Question

Multiple Choice:

1. The idea of “Free from bias” represents the primary quality of :

    a. Relevance

b. Verifiability.

c. Faithful representation

d. Neutrality.

2. According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?

a. Replacement cost.

b. Net realizable value.

c. Historical cost.

d. Present value of future cash flows.

2. In general, completed earnings process under revenue realization refers to “ownership is transferred” and :

        a. “production is completed”.

b. “a purchase order is received”.

c. “cash is collected”.

d. “physical substance is transferred”.

4. On April 15,2013, Hank, one of Exxon Corporation’s investors concluded that the

2013 Research and Development Costs will increase 15% based on the 2012 R &D listed in the Exxon’s financial Statements. This implies the Exxon’s financial statements has the following value?

a. Predictive Value.

b. Feedback Value.

c. Confirmatory Value.

d. Timeliness Value.

Scenario Analysis

Davis, an entry-level controller, decreased the valuation of all assets and liabilities of the financial statements by 10% because he thought the purchasing power of the dollar is decreasing.   

Do you agree or disagree? Briefly the reason for your answer

Answer 1

1) The idea of ' free from bias ' represents the primary quality of: (d) Neutrality .

Explanation : Neutrality means financial statements doesn't effected by personal judgement or prejudice of the accounts.

2) According to FASB conceptual framework (d) present value of future cash flows would not be used to measure inventory .

Explanation : As per FASB conceptual framework work,at the time of inventory valuation upper and lower limit must have to be calculated .During calculating both these limits all three items (a) historical cost, (b) replacement cost and (c) realizable value have to be compare for consideration. Only present value of future cash flows not been considered because it doesn't consider time value of money.

3) In general, completed earning process under revenue realization refers ownership is transferred and (d) physical substance is transferred

Explanation : Production is completed or purchase order is received are not been considered as earnings process completed. Also cash is collected doesn't mean earning process has been completed ,some time in advance vendors collect cash. It is a liability ,it does not said earnings process has been completed . When ownership transfer and substance delivered it assumed earning process completed in accrual basis. Here credit sales is also considered as revenue.

4) Exxon's financial statement has the (a) predictive value.

Explanation : It helps to assume or predict future expenditure for R & D based on previous year expenditure .It allows the account or management to make prediction.

5) I am disagree with him.Purchasing power of dollars is decreasing, is the effect of inflation . During inflation all non current tangible assets and value of inventory get increased and at the same time value of some liabilities also gets increase like cost of supplies, accrued expenses, debt with floating interest etc.

But if in these time balance sheet has been understated then, it shows poor financial condition than actual. According to that balance sheet, if he wants to sell his business during or after inflation period ,he could realize much lesser than actual value of his business assets.