To be a faithful representation as described in the conceptual framework

CHAPTER 2

CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING

CHAPTER LEARNING OBJECTIVES

1. Describe the usefulness of a conceptual framework and the objective of financial reporting.

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   • CONCEPTUAL FRAMEWORK FOR FINANCIAL
   • CHAPTER LEARNING OBJECTIVES
   • TRUE-FALSE—Conceptual
   • MULTIPLE CHOICE—Conceptual
   • What is faithful representation in Conceptual Framework?
   • What is faithful representation as a qualitative characteristic of Conceptual Framework?
   • What means faithful representation?
   • What are the 3 main elements of the conceptual frame?

2. Identify the qualitative characteristics of accounting information and the basic elements of financial statements.

3. Review the basic assumptions of accounting.

4. Explain the application of the basic principles of accounting.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

TRUE-FALSE—Conceptual

1. The conceptual framework for accounting has been discovered through empirical research.

2. A conceptual framework is a coherent system of concepts that flow from an objective.

3. The International Accounting Standards Board (IASB) uses a conceptual framework based on individual concepts developed by each member of the standard-setting body.

4. A soundly developed conceptual framework enables the International Accounting Standards Board (IASB) to issue more useful and consistent pronouncements over time.

5. A soundly developed conceptual framework enables the International Accounting Standards Board (IASB) to quickly solve new and emerging practical problems by referencing basic theory.

6. The IASB has issued a conceptual framework and has agreed to develop a common conceptual framework with the FASB.

7. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includes supplementary information.

8. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includes the elements of financial statements.

9. The 2nd level of the IASB’s conceptual framework provides the qualitative characteristics that make accounting information useful and the elements of financial statements.

10. One of the challenges in developing a common conceptual framework will be to agree on how the framework should be organized since the FASB and IASB conceptual frameworks are organized in very different ways.

11. The first level of the conceptual framework identifies the recognition and measurement concepts used in establishing accounting standards.

12. Decision usefulness is the underlying theme of the conceptual framework.

13. Users of financial statements are assumed to have no knowledge of business and financial accounting matters by financial statement preparers.

14. The foundation of the International Accounting Standards Board’s (IASB’s) Conceptual Framework is found on the third level of the Framework and includes assumptions, principles, and constraints.

15. An implicit assumption of the International Accounting Standards Board’s (IASB’s) Conceptual Framework is that users need to be experts in business and financial accounting matters to understand the information contained in financial statements.

16. Relevance and faithful representation are the two fundamental qualities that make accounting information useful for decision making.

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Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. The periodicity assumption of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate.

2. The IASB conceptual framework specifically identifies accrual basis accounting as one of its fundamental assumptions.

3. One assumption made by the IASB conceptual framework is that the reporting entity is a going concern.

4. The expense recognition principle states that debits must equal credits in each transaction.

5. Revenues are recognized in the accounting period in which the performance obligation is satisfied.

6. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.

7. Companies consider only quantitative factors in determining whether an item is material.

8. The International Accounting Standards Board has given companies the option of using fair value to report financial liabilities.

9. Under International Financial Reporting Standards (IFRS) product costs are charged off in the immediate period and period costs may be carried into future periods.

10. Under International Financial Reporting Standards (IFRS) notes to the financial statements must qualify as an element.

11. Under International Financial Reporting Standards (IFRS) supplementary information may be information that is high in relevance but low in reliability.

12. The cost constraint included in the International Accounting Standards Board’s conceptual framework states that financial information should be free from cost to users of the information.

13. The International Accounting Standards Board’s (IASB) rule for materiality is any item under 5% of net income is considered immaterial.

14. The International Accounting Standards Board’s (IASB) conceptual framework includes the concept of prudence or conservatism which means when in doubt, choose the solution that will be least likely to overstate assets or income and/or understate liabilities or expenses.

15. Under International Financial Reporting Standards (IFRS) companies must consider both quantitative and qualitative factors in determining whether an item is material.

16. Under International Financial Reporting Standards (IFRS) companies need not report immaterial items within the body of the financial statements, but must disclose them in the notes or supplementary information that accompany the financial statements.

