Intermediate Accounting Vol 1, 3rd Edition-Test Bank

Test Bank For Intermediate Accounting Vol 1, 3rd Edition

Chapter 1 Fundamentals of Financial Accounting Theory

Learning Objective 1

1) Which statement is not correct?
A) Financial accounting is the process of providing information to external parties.
B) Accounting is about the communication of financial information.
C) Accounting is the production of information about an enterprise and the transmission of that information to those who need the information.
D) Financial accounting is the process of providing information to internal parties.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

2) How does an accountant decide on the appropriate method of accounting for a business transaction?
A) Evaluating if the particular method is consistent with the conceptual framework.
B) Ensuring that the accounting method agrees with that selected by other companies.
C) Evaluating whether the selected method differs from the underlying economics.
D) Testing the selected method for numerical accuracy and consistency.
Answer: A
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

3) Which statement is correct?
A) Financial reporting is the process of preparing information for internal parties.
B) Financial reporting involves issuing financial statements to external parties.
C) Financial reporting provides the same information as management accounting.
D) Financial reporting is based on rules issued by the CPA or IASB.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

4) Which is not a question that financial accounting theory can answer?
A) Why do companies provide financial information to external parties?
B) Why do all companies use the same accounting policies?
C) Why is certain disclosure mandatory in financial reporting?
D) What is the role of financial accounting and reporting?
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
5) Why is financial information required?
Answer:
• Governmental bodies issue proclamations requiring companies to provide financial information.
• Quasi-governmental organizations issue proclamations requiring companies to provide financial information.
• Accounting organizations such as the CPA or IASB issue proclamations requiring companies to provide financial information.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

6) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these accounting activities related to each other?
Answer: Financial reporting is the process by which enterprises provide information to external parties.
Managerial accounting, on the other hand, involves reporting within the enterprise.
Tax accounting is the reporting of taxable amounts to the government revenue authorities.

What ties all the branches of accounting together is the idea that some people have information that others need.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

7) Discuss three reasons why it is important to understand accounting theory.
Answer:
• In order to make the best decisions possible, external investors as well as internal managers need to interpret financial and accounting information about the state of the business.
• There is a misunderstanding that accounting standards are simply proclamations issued by government or quasi-governmental regulatory agencies such as the International Accounting Standards Board (IASB) that have no economic benefit to society.
• Rather, financial reporting is an economic good and is therefore subject to the laws of supply and demand. Accounting standards reflect and respond to, although imperfectly, the demand for financial information and the ability of enterprises to supply that information. Financial accounting theory helps us to understand the complexities in the production and consumption (use) of accounting information. Viewed in this way, financial information can be, and is, a subject of rigorous economic analysis.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

8) Explain the meaning of generally accepted accounting principles (GAAP).
Answer: GAAP refers to broad principles and conventions of general application as well as rules and procedures that determine accepted accounting practices.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
9) Explain the process an accountant uses to determine the appropriate accounting method for a business transaction.
Answer: As GAAP refers to broad principles, not specific rules, accounting involves exercising professional judgment to determine the appropriate accounting. Judgment is exercised by:
• considering the range of possible methods of accounting;
• evaluating whether and how the particular method of accounting is consistent with the conceptual framework underlying GAAP;
• appreciation for the underlying economic forces at work and ensuring that the accounting appropriately reflects the substance of the transaction.
Diff: 3 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

10) Explain what accounting is and why financial reporting exists.
Answer: Accounting is the production of information about an enterprise and the transmission of that information from those who have it to those who need it. In other words, accounting is communicating information about business transactions and activities about business entities to interested external parties.

Financial reporting is the process by which enterprises provide information to external parties. Financial reporting is an economic good that is subject to the laws of supply and demand. Financial reporting exists because interested parties require information about the business entity to make their investment, credit or other decisions. The demand for information arises from people’s need to make decisions under uncertainty about the future. In many contexts, there are asymmetric distributions of information amongst people. Those who have more information are the potential suppliers of information to those who have less.
People making decisions under uncertainty demand information to alleviate that uncertainty; an asymmetric distribution of information allows some individuals to supply information to others.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.

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