Intermediate Accounting Terms Quiz

1. What are the main components of the FA framework?

The first level focuses on inventory management. The second level covers employee training programs. The third level includes cost-cutting measures.

The first level deals with profit margins. The second level includes revenue projections. The third level involves market research.

The first level deals with the objective of financial reporting. The second level includes the qualitative characteristics of useful information and elements of financial statements. The third level includes foundational principles and conventions.

The first level deals with business operations. The second level involves marketing strategies. The third level includes customer relations.

The correct answer outlines the specific components of the Financial Accounting (FA) framework, which includes the objective of financial reporting, qualitative characteristics of useful information, and foundational principles and conventions. The incorrect answers do not accurately capture the main components of the FA framework, making them incorrect choices.

Explanation

The correct answer outlines the specific components of the Financial Accounting (FA) framework, which includes the objective of financial reporting, qualitative characteristics of useful information, and foundational principles and conventions. The incorrect answers do not accurately capture the main components of the FA framework, making them incorrect choices.

2. What is the objective of Financial Reporting?

To serve as a marketing tool for the company.

To prioritize the interests of shareholders over all other stakeholders.

To manipulate financial data to show favorable results to stakeholders.

The objective of financial reporting is to provide information that is useful to indi- viduals making investment and credit decisions

Financial reporting is intended to provide relevant information to help users make informed decisions, not to manipulate data, act as a marketing tool, or favor a particular group of stakeholders.

Explanation

Financial reporting is intended to provide relevant information to help users make informed decisions, not to manipulate data, act as a marketing tool, or favor a particular group of stakeholders.

3. What are the qualitative characteristics of financial accounting?

Enhancing characteristics include secrecy, complexity, and ambiguity

Quantitative characteristics of financial accounting

Primary goal is to maximize profits at all costs

The overriding criterion by which accounting choices can be judged is decision usefulness; that is, the goal is to provide the information that is the most useful for decision-making. Fundamental characteristics include relevance and faithful representation. These two characteristics must be present. Enhancing characteristics include comparability, verifiability, timeliness, and understandability. There may be trade-offs

The correct answer discusses the qualitative characteristics of financial accounting, emphasizing decision usefulness, relevance, faithful representation, comparability, verifiability, timeliness, and understandability. The incorrect answers provided misrepresent the concepts and goals of financial accounting.

Explanation

The correct answer discusses the qualitative characteristics of financial accounting, emphasizing decision usefulness, relevance, faithful representation, comparability, verifiability, timeliness, and understandability. The incorrect answers provided misrepresent the concepts and goals of financial accounting.

4. What are the basic elements of financial statements?

The basic elements are (1) assets, (2) liabilities, (3) equity, (4) revenues, and (5) expenses.

The basic elements of financial statements are (1) assets, (2) liabilities, (3) equity, (4) revenues, (5) expenses, (6) gains, and (7) losses

The basic elements are (1) assets, (2) liabilities, (3) equity, (4) revenues, (5) expenses, (6) gains, and (7) dividends.

The basic elements are (1) assets, (2) liabilities, (3) equity, and (4) losses.

Financial statements consist of the elements assets, liabilities, equity, revenues, expenses, gains, and losses. Dividends are not considered a basic element of financial statements. Revenues and expenses are also included in addition to assets, liabilities, equity, gains, and losses, making them essential components of financial reporting.

Explanation

Financial statements consist of the elements assets, liabilities, equity, revenues, expenses, gains, and losses. Dividends are not considered a basic element of financial statements. Revenues and expenses are also included in addition to assets, liabilities, equity, gains, and losses, making them essential components of financial reporting.

5. What is the QUALITATIVE characteristic of financial information for: (a) Financial statements should include all information necessary to portray the underlying transactions. (b) Financial information should make a difference in the decision-making of a user. (c) Financial information should not favour one user or stakeholder over another.

Consistency

Accuracy

A) completeness
b) relevance
c) neutral

Timeliness

In this scenario, the correct answer for the provided characteristics is Completeness, Relevance, and Neutrality. Completeness ensures that all necessary information is included, relevance makes sure that the information is useful for decision-making, and neutrality avoids bias towards any user or stakeholder. The incorrect answers such as Consistency, Accuracy, and Timeliness do not specifically align with the characteristics described in the question.

Explanation

In this scenario, the correct answer for the provided characteristics is Completeness, Relevance, and Neutrality. Completeness ensures that all necessary information is included, relevance makes sure that the information is useful for decision-making, and neutrality avoids bias towards any user or stakeholder. The incorrect answers such as Consistency, Accuracy, and Timeliness do not specifically align with the characteristics described in the question.

6. Indicate the QUALITATIVE characteristic of financial information for:

D) representational faithfulness
e) predictive value
f) freedom from omission or error

A) neutrality b) verifiability c) timeliness

7. Identify which qualitative characteristic of accounting information is best described in each item below.

D) timeliness

B) relevancy

A) verifiability
b) comparability
c) timeliness

C) comparability

In option a), the auditing process provides verifiability to the annual reports. Relevancy, comparability, and timeliness are not the best descriptors for the given scenarios.

Explanation

In option a), the auditing process provides verifiability to the annual reports. Relevancy, comparability, and timeliness are not the best descriptors for the given scenarios.

8. Discuss whether the following items would meet the definition of an asset currently proposed by the IASB and FASB. If so, explain with reference to the appropriate criteria.(a) Corporate fleet of cars for senior management.(b) Franchise licence to operate a Tim Hortons store.(c) Customized manufacturing machinery that can only be used for one product line and for which there is a small and limited customer market.

