishing auditing standards in the U.S.IAACSB: Reflective thinkingBlooms: Knowledge

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1858. ____ Primary national organization of accountants working in industry.JAACSB: Reflective thinkingBlooms: Knowledge59. ____ Sets accounting standards in the U.S.BAACSB: Reflective thinkingBlooms: Knowledge60. ____ Provides timely responses to financial reporting issues.FAACSB: Reflective thinkingBlooms: Knowledge61. ____ The FASB's parent organization.HAACSB: Reflective thinkingBlooms: Knowledge62. ____ Parent organization of the IASB.CAACSB: Reflective thinkingBlooms: Knowledge

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-1963. ____ FASB's predecessor.EAACSB: Reflective thinkingBlooms: Knowledge64. ____ Regulates the financial reporting for public companies.DAACSB: Reflective thinkingBlooms: Knowledge65. ____ National organization of certified public accountants.GAACSB: Reflective thinkingBlooms: Knowledge66. ____ Sets global accounting standards.AAACSB: Reflective thinkingBlooms: Knowledge

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-20Multiple Choice Questions67. External decision makers would not look primarily to financial accounting information toassist them in making decisions on:A. Granting credit.B.Capital budgeting.C. Selecting stocks.D. Mergers and acquisitions.AACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 1Level of Learning: 168. Corporations issue their shares to the investing public in the:A.B.C.D.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 1Level of Learning: 169. The primary focus for financial accounting information is to provide information usefulfor:A.B.C.D.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 1Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2170. Which of the following is not true about net operating cash flow?A. It is the difference between cash receipts and cash disbursements from providing goodsand services.B.It is a measure used in accrual accounting and is recognized as the best predictor of futureoperating cash flows.C. Over short periods of time, it may not be indicative of long-run cash-generating ability.D. It is easy to understand and all information required to measure it is factual.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 1Level of Learning: 271. Which of the following groups is not among financial intermediaries?A. Mutual fund managersB. Financial analystsC.CPAsD. Credit rating organizationsAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 1Level of Learning: 272. Which of the following was the first private sector entity that set accounting standards inthe United States?A. Accounting Principles BoardB.Committee on Accounting ProcedureC. Financial Accounting Standards BoardD. AICPAAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 1Level of Learning: 2

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2273. Which of the following does not apply to secondary markets?A. Transactions are important to the efficient allocation of resources in our economy.B.New resources are provided when shares of stock are sold by the corporation to the initialowners.C. Transactions help to establish market prices for additional shares that may be issued in thefuture.D. Many investors might be unwilling to provide resources to corporations if there is noavailable mechanism for the future sale of their stocks and bonds to others.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 2Level of Learning: 274. A cause-and-effect relationship is implicit in the:A. Realization principle.B. Historical cost principle.C.Matching principle.D. Going concern assumption.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 2Level of Learning: 275. The full disclosure principle requires a balance between:A. Comparability and consistency.B.Relevance and cost effectiveness.C. Reliability and neutrality.D. Timeliness and predictive value.AACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 2Level of Learning: 2

