CHAPTER 1

FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS

IFRS questions are available at t e en! o" t is # a$ter%

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Des#ri$tion
Definition of financial accounting. Purpose of financial statements. Definition of financial accounting. Capital allocation process. Objective of financial reporting. Decision!"sefulness approac#. "sers of financial statements. Committee on &ccounting Proce'ure. Passage of ne) F&*+ statement. *tatements of Financial &ccounting Concepts. Creation of &ccounting Principles +oar'. F&*+ Co'ification. Co'e of Professional Con'uct. -&&P an' political action. Public Compan. &ccounting Oversig#t +oar'. /0pectations gap. Financial reports. Fair value information. 1nternational Financial 2eporting *tan'ar's. /t#ical issues.

)ULTIPLE CHOICE'Con#e$tual
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Des#ri$tion
Financial accounting. "sers of financial reports. 1'entif. t#e major financial statements. Financial reporting entit.. Differences bet)een financial an' managerial accounting. Financial reporting communication. 3anagerial accounting. Capital allocation process. /fficient use of resources. Capital allocation process. Financial statement information. &ccounting profession c#allenge. Financial reporting objective. Financial statements primar. users.

1&/ c

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition 35. 1nvestor4s 'ecision ma5ing.

)ULTIPLE CHOICE'Con#e$tual
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Des#ri$tion
&ccrual accounting. /ntit. perspective. 3eaning of 8generall. accepte'.9 Common set of stan'ar's an' proce'ures. :imitation of general purpose financial statements. *ecurities an' /0c#ange Commission an' accounting stan'ar' setting. Due process in F&*+ stan'ar' setting. Organi;ations responsible for setting accounting stan'ar's. 2eason for &ccounting Principles +oar' creation Organi;ation issuing &ccounting 2esearc# +ulletins. C#aracteristic of -&&P. C#aracteristics of -&&P. F&*+ accounting stan'ar's. F&*+ stan'ar' passage. Purpose of /merging 1ssues Tas5 Force. &1CP& role in stan'ar' setting. 2ole of */C. Po)ers of t#e */C. */C enforcement. Creation of F&*+. &ppointment of F&*+ members. Purpose of t#e Financial &ccounting Foun'ation. C#aracteristics of F&*+. F&*+ an' <'ue process< s.stem. Publications of F&*+. Purpose of F&*+ Tec#nical +ulletins. Purpose of /merging 1ssues Tas5 Force. 2ole of t#e &1CP&. Pronouncement issue' b. t#e &P+. *tan'ar' setting organi;ations. 1'entification of stan'ar' setting organi;ations. *tatements of financial accounting concepts. F&*+ members. F&*+ statement process. =ature of -&&P. +o'. )#ic# promulgates -&&P. Publications )#ic# are not -&&P. Publications )#ic# are not -&&P. Co'e for Professional Con'uct 2ule 2,3. Purpose of F&*+ staff position. Components of -&&P. Political environment of stan'ar' setting. 1nternational &ccounting *tan'ar's +oar'.

Financial &ccounting an' &ccounting *tan'ar's

1&3

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Des#ri$tion
*tan'ar' setting process pressure. Danger of politics in stan'ar' setting Definition of <e0pectation gap<. 2eason accounting stan'ar's 'iffer across countries. &'vantage of countries a'opting same accounting stan'ar's. /t#ical concern of accountants.

=ote> t#ese ?uestions also appear in t#e Problem!*olving *urvival -ui'e.

E0ERCISES
Ite, Des#ri$tion
/1!%5 /1!% /1!%$ /1!%% /1!%( Objectives of financial reporting. Development of accounting principles. Publications an' organi;ations. F&*+. /volution of a statement of financial accounting stan'ar's.

CHAPTER LEARNING O*1ECTI2ES

1. 1'entif. t#e major financial statements an' ot#er means of financial reporting. 2. /0plain #o) accounting assists in t#e efficient use of scarce resources. 3. 1'entif. t#e objective of financial reporting. 4. /0plain t#e nee' for accounting stan'ar's. 5. 1'entif. t#e major polic.!setting bo'ies an' t#eir role in t#e stan'ar'!setting process. . /0plain t#e meaning of generall. accepte' accounting principles 6-&&P7 an' t#e role of t#e Co'ification for -&&P. $. Describe t#e impact of user groups on t#e rule!ma5ing process. %. Describe some of t#e c#allenges facing financial reporting. (. "n'erstan' issues relate' to et#ics an' financial accounting. 1,. Compare t#e proce'ures relate' to financial accounting an' accounting stan'ar's un'er -&&P an' 1F2*.

