2chapter2 Conceptual Framework答案

C2-1Qualitative CharacteristicsThe FASB Statement of Concept No.2,several qualitative characteristics of useful accounting information were identified.The following is a list of these qualities as well as a list of statements describing the qualities.parabilityB.Decision usefulnessC.RelevanceD.ReliabilityE.Predictive valueF.Feedback valueG.TimelinessH.VerifiabilityI.NeutralityJ.Representational faithfulnessK.ConsistencyL.Materiality_____ 1.Ability of measures to form a consensus that the selected accounting method has been used without error or bias._____ 2.Making information available to decision makers before it loses it capacity to influence decisions._____ 3.Capacity to make a difference in a decision._____ 4.Overall qualitative characteristic._____ 5.Absence of bias intended to influence behavior in a particular direction._____ 6.Reasonably free from error and bias._____7.Helps decision makers forecast correctly._____8.Validity._____9.Interactive quality;helps identify and explain similarities and differences._____10.Quantitative“threshold”constraints._____11.Conformity form period to period._____12.helps decision makers confirm or correct prior expectations.R equired place the appropriate letter identifying each quality on the line in front of the statement describing the quality.ANSWER:C2-21.H2.G3.C4.B5.I6.D7.E8.J9.A10.L11.K12.FC2-2A ccounting A ssumptions and C onvertionsCertain accounting assumption and conventions have had an important impact on the development of generally accepted accounting principles.The following is a list of statements describing certain accounting practices.A.EntityB.ContinuityC.Period of timeD.Historical costE.Monetary unitF.RealizationG.MatchingH.Conservatism_____ 1.The business,rather than its owners,is the reporting unit._____ 2.Depreciation costs are expenses in period of use rather than at the time the asset is required._____ 3.Accounting measurement are reported in dollars._____ 4.The year is the normal reporting unit._____ 5.In the absence of evidence to the contrary,the business will operate long enough to carry out its existing commitments._____ 6.Revenue is usually recognized at the time of sale._____7.Exchange price is retained in the accounting records._____8.An accounting alternatives is selected that is least likely to overstate assets and income.R equired select the accounting assumption or convention that justifies each accounting practice and place the appropriate letter on the line preceding the statement.ANSWER:C2-21.A2.G3.E4.C5.B6.F7.D8.HC2-3Objectives of Financial ReportingThe FASB has identified several objectives of financial reporting.These objectives proceed from the more general to the more specific and are intended to act as guidelines for providing accounting information in financial reports.R equired Starting with the most general objectives,prepare a written report that identifies and briefly explains the objectives of financial reporting.ANSWER:C2-3The most general objective of financial reporting states that financial reporting should provide useful information for present and potential investors,creditors, and other users in making their investment,credit,and similar decisions.These external users are expected to have a reasonable understanding of business and economic activities and be willing to study the information with reasonable diligence in order to comprehend the financial information.The second objective is the"derived external user objective."It states that financial reporting should provide information that is useful to external users in assessing the amounts,timing,and uncertainty of prospective cash receipts. This objective is important because to be successful,an investor or creditor must receive not only a return of investment,but also a return on investment in proportion to the risk involved.Financial information is needed to help establish expectations about the prospective cash receipts.The third objective is the"derived company objective."It states that financial reporting should provide information to help external users in assessing the amounts,timing,and uncertainty of prospective net cash inflows to the relatednon--cash resources to panies,like external users,invest cash in nonearn more cash and receive a return on their investment in addition to a return of their investment.The company's ability to generate net cash inflows affects bothits ability to pay dividends and interest and the market prices of its securities, which,in turn,impact on investors'and creditors'cash flows.The next three,more specific,objectives indicate the types of informationabout a company that should be provided in financial reports.The first is to provide information about a company's economic resources, obligations,and owners'equity.This information is useful to external users forfour reasons:(a)to identify the company's financial strengths and weaknesses and to assess its liquidity,(b)to provide a basis to evaluate information about the company's performance during a period,(c)to