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2376. Which of the following groups is not among the external users for whom financialstatements are prepared?A. CustomersB. SuppliersC. EmployeesD.All of these are external users of financial statements.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 2Level of Learning: 277. In a recent annual report, Apple Computer reported the following in one of its disclosurenotes: "Warranty Expense: The Company provides currently for the estimated cost for productwarranties at the time the related revenue is recognized." This note exemplifies Apple's useof:A. ConservatismB.The matching principleC. Realization principleD. Full disclosure principleAACSB: Reflective thinkingBlooms: SynthesisLearning Objective: 2Level of Learning: 278. GAAP is an abbreviation for:A. Generally authorized accounting procedures.B. Generally applied accounting procedures.C. Generally accepted auditing practices.D.Generally accepted accounting principles.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2479. The SEC issues accounting standards in the form of:A. Accounting Research Bulletins.B.Financial Reporting Releases.C. Financial Accounting Standards.D. Financial Technical Bulletins.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 180. Pronouncements issued by the Committee on Accounting Procedures:A.Dealt with specific accounting and reporting problems.B. Were based on exposure drafts and public comment letters.C. Originated from congressional studies and SEC directives.D. Were the outcome of research studies and a theoretical framework.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 181. The FASB's standard-setting process includes, in the correct order:A. Exposure draft, research, discussion memorandum, SFAS.B. Research, exposure draft, discussion memorandum, SFAS.C.Research, discussion memorandum, exposure draft, SFAS.D. Discussion memorandum, research, exposure draft, SFAS.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2582. Which of the following isnota provision of the Public Company Accounting Reform andInvestor Protection Act of 2002 (Sarbanes-Oxley)? The ActA. Changed the entity responsible for setting auditing standards.B. Increased corporate executive responsibility for financial statements.C. Limited nonaudit services that can be performed by auditors for audit clients.D.Changed the entity responsible for setting accounting standards.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 183. CPAs are licensed by:A. The AICPA.B. The SEC.C. The federal government.D.State governments.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 184. A firm's comprehensive income is always:A. The same as its net income.B. Greater than its net income.C. Less than its net income.D.Could be greater than or less than net income.AACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 3Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2685. Which of the following has the authority to set accounting standards in the United States?A. FASBB. IRSC.SECD. AICPAAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 186. The most likely important flaw leading to the demise of the APB was the perceived lackof:A. Confidence.B. Competence.C.Independence.D. Importance.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 3Level of Learning: 287. Accounting standard setting has been characterized as:A.A political process.B. Using the scientific method.C. Pure deductive reasoning.D. Pure inductive reasoning.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2788. The International Accounting Standards Board:A. Was the predecessor to the IASC.B. Can overrule the FASB when their policies disagree.C.Promotes the use of high-quality, understandable global accounting standards.D. Has its headquarters in Geneva.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 189. The most political issue in the FASB's most recent deliberations and pronouncements onbusiness combinations was:A.The negative effects on subsequent earnings of amortizing goodwill if firms were requiredto use the purchase method of accounting for the combination.B. The negative effects on subsequent earnings of amortizing goodwill if firms were requiredto use the pooling method of accounting for the combination.C. The unrealistic balance sheet assets that would be created if firms were required to use thepurchase method of accounting for the combination.D. The unrealistic balance sheet assets that would be created if firms were required to use thepooling method of accounting for the combination.AACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 4Level of Learning: 190. Which of the following is not a provision of the Public Company Accounting Reform andInvestor Protection Act of 2002?A. Corporate executive accountability.B. Auditor rotation.C. Retention of workpapers.D.All of these are provisions of the Act.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2891. When a registrant company submits its annual filing to the SEC, it uses:A. Form 10-A.B.Form 10-K.C. Form 10-Q.D. Form S-1.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 192. The primary professional organization for those accountants working in industry is the:A. AAAB. AICPAC. IIAD.IMAAACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 193. The FASB issues a Statement of Accounting Standards if _________ FASB memberssupport it.A. 5 of 9B. 5 of 7C.4 of 7D. None of these is correct.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 1

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-2994. The primary historical reason for the FASB reversing its positions when politicalpressures occur is:A. The cost gathering data was prohibitive.B. The difficulties in measurement were too great.C. They have no authority in such situations.D.The SEC did not support the FASB position.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 4Level of Learning: 295. The most recent example of the political process at work in standard setting is the heateddebate that occurred on the issue of:A. Pension plan accounting.B. Accounting for posteretirement benefits other than pensions.C.Accounting for business combinations.D. Accounting for stock-based compensation.AACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 4Level of Learning: 296. The recognition of which of the following expenses exemplifies the application of thematching principle?A. President's salary.B. Research and development.C.Cost of goods sold.D. Advertising.AACSB: Reflective thinkingBlooms: ComprehensionLearning Objective: 4Level of Learning: 2

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Chapter 001 Environment and Theoretical Structure of Financial Accounting1-3097. The FASB's conceptual framework's qualitative characteristics of accounting informationinclude:A. Historical cost.B. Realization.C.Reliability.D. Full disclosure.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 5Level of Learning: 198. The FASB's conceptual framework's qualitative characteristics of accounting informationinclude:A. Full disclosure.B.Relevance.C. Going concern.D. Historical cost.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 5Level of Learning: 199. The conceptual framework's qualitative characteristic of relevance includes:A.Timeliness.B. Verifiability.C. Representational faithfulness.D. Neutrality.AACSB: Reflective thinkingBlooms: KnowledgeLearning Objective: 5Level of Learning: 1

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