Chapter 1

Question 1

What is accounting?

Answer 1

Accounting is the identification, measurement, and communication of financial information.

Question 2

Who are the internal users of accounting information?

Answer 2

Management and employees.

Question 3

Who are the external users of accounting information?

Answer 3

Investors, creditors, and government agencies.

Question 4

What do financial statements provide?

Answer 4

Information needed by external users.

Question 5

What does the Balance Sheet report?

Answer 5

Entity’s resources (Assets), claims to the resources (Liabilities), and changes in them (Equity) for a point in time.

Question 6

What does the Income Statement show?

Answer 6

Results of operations for a period of time, following accrual accounting.

Question 7

What items are included in the Statement of Comprehensive Income?

Answer 7

Net Income and four ‘other’ items that report ‘unrealized’ gains/losses.

Question 8

What does the Statement of Stockholders’ Equity show?

Answer 8

Investments by owners, distributions to owners, and all other changes in equity.

Question 9

What is reported in the Statement of Cash Flows?

Answer 9

Inflows and outflows of CASH from Operating, Investing, and Financing activities.

Question 10

What is the accrual basis of accounting?

Answer 10

Record revenues when earned and expenses when incurred, regardless of cash flow.

Question 11

Why is accrual accounting useful?

Answer 11

It helps in analyzing performance and assessing future cash flows.

Question 12

What does U.S. GAAP stand for?

Answer 12

Generally Accepted Accounting Principles in the United States.

Question 13

Who has the authority to set accounting standards?

Answer 13

The SEC delegates this task to the accounting profession.

Question 14

What is the role of the SEC?

Answer 14

To require public companies to file audited financial statements.

Question 15

What is the FASB?

Answer 15

Financial Accounting Standards Board, which establishes GAAP.

Question 16

What is the Accounting Standards Codification (ASC)?

Answer 16

The single authoritative U.S. GAAP source, effective July 1, 2009.

Question 17

What are ASUs?

Answer 17

Accounting Standards Updates that establish GAAP.

Question 18

What does the Sarbanes Oxley Act of 2002 establish?

Answer 18

The PCAOB and increased auditor independence rules.

Question 19

What is the primary objective of financial reporting according to SFAC #8?

Answer 19

To provide useful financial information to present and potential equity investors, lenders, and other creditors.

Question 20

What are the fundamental qualitative characteristics of financial information?

Answer 20

Relevance and Faithful Representation.

Question 21

What enhances the usefulness of financial information?

Answer 21

Comparability and consistency.

Question 22

What are the 10 elements of financial reporting under SFAC #8?

Answer 22

• Statement of Financial Position * Earnings for the Period * Investments & Distributions to Owners * Comprehensive Income

Question 23

What does the Economic Entity Assumption state?

Answer 23

The firm keeps its activity separate and distinct from its owners or other business units.

Question 24

What is the Going Concern Assumption?

Answer 24

The company will continue to operate in the foreseeable future.

Question 25

What is the Measurement Principle?

Answer 25

Assets and liabilities are reported based on Historical Cost or Fair Value.

Question 26

What is the Revenue Recognition Principle?

Answer 26

Revenue is recognized when performance obligations are satisfied.

Question 27

What does the Expense Recognition Principle state?

Answer 27

Expenses must be recognized when the resource used up contributes to revenue.

Question 28

What is the Full Disclosure Principle?

Answer 28

Required footnotes must be sufficient detail to make a difference to users.

Question 29

What is the Full Disclosure Principle?

Answer 29

Must disclose required footnotes within the financial statements ## Footnote Footnotes must be sufficiently detailed and condensed for understanding.

Question 30

What is the Economic Entity Assumption?

Answer 30

Indicates that personal and business record keeping should be separately maintained.

Question 31

What does the Going Concern Assumption imply?

Answer 31

Assumes that the business will continue to operate indefinitely.

Question 32

What is the Monetary Unit Assumption?

Answer 32

Assumes that the dollar is the 'measuring stick' used to report on financial performance.

Question 33

What is the Periodicity Assumption?

Answer 33

Separates financial information into time periods for reporting purposes.

Question 34

What is the Measurement Principle (Historical Cost)?

Answer 34

Indicates that fair value changes subsequent to purchase are not recorded in the accounts.

Question 35

What is the Measurement Principle (Fair Value)?

Answer 35

Fair value changes are recognized in the financial statements.

Question 36

What is the Expense Recognition Principle?

Answer 36

Allocates expenses to revenues in the proper period.

Question 37

What does the Cost Constraint entail?

Answer 37

The cost of providing useful financial information should not exceed the benefits.

Question 38

What is the Revenue Recognition Principle?

Answer 38

Revenue is recorded when the product is delivered.

Question 39

True or False: Under conservatism, losses are recognized immediately when expected.

Answer 39

True

Question 40

What are the challenges to financial reporting?

Answer 40

Impact of technology and globalization, complex transactions, global standards, intangible assets.

Question 41

What is the issue with Non-GAAP Metrics?

Answer 41

Proliferation of Non-GAAP Measures creates challenges for comparability.

Question 42

What is the debate surrounding Fair Value Reporting?

Answer 42

Debate on using fair value vs. historical cost and the subjectivity involved in valuation models.

Question 43

What role does lobbying play in standard-setting?

Answer 43

Stakeholders lobby for favorable accounting rules.

Question 44

What is the impact of regulatory oversight on GAAP?

Answer 44

The SEC, PCAOB, and Congress can influence the FASB's agenda and pace of change.

Question 45

What is Earnings Management?

Answer 45

Manipulation of financial results by managers to meet targets.

Question 46

What ethical considerations must accountants uphold?

Answer 46

Integrity, objectivity, and professional competence.

Question 47

What are the three models for setting GAAP?

Answer 47

* Purely political approach * Private, professional approach * Public/private mixed approach

Question 48

How can financial statements be located?

Answer 48

Google the company name with 'investor relations' or use the SEC EDGAR database.

Question 49

What unique aspect does Southwest Airlines have in its revenue recognition?

Answer 49

Revenue recognition is unique to an airline's business model.

Question 50

Fill in the blank: The cost constraint limits the provision of useful financial information, stating that the 'cost' should not exceed the _______.

Answer 50

benefits