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INTERMEDIATE ACCOUNTING EXAM REVIEW QUESTIONS WITH COMPLETE ANSWERS
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INTERMEDIATE ACCOUNTING EXAM REVIEW QUESTIONS WITH COMPLETE ANSWERS
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INTERMEDIATE ACCOUNTING EXAMREVIEW QUESTIONS WITH COMPLETE
ANSWERS
Understand the financial reporting environment. - Answer-a. Companies provide four
primary financial statements of financial reporting: 1) the balance sheet, 2) the income
statement, 3) the statement of cash flows, and 4) the statement of owners' or
stockholders' equity.
b. The Objective of General-Purpose financial reporting -- to provide financial
information about the reporting entity that is useful to present and potential equity
investors, lenders, and other creditors in decisions about providing resources to the
entity through equity investments and loans or other forms or credit. Information that is
decision-useful to investors may also be helpful to other users of financial reporting who
are not investors.
c. For financial reporting to be successful, a set of standards that are generally
accepted and universally practiced are required to be followed.
Identify the major policy-setting bodies and their role in the standard-setting process. -
Answer-a. The Securities and Exchange Commission (SEC) -- a federal agency which
is capable of prescribing, in whatever detail it desires, the accounting standards to be
employed by companies that fall within its jurisdiction.
b. The American Institute of Certified Public Accountants (AICPA) -- issues standards
through its committee on Accounting Procedure and Accounting Principles Board.
c. The Financial Accounting Standards Board (FASB) -- establishes new and improves
upon current standards of financial accounting and reporting for the guidance and
education of the public.
Explain the meaning of generally accepted accounting principles (GAAP) and the role of
the Codification for GAAP. - Answer-a. Generally Accepted Accounting Standards -- the
principles that have substantial authoritative support, such as FASB standards,
interpretations, and Staff Positions, APB opinions and interpretations, AICPA
Accounting Research Bulletins, and other authoritative pronouncements. b. The role of
the Codification is to simplify user access to all authoritative U.S. GAAP. The
Codification also changes the way GAAP is documented, presented, and updated.
Describe the major challenges in the financial reporting environment. - Answer-a. The
first major challenge is that user groups may want particular economic events
accounted for or reported in a particular way, and they fight hard to get what they want.
Especially, they target the FASB to influence changes in existing GAAP and in the
development of new rules.
b. The second major challenge is that financial reports fail to provide: 1) some key
performance measures widely use by management, 2) forward-looking information need
, by investors and creditors, 3) sufficient information on a company's soft assets
(intangibles), 4) real-time financial information, and 5) easy-to-comprehend information.
c. Lastly, financial accountants are called on for moral discernment and ethical decision-
making. Decisions sometimes are difficult because a public consensus has not emerged
to formulate a comprehensive ethical system that provides guidelines in making ethical
judgments.
Differentiate between financial accounting and managerial accounting. - Answer-
Financial accounting is the process that culminates in the preparation of financial
reports on the enterprise for use by both internal and external parties, whereas
Managerial accounting is the process of simply identifying, measuring, analyzing, and
communicating financial information needed by management to plan, control, and
evaluate a company's operations.
Differentiate between "financial statements" and "financial reporting." - Answer-Financial
statements are the principle means through which a company communicates its
financial information to those outside it. Such statements provide a company's history
quantified in money terms. Financial reporting is actually a means of improving upon
and better providing useful information than provide in formal financial statements.
How does accounting help the capital allocation process? - Answer-Accounting helps
the capital allocation process by accurately measuring performance so that the correct
managers and companies are able to attract investment capital. Essentially, accounting
helps people conserve limited resources and make sure they are used effectively and
efficiently.
What is the objective of financial reporting? - Answer-The overall objective of financial
reporting is to provide financial information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in decisions about
providing resources to the entity.
Briefly explain the meaning of decision-usefulness in the context of financial reporting. -
Answer-The approach in financial reporting to provide information that is useful for
investors making financial decisions. Most importantly, investors are interested in
assessing 1) the company's ability to generate new cash inflows and 2) management's
ability to protect and enhance the capital providers' investments. (Assess amounts,
timing, and uncertainty of prospective cash inflows from dividends or interest, and
proceeds from the sale, redemption, or maturity of securities or loans.
Of what value is a common set of standards in financial accounting and reporting? -
Answer-A common set of standards in financial accounting and reporting for every
business entity, investor, and creditor is among the top areas of focus and value
universally.
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