provide direct indications of the cash flow potentials of some resources and the cash needed to satisfy obligations, and(d)to indicate the potential cash flows that are the joint result of combining various resources in the company's operations.The second specific objective of financial reporting is to provide information about a company's financial performance during a specified period.The primary focus here is information concerning a company's comprehensive income and its components.This information about a company is useful to external users in(a)evaluating management's performance,(b)estimating the "earning power"or other amounts perceived as representative of its long-term earning ability,(c)predicting future income,and(d)assessing the risk of investing in or lending to the company.Although comprehensive income is the primary concern,the third specific objective of financial reporting is to provide information about a company's cash flows.External users use cash(or cash and cash equivalents)flow information about a company(a)to help understand its operations,(b)to evaluate its financing and investing activities,(c)to assess its liquidity,and(d)to interpret the comprehensive income information provided.Other issues(objectives)of financial reporting are to provide information abouthow the management of a company has discharged its stewardship responsibility for the company's resources and to provide for full disclosure to help external users understand the information presented to them.C2-6Characteristics of Useful InformationFinancial accounting and reporting provide information that is used in decision making regarding the allocation of resources.In Statement of Financial Accounting Concepts No.1,“Objectives of Financial Reporting by Business Enterprises”,the FASB defined the following basic objectives of financial reporting:Financial reporting should provide understandable information to present and potential users:That is useful in making rational decisions.That facilitates assessing the amounts,timing,and uncertainty related to the company’s cash flows.About the company’s economic resources,its claims to those resources,and the changes in its resources and obligations occurring from earnings and other operating activities.The qualitative characteristics of useful information were identified in the FASB’s Statement of Financial Accounting Concepts No.2,“Qualitative Characteristics of Accounting Information.”These characteristics distinguish better information(more useful)from inferior information(less useful).R equired1.For the primary quality relevance,a.define relevanceb.explain the meaning and importance of each of the three ingredients of relevance.2.For the primary quality reliability,a.define reliabilityb.explain the meaning and importance of each of the three ingredients of reliability.3.explain the concepts ofparabilityb.consistencyc.materialityANSWER:C2-61. a.Relevance means relating to the matter at hand.Therefore,relevantaccounting information has the capacity to:•make a difference in a decision.•help users to form predictions about the outcomes of future events (predictive value).•confirm or correct prior expectations(feedback value).b.Predictive value is that quality of information that improves thedecision-maker's ability to determine expected outcomes.Feedbackvalue is that quality of information that assists the decision-maker toconfirm or change previously determined expected outcomes.Thepredictive and feedback qualities are interactive in that knowledge ofactual results(feedback)generally improves the results of similar futureactions(predictive).Timeliness is that quality of information that makesit available to the user before it loses its capacity to influence thedecision.Timeliness may be a trade-off with a degree of precision;however,lack of timeliness can reduce relevance.2. a.Reliability is the quality of accounting information that assures that it isreasonably free from error and bias and faithfully represents what itpurports to represent.Reliability is the quality that gives usersconfidence that they can depend on the information provided infinancial statements because the level of accuracy is higher.b.Verifiability is that quality of information that assures that accountinginformation would be substantially duplicated by independentmeasurers using the same measurement methods.Verifiability impliesa consensus among accountants on the measurement of an economicevent and the way it is reported.Neutrality is the absence of bias inreported information with no intention to attain a predetermined result orto induce a particular mode of behavior.Accounting informationshould be arrived at by choosing the proper accounting alternativeswithout regard for the outcome.Representational faithfulness is thatquality of information that indicates an agreement between aneconomic event and its measure or description.3. parability is that quality of accounting information that enablesusers to identify similarities in and differences between two sets ofeconomic parability