1&7

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition

SU))AR4 OF LEARNING O*1ECTI2ES *4 5UESTIONS

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Financial &ccounting an' &ccounting *tan'ar's

1&8

TRUE&FALSE'Con#e$tual
1. Financial accounting is t#e process of i'entif.ingA measuringA anal.;ingA an' communicating financial information nee'e' b. management to planA evaluateA an' control a compan.4s operations. 2. Financial statements are t#e principal means t#roug# )#ic# a compan. communicates its financial information to t#ose outsi'e it. 3. "sers of financial reports of a compan. use t#e information provi'e' b. t#ese reports to ma5e t#eir capital allocation 'ecisions. 4. &n effective process of capital allocation promotes pro'uctivit. an' provi'es an efficient mar5et for bu.ing an' selling securities an' obtaining an' granting cre'it. 5. T#e objective of financial reporting is to report t#e plans ma'e b. a compan. to improve t#e pro'uctivit. of its emplo.ees. . 1nvestors are intereste' in financial reporting because it provi'es information t#at is useful for ma5ing 'ecisions. $. "sers of financial accounting statements #ave bot# coinci'ing an' conflicting nee's for information of various t.pes. %. T#e *ecurities an' /0c#ange Commission appointe' t#e Committee on &ccounting Proce'ure. (. T#e passage of a ne) F&*+ &ccounting *tan'ar's "p'ate re?uires t#e support of five of t#e seven boar' members. 1,. *tatements of Financial &ccounting Concepts set fort# fun'amental objectives an' concepts t#at are use' b. t#e F&*+ in 'eveloping future stan'ar's of financial accounting an' reporting. 11. T#e &1CP& create' t#e &ccounting Principles +oar' in 1(5(. 12. T#e F&*+4s Co'ification creates a ne) set of -&&P. 13. T#e &1CP&4s Co'e of Professional Con'uct re?uires t#at members prepare financial statements in accor'ance )it# generall. accepte' accounting principles. 14. -&&P is a pro'uct of careful logic or empirical fin'ings an' is not influence' b. political action. 15. T#e Public Compan. &ccounting Oversig#t +oar' #as oversig#t an' enforcement aut#orit. an' establis#es au'iting an' in'epen'ence stan'ar's an' rules. 1 . T#e e0pectations gap is 'ue to t#e 'ifference bet)een )#at t#e public t#in5s accountants s#oul' 'o an' )#at accountants t#in5 t#e. can 'o.

1&9

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition

1$. Financial reports in t#e earl. 21st centur. 'i' not provi'e an. information about a compan.4s soft assets 6intangibles7. 1%. &ccounting stan'ar's are no) less li5el. to re?uire t#e recor'ing or 'isclosure of fair value information. 1(. ".*. companies t#at list overseas are re?uire' to use 1nternational Financial 2eporting *tan'ar'sA issue' b. t#e 1nternational &ccounting *tan'ar's +oar'. 2,. /t#ical issues in financial accounting are governe' b. t#e &1CP&.

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)ULTIPLE CHOICE'Con#e$tual
21. -eneral!purpose financial statements are t#e pro'uct of a. financial accounting. b. managerial accounting. c. bot# financial an' managerial accounting. '. neit#er financial nor managerial accounting. B#ic# of t#e follo)ing is not a user of financial reportsC a. Cre'itors. b. -overnment agencies. c. "nions. '. &ll of t#ese are users. T#e financial statements most fre?uentl. provi'e' inclu'e all of t#e follo)ing e?#e$t t#e a. balance s#eet. b. income statement. c. statement of cas# flo)s. '. statement of retaine' earnings. T#e information provi'e' b. financial reporting pertains to a. in'ivi'ual business enterprisesA rat#er t#an to in'ustries or an econom. as a )#ole or to members of societ. as consumers. b. business in'ustriesA rat#er t#an to in'ivi'ual enterprises or an econom. as a )#ole or to members of societ. as consumers. c. in'ivi'ual business enterprisesA in'ustriesA an' an econom. as a )#oleA rat#er t#an to members of societ. as consumers. '. an econom. as a )#ole an' to members of societ. as consumersA rat#er t#an to in'ivi'ual enterprises or in'ustries.

22.

23.

24.

Financial &ccounting an' &ccounting *tan'ar's 25.

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&ll t#e follo)ing are 'ifferences bet)een financial an' managerial accounting in #o) accounting information is use' e?#e$t to a. plan an' control compan.Ds operations. b. 'eci'e )#et#er to invest in t#e compan.. c. evaluate borro)ing capacit. to 'etermine t#e e0tent of a loan to grant. '. &ll t#e ans)er c#oices are correct. B#ic# of t#e follo)ing represents a form of communication t#roug# financial reporting but not t#roug# financial statementsC a. +alance s#eet. b. Presi'entDs letter. c. 1ncome statement. '. =otes to financial statements. T#e process of i'entif.ingA measuringA anal.;ingA an' communicating financial information nee'e' b. management to planA evaluateA an' control an organi;ation4s operations is calle' a. financial accounting. b. managerial accounting. c. ta0 accounting. '. au'iting. Eo) 'oes accounting #elp t#e capital allocation process attract investment capitalC a. +. provi'ing timel.A relevant information. b. +. encouraging innovation. c. +. promoting pro'uctivit.. '. +. provi'ing timel.A relevant information an' b. encouraging innovation. B#ic# of t#e follo)ing #elps in 'etermining )#et#er a business t#rivesC a. 3ar5ets. b. Free enterprise. c. Competition. '. &ll of t#ese ans)er c#oices are correct. B#ic# of t#e follo)ing is relate' to an effective capital allocationC a. Promoting pro'uctivit.. b. /ncouraging innovation. c. Provi'ing an efficient mar5et for bu.ing an' selling securities. '. &ll of t#ese ans)er c#oices are correct. Financial statements in t#e earl. 2,,,s provi'e information relate' to a. nonfinancial measurements. b. for)ar'!loo5ing 'ata. c. #ar' assets 6inventor. an' plant assets7. '. =one of t#ese ans)er c#oices are correct. B#ic# of t#e follo)ing is not a major c#allenge facing t#e accounting professionC a. =onfinancial measurements. b. Timeliness. c. &ccounting for #ar' assets. '. For)ar'!loo5ing information.