17. The conceptual framework underlying U. GAAP is similar to that underlying IFRS.

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Conceptual Framework for Financial Reporting

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. F 10. F 19. F 28. F 37. F 46. F 2. T 11. F 20. T 29. T 38. T 47. F 3. F 12. T 21. F 30. F 39. T 48. T 4. T 13. F 22. T 31. F 40. F 49. F 5. T 14. F 23. F 32. T 41. T 50. T 6. T 15. F 24. F 33. F 42. F 7. F 16. T 25. F 34. F 43. F 8. T 17. T 26. T 35. T 44. T 9. T 18. F 27. F 36. T 45. F

MULTIPLE CHOICE—Conceptual

1. A soundly developed conceptual framework of concepts and objectives should a. increase financial statement users’ understanding of and confidence in financial reporting. b. enhance comparability among companies’ financial statements. c. allow new and emerging practical problems to be more quickly solved. d. all of these answers are correct.

2. Which of the following is not true concerning a conceptual framework in accounting? a. It should be a basis for standard-setting. b. It should allow practical problems to be solved more quickly by reference to it. c. It should be based on fundamental truths that are derived from the laws of nature. d. All of these answers are correct.

3. What is a purpose of having a conceptual framework? a. To make sure that economic activity can be identified with a particular legal entity. b. To segregate activities among competing companies. c. To provide comparable information for different companies. d. To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards.

S54. Which of the following is not a benefit associated with the IASB Conceptual Framework Project? a. A conceptual framework should increase financial statement users’ understanding of and confidence in financial reporting. b. Practical problems should be more quickly solvable by reference to an existing conceptual framework. c. A coherent set of accounting standards and rules should result. d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

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Conceptual Framework for Financial Reporting

1. The objective of financial reporting in the International Accounting Standards Board’s (IASB’s) Conceptual Framework a. Is the foundation for the Framework. b. Includes the qualitative characteristics that make accounting information useful. c. Is found on the third level of the Framework. d. All of the choices are correct regarding the objective of financial reporting.

2. An implicit assumption of the International Accounting Standards Board’s (IASB’s) Conceptual Framework is that a. Information must be decision-useful to all potential users of financial reporting. b. General-purpose financial reporting is the primary source of information for users of financial reporting. c. Users need reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. d. All of the choices are correct.

3. The overriding criterion by which accounting information can be judged is that of a. usefulness for decision making. b. freedom from bias. c. timeliness. d. comparability.

4. Which of the following is a fundamental quality of useful accounting information? a. Comparability. b. Relevance. c. Neutrality. d. Materiality.

5. Which of the following is a fundamental quality of useful accounting information? a. Conservatism. b. Comparability. c. Faithful representation. d. Consistency.

6. What is meant by comparability when discussing financial accounting information? a. Information has predictive or feedback value. b. Information is reasonably free from error. c. Information that is measured and reported in a similar fashion across companies. d. Information is timely.

7. What is meant by consistency when discussing financial accounting information? a. Information presented by a company that applies the same accounting treatment to similar events, from period to period. b. Information is timely. c. Information that is classified, characterized, and presented clearly and concisely. d. Information is verifiable.

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Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. Which of the following is an ingredient of relevance? a. Verifiability. b. Timeliness. c. Predictive value. d. Neutrality.

2. Which of the following is an ingredient of faithful representation? a. Predictive value. b. Materiality. c. Neutrality. d. Confirmatory value.

3. Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic of accounting information? a. Consistency. b. Verifiability. c. Timeliness. d. Comparability.

4. Company A issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information? a. Comparability. b. Timeliness. c. Understandability. d. Verifiability.

5. What is the quality of information that is capable of making a difference in a decision? a. Faithful representation. b. Materiality. c. Timeliness. d. Relevance.

6. Neutrality is an ingredient of which fundamental quality of information? a. Faithful representation. b. Comparability. c. Relevance. d. Understandability.

7. Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link is a. relevance. b. faithful representation. c. understandability. d. materiality.

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Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, an enhancing qualitative characteristic is a. Predictive value. b. Free from error. c. Timeliness. d. Confirmatory value.

2. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, an ingredient of a fundamental qualitative characteristic is a. Neutrality. b. Verifiability. c. Timeliness. d. Understandability.

3. In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, a fundamental qualitative characteristic is a. Materiality. b. Faithful representation. c. Decision usefulness. d. Neutrality.

4. To be a faithful representation as described by the International Accounting Standards Board’s (IASB’s) Conceptual Framework, information must be all of the following except: a. Complete. b. Free from error. c. Confirmatory. d. Neutral.

5. Enhancing qualities as described by the International Accounting Standards Board’s (IASB’s) Conceptual Framework, include all of the following except: a. Comparability. b. Neutrality. c. Understandability. d. Verifiability.

