Far - The Financial Reporting Environment: Cash Flow Information And Present Value

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Far - The Financial Reporting Environment: Cash Flow Information And Present Value - Quiz

FAR- study for the CPA exam. Cash flow information and present value.


Questions and Answers
  • 1. 

    According to the FASB’s conceptual framework, the expected cash flow (ECF) approach to measuring present value

    • A.

      Determines the single most likely amount or best estimate.

    • B.

      Encompasses all expectations about possible cash flows.

    • C.

      Uses a single set of estimated cash flows.

    • D.

      Is limited to assets and liabilities with contractual cash flows.

    Correct Answer
    B. Encompasses all expectations about possible cash flows.
    Explanation
    The traditional approach to calculating present value employs one set of estimated cash flows and one interest rate. This approach is expected to continue to be used in many cases, for example, when contractual cash flows are involved. However, according to the FASB’s conceptual framework, the ECF approach is applicable in more complex circumstances, such as when no market or no comparable item exists for an asset or liability. The ECF results from multiplying each possible estimated amount by its probability and adding the products. The ECF approach emphasizes explicit assumptions about the possible estimated cash flows and their probabilities. The traditional method merely includes those uncertainties in the choice of interest rate. Moreover, by allowing for a range of possibilities, the ECF approach permits the use of present value when the timing of cash flows is uncertain.

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  • 2. 

    According to the FASB’s conceptual framework, which of the following is an essential characteristic of a liability?

    • A.

      Liabilities must be legally enforceable.

    • B.

      The identity of the recipient entity must be known to the obligated entity before the time of settlement.

    • C.

      Liabilities represent an obligation that has arisen as the result of a previous transaction.

    • D.

      Liabilities must require the obligated entity to pay cash to a recipient entity.

    Correct Answer
    C. Liabilities represent an obligation that has arisen as the result of a previous transaction.
    Explanation
    A liability has three essential characteristics: (1) It represents an obligation that requires settlement by a probable future transfer or use of assets, (2) the entity has little or no discretion to avoid the obligation, and (3) the transaction or other event giving rise to the obligation has already occurred.

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  • 3. 

    According to the FASB’s conceptual framework, noncurrent payables are usually measured and reported at

    • A.

      Present value of future cash flows.

    • B.

      Current market value.

    • C.

      Historical proceeds.

    • D.

      Settlement value.

    Correct Answer
    A. Present value of future cash flows.
    Explanation
    Present value is in theory the most relevant method of measurement because it incorporates time value of money concepts. In practice, it is used only for noncurrent receivables and payables. Determination of the present value of an asset or liability requires discounting at an appropriate interest rate the related future cash flows expected to occur in the due course of business.

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  • 4. 

    A preliminary prospectus, permitted under SEC Regulations, is known as the

    • A.

      Qualified prospectus.

    • B.

      Unaudited prospectus.

    • C.

      “Blue-sky” prospectus.

    • D.

      “Red-herring” prospectus.

    Correct Answer
    D. “Red-herring” prospectus.
    Explanation
    To comply with the 1933 act, an issuer of securities must prepare a registration statement and a prospectus. A preliminary prospectus is called a red-herring prospectus because of the required red legend identifying it as preliminary. It contains most of the information to be included in the final prospectus. It can be distributed to potential purchasers during the 20-day waiting period.

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  • 5. 

    According to the FASB’s conceptual framework, comprehensive income includes which of the following?Loss on Discontinued Operations? Invenstments by Owners?

    • A.

      Neither

    • B.

      Investments by Owners

    • C.

      Both

    • D.

      Loss on Discontinued Operations

    Correct Answer
    D. Loss on Discontinued Operations
    Explanation
    According to the FASB’s conceptual framework, comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.

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  • 6. 

    According to the FASB’s conceptual framework, which of the following enhances information that is relevant and faithfully represented?

    • A.

      Neutrality.

    • B.

      Materiality.

    • C.

      Comparability.

    • D.

      Confirmatory value.

    Correct Answer
    C. Comparability.
    Explanation
    Comparability is a qualitative characteristic that enhances the usefulness of relevant and faithfully represented information. It enables users to identify similarities in and differences among items.

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  • 7. 

    The resource providers of not-for-profit entities have which of the following as their primary concerns?  I. Financial return on investmentII .Services rendered by the not-for-profit entityIII. The continuing ability of the not-for-profit entity to render servicesIV. Determining compliance with laws, rules, and regulations 

    • A.