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1&; 33.

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition B#at is t#e objective of financial reportingC a. Provi'e information t#at is useful to management in ma5ing 'ecisions. b. Provi'e information t#at clearl. portra.s nonfinancial transactions. c. Provi'e information about t#e reporting entit. t#at is useful to present an' potential e?uit. investorsA len'ersA an' ot#er cre'itors. '. Provi'e information t#at e0clu'es claims to t#e resources. Primar. users for general!purpose financial statements inclu'e a. cre'itors. b. emplo.ees. c. investors. '. bot# cre'itors an' investors. B#ic# of t#e follo)ing )ill be of interest to investors in 'ecision!ma5ingC a. &ssessing t#e compan.4s abilit. to generate net cas# inflo)s. b. &ssessing management4s abilit. to protect an' en#ance t#e capital provi'ers4 investments. c. +ot# assessing t#e compan.4s abilit. to generate net cas# inflo)s an' assessing management4s abilit. to protect an' en#ance t#e capital provi'er4s investments. '. &ssessing t#e compan.4s abilit. to collect 'ebts. &ccrual accounting is use' because a. cas# flo)s are consi'ere' less important. b. it provi'es a better in'ication of a compan.4s abilit. to generate cas# flo)s t#an t#e cas# basis. c. it recogni;es revenues )#en cas# is receive' an' e0penses )#en cas# is pai'. '. =one of t#e ans)er c#oices are correct. B#ic# perspective is a'opte' as a part of t#e objective of general!purpose financial reportingC a. & 'ecision!usefulness perspective. b. & proprietar. perspective. c. &n entit. perspective. '. & financial reporting perspective. B#ic# of t#e follo)ing is a re?uirement for an accounting principle to be calle' <generall. accepte'<C a. &n aut#oritative accounting rule!ma5ing bo'. #as establis#e' it in an official pronouncement. b. T#e principle #as been accepte' as appropriate because of its universal application. c. &n aut#oritative accounting rule!ma5ing bo'. #as establis#e' it an' it #as been accepte' because of its universal application. '. =one of t#e ans)er c#oices are correct. & common set of accounting stan'ar's an' proce'ures are calle' a. financial accounting stan'ar's. b. generall. accepte' accounting principles. c. objectives of financial reporting. '. statements of financial accounting concepts.

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B#ic# of t#e follo)ing is a general limitation of <general purpose financial statements<C a. -eneral purpose financial statements ma. not be t#e most informative for a specific enterprise. b. -eneral purpose financial statements are not comparable. c. -eneral purpose financial statements 'o not fairl. present a compan.Ds financial operations. '. =one of t#e ans)er c#oices are correct. B#at is t#e relations#ip bet)een t#e *ecurities an' /0c#ange Commission an' accounting stan'ar' setting in t#e "nite' *tatesC a. T#e */C re?uires all companies liste' on an e0c#ange to submit t#eir financial statements to t#e */C. b. T#e */C coor'inates )it# t#e &1CP& in establis#ing accounting stan'ar's. c. T#e */C #as a man'ate to establis# accounting stan'ar's for enterprises un'er its juris'iction. '. T#e */C revie)s financial statements for compliance. B#at is 'ue process in t#e conte0t of stan'ar' setting at t#e F&*+C a. T#e F&*+ operates in full vie) of t#e public. b. Public #earings are #el' on propose' accounting stan'ar's. c. 1ntereste' parties can ma5e t#eir vie)s 5no)n. '. &ll of t#e ans)er c#oices are correct. B#ic# of t#e follo)ing organi;ations #as been responsible for setting ".*. accounting stan'ar'sC a. T#e &ccounting Principles +oar'. b. T#e Committee on &ccounting Proce'ure. c. T#e Financial &ccounting *tan'ar's +oar'. '. &ll of t#e ans)er c#oices are correct. B#. 'i' t#e &1CP& create t#e &ccounting Principles +oar'C a. T#e */C 'isban'e' t#e previous stan'ar' setting organi;ation. b. T#e previous stan'ar' setting organi;ation 'i' not provi'e a structure' set of accounting principles. c. =o suc# organi;ation e0iste' in t#e past. '. =one of t#e ans)er c#oices are correct. B#ic# organi;ation )as responsible for issuing &ccounting 2esearc# +ulletinsC a. T#e &ccounting Principles +oar'. b. T#e Committee on &ccounting Proce'ure. c. T#e */C. '. T#e F&*+. & c#aracteristic of generall. accepte' accounting principles inclu'e> a. a common set of stan'ar's an' principles. b. stan'ar's an' principles are base' a fe'eral statutes. c. acceptance re?uires an affirmative vote of Certifie' Public &ccountants. '. practices t#at become accepte' for at least a .ear b. all in'ustr. members.

41.