6. Erin Company applies the same accounting treatment to similar events from period to period. Erin Company is exhibiting which of the following qualities as described by the International Accounting Standards Board’s (IASB’s) Conceptual Framework? a. Verifiability. b. Consistency. c. Predictive value. d. All of the choices are correct.

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Conceptual Framework for Financial Reporting

S88. According to the IASB Conceptual Framework, the elementsassets, liabilities, and

equitydescribe amounts of resources and claims to resources at/during a Moment in Time Period of Time a. Yes No b. Yes Yes c. No Yes d. No No

1. Which of the following is not a basic element of financial statements? a. Assets. b. Statement of financial position. c. Expenses. d. Income.

2. Which of the following basic elements of financial statements is more associated with the statement of financial position than the income statement? a. Equity. b. Income. c. Gains. d. Expenses.

3. Issuance of common stock for cash affects which basic element of financial statements? a. Revenues. b. Losses. c. Liabilities. d. Equity.

4. The International Accounting Standards Board (IASB) defines five interrelated elements of financial statements. Which of the following is not one of those elements? a. Asset. b. Income. c. Equity. d. All of the choices are elements defined by the IASB.

5. The International Accounting Standards Board (IASB) defines one of the 5 elements as follows: “the residual interest in the assets of the entity after deducting all its liabilities” Which element matches this description? a. Retained earnings. b. Income. c. Equity. d. All of the choices match this definition.

6. Which of the following is not a basic assumption underlying the financial accounting structure? a. Economic entity assumption. b. Going concern assumption. c. Periodicity assumption. d. Historical cost assumption.

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Conceptual Framework for Financial Reporting

1. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d. neutrality characteristic.

2. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? a. Cost constraint b. Periodicity assumption c. Conservation d. Expense recognition principle

3. The assumption that a company will not be sold or liquidated in the near future is known as the a. economic entity assumption. b. monetary unit assumption. c. materiality assumption. d. none of these answers are correct.

4. Which of the following is an implication of the going concern assumption? a. The historical cost principle is credible. b. Depreciation and amortization policies are justifiable and appropriate. c. The current-noncurrent classification of assets and liabilities is justifiable and signifi- cant. d. All of these answers are correct.

5. The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include all of the following except: a. Going concern. b. Periodicity. c. Accrual basis. d. Materiality.

6. The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include a. Neutrality. b. Periodicity. c. Understandability. d. Materiality.

7. The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include a. Monetary unit. b. Decision usefulness c. Timeliness. d. All of the choices are basic assumptions of accounting.

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Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. Which of the following basic assumptions of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate? a. Periodicity. b. Decision usefulness c. Monetary unit. d. Going concern.

2. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more a. verifiable. b. relevant. c. indicative of the entity’s purchasing power. d. conservative.

3. Valuing assets at their liquidation values rather than their cost is inconsistent with the a. periodicity assumption. b. expense recognition principle. c. materiality equality. d. historical cost principle.

4. Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the a. consistency characteristic. b. expense recognition principle. c. revenue recognition principle. d. relevance characteristic.

5. Generally, revenue from sales should be recognized at a point when a. management decides it is appropriate to do so. b. the product is available for sale to the ultimate consumer. c. the entire amount receivable has been collected from the customer and there remains no further warranty liability. d. None of these answers are correct.

6. Revenue should be recognized a. at the end of production. b. at the time of cash collection. c. when realized. d. when the performance obligation is satisfied.

7. The measurement principle includes the a. fair value principle only. b. historical cost principle only. c. revenue recognition principle and expense recognition principle. d. historical cost principle and the fair value principle.

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Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles? a. President’s letter to shareholders. b. Statement of financial position. c. Income statement. d. Notes to financial statements.

2. What is the general approach as to when product costs are recognized as expenses? a. In the period when the expenses are paid. b. In the period when the expenses are incurred. c. In the period when the vendor invoice is received. d. In the period when the related revenue is recognized.

3. Not adjusting the amounts reported in the financial statements for inflation is an example of which basic assumption or principle of accounting? a. Economic entity. b. Going concern. c. Monetary unit. d. Full disclosure.

4. Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting? a. Expense recognition. b. Full disclosure. c. Revenue recognition. d. Historical cost.

5. When should an expenditure be recorded as an asset rather than an expense? a. Never. b. Always. c. If the amount is material. d. When future benefit exists.

6. Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company’s share price? a. Full disclosure. b. Going concern. c. Historical cost. d. Expense recognition.

7. Which assumption or principle requires that all information significant enough to affect a decision of reasonably informed users should be reported in the financial statements? a. Expense recognition. b. Going concern. c. Historical cost. d. Full disclosure.

