(c) The Statements of Financial Accounting Concepts (SFAC) were issued to establish a framework from which financial accounting and reporting standards could be developed. The SFAC provide the theory behind accounting and reporting and provide guidance when no GAAP exists. The SFAC are not included as GAAP.
(d) Per SFAC 8, the objectives of financial reporting focus on providing present and potential investors and creditors with information useful in making investment decisions. Financial statement users do not have the authority to prescribe the data they desire. Therefore, they must rely on external financial reporting to satisfy their information needs, and the objectives must be based on the needs of those users.
(b) The FASB conceptual framework has identified the cost-benefit constraint to the relevance of providing financial reports. Information is not disclosed if the costs of disclosure outweigh the benefits of providing the information. Comparability is an enhancing qualitative characteristic. Reliability is no longer part of the conceptual framework according to SFAC 8. Faithful representation is a fundamental qualitative characteristic.
(c) The enhancing qualitative characteristics of financial reporting are comparability (including consistency), verifiability, timeliness, and understandability. Answer (a) is incorrect because relevance and faithful representation are fundamental qualitative characteristics of financial information. Reliability is no longer listed as a fundamental quality. Answer (b) is incorrect because cost-benefit is a constraint, and materiality is a threshold for reporting useful information. Answer (d) is incorrect because completeness, neutrality, and freedom from error are characteristics of faithful representation, a fundamental qualitative characteristic.
(a) Per SFAC 8, comparability is an enhancing quality of financial reporting which relates to both relevance and faithful representation. Confirmatory value and predictive value only relate to relevance. Freedom from error only relates to faithful representation.
(d) Per SFAC 5, recognition is the process of formally recording or incorporating an item into the financial statements as an asset, liability, revenue, expense, or the like. According to SFAC 6, allocation is the process of assigning or distributing an amount according to a plan or formula, matching is the simultaneous recognition of revenues with expenses that are related directly or jointly to the same transactions or events, and realization is the process of converting noncash resources and rights into money.
(a) Per SFAC 5, earnings and comprehensive income have the same broad components—revenues, expenses, gains, and losses—but are not the same because certain classes of gains and losses are excluded from earnings. Changes in market values of investments in marketable equity securities classified as available-for-sale securities are included in comprehensive income, but are excluded from earnings until realized. Answers (b), (c), and (d) are incorrect because they would be included in both earnings and comprehensive income. Note that unrealized gains and losses on marketable equity securities classified as trading securities are included in earnings. This treatment is in accordance with SFAS 115.
(c) Per SFAC 6, comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends paid to stockholders is a change in equity resulting from a distribution to owners, so it is excluded from comprehensive income. Answers (a), (b), and (d) are all included in comprehensive income because they are changes in equity, but are not investments by, or distributions to, owners.
(d) The fundamental qualitative characteristic of faithful representation has the components of completeness, neutrality, and freedom from error. Answer (a) is incorrect because predictive value and confirmatory value are the components of relevance. Answer (b) is incorrect because comparability and consistency are enhancing characteristics, and confirmatory value is a component of relevance. Answer (c) is incorrect, because understandability is an enhancing characteristic, predictive value is a component of relevance, and reliability is no longer a characteristic in the concept statements.
(b) According to SFAC 6, realization is the process of converting noncash resources and rights into money through the sale of assets for cash or claims to cash. When equipment is sold for a note receivable, money is realized since a note qualifies as a claim to cash. Answers (a) and (d) relate to cost allocation. Answer (c) is incorrect because accounts receivable represents a claim to cash. Realization occurs at the time of sale rather than when cash is collected.
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