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Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition C#aracteristics of generall. accepte' accounting principles inclu'e all of t#e follo)ing e?#e$t a. aut#oritative accounting t#at t#e rule!ma5ing bo'. #as establis#e' as a principle of reporting. b. stan'ar's are consi'ere' useful b. t#e profession. c. eac# principle is approve' b. t#e */C. '. practice #as become universall. accepte' over time. B#. )as it believe' t#at accounting stan'ar's t#at )ere issue' b. t#e Financial &ccounting *tan'ar's +oar' )oul' carr. more )eig#tC a. *maller members#ip. b. T#e F&*+ boar' members )ere )ell!pai'. c. T#e F&*+ boar' members )ere CP&s. '. Due process. T#e passage of a ne) F&*+ &ccounting *tan'ar's "p'ate re?uires t#e support of a. seven +oar' members. b. t#ree +oar' members. c. four +oar' members. '. five +oar' members. B#at is t#e purpose of /merging 1ssues Tas5 ForceC a. Provi'e interpretation of e0isting stan'ar's. b. Provi'e a consensus on #o) to account for ne) an' unusual financial transactions. c. Provi'e interpretive gui'ance. '. Provi'e timel. gui'ance on select issues. B#ic# organi;ation is responsible for issuing /merging 1ssues Tas5 Force *tatementsC a. T#e F&*+ b. T#e C&P c. T#e &P+ '. T#e */C T#e role of t#e *ecurities an' /0c#ange Commission in t#e formulation of accounting principles can be best 'escribe' as a. consistentl. primar.. b. consistentl. secon'ar.. c. sometimes primar. an' sometimes secon'ar.. '. non!e0istent. T#e bo'. t#at #as t#e po)er to prescribe t#e accounting practices an' stan'ar's to be emplo.e' b. companies t#at fall un'er its juris'iction is t#e a. F&*+. b. &1CP&. c. */C. '. &P+.

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Financial &ccounting an' &ccounting *tan'ar's 54.

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Companies t#at are liste' on a stoc5 e0c#ange are re?uire' to submit t#eir financial statements to t#e a. &1CP&. b. &P+ c. F&*+. '. */C. T#e Financial &ccounting *tan'ar's +oar' 6F&*+7 )as propose' b. t#e a. &merican 1nstitute of Certifie' Public &ccountants. b. &ccounting Principles +oar'. c. *tu'. -roup on t#e Objectives of Financial *tatements. '. *tu'. -roup on establis#ment of &ccounting Principles 6B#eat Committee7. B#ic# of t#e follo)ing is true of t#e Financial &ccounting *tan'ar's +oar' a. 1t #as issue' a series of pronouncements entitle' &u'iting *tan'ar's "p'ates. b. 1t )as t#e forerunner of t#e current &ccounting Principles +oar'. c. 1t is t#e arm of t#e *ecurities an' /0c#ange Commission responsible for setting financial accounting stan'ar's. '. T#e members of t#e F&*+ are appointe' b. t#e Financial &ccounting Foun'ation. T#e Financial &ccounting Foun'ation a. oversees t#e operations of t#e F&*+. b. oversees t#e operations of t#e &1CP&. c. provi'es information to intereste' parties on financial reporting issues. '. )or5s )it# t#e Financial &ccounting *tan'ar's &'visor. Council to provi'e informa! tion to intereste' parties on financial reporting issues. T#e major 'istinction bet)een t#e Financial &ccounting *tan'ar's +oar' 6F&*+7 an' its pre'ecessorA t#e &ccounting Principles +oar' 6&P+7A is a. t#e F&*+ issues e0posure 'rafts of propose' stan'ar's. b. all members of t#e F&*+ are full. remunerate'A serve full timeA an' are in'epen'ent of an. companies or institutions. c. all members of t#e F&*+ possess e0tensive e0perience in financial reporting. '. a majorit. of t#e members of t#e F&*+ are CP&s 'ra)n from public practice. T#e Financial &ccounting *tan'ar's +oar' emplo.s a <'ue process< s.stem )#ic# a. is an efficient s.stem for collecting 'ues from members. b. enables intereste' parties to e0press t#eir vie)s on issues un'er consi'eration. c. i'entifies t#e accounting issues t#at are t#e most important. '. re?uires t#at all accountants must receive a cop. of financial stan'ar's. B#ic# of t#e follo)ing is not a publication of t#e F&*+C a. *tatements of Financial &ccounting Concepts b. &ccounting 2esearc# +ulletins c. 1nterpretations '. Tec#nical +ulletins

