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ACG 4101 Exam 1 (Chapter 1-4) (1).
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ACG 4101 Exam 1 (Chapter 1-4) (1).
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ACG 4101 Exam 1 (Chapter 1-4)Difference b/w cash basis and accrual basis - ANS-Cash Basis:
- Measurement of cash receipts and cash payments
- Difference is net operating cash flow
Accrual Basis:
- Measurement of revenue and expenses
- Difference is net income or net loss
Which if the following is not a potential advantage of accrual accounting over cash basis
accounting?
a. spreads out the influence of one-time events that affect multiple reporting periods
b. highlights the performance for a period of time
c. captures underlying economic activity more timely
d. better matching of revenues and expenses. - ANS-b
Purpose of GAAP - ANS-Set both broad and specific guidelines that companies can use for
measuring and reporting in their financial statements. Enhance comparability of information
among companies.
Hierarchy of standard-setting authority (x4 levels) - ANS-1. Congress, 2. SEC, 3. Private Sector,
4. FASB (1973-present)
- SEC has final authority on accounting standards but has delegated task of setting accounting
standards to the private sector.
The Financial Accounting Standards Board (FASB)
a. is a devision of SEC
b. is a private body that helps set accounting standards in the US
c. is responsible for setting auditing standards that all auditors must follow
d. consists entirely of members of the American Institute of Certified Public Accountants - ANS-b
What are the roles of an auditor? - ANS-Make sure that GAAP standards are followed. Provide
a professional, independent opinion of whether a company's financial statements fairly present
company's financial position, its results of its operations, and its cash flow in compliance
w/GAAP.
Sarbanes-Oxley Act
- Oversight board
,- Corporate executive accountability
- nonaudit services
- retention of work papers
- auditor rotation
- conflicts of interest
- hiring of auditors
- internal controls - ANS-- Oversight board: the Public Company Accounting Oversight Board set
standards of auditing, quality control, ethics, etc. that relate to the prep of auditing reports. SEC
has oversight and enforcing authority.
- Corporate executive accountability: corporate executives must personally certify financial
statements and company disclosures
- Nonaudit services: Makes it unlawful for auditors of public companies to perform a variety of
nonaudit services (i.e. bookkeeping, internal audit outsourcing, appraisal, tax services etc.).
- Retention of work papers: auditors of public companies must retain all audit or review work
papers for 7 years or face the threat of a prison term.
- Auditor rotation: Lead audit partners are required to rotate every 5 years.
- Conflicts of interest: audit firms are not allowed to audit public companies whose chief
executives worked for the audit firm and participated in that company's audit during the
preceding year.
- Hiring of auditor: audit firms are hired by the audit committee of the board of directors of that
company, not company management.
- Internal control: section 404 requires that company management document and asses the
effectiveness of all internal control processes that could affect financial reporting. Requires
company auditors express an opinion of whether the company has maintained effective internal
control over financial reporting.
Which of the following is not a provision of the public company accounting reform and investor
protection act of 2002 (Sarbanes Oxley)?
a. required that all auditors assess the effectiveness of all internal control processes
b. increased corporate executive responsibility for financial statements
c. limited nonaudit services that can be performed by auditors for audit clients
d. changed the entity responsible for setting auditing standards - ANS-a. b/c not all internal
control processes. Only the ones responsible for financial reporting.
Conceptual framework - Accounting Constitution - Purpose? - ANS-Provides an underlying
foundation for US accounting standards (lead to consistent standards that guide the standards
of events to be accounted for, measurement of those events, and means of summarizing and
communicating them to interested parties). Provides structure and direction to reporting but
does not directly prescribe GAAP.
The FASB disseminates this framework in their Statements of Financial Accounting Concepts.
Conceptual Framework Map
- Objective
, - Qualitative Characteristics
- Constraints
- Elements
- Recognition & Measurement Concepts
= Financial Statements - ANS-- Objective: provide financial statements that are useful to capital
providers.
Qualitative Characteristics & Constraint - ANS-Primary Qualities: Relevance & Faithful
Representation
Ingredients of Primary:
Relevance - Predictive Value (predict future operations), Confirmatory Value (helps investors
confirm or change prior assessments regarding company's operations), and Materiality (if that
information is omitted, could affect user's decisions)
Faithful Representation - Completeness (includes all information for faithful representation and
economic phenomenon it purports to represent), Neutrality (free from bias), and Free from Error
(no errors or omissions)
Secondary Qualities: Comparability (Consistency; helps users see similarities & differences b/w
events and conditions), Verifiability (can be verified by other independent measures and would
reach same consensus), Timeliness (info. available early enough for decision process), and
Understandability (users can comprehend info. w/in the context of decision being made)
Constraint: cost effectiveness = benefits of providing information must outweigh the cost.
Which of the following is not a component of faithful representation as defined in the FASB's
conceptual framwork?
a. free from error
b. neutrality
c. understandability
d. completeness - ANS-c.
Charging off the cost of a wastebasket with an estimated useful life of 10 years an an expense
of the period when purchases is an example of ...
a. consistency characteristic
b. expense recognition principle
c. materiality characteristic
d. historical cost principle - ANS-c. and not b b/c b would be if you were recognizing
depreciation (in question... expensing in the period puchased)
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