      II, III, and IV.

    • B.

      I, II, and III.

    • C.

      II and III.

    • D.

      I and IV.

    Correct Answer
    C. II and III.
    Explanation
    Resource providers of not-for-profit entities have as their primary concerns the services rendered by the entity and the continuing ability of the entity to render those services. These needs differ from the needs of resource providers for business enterprises, whose primary concern is financial return.

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  • 8. 

    A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?

    • A.

      45 days.

    • B.

      40 days.

    • C.

      60 days.

    • D.

      30 days.

    Correct Answer
    B. 40 days.
    Explanation
    Form 10-Q is the quarterly report to the SEC. It must be filed within 40 days after the end of the period for large accelerated filers.

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  • 9. 

    Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?

    • A.

      Going concern.

    • B.

      Periodicity.

    • C.

      Economic entity.

    • D.

      Monetary unit.

    Correct Answer
    D. Monetary unit.
    Explanation
    The monetary-unit assumption provides that all transactions and events can be measured in terms of a common denominator, for instance, a monetary unit. Accounting records are kept in terms of money. Using money as the unit of measure is the best way of providing economic information to users of financial statements. Also, the changing purchasing power of the monetary unit is assumed not to be significant.

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  • 10. 

    Under IFRS, all of the following are conditions that must be met for recognizing revenue from a sale of goods, except

    • A.

      The entity has received the full consideration from the sale.

    • B.

      The amount of the transaction can be reliably measured.

    • C.

      The entity has transferred the significant risks and rewards of ownership.

    • D.

      Transaction costs can be reliably measured.

    Correct Answer
    A. The entity has received the full consideration from the sale.
    Explanation
    Under IFRS, for a sale of goods, revenue is recognized when all five of the following conditions are met: (1) The entity has transferred the significant risks and rewards of ownership, (2) the entity has neither continuing managerial involvement to an extent associated with ownership nor effective control over the goods, (3) the amount of the transaction can be reliably measured, (4) it is probable that the economic benefits will flow to the entity, and (5) transaction costs can be reliably measured.

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  • 11. 

    According to the FASB’s conceptual framework, which of the following attributes should notbe used to measure inventory?

    • A.

      Replacement cost.

    • B.

      Historical cost.

    • C.

      Net realizable value.

    • D.

      Present value of future cash flows.

    Correct Answer
    D. Present value of future cash flows.
    Explanation
    The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.

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  • 12. 

    The FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?

    • A.

      Currently Reported Net Income= Financial Capital - Comprehensive Income = Financial Capital

    • B.

      Currently Reported Net Income= Physical Capital - Comprehensive Income = Physical Capital

    • C.

      Currently Reported Net Income= Physical Capital - Comprehensive Income = Financial Capital

    • D.

      Currently Reported Net Income= Financial Capital - Comprehensive Income = Physical Capital

    Correct Answer
    A. Currently Reported Net Income= Financial Capital - Comprehensive Income = Financial Capital
    Explanation
    The financial capital maintenance concept is the traditional basis of financial statements as well as the full set of financial statements, including comprehensive income, discussed in the conceptual framework. Under this concept, a return on investment (defined in terms of financial capital) results only if the financial amount of net assets at the end of the period exceeds the amount at the beginning after excluding the effects of transactions with owners. Under a physical capital concept, a return on investment (in terms of physical capital) results only if the physical productive capacity (or the resources needed to achieve that capacity) at the end of the period exceeds the capacity at the beginning after excluding the effects of transactions with owners. The latter concept requires many assets to be measured at current (replacement) cost.

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  • 13. 

    The reporting model described in the guidance on not-for-profit financial statements applies to

    • A.

      Business entities and nongovernmental not-for-profit entities.

    • B.

      Governmental not-for-profit entities that also use proprietary fund accounting.

    • C.

      Business entities and governmental not-for-profit entities.

    • D.

      Nongovernmental not-for-profit entities.

    Correct Answer
    D. Nongovernmental not-for-profit entities.
    Explanation
    The reporting model for financial accounting and reporting by nongovernmental not-for-profit entities (NFPs) recognizes that the information needs of resource providers of NFPs differ from those of resource providers of business entities. The latter are primarily concerned about financial return, whereas the former are primarily concerned about the services rendered by the NFP and its continuing ability to render those services.

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  • 14. 