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Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition F&*+ Tec#nical +ulletins a. are similar to F&*+ 1nterpretations in t#at t#e. establis# enforceable stan'ar's un'er t#e &1CP&Ds Co'e of Professional /t#ics. b. are issue' mont#l. b. t#e F&*+ to 'eal )it# current topics. c. are not e0pecte' to #ave a significant impact on financial reporting in general an' provi'e gui'ance )#en it 'oes not conflict )it# an. broa' fun'amental accounting principle. '. )ere recentl. 'iscontinue' b. t#e F&*+ because t#e. 'ealt )it# speciali;e' topics #aving little impact on financial reporting in general. T#e purpose of t#e /merging 1ssues Tas5 Force is to a. 'evelop a conceptual frame)or5 as a frame of reference for t#e solution of future problems. b. lobb. t#e F&*+ on issues t#at affect a particular in'ustr.. c. 'o researc# on issues t#at relate to long!term accounting problems. '. issue statements )#ic# reflect a consensus on #o) to account for ne) an' unusual financial transactions t#at nee' to be resolve' ?uic5l.. T#e &merican 1nstitute of Certifie' Public &ccountants 6&1CP&7 continues to be involve' in all of t#e follo)ing e?#e$t a. 'eveloping an' enforcing professional et#ics. b. 'eveloping au'iting stan'ar's for public companies. c. provi'ing professional e'ucation programs. '. &ll of t#e ans)er c#oices are correct. B#ic# of t#e follo)ing pronouncements )ere issue' b. t#e &ccounting Principles +oar'C a. &ccounting 2esearc# +ulletins b. &P+ Opinions c. &P+ *tatements of Position '. *tatements of Financial &ccounting Concepts B#ic# of t#e follo)ing organi;ations #as not been instrumental in t#e 'evelopment of financial accounting stan'ar's in t#e "nite' *tatesC a. &1CP& b. F&*+ c. 1&*+ '. */C B#ic# of t#e follo)ing organi;ations #as not publis#e' accounting stan'ar'sC a. &merican 1nstitute of Certifie' Public &ccountants. b. *ecurities an' /0c#ange Commission. c. Financial &ccounting *tan'ar's +oar'. '. &ll of t#ese #ave publis#e' accounting stan'ar's. T#e purpose of *tatements of Financial &ccounting Concepts is to a. establis# -&&P. b. mo'if. or e0ten' an e0isting F&*+ &ccounting *tan'ar's "p'ate. c. form a conceptual frame)or5 for solving e0isting an' emerging problems. '. 'etermine t#e nee' for F&*+ involvement in an emerging issue.

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Financial &ccounting an' &ccounting *tan'ar's

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1 & 13

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3embers of t#e Financial &ccounting *tan'ar's +oar' are a. emplo.e' b. t#e &merican 1nstitute of Certifie' Public &ccountants 6&1CP&7. b. part!time emplo.ees. c. re?uire' to #ol' a CP& certificate. '. in'epen'ent of an. ot#er organi;ation. T#e follo)ing are part of t#e <'ue process< s.stem use' b. t#e F&*+ in t#e evolution of a t.pical F&*+ &ccounting *tan'ar's "p'ate> 1. /0posure Draft 2. F&*+ &ccounting *tan'ar's "p'ate 3. Preliminar. Fie)s T#e c#ronological or'er in )#ic# t#ese items are release' is as follo)s> a. 1A 2A 3. b. 1A 3A 2. c. 2A 3A 1. '. 3A 1A 2.

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B#ic# of t#e follo)ing is true of generall. accepte' accounting principlesC a. -&&P inclu'es 'etaile' practices an' proce'ures as )ell as broa' gui'elines of general application. b. -&&P is influence' b. pronouncements of t#e */C an' 12*. c. -&&P c#anges over time as t#e nature of t#e business environment c#anges. '. &ll of t#ese ans)er c#oices are correct. T#e most significant current source of generall. accepte' accounting principles is t#e a. &1CP&. b. */C. c. &P+. '. F&*+. B#ic# of t#e follo)ing is not a part of generall. accepte' accounting principlesC a. T#e F&*+ 1nterpretations b. T#e C&P &ccounting 2esearc# +ulletins c. T#e &P+ Opinions '. &ll of t#ese are part of generall. accepte' accounting principles. B#ic# of t#e follo)ing publications 'oes not ?ualif. as a statement of generall. accepte' accounting principlesC a. *tatements of financial stan'ar's issue' b. t#e F&*+ b. &ccounting interpretations issue' b. t#e F&*+ c. &P+ Opinions '. &ccounting researc# stu'ies issue' b. t#e &1CP& 2ule 2,3 of t#e Co'e of Professional Con'uct a''resses> a. et#ical re?uirements. b. financial statements being base' on generall. accepte' accounting principles. c. a'vertising to obtain clients. '. au'iting financial statements.

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1 & 17 $5.

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition B#at is t#e purpose of a F&*+ *taff PositionC a. Provi'e interpretation of e0isting stan'ar's. b. Provi'e a consensus on #o) to account for ne) an' unusual financial transactions. c. Provi'e interpretive gui'ance. '. Provi'e timel. gui'ance on select issues. B#ic# of t#e follo)ing is not consi'ere' a component of generall. accepte' accounting principlesC a. F&*+ 1mplementation -ui'es. b. Bi'el. recogni;e' in'ustr. practices. c. &rticles publis#e' in CP& journals. '. &1CP& &ccounting 1nterpretations. Financial accounting stan'ar'!setting in t#e "nite' *tates a. can be 'escribe' as a social process )#ic# reflects political actions of various intereste' user groups as )ell as a pro'uct of researc# an' logic. b. is base' solel. on researc# an' empirical fin'ings. c. is a legalistic process base' on rules promulgate' b. governmental agencies. '. is 'emocratic in t#e sense t#at a majorit. of accountants must agree )it# a stan'ar' before it becomes enforceable. T#e purpose of t#e 1nternational &ccounting *tan'ar's +oar' is to a. issue enforceable stan'ar's )#ic# regulate t#e financial accounting an' reporting of multinational corporations. b. 'evelop a uniform currenc. in )#ic# t#e financial transactions of companies t#roug#! out t#e )orl' )oul' be measure'. c. promote uniform accounting stan'ar's among countries of t#e )orl'. '. arbitrate accounting 'isputes bet)een au'itors an' international companies. B#ic# of t#e follo)ing is a source of pressure t#at ma. influence t#e accounting stan'ar' setting processC a. Congress. b. :obb.ist. c. CP& firms. '. &ll of t#ese ans)ers are correct. B#at is a possible 'anger if politics pla.s too big a role in accounting stan'ar' settingC a. &ccounting stan'ar's t#at are not trul. generall. accepte'. b. 1n'ivi'uals ma. influence t#e stan'ar's. c. "ser groups become active. '. T#e F&*+ 'elegates its aut#orit. to electe' officials.

