"Answer (B) is correct. According to the FASB’s Conceptual Framework, the objectives of external financial reporting are to provide information that (1) is useful to present and potential investors, creditors, and others in making rational financial decisions regarding the enterprise; (2) helps those parties in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from sale, redemption, or maturity of securities or loans; and (3) concerns the economic resources of an enterprise, the claims thereto, and the effects of transactions, events, and circumstances that change its resources and claims thereto."
"Answer (A) is correct. The objective is to report financial information that is useful in making decisions about providing resources to the reporting entity. Primary users of financial information are current or prospective investors and creditors who cannot obtain it directly. Their decisions depend on expected returns."
Answer (D) is correct. Managerial accounting assists management decision making, planning, and control. Financial accounting addresses accounting for an entity’s assets, liabilities, revenues, expenses, and other elements of financial statements. Financial statements are the primary method of communicating to external parties information about the entity’s results of operations, financial position, and cash flows. For general-purpose financial statements to be useful to external parties, they must be prepared in conformity with accounting principles that are generally accepted in the United States. However, managerial accounting information is primarily directed to specific internal users. Hence, it ordinarily need not follow such guidance.
Answer (D) is correct. Financial accounting principles assume that a business entity is a going concern in the absence of evidence to the contrary. The concept justifies the use of depreciation and amortization schedules, and the recording of assets and liabilities using attributes other than liquidation value.
Answer (D) is correct. The balance sheet presents three major financial accounting elements: assets (items of value), liabilities (debts), and equity (net worth). According to the FASB Conceptual Framework, assets are probable future economic benefits resulting from past transactions or events. Liabilities are probable future sacrifices of economic benefits arising from present obligations as a result of past transactions or events. Equity is the residual interest in the assets after deduction of liabilities.
Answer (D) is correct. For financial reporting purposes, current assets consist of cash and other assets or resources expected to be realized in cash, sold, or consumed during the longer of 1 year or the normal operating cycle of the business.
Answer (B) is correct. The statement of financial position, or balance sheet, provides information about an entity’s resource structure (assets) and financing structure (liabilities and equity) at a moment in time. According to the FASB’s Conceptual Framework, the statement of financial position does not purport to show the value of a business, but it enables investors, creditors, and other users to make their own estimates of value. It helps users to assess liquidity, financial flexibility, profitability, and risk.
Answer (D) is correct. The statement of financial position, also known as the balance sheet, reports an entity’s financial position at a moment in time. It is therefore not useful for assessing past performance for a period of time. A balance sheet can be used to help users assess liquidity, financial flexibility, and risk.
Answer (B) is correct. Current liabilities include those obligations that are expected to be satisfied by the (1) payment of cash, (2) use of current assets other than cash, or (3) creation of new current liabilities within 1 year from the balance sheet date (or operating cycle, if longer).
Answer (B) is correct. Revenues should be recognized when (1) realized or realizable and (2) earned. The most common time at which these two conditions are met is when goods are delivered or services are rendered.
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