Chapter 2: Practice Problems

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1. All of these answer choices are 22 (02.01.MC-Conc). A 3. Business entities will need far S25 (02.01.MC-Conc). Which
correct. soundly developed less assistance from of the following is not a
conceptual framework of accountants because the benefit associated with the
concepts and objectives financial reporting process FASB Conceptual Framework
should will be quite easy to apply. Project?

a. increase financial a. A conceptual framework

statement users' should increase financial
understanding of and statement users'
confidence in financial understanding of and
reporting. confidence in financial
reporting.
b. enhance comparability
among companies' b. Practical problems should
financial statements. be more quickly solvable by
reference to an existing
c. allow new and emerging conceptual framework.
practical problems to be
more quickly solved. c. A coherent set of
accounting standards and
d. All of these answer rules should result.
choices are correct.
d. Business entities will need
2. -An item must make a Which of the following
far less assistance from
difference or it need not be statements about
accountants because the
disclosed. materiality is correct?
financial reporting process
-Materiality is a matter of
will be quite easy to apply.
relative size or importance.
-An item is material if its 4. a company applies the same 56 (02.03.MC-Conc).
inclusion or omission would accounting treatment to Financial information exhibits
influence or change the similar events, from period to the characteristic of
judgment of a reasonable period consistency when
person.

a. expenses are reported as

charges against revenue in
the period in which they are
paid.

b. a company applies the

same accounting treatment
to similar events, from
period to period.

c. extraordinary gains and

losses are not included on
the income statement.

d. accounting procedures are

adopted which give a
consistent rate of net income.
5. consistency 38 (02.03.MC-Conc). Changing the method 9. derive their credibility and 21 (02.01.MC-Conc). Generally
of inventory valuation should be reported in authority from general accepted accounting
the financial statements because of which recognition and principles
qualitative characteristic of accounting acceptance by the
information? accounting profession a. are fundamental truths or
axioms that can be derived
a. Consistency from laws of nature.

b. Verifiability b. derive their authority from

legal court proceedings.
c. Timeliness
c. derive their credibility and
d. Comparability authority from general
recognition and acceptance by
6. cost-benefit 120 (02.07.MC-Conc). The cost constraint is
the accounting profession.
relationship also referred to as the

d. have been specified in

a. cost-benefit relationship.
detail in the FASB conceptual
framework.
b. materiality quality.
10. distributions to owners 63 (02.04.MC-Conc). Which of
c. monetary unit assumption. the following elements of
financial statements is not a
d. measurement principle. component of comprehensive
income?
7. d. 126 (02.03.MC-CPA). According to the FASB's
Comparability: conceptual framework, which of the
a. Revenues
yes; following relates to both relevance and
Neutrality: faithful representation?
b. Distributions to owners
yes

c. Losses
a. Comparability: Yes; Neutrality: Yes

d. Expenses
b. Comparability: Yes; Neutrality: No 11. expense recognition 90 (02.06.MC-Conc). Which of
principle the following is commonly
referred to as the matching
c. Comparability: No; Neutrality: Yes principle?

a. Revenue recognition
d. Comparability: No; Neutrality: No principle
8. decision 27 (02.02.MC-Conc). The underlying theme
b. Measurement principle
usefulness of the conceptual framework is

c. Expense recognition
a. decision usefulness.
principle
b. understandability.
d. Full disclosure principle
c. faithful representation.

d. comparability.
12. Fair 96 (02.06.MC-Conc). Which of the following is 15. If needed by financial 115 (02.07.MC-Conc). Which
values an argument against using historical cost in statement users, of the following statements
are more accounting? management should gather concerning the cost-benefit
relevant. information not included in relationship is not true?
a. Fair values are more relevant. the financial statements that
would not otherwise be
b. Historical costs are based on an exchange gathered for internal use. a. Business reporting should
transaction. exclude information outside
of management's expertise.
c. Historical costs are reliable.

d. Fair values are subjective. b. Management should not

be required to report
13. full 107 (02.06.MC-Conc). Which assumption or
information that would
disclosure principle requires that all information significant
significantly harm the
enough to affect decisions of reasonably
company's competitive
informed users should be reported in the
position.
financial statements?

a. Matching.
c. Management should not
be required to provide
b. Going concern.
forecasted financial
information.
c. Historical cost.

d. Full disclosure.
d. If needed by financial
14. historical 108 (02.06.MC-Conc). A company has a factory statement users,
cost building that originally cost the company management should gather
$250,000. The current fair value of the factory information not included in
building is $3 million. The president would like to the financial statements that
report the difference as a gain. The write-up would not otherwise be
would represent a violation of which accounting gathered for internal use.
assumption or principle?
16. materiality ingredient 117 (02.03.MC-Conc).
Expensing the cost of a
wastebasket with an
a. Revenue recognition
estimated useful life of 10
years when purchased is an
example of the application
b. Going concern
of the

a. consistency characteristic.
c. Historical cost

b. expense recognition
principle.
d. Monetary unit

c. materiality ingredient.

d. historical cost principle.