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Financial &ccounting an' &ccounting *tan'ar's %1.

1 & 18

B#at is t#e <e0pectations gap<C a. T#e 'ifference bet)een )#at t#e public t#in5s t#e accountant s#oul' not 'o an' )#at t#e accountant 5no)s t#e. s#oul' 'o. b. T#e 'ifference bet)een )#at t#e public t#in5s t#e accountant is 'oing an' )#at Congress sa.s t#e accountant is 'oing. c. T#e 'ifference bet)een )#at t#e public t#in5s t#e accountant s#oul' 'o an' )#at t#e accountant t#in5s t#e. can 'o. '. T#e 'ifference bet)een )#at t#e accountant is 'oing an' )#at t#e Courts sa. t#e accountant s#oul' be 'oing. B#at is not a reason t#at accounting stan'ar's ma. 'iffer across countriesC a. -overnments. b. :anguage. c. Culture. '. Past practice. B#at )oul' be an a'vantage of #aving all countries a'opt an' follo) t#e same accounting stan'ar'sC a. &greement. b. Comparabilit.. c. :o)er preparation costs. '. Comparabilit. an' lo)er preparation costs. B#ic# of t#e follo)ing is an et#ical concern of accountantsC a. /arnings manipulation. b. Conservative accounting. c. 1n'ustr. practices. '. =one of t#ese ans)ers are correct.

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)ulti$le C oi#e Ans(ers'Con#e$tual

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1 & 19

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition

E0ERCISES
E?% 1&;8GObjective of financial reporting. B#at is t#e objective of financial reportingC Eo) 'o general!purpose financial statements #elp meet t#is objective. Solution 1&;8 T#e objective of financial reporting is to provi'e financial information about t#e reporting entit. t#at is useful to present an' potential e?uit. investorsA len'ersA an' ot#er cre'itors in 'ecisions about provi'ing resources to t#e entit.. -eneral!purpose financial statements provi'e financial reporting information to a )i'e variet. of users. T#e. #elp s#are#ol'ersA cre'itorsA emplo.eesA an' regulators to better un'erstan' a compan.4s financial position an' relate' performance.

E?% 1&;9GDevelopment of accounting principles. Presente' belo) are t#ree in'epen'entA unrelate' statements regar'ing t#e formulation of generall. accepte' accounting principles. /ac# statement contains some incorrect or 'ebatable statement6s7. *tatement 1 T#e users of financial accounting statements #ave coinci'ing an' conflicting nee's for statements of various t.pes. To meet t#ese nee'sA an' to satisf. t#e financial reporting responsibilit. of managementA accountants prepare 'ifferent sets of financial statements for 'ifferent users. *tatement 11 T#e F&*+ s#oul' be responsive to t#e nee's an' vie)points of t#e entire economic communit.A not just t#e public accounting profession. T#e F&*+ t#erefore )ill succee' because it )ill 'eal effectivel. )it# all intereste' groups. *tatement 111 T#e *ecurities an' /0c#ange Commission is ver. concerne' about financial reporting an' #as formulate' a committee calle' t#e &ccounting *tan'ar's /0ecutive Committee 6&c*/C7. T#is )ill provi'e input to t#e F&*+. 1n a''itionA after eac# F&*+ *tatement is issue'A t#e &c*/C issues *tatements of Position stating its position on t#e F&*+ statement. Instru#tions /valuate eac# of t#e in'epen'ent statements an' i'entif. t#e areas of fallacious reasoning in eac#. /0plain )#. t#e reasoning is incorrect. Complete .our 'iscussion of eac# statement before procee'ing to t#e ne0t statement.

Financial &ccounting an' &ccounting *tan'ar's Solution 1&;9 *tatement 1

1 & 1:

