ACC 356 Exam 1 Verified Questions And Answers Rated A+
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Course
ACC 356
Institution
ACC 356
ACC 356 Exam 1 Verified Questions And Answers Rated A+
Define relevance and its components. What is an example of financial reporting information that has both of these components? ANS Relevance means it is capable of making a difference in user's decision making. It can have confirmatory value (...
ACC 356 Exam 1 Verified Questions And Answers
Rated A+
Define relevance and its components. What is an example of financial reporting information that has both of these
components? ANS Relevance means it is capable of making a difference in user's decision making. It can have
confirmatory value (confirm or correct prior expectations) or predictive value (help predict future outcomes).
Revenue has both of these components.
Define representational faithfulness and its components. ANS A depiction of an item in the financial statements
faithfully represents what it purports to represent. This means it must be complete, neutral, and free of material error.
What characteristics enhance usefulness of the financial statement item? ANS Comparability: allows users to
detect and explain similarities and differences
Verifiability: ability to ensure that info represents what it purports to represent (or without bias)
Timeliness: Information is available before it loses capacity to make a difference
Understandability: Info can be understood (Enron example)
Financial reporting should provide information... ANS About the economic resources of an enterprise, the claims
to those resources, and the effects of transactions, events, and circumstances that change resources and claims to
those resources
Financial reporting should provide information that help capital providers assess: ANS 1. Amounts, timing, and
uncertainty of prospective net cash inflows to the firm
2. Management's ability as a steward of resources
Why accrual accounting? ANS Accrual accounting more closely tracks the occurrence of transactions and other
events and circumstances that have affected the entity's wealth during the period
What are the important elements of the FASB's definition of an asset? ANS 1. Probable future economic benefits
2. Arisen from a past transaction
3.Entity can control (obtain benefits and prevent others from accessing those benefits)
What are the important elements of the FASB's definition of a liability? ANS 1. Probable future sacrifice
2. Transaction or obligating event has already occurred
3. Little or no discretion to avoid the future sacrifice as present obligations
, What are important elements of the FASB's definition of an expense? ANS 1. No probable, controllable future
benefits or
2. They cannot be measured in a relevant and reliable way
What is a constructive liability? Give an example. ANS It may not be enforceable legally, but based upon
customs, social norms, or past behavior. Example is a yearly bonus.
What is the FASB's definition of owners' equity? ANS The residual interest in assets after liabilities have been
subtracted.
How did FASB deal with uncertainty over future resource inflows and outflows in the definition of assets and
liabilities? ANS They use "probable" to modify future benefits in the definition of an asset and future sacrifices
in the definition of a liability
Why is uncertainty such a central issue? ANS Users want information to help predict future outcomes and
events, which involves uncertainty. If there weren't uncertainty, accounting would require far less judgement, but
there would be little demand for financial reporting.
What is the role of recognition criteria? ANS To cope with uncertainty and enhance the reliability of the balance
sheet. Therefore, it provides a minimum acceptable threshold of reliability that must be achieved before an asset,
liability, revenue, or expense will be put in financial statements.
According to FASB's conceptual framework, what are the fundamental recognition criteria? ANS 1. Definition:
Item meets the definition of balance sheet elements
2. Measurability: Has relevant attribute measurable with sufficient reliability
3. Relevance: Information is capable of making a difference in decisions
4. Reliability: Information is representationally faithful, neutral, and complete
What are the possible attributes that might be used for measuring an asset? ANS 1. Historical cost
2. Current cost
3. Current market value
4. Net realizable value
5. PV of discounted cash flows
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