17. moment in S66 (02.04.MC-Conc). According to the FASB 21. none are 62 (02.04.MC-Conc). One of the elements of
time-yes Conceptual Framework, the elements - assets, correct financial statements is comprehensive income.
period of liabilities, and equity - describe amounts of As described in Statement of Financial
time-no resources and claims to resources at/during a: Accounting Concepts No. 6, "Elements of
Financial Statements," comprehensive income is
equal to
a. Moment in time: Yes; Period of time: No

a. revenues minus expenses plus gains minus

b. Moment in time: Yes; Period of time: Yes losses.

c. Moment in time: No; Period of time: Yes b. revenues minus expenses plus gains minus
losses plus investments by owners minus
distributions to owners.
d. Moment in time: No; Period of time: No
18. monetary S75 (02.05.MC-Conc). Which of the following
c. revenues minus expenses plus gains minus
unit basic accounting assumptions is threatened by
losses plus investments by owners minus
assumption the existence of severe inflation in the
distributions to owners plus assets minus
economy?
liabilities.
a. Monetary unit assumption

d. None of these answer choices are correct.

b. Periodicity assumption
22. operating P64 (02.04.MC-Conc). The calculation of
c. Going-concern assumption income: comprehensive income includes which of the
yes; following?
d. Economic entity assumption distribution
to owners: a. Operating Income: Yes; Distribution to
19. neutrality Which of the following is an ingredient of
no Owners: Yes
faithful representation?
20. neutrality 131 (02.03.MC-CPA). According to the FASB's b. Operating Income: No; Distribution to
conceptual framework, what does the concept Owners: No
of faithful representation include?
c.. Operating Income: No; Distribution to
Owners: Yes
a. Verifiability
d. Operating Income: Yes; Distribution to
Owners: No
b. Predictive value
23. periodicity 72 (02.05.MC-Conc). Which basic assumption is
assumption illustrated when a firm reports financial results
on an annual basis?
c. Materiality

a. Economic entity assumption

d. Neutrality
b. Going concern assumption

c. Periodicity assumption

d. Monetary unit assumption

24. relevance and 122 (02.07.MC-Conc). Trade-offs between 27. verifiable 84 (02.06.MC-Conc). Proponents of
faithful the characteristics that make information historical cost ordinarily maintain that in
representation useful may be necessary or beneficial. comparison with all other valuation
Issuance of interim financial statements is alternatives for general purpose financial
an example of a trade-off between reporting, statements prepared using
historical costs are more
a. relevance and faithful representation.

b. faithful representation and periodicity. a. verifiable.

c. timeliness and materiality.

b. relevant.
d. understandability and timeliness.
25. Relevance: No; 50 (02.03.MC-Conc). According to
c. indicative of the entity's purchasing
Faithful Statement of Financial Accounting
power.
Representation: Concepts No. 8, neutrality is an ingredient
Yes of the fundamental quality(ies) of:

d. conservative.
a. Relevance: Yes; Faithful Representation: 28. when in doubt, 113 (02.03.MC-Conc). What is prudence
Yes recognizing the or conservatism?
option that is
least likely to
b. Relevance: No; Faithful Representation: overstate assets a. Understating assets and net income
Yes and income

b. When in doubt, recognizing the option

c. Relevance: Yes; Faithful Representation: that is least likely to overstate assets and
No income

d. Relevance: No ; Faithful Representation: c. Recognizing the option that is least

No likely to overstate assets and income
26. true 14 (02.05). The historical cost principle
would be of limited usefulness if not for
d. Recognizing revenue when earned and
the going concern assumption.
realized
True
29. when the 97 (02.06.MC-Conc). When is revenue
False company generally recognized?
satisfies the
performance a. When cash is received
obligation
b. When the warranty expires

c. When production is completed

d. When the company satisfies the

performance obligation