1t is true t#at users of financial accounting statements #ave coinci'ing an' conflicting nee's for statements of various t.pes. Eo)everA to meet t#ese nee'sA accountants generall. prepare a single set of general!purpose financial statementsA rat#er t#an a number of 'ifferent t.pes of financial statements. 1t ma. be argue' t#at accountants often 'o prepare special statements for particular purposesA but in general t#e accounting profession #as relie' on general purpose financial statements prepare' in conformance )it# generall. accepte' accounting principles. *tatement 11 1t is true t#at t#e F&*+ s#oul' be responsive to t#e nee's of t#e entire economic communit.A not just t#e public accounting profession. Eo)everA it is not clear )#et#er t#e F&*+ )ill succee'. T#e F&*+ )ill #ave t#e best c#ance of survival if it 'eals )it# problems promptl.A sets proper prioritiesA ta5es )#atever action it t#in5s is rig#t an' in t#e public interestA an' #an'les pressures responsibl. )it#out overreacting to t#em. *tatement 111 T#e &ccounting *tan'ar's /0ecutive Committee 6&c*/C7 )as establis#e' )it#in t#e &merican 1nstitute of Certifie' Public &ccountantsA not t#e *ecurities an' /0c#ange CommissionA to respon' to pronouncements of t#e F&*+. T#e &c*/C 'oes issue *tatements of PositionA but issues t#em before t#e F&*+ sets stan'ar's on t#e issue. E?% 1&;:GPublications an' organi;ations. *ignificant accounting publications are liste' belo) 61!%7. *ources or sponsors of accounting publications are i'entifie' ne0t b. alp#abetical c#aracter 6a!e7. 3atc# t#e publications )it# t#eir sources. Publications HHHHH 1. &ccounting 2esearc# +ulletins 61(53!1(5(7 HHHHH 2. &ccounting *tan'ar's "p'ates HHHHH 3. *tatements of Position 6*OPs7 HHHHH 4. *tatements of Financial &ccounting Concepts HHHHH 5. Opinions 61( 2!1($37 *ourcesI*ponsors a. Financial &ccounting *tan'ar's +oar' b. &ccounting *tan'ar's /0ecutive Committee c. T#e &1CP& '. Committee on &ccounting Proce'ure e. &ccounting Principles +oar'

1 & 1;

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition

Solution 1&;: 1. ' 2. a 3. b E?% 1&;;GF&*+. T#e Financial &ccounting *tan'ar's +oar' )as establis#e' because man. groups intereste' in financial reporting believe' t#at t#e &ccounting Principles +oar' )as not effective. Discuss t#e apparent a'vantages t#at t#e F&*+ s#oul' #ave over its earlier counterpartA t#e &P+. Solution 1&;; 1. *maller members#ip. T#e F&*+ is compose' of seven membersA replacing t#e relativel. large 1%!member &P+. 2. Full!timeA remunerate' members#ip. F&*+ members are )ell!pai'A full!time membersA appointe' for rene)able five!.ear terms. T#e &P+ members )ere unpai' an' part!time. 3. -reater autonom.. T#e &P+ )as a senior committee of t#e &1CP&A )#ereas t#e F&*+ is not part of an. single professional organi;ation. 1t is appointe' b. an' ans)erable onl. to t#e Financial &ccounting Foun'ation. 4. 1ncrease' in'epen'ence. T#e &P+ members retaine' t#eir private positions )it# firmsA companiesA or institutions. T#e F&*+ members must sever all suc# ties. 5. +roa'er representation. &ll &P+ members )ere re?uire' to be CP&s an' members of t#e &1CP&. Currentl.A it is not necessar. to be a CP& to be a member of t#e F&*+. 4. a 5. e

E?% 1&;<G/volution of a statement of financial accounting stan'ar's. 1n establis#ing financial accounting stan'ar'sA t)o basic premises of t#e F&*+ are 617 T#e F&*+ s#oul' be responsive to t#e nee's an' vie)points of t#e entire economic communit.A not just t#e accounting profession. 627 1t s#oul' operate in full vie) of t#e public t#roug# a <'ue process< s.stem t#at gives intereste' persons ample opportunit. to ma5e t#eir vie)s 5no)n. To ensure ac#ievement of t#ese goalsA )#at are t#e steps ta5en in t#e evolution of an F&*+ *tatement of Financial &ccounting *tan'ar'sC Solution 1&;< T#e steps in t#e evolution of an F&*+ &ccounting *tan'ar's "p'ates are> a. Topics are i'entifie' an' place' on t#e +oar'Ds agen'a. b. 2esearc# an' anal.sis are con'ucte' an' preliminar. vie)s of pros an' cons are issue'. c. & public #earing on t#e propose' stan'ar' is #el'. '. T#e +oar' evaluates t#e researc# an' public response an' issues an e0posure 'raft. e. T#e +oar' evaluates t#e responses an' c#anges t#e e0posure 'raftA if necessar.. T#e final stan'ar' is t#en issue'.

Financial &ccounting an' &ccounting *tan'ar's

1 & 1<

IFRS 5UESTIONS
True@FalseA 1. 1F2* inclu'es bot# 1nternational Financial 2eporting *tan'ar's an' 1nternational &ccounting *tan'ar's. 2. 1nternational Financial 2eporting *tan'ar's prece'e' 1nternational &ccounting *tan'ar's 3. T#e stan'ar'!setting structure use' b. t#e 1nternational &ccounting *tan'ar's +oar' is ver. similar to t#at use' b. t#e Financial &ccounting *tan'ar's +oar'. 4. T#e rules!base' stan'ar's of 1F2* are more 'etaile' t#an t#e simplerA principles!base' stan'ar's of ".*. -&&P. 5. T#e 1nternational &ccounting *tan'ar's +oar' #as seven members. . T#e internal control stan'ar's applicable to *arbanesJO0le. 6*OK7 appl. onl. to large public companies liste' on ".*. e0c#anges. Ans(ers to True@False questionsA 1. True 2. False 3. True 4. False 5. False . True