A) No. Senior management cars are not direct economic resources for the company. b) No. Operating a Tim Hortons store does not provide economic benefit. c) No. Customized machinery for limited market does not meet asset criteria.

Criteria are 1) present economic resources not contingent on a future event 2) right to (exclusive) access:
a) yes. cars are tangible economic resources, used to produce economic benefit to the company. Can be sold, company has exclusive access to them
b) yes. represent an economic resource, can be sold and are for use exclusively by the company
c) yes. can be bought or sold, is used to produce economic benefit. small and limited market is irrelevant

The correct answers provide a thorough explanation based on the criteria set by the IASB and FASB, while the incorrect answers misinterpret the nature of the assets and their potential economic benefits.

Explanation

The correct answers provide a thorough explanation based on the criteria set by the IASB and FASB, while the incorrect answers misinterpret the nature of the assets and their potential economic benefits.

9. Discuss whether the following items would meet the definition of an asset currently proposed by the IASB and FASB. If so, explain with reference to the appropriate criteria. (d) The parent company has guaranteed the operating line of credit of its subsidiary. Is the guarantee an asset for the subsidiary? (e) FreshWater Inc. bottles and sells the spring water from a natural spring near its property. Is the natural spring an asset of the company? (f) Mountain Ski Resort Ltd. often has to use its snow-making machine to make snow for its hills and trails when there is not enough natural snowfall. Is the snow an asset for Mountain Ski?

A) Yes. The guarantee ensures financial stability for the subsidiary.

B) Yes. The natural spring provides a valuable resource for FreshWater Inc.

C) Yes. The snow created by the machine provides additional revenue for Mountain Ski Resort Ltd.

Criteria are 1) present economic resources not contingent on a future event 2) right to (exclusive) access:
d) no. cannot be bought or sold, access to capital is not an asset
e) no. freshwater does not have exclusive access to the water so it cannot be considered an asset
f) the made snow could be considered an asset, but it would be very short lived and the costs expenses.

10. Discuss whether the following items would meet the definition of a liability currently proposed by the IASB and FASB. If so, explain with reference to the appropriate criteria. (a) Environmental remediation after a chemical spill has occurred. This spill has violated an existing law and statute. Does a liability for cleanup exist? (b) Environmental remediation after a chemical spill has occurred. No existing law or statute has been broken. Does a liability for cleanup exist? (c) As part of its contract with the government, a logging company must replant one tree for each tree it cuts. Does a liability for replanting exist? (d) A logging company has a corporate policy of always replanting trees and advertises this fact in its corporate and marketing brochures. Does a liability for replanting exist?

Liability criteria: 1) represent an economic burden or obligation and 2) is enforceable
a) yes. burden and enforceable
b) no.
c) yes. obligation and enforceable
d) yes, an obligation exists because they have created an expectation they will replant

B) Yes, because it is a common business practice

D) No, unless there is a legal requirement to replant

C) No, because it is a voluntary action by the logging company

11. For each item that follows, indicate which element of the financial statements it belongs to: (a) Retained earnings (b) Sales (c) Acquired goodwill (d) Inventory (e) Depreciation.

A) liabilities

D) liabilities

B) expenses

A) equityb) revenue - ordinary activities of the companyc) assetsd) assetse) expenses - ordinary activity of the company

C) liabilities

In financial statements, retained earnings typically belong to equity, sales are part of revenue - ordinary activities, acquired goodwill is considered an asset, inventory is also an asset, while depreciation is an expense related to ordinary business activities.

Explanation

In financial statements, retained earnings typically belong to equity, sales are part of revenue - ordinary activities, acquired goodwill is considered an asset, inventory is also an asset, while depreciation is an expense related to ordinary business activities.

12. For each item that follows, indicate which element of the financial statements it belongs to: (f) Loss on sale of equipment (g) Interest payable (h) Dividends (i) Gain on sale of investment securities (j) Issuance of common shares.

B) assets

C) expenses

F) losses - peripheral activityg) liabilitiesh) equity - distributions to owners i) gains - peripheral activityj) equity - investments by owners

A) revenues

In this question, items f, i are related to gains or losses which belong to the peripheral activities section, items g, j are related to liabilities or equity - investments by owners, and item h belongs to equity - distributions to owners on the financial statements.

Explanation

In this question, items f, i are related to gains or losses which belong to the peripheral activities section, items g, j are related to liabilities or equity - investments by owners, and item h belongs to equity - distributions to owners on the financial statements.

13. For each item that follows, identify the foundational principle of accounting that best describes it: (g) Gomez, Inc. provides information about pending lawsuits in the notes to its financial statements. (h) Douglas Farms reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is higher. (i) McDonald Corporation uses fair value measurements for its financial instruments portfolio. (j) Magnificent Inc. assumes that it will continue to operate into the foreseeable future.

J) going concern

G) full disclosure
h) historical cost
i) fair value
j) going concern

H) historical cost

I) fair value

Each of the statements provided corresponds to a foundational principle of accounting - (g) full disclosure relates to providing all relevant information about pending lawsuits, (h) historical cost refers to reporting assets at their original purchase price, (i) fair value involves using current market values for financial instruments, and (j) going concern ensures the assumption of operational continuity.

Explanation

Each of the statements provided corresponds to a foundational principle of accounting - (g) full disclosure relates to providing all relevant information about pending lawsuits, (h) historical cost refers to reporting assets at their original purchase price, (i) fair value involves using current market values for financial instruments, and (j) going concern ensures the assumption of operational continuity.