1.According to the FASB and IASB conceptual frameworks, the primary users of financial reports include all of the following, except:
a. Investors.
b. Lenders.
c. Creditors.
d. Regulators.
Explanation
Choice "d" is correct. The FASB and IASB conceptual frameworks indicates that regulators are not considered to be primary users.
Choice "a" is incorrect. Investors are primary users.
Choice "c" is incorrect. Creditors are primary users.
Choice "b" is incorrect. Lenders are primary users.
2.According to the FASB and IASB conceptual frameworks, the objective of general purpose financial reporting is to:
a. Comply with generally accepted accounting principles.
b. Comply with the need for conservatism.
c. Provide financial information that is useful to primary users.
d. Report on how effectively and efficiently management has used the entity\'s resources.
Explanation
Choice "c" is correct. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity.
Choice "a" is incorrect. Generally accepted accounting principles are derived from and based on the objective of financial reporting, not the other way around.
Choice "d" is incorrect. Information concerning how effectively and efficiently management has discharged its responsibility to use the entity\'s resources is only one aspect of the information financial reporting is intended to provide.
Choice "b" is incorrect. Conservatism is not the objective of financial reporting, although it is an underlying concept.
3.What is the underlying concept that supports the immediate recognition of a contingent loss?
a. Consistency.
b. Matching.
c. Conservatism.
d. Substance over form.
Explanation
Choice "c" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. Recognition of a contingent loss is the recording of an amount representing uncertainty and risk in a business situation.
Choice "d" is incorrect. The substance over form concept presumes that the transaction form may not dictate the accounting treatment.
Choice "a" is incorrect. Consistency is conformity from period to period with unchanging policies and procedures.
Choice "b" is incorrect. The matching principle dictates that expenses be matched with the related revenues generated or the time period in which the expense is incurred and known. SFAS #5 cites matching as the one concept supporting the immediate recognition of a contingent loss, but it is not the primary underlying concept.
4.Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism during a particular reporting period?
a. Reporting investments with appreciated market values at market value.
b. Accrual of a contingency deemed to be reasonably possible.
c. Reporting inventory at the lower of cost or market value.
d. Capitalization of research and development costs.
Explanation
Choice "c" is correct. The rule of conservatism states that revenues and gains should be recognized when the earnings process is complete, but that expenses and losses should be expensed immediately. Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when market is lower than cost in the period the loss is sustained, rather than when the inventory is sold, consistent with the rule of conservatism.
Choice "d" is incorrect. Because the future benefits of R&D costs are questionable, these cost should be expensed immediately, consistent with the rule of conservatism and the matching principle.
Choice "b" is incorrect. The rule of conservatism only requires the accrual of "probable" losses. The accrual of a reasonably possible loss is not required and the accrual of any contingent gain, whether probable, reasonably possible, or remote, is prohibited.
Choice "a" is incorrect. The reporting of marketable securities with appreciated values at market value requires the recording of a gain on the asset before the gain is realized. This contradicts the rule of conservatism, but is allowed because fair value is a more relevant measure of the value of marketable securities.
5.According to the FASB and IASB conceptual frameworks, the quality of information that helps users forecast future outcomes is:
a. Representational faithfulness.
b. Neutrality.
c. Predictive value.
d. Confirming value.
Explanation
Choice "c" is correct. The quality of information that helps users forecast future outcomes is predictive value. Forecasting is predicting.
Choice "d" is incorrect. The quality of information that helps users forecast future outcomes is called predictive value, not confirming value. Confirming value provides feedback about evaluations previously made by users.
Choice "a" is incorrect. The quality of information that helps users forecast future outcomes is called predictive value, not representational faithfulness. Representational faithfulness means that financial information faithfully represents the reported economic phenomena.
Choice "b" is incorrect. The quality of information that helps users forecast future outcomes is called predictive value, not neutrality. Neutrality is the depiction of financial information that is free from bias in selection or presentation.
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