)ulti$le C oi#eA $. &ut#oritative stan'ar's for 1F2* inclu'e> a. 1nternational Financial 2eporting *tan'ar's onl.. b. 1nternational Financial 2eporting *tan'ar's an' 1nternational &ccounting *tan'ar's onl.. c. 1nternational Financial 2eporting *tan'ar'sA 1nternational &ccounting *tan'ar's an' ".*. -&&P onl.. '. 1nternational Financial 2eporting *tan'ar'sA 1nternational &ccounting *tan'ar's an' an. -&&P stan'ar' recogni;e' b. an organi;e' stoc5 e0c#ange. %. B#ic# of t#ese statements regar'ing t#e 1F2* an' ".*. -&&P is correctC a. ".*. -&&P is consi'ere' to be <principles!base'<. b. ".*. -&&P is consi'ere' to be less 'etaile' t#an 1F2*. c. 1F2* is consi'ere' to be <principles!base'< an' less 'etaile' t#an ".*. -&&P '. +ot# ".*. -&&P an' 1F2* are consi'ere' to be <rules!base'<A but ".*. -&&P ten's to be more comple0. (. T#e 1&*+Ds stan'ar'!setting structure inclu'es all of t#e follo)ing e?#e$t a. t#e *tan'ing 1nterpretations Committee b. t#e *tan'ar's &'visor. Council c. t#e *tan'ar's Comparison Committee '. t#e Trustees

1 & /=

Test *an+ "or Inter,e!iate A##ountin-. Fi"teent E!ition

1,. B#ic# of t#e follo)ing organi;ations #ave committe' to 'evelop #ig#!?ualit.A compatible accounting stan'ar's t#at coul' be use' for 'omestic an' cross!bor'er financial reporting a. T#e Financial &ccounting *tan'ar's +oar' 6F&*+7 an' t#e 1nternational Organi;ation of *ecurities Commission 61O*CO7 b. T#e Financial &ccounting *tan'ar's +oar' 6F&*+7 an' t#e 1nternational &ccounting *tan'ar's +oar' 61&*+7 c. T#e 1nternational &ccounting *tan'ar's +oar' 61&*+7 an' 1nternational Organi;ation of *ecurities Commission 61O*CO7 '. T#e 1nternational &ccounting *tan'ar's +oar' 61&*+7 an' t#e *tan'ar's &'visor. Council 6*&C7 11. B#ic# of t#e follo)ing organi;ations is not among t#e four international stan'ar'!setting organi;ationsC a. T#e 1nternational &ccounting *tan'ar's Committee Foun'ation 61&*CF7 b. T#e *tan'ar's &'visor. Council 6*&C7 c. T#e 1nternational Financial 2eporting 1nterpretations Committee 61F21C7 '. T#e Financial /0ecutives 1nstitute 6F/17 12. B#ic# of t#e follo)ing organi;ations selects members for t#e 1&*+C a. T#e &ccounting *tan'ar's Committee Foun'ation b. T#e *tan'ar's &'visor. Council c. T#e 1nternational Financial 2eporting 1nterpretations Committee '. T#e 1nternational &ccounting *tan'ar's Committee Foun'ation 13. T#e 1&*+ consists of HHHHHHHHH part!time members. a. seven b. t)o c. t#ree '. five 14. T#e purpose of t#e 1nternational &ccounting *tan'ar's +oar' is to> a. regulate stoc5 prices at t#e international level. b. 'evelop a uniform currenc. in )#ic# t#e financial transactions occur. c. 'evelop a single set of #ig#!?ualit. financial reporting stan'ar's. '. arbitrate accounting 'isputes bet)een au'itors an' international companies. Ans(ers to )ulti$le C oi#eA $. b 11. ' %. c 12. ' (. c 13. b 1,. b 14. c S ort Ans(erA 15. B#. )oul' it be a'vantageous for ".*. -&&P an' 1nternational -&&P to be t#e sameC 2elevant an' reliable financial information is a necessit. for viable capital mar5ets. "nfortunatel.A financial statements from companies outsi'e t#e "nite' *tates are often prepare' using 'ifferent principles t#an ".*. -&&P. &s a resultA international companies #ave to 'evelop financial information in 'ifferent )a.s. +e.on' t#e a''itional costs t#ese companies incurA users of financial statements are often force' to un'erstan' at least t)o sets of -&&P. 1t is not surprising t#at t#ere is a gro)ing 'eman' for one set of #ig# ?ualit. international stan'ar's.

Financial &ccounting an' &ccounting *tan'ar's

1 & /1

1 . B#at is t#e 'ifference bet)een principles!base' an' rules!base' accounting rulesC 1s 1F2* more principles!base' t#an ".*. -&&PC /0plain. Principles!base' rules are consi'ere' to be base' on accounting principles to result in financial statements t#at are presente'. 2ules!base' stan'ar's are generall. ?uite 'etaile'A an' in man. instances follo) a 8c#ec5!bo09 mentalit. t#at some conten' ma. s#iel' au'itors an' companies from legal liabilit.. +ecause 1F2* ten's to be simpler an' less stringent in its accounting an' 'isclosure re?uirementsA it is generall. consi'ere' more principles!base' t#an ".*. -&&P.