allows users to relateaccounting information over time and among similar companies.b.Consistency is the application of accounting standards from period toperiod in the same manner.Through the consistent application ofaccounting standards,comparability of accounting information isenhanced.c.Materiality in the context of accounting information means being of substance or significance.Materiality judgments are situation specific;however, the essence of the materiality concept is stated in FASB Concepts Statement No.2 as follows,"The omission or misstatement of an item in a financial report is material if,in the light of surrounding circumstances,the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item."C2-14Violations of Assumptions and ConventionsThe following are accounting procedures and practices used by several companies.A.As soon as it purchased inventory,Sokolich Company records the purchaseprice as cost of goods sold to simplify its accounting procedures.B.At the end of each year Sloan Company records and reports its economicresources based on appraisal values.C.Ebert Company prepares financial statements only every two years to reduce itscosts of preparing the statements.D.Guthrie company sells on account and records revenue at that time,even thoughit knows that collection is highly uncertain and very significant efforts have to be made to collect the accounts.E.Because of inflation,Cross Company adjusts its financial statement each year toshow the current purchasing power for all items.F.David Thomas combines his personal transactions and business transactionswhen he prepares his company’s financial statements so that he can tell how well he is doing on an“overall”basis.G.At the end of each year Vann Company reports its economic resources on aliquidation basis even though it is likely to operate in the future.R equired Identify what accounting assumption,principle,or convention each procedure or practice violates,and indicate what should be done to rectify the violation.ANSWER:C2-14A.Violation of the matching principle;cost of goods sold should be matchedagainst the revenues when the goods are sold,not purchased.B.Violation of the historical cost convention;the historical cost(exchangeprice)should be retained in the accounting records until the economicresources have been consumed,sold,or liquidated.C.Violation of period-of-time assumption;the financial statements should beprepared at least once a year.D.Violation of the realization convention;revenue should not be recognizeduntil realization has taken place and the earning process is substantiallycomplete(i.e.,the revenue has been earned).E.Violation of the stable monetary unit assumption;the financial statementsshould not be adjusted for the effects of inflation.F.Violation of entity assumption;Thomas should maintain separate records ofhis personal and business transactions and prepare his company's financial statements based only on the business transactions.G.Violation of continuity assumption(and historical cost convention);theeconomic resources should be reported on an historical cost basis.M2M2--1Accruing net losses on noncancelable purchase commitments for inventory is an example of the accounting concept of(A)(A)、Conservatism(B)、Realization(C)、Consistency(D)、MaterialityM2M2--3According to Statement of Financial Accounting Concepts No.2,an interim earnings report is expected to have which of the following?(B)Predictive value Feedback value(A)、No No(B)、Yes Yes(C)、Yes No(D)、No YesM2--4A patents,purchased in2001and being amortized over a ten-year life,was M2determined to be worthless in2004.the write-off the asset in2004is an example of which of the following principles?(B)(A)、Associating cause and effect(B)、Immediate recognition(C)、Systematic and rational allocation(D)、objectivityM2--5An accrued expense is an expense(A)M2(A)、Incurred but not paid(B)、Paid but not incurred(C)、Incurred and paid(D)、Not reasonably estimableM2--6Which of the following accounting concepts states that an accountingM2transaction should be supported by sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures andconclusions?(B)(A)、Matching(B)、Verifiability(C)、Periodicity(D)、Stable monetary unitM2--7Which of the following is considered a pervasive constraint by Statement M2of Financial Accounting Concepts No.2?(A)(A)、Benefits/costs(B)、Conservatism(C)、Timeliness(D)、VerifiabilityM2--8The valuation of a promise to receive cash in the future at present value on M2the financial statements of a company is valid because of the accounting concept of (C).(A)、Entity(B)、Materiality(C)、Going concern(D)、NeutralityM2--9Under Statement of Financial Accounting Concepts,which of the following M2relates to both relevance and reliability?(D)(A)、Timeliness(B)、Neutrality(C)、Feedback value(D)、ConsistencyM2--10Under Statement of Financial Accounting Concepts No.6,which of theM2following,in the most precise sense,means the process of converting noncash resources and rights into cash or claims to cash?(D)(A)、Allocation(B)、Recognition(C)、Recordation(D)、Realization。