    Form 10-K is filed with the SEC to update the information a company supplied when filing a registration statement under the Securities Exchange Act of 1934. Form 10-K is a report that is currently filed

    • A.

      Annually within 90 days of the end of a company’s fiscal year for non-accelerated filers.

    • B.

      Monthly within 2 weeks of the end of each month.

    • C.

      Quarterly within 45 days of the end of each quarter.

    • D.

      Semiannually within 30 days of the end of a company’s second and fourth fiscal quarters.

    Correct Answer
    A. Annually within 90 days of the end of a company’s fiscal year for non-accelerated filers.
    Explanation
    Form 10-K is the annual report to the SEC. It must be filed within 90 days (75 days for accelerated filers) after the corporation’s year end. It must contain audited financial statements and be signed by the principal executive, financial, and accounting officers and by a majority of the board.

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  • 15. 

    According to the FASB’s conceptual framework, the objective of general-purpose financial reporting is most likely based on

    • A.

      Reporting on how well management has discharged its responsibilities.

    • B.

      Generally accepted accounting principles.

    • C.

      The need for conservatism.

    • D.

      The needs of the users of the information.

    Correct Answer
    D. The needs of the users of the information.
    Explanation
    The objective of general-purpose financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

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  • 16. 

    Materiality and relevance are both defined by

    • A.

      What influences or makes a difference to a decision maker.

    • B.

      The perceived benefits to be denied that exceed the perceived costs associated with it.

    • C.

      The consistency in the application of methods over time.

    • D.

      Quantitative criteria set by the Financial Accounting Standards Board.

    Correct Answer
    A. What influences or makes a difference to a decision maker.
    Explanation
    Both materiality and relevance are characteristics defined by their ability to influence or make a difference to a decision maker. Materiality is an entity-specific aspect of relevance based on the nature, magnitude, or both of the items to which the information relates in the context of an individual entity’s financial report.

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  • 17. 

    Financial information is most likely to be verifiable when an accounting transaction occurs that

    • A.

      Is promptly recorded in a fixed amount of monetary units.

    • B.

      Allocates revenues or expense items in a rational and systematic manner.

    • C.

      Involves an arm’s-length transaction between two independent parties.

    • D.

      Furthers the objectives of the entity.

    Correct Answer
    C. Involves an arm’s-length transaction between two independent parties.
    Explanation
    Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm’s-length transaction between independent interests suggests that the transaction is verifiable.

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  • 18. 

    The objective of present value when used to determine an accounting measurement for initial recognition purposes is to

    • A.

      Estimate fair value.

    • B.

      Capture the value of an asset or liability in the context of a given entity.

    • C.

      Estimate value in use.

    • D.

      Calculate the effective-settlement amount of assets.

    Correct Answer
    A. Estimate fair value.
    Explanation
    The objective of present value measurements is to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty. A present value measurement includes five elements: estimates of cash flows, expectations about their variability, the time value of money, the price of uncertainty inherent in an asset or liability, and other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.

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  • 19. 

    Which of the following does not describe a difference between the business-type activities and the governmental-type activities of a governmental entity?

    • A.

      Business-type activities adopt budgets, but they often lack the legal force of the budget for governmental-type activities.

    • B.

      Business-type activities involve a direct exchange of money in return for goods delivered or services rendered.

    • C.

      Business-type activities have heavy investments in revenue-producing capital assets.

    • D.

      Compared between governments than are governmental-type activities.

    Correct Answer
    D. Compared between governments than are governmental-type activities.
    Explanation
    Business-type activities often perform only a single function and are thus more easily compared between governments than are governmental-type activities.

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  • 20. 

    Under SFAC No. 6, Elements of Financial Statements, interrelated elements of financial statements include:Notes to financial statements?Distributions to owners?

    • A.

      Notes to Financial Statements

    • B.

      Neither

    • C.

      Distributions to Owners

    • D.

      Distributions to Owners and Notes to Financial Statements

    Correct Answer
    C. Distributions to Owners
    Explanation
    The elements of financial statements directly related to measuring the performance and status of business enterprises and nonbusiness organizations are assets, liabilities, equity of a business or net assets of a nonbusiness organization, revenues, expenses, gains, and losses. The elements of investments by owners, distributions to owners, and comprehensive income relate only to business enterprises. Information disclosed in notes or parenthetically on the face of financial statements amplifies or explains information recognized in the financial statements.

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  • Current Version
  • Mar 19, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 05, 2014
    Quiz Created by
    Kosdaisy
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