Conceptual Framework of FASB Quiz

According to the FASB's conceptual framework, which of the following is an essential characteristic of an asset?

• The claims to an asset's benefits are legally enforceable

• An asset is tangible

• An asset is obtained at a cost

• An asset provides future benefits

According to the FASB's conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called what?

• Depreciated equipment was sold in exchange for a note receivable

• Replacement Cost

• Comparability

• Predictive Value

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

• The financial capital concept is applied to currently reported net income and to comprehensive income (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.)

• The federal income tax savings using the immediate write-off method exceed the savings obtained by allocating the cost to several periods (In applying the principles of expense recognition, costs are analyzed to determine whether they can be associated with revenue on a cause-and-effect basis, e.g. cost of goods sold. If not, a systematic and rational allocation should be attempted, e.g., depreciation. If neither principle applies, costs are recognized immediately. Accordingly, even though federal income tax savings could be obtained by the immediate write-off method, GAAP might require another treatment of the expense.)

• Reflects the highest and best use by market participants (The FVM is based on the highest and best use (HBU) by market participants. This use maximizes the value of the asset. The HBU is in-use if the value-maximizing use is in combination with other assets in a group. An example is machinery. The HBU is in-exchange if the value-maximizing use is as a standalone asset. An example is a financial asset.)

• When the service is provided (According to SFAC 5, revenues should be recognized when they are realized or realizable and earned. The most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers.)

Which of the following is considered a pervasive constraint by the FASB's conceptual framework?

• Cost

• Conservatism

• Timeliness

• Verifiability

According to the FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of useful financial information with one of its aspects?

• Relevance and Materiality

• Relevance and Neutrality

• Faithful Representation and Predictive Value

• Faithful Representation and Confirmatory Value

Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?

• Involves an arm's length transaction between to Independent Interests (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.)

• Entity (Accounting information pertains to a business entity, the boundaries of which are not necessarily those of the legal entity. For instance, a parent and subsidiary are legally separate but are treated as a single business entity in consolidated statements. Consolidated financial statements are prepared in acknowledgement of this phenomenon.)

• Confirmatory Value (Relevance is a fundamental qualitative characteristic. Relevant information is able to make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both. Something has confirmatory value with respect to prior evaluations if it provides feedback that confirms or changes (corrects) them.)

• To match the costs of production with revenues as earned (If costs benefit more than one accounting period, they should be systematically and rationally allocated to all periods benefited. This is done by capitalizing the costs and depreciating or amortizing them over the periods in which the asset helps generate revenue. The term 'matching' is most narrowly defined as the expense recognition principle of associating cause and effect, but it is sometimes used more broadly (as here) to apply to the entire process of expense recognition or even of income determination.)

Which of the following characteristics relates to both accounting relevance and faithful representation?

• Verifiability

• Timeliness

• Comparability

• All of the answers are correct

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

• Discounted cash flow of Favre's operations

• Quoted market prices available from a business broker for a similar asset

• Quoted market prices on a stock exchange for an identical asset

• Historical performance and return on Driver's investment in Favre

Items currently reported in the financial statements are measured by different attributes. The amount of cash or its equivalent that would have to be paid if the same or an equivalent asset were acquired currently defines the attributes of:

• Historical Cost

• Current Cost

• Current Market Value

• Net Realizable Value

What is the purpose of information presented in notes to the financial statements?

• The needs of the users of the information. (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.)

• To provide disclosures required by generally accepted accounting principles (Notes are an integral part of the basic financial statements. Notes provide information essential to understanding the financial statements, including disclosures required by GAAP.)

• "Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Thus, fair value is an exit price.

• Present value of future cash flows (According to SFAC 5, the appropriate measurement attribute for noncurrent liabilities is "the present or discounted value of the future cash outflows expected to be required to satisfy the liability in the course of business.")