Question

The objective of financial reporting is:
A. To provide the market value of a firm at a point in time.
B. To provide the total market value of its common stock.
C. To provide information useful for decision making by investors and creditors.
D. To require all companies to comply with GAAP.

A firm's accounting policy is to immediately expense the cost of metal wastebaskets it purchases for use by its employees at their desks. The total cost of wastebaskets in any year is $1,000 and the firm has $6 billion in total assets. The firm expects the wastebaskets to last indefinitely. The firm
A. Is violating GAAP
B. Is invoking the materiality constraint
C. Is invoking the conservatism constraint
D. Is violating the relevance principle
E. None of these answers are correct.

Which of the following accounting concepts best justifies the use of accruals and deferrals?
A. Cost/benefit constraint
B. Unit-of-measure assumption
C. Continuity assumption
D. Materiality constraint

Accounting traditionally has been influenced by conservatism because of the:
A. probability of undetected errors in the financial statements.
B. difficulty in measuring net income on the accrual basis.
C. inherent uncertainties of many accounting measurements.
D. difficulty in making certain calculations.
E. large number of transactions recorded in any one period.

S Corporation offered to issue 5,000 shares of its no par value common shares to another company in exchange for a building at a time when there were 1,000,000 shares already outstanding and were selling for $4.00 per share at the time. The owner of the building had the opportunity to sell it to a competing buyer for $26,000. However, because the seller wanted the S Corporation shares, S's offer was accepted. At what amount should the building be reported in S's financial statements?
A. $26,000
B. $10,000
C. $20,000
D. $16,000

Accounting information is considered to be relevant when it
A. can be depended on to represent the economic conditions and events that it is intended to represent.
B. is capable of making a difference to a decision-maker.
C. is understandable by reasonably informed users of accounting information.
D. is verfiable and neutral.

The separate entity assumption:
A. requires periodic income measurement.
B. is applicable to both incorporated and unincorporated businesses.
C. is not applicable to an unincorporated business.
D. recognizes the legal nature of a business organization

The underlying concept that the value of accounting information must exceed the expenditures incurred to provide it is called the:
A. substance over form.
B. cost/benefit implementation constraint.
C. conservatism.
D. full-disclosure principle

A firm signs a major contract in December to construct custom machinery for a client. No work is begun the current year, yet the notes to the firm's financial statements discuss the nature and dollar amount of the contract. This is an example of
A. Reliability
B. Full disclosure
C. Historical cost
D. Conservatism
E. Reliability quality

If accounting information is timely and has predictive and feedback value, then it can be characterized as:
A. Verifiable.
B. Qualitative.
C. Reliable.
D. Relevant.

A primary objective of financial reporting is to:
A. assist investors in predicting prospective cash flows.
B. assist investors in analyzing the economy.
C. assist suppliers in determining an appropriate discount to offer a particular company.
D. enable banks to determine an appropriate interest rate for their commercial loans.

If, in year 1, a company used LIFO; year 2, FIFO; and in year 3, moving average cost for inventory valuation, which of the following assumptions, constraints, or principles would be violated:
A. cost.
B. time period.
C. matching.
D. consistency.
E. materiality.

Answer 1

1) The objective of financial reporting is:

Solution: To provide information useful for decision making by investors and creditors

Explanation: The primary objective of financial reporting is to provide vital information to investors and creditors for purpose of decision making.

2) A firm's accounting policy is to immediately expense the cost of metal wastebaskets it purchases for use by its employees at their desks. The total cost of wastebaskets in any year is $1,000 and the firm has $6 billion in total assets. The firm expects the wastebaskets to last indefinitely. The firm

Solution: Is invoking the materiality constraint

Explanation: The materiality constraint primarily determines whether company's transactions are significant to the financial results of a business.

3) Which of the following accounting concepts best justifies the use of accruals and deferrals?

Solution: Continuity assumption

Explanation: Continuity assumption refers that the firm will continue to operate indefinitely or at least for another twelve months.

4) Accounting traditionally has been influenced by conservatism because of the

Solution: inherent uncertainties of many accounting measurements

Explanation: Conservatism's influence on accounting practice has been mainly due to the inherent uncertainties of many accounting measurements

5) S Corporation offered to issue 5,000 shares of its no par value common shares to another company in exchange for a building at a time when there were 1,000,000 shares already outstanding and were selling for $4.00 per share at the time. The owner of the building had the opportunity to sell it to a competing buyer for $26,000. However, because the seller wanted the S Corporation shares, S's offer was accepted. At what amount should the building be reported in S's financial statements?

Solution: $20,000

Explanation: 5,000 * $4.00 = $20,000

6) Accounting information is considered to be relevant when it

Solution: is capable of making a difference to a decision-maker

Explanation: Information needs to be relevant to the decision making requirements of the user

7) The separate entity assumption

Solution: is applicable to both incorporated and unincorporated businesses

Explanation: The separate entity assumption means that the transactions conducted by a incorporated and unincorporated business are separate in reference to conducted by its owners.

8) The underlying concept that the value of accounting information must exceed the expenditures incurred to provide it is called the

Solution: cost/benefit implementation constraint

Explanation: Cost/benefit implementation constraint refers to the concept that the value of accounting information should be greater than the expenditures incurred to provide it.