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Conceptual Framework for Financial Reporting

1. The basic principles of accounting used by the International Accounting Standards Board include all of the following except: a. Measurement b. Full disclosure c. Revenue recognition d. Going concern

2. The International Accounting Standards Board has given companies the option of using fair value to report all of the following except: a. Receivables b. Investments c. Financial liabilities d. All of the choices can be valued at fair value.

3. Under International Financial Reporting Standards (IFRS) revenue is recognized a. At the time cash is collected. b. During production. c. At the end of production. d. When the performance obligation is satisfied.

4. Under International Financial Reporting Standards (IFRS) _______ costs are charged off in the immediate period and ________ costs may be carried into future periods. a. Period; product. b. Material; overhead. c. Product; period. d. Overhead; administrative.

5. Under International Financial Reporting Standards (IFRS) notes to the financial statements a. Must be quantifiable. b. Must qualify as an element. c. Amplify or explain items presented in the main body of the financial statements. d. All of the choices are correct regarding notes to the financial statements.

6. Under International Financial Reporting Standards (IFRS) supplementary information a. May be information that is high in relevance but low in reliability. b. May include explanations of uncertainties and contingencies. c. May include descriptions of accounting policies and methods. d. All of the choices are correct regarding supplementary information.

7. Which of the following is a constraint in presenting financial information? a. Cost. b. Full disclosure. c. Relevance. d. Consistency.

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Conceptual Framework for Financial Reporting

1. The International Accounting Standards Board’s (IASB) conceptual framework includes a cost-benefit constraint. Which of the following is true regarding this constraint? a. Benefits are more difficult to quantify than costs. b. The IASB seeks input on costs and benefits as part of their due process. c. Benefits to preparers may include access to capital at a lower cost. d. All of the choices are correct.

2. The International Accounting Standards Board’s (IASB) conceptual framework includes a materiality constraint. Which of the following is true regarding this constraint? a. The IASB’s rule for materiality is any item under 5% of net income is considered immaterial. b. Materiality factors into both internal and external accounting decisions. c. An item is immaterial if its inclusion or omission would influence or change the judgment of a reasonable person. d. All of the choices are correct.

3. The International Accounting Standards Board’s (IASB) conceptual framework a. Includes the concept of prudence or conservatism which means when in doubt, choose the solution that will be least likely to overstate assets or income and/or understate liabilities or expenses. b. Excludes the concept of prudence or conservatism because it is inconsistent with neutrality, which encompasses freedom from bias. c. Includes the concept of prudence or conservatism which means when in doubt, choose the solution that will be least likely to understate assets or income and/or overstate liabilities or expenses. d. Includes the concept of prudence or conservatism as a desirable, but not required, quality of financial reporting information.

4. The International Accounting Standards Board’s (IASB) conceptual framework includes which of the following constraints? a. Prudence b. Conservatism c. Cost d. All of the choices are constraints in the IASB’s conceptual framework.

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Test Bank for Intermediate Accounting: IFRS Edition, 3e

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 51. d 67. a 83. a 99. c 115. d 131. d 147. c 52. c 68. c 84. b 100. c 116. b 132. d 53. d 69. c 85. c 101. d 117. b 133. a 54. d 70. d 86. b 102. a 118. c 134. c 55. c 71. b 87. b 103. b 119. a 135. a 56. d 72. d 88. a 104. d 120. d 136. a 57. a 73. a 89. b 105. d 121. b 137. c 58. a 74. c 90. a 106. d 122. c 138. d 59. b 75. c 91. d 107. b 123. a 139. c 60. c 76. b 92. d 108. a 124. d 140. a 61. a 77. b 93. c 109. d 125. c 141. c 62. c 78. d 94. d 110. a 126. a 142. d 63. a 79. d 95. c 111. d 127. d 143. a 64. b 80. d 96. b 112. c 128. a 144. d 65. c 81. d 97. a 113. d 129. d 145. b 66. c 82. c 98. a 114. d 130. d 146. b

Solutions to those Multiple Choice questions for which the answer is “none of these.” 78. a company changes its inventory method every few years in order to maximize reported income (other answers are possible). 79. comparability. 104. going concern assumption. 113. It is probable that future economic benefits will flow to the company and it is possible to reliably measure the amount.

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What is faithful representation in Conceptual Framework?

What is faithful representation as a qualitative characteristic of Conceptual Framework?

What means faithful representation?

What are the 3 main elements of the conceptual frame?