Identify by letter the accounting concept that relates to each statement or phrase below. 1. Inflation causes a violation of this assumption. 2. Information that could affect decision making should be reported. 3. Recognizing expenses in the period they were incurred to produce revenue. 4. The basis for measurement of many assets and liabilities. 5. Relates to the qualitative characteristic of timeliness. 6. All economic events can be identified with a particular entity. 7. The benefits of providing accounting information should exceed the cost of doing so. 8. A consequence is that GAAP need not be followed in all situations. 9. Not a qualitative characteristic, but a practical justification for some accounting choices 10. Assumes the entity will continue indefinitely. Determine the response that best completes the following statements or questions. 1. The primary objective of financial reporting is to provide information a. About a firm's management team b. Useful to capital providers c. Concerning the changes in financial position resulting from the income-producing efforts of the entity d. About a firm's financing and investing activities 2. Statements of Financial Accounting Concepts issued by the FASB a. Represent GAAP b. Have been superseded by SFASS c. Are subject to approval of the SEC d. Identify the conceptual framework within which accounting standards are developed 3. In general, revenue is recognized when a. The sales price has been collected b. A purchase order has been received c. A good or service has been delivered to a customer d. A contract has been signed 4. In depreciating the cost of an asset, accountants are most concerned with a. Conservatism b. Recognizing revenue in the appropriate period c. Full disclosure d. Recognizing expense in the appropriate period 5. The primary objective of the matching principle is to a. Provide full disclosure b. Record expenses in the period that related revenues are recognized c. Provide timely information to decision makers d. Promote comparability between financial statements of different periods 6. The separate entity assumption states that, in the absence of contrary evidence, all entities will survive indefinitely a. True b. False 43 CHAPTER 1 Environment and Theoretical Structure of Financial Accounting the class. The mission of your group is to explain how the concepts of relevance and faithful representation relate to this issue. Required Each group member should consider the question independently and draft a tentative answer prior to the class ses- sion for which the case is assigned In class, each group will meet for 10 to 15 minutes in different areas of the classroom. During that meeting. group members will take turns sharing their suggestions for the purpose of arriving at a single group treatment. After the allotted time, a spokesperson for each group (selected during the group meetings) will share the group's solution with the class. The goal of the class is to incorporate the views of each group into a consensus answer to the question munication 1-7 inting urd setting Case 1-8 tors ability One of your friends is a financial analyst for a major stock brokerage firm. Recently she indicated to you that she had read an article in a weekly business magazine that alluded to the political process of establishing accounting standards. She had always assumed that accounting standards were established by determining the approach that conceptually best reflected the economics of a transaction. Required: Write a one to two page article for a business journal explaining what is meant by the political process for estab lishing accounting standards. Be sure to include in your article a discussion of the need for the FASB to balance accounting considerations and economic consequences It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' faimess, which is determined by the extent to which they are prepared in compliance with GAAP. Some feel that it is impossible for an auditor to give an independent opinion on a company's financial state. ments because the auditors' fees for performing the audit are paid by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns. Required: How might an auditor's ethies be challenged while performing an audit? Generally accepted accounting principles do not require companies to disclose forecasts of any financial variables to external users. A friend, who is a finance major, is puzzled by this and asks you to explain why such relevant information is not provided to investors and creditors to help them predict future cash flows. Required: Explain to your friend why this information is not routinely provided to investors and creditors Mary McQuire is trying to decide how to invest her money. A friend recommended that she buy the stock of one of two corporations and suggested that she should compare the financial statements of the two companies before making a decision. Required: 1. Do you agree that Mary will be able to compare the financial statements of the two companies? 2. What role does the auditor play in ensuring comparability of financial statements between companies? Concepts Statement 8 includes a discussion of the cost effectiveness constraint. Assume that the FASB is consid ering revising an important accounting standard. Required: 1. What is the desired benefit from revising an accounting standard? 2. What are some of the possible costs that could result from a revision of an accounting standard? 3. What does the FASB do in order to assess possible benefits and costs of a proposed revision of an accounting Identify by letter the accounting concept that relates to each statement or phrase below. 1. Inflation causes a violation of this assumption. 2. Information that could affect decision making should be reported. 3. Recognizing expenses in the period they were incurred to produce revenue. 4. The basis for measurement of many assets and liabilities. 5. Relates to the qualitative characteristic of timeliness. 6. All economic events can be identified with a particular entity. 7. The benefits of providing accounting information should exceed the cost of doing so. 8. A consequence is that GAAP need not be followed in all situations. 9. Not a qualitative characteristic, but a practical justification for some accounting choices 10. Assumes the entity will continue indefinitely. Determine the response that best completes the following statements or questions. 1. The primary objective of financial reporting is to provide information a. About a firm's management team b. Useful to capital providers c. Concerning the changes in financial position resulting from the income-producing efforts of the entity d. About a firm's financing and investing activities 2. Statements of Financial Accounting Concepts issued by the FASB a. Represent GAAP b. Have been superseded by SFASS c. Are subject to approval of the SEC d. Identify the conceptual framework within which accounting standards are developed 3. In general, revenue is recognized when a. The sales price has been collected b. A purchase order has been received c. A good or service has been delivered to a customer d. A contract has been signed 4. In depreciating the cost of an asset, accountants are most concerned with a. Conservatism b. Recognizing revenue in the appropriate period c. Full disclosure d. Recognizing expense in the appropriate period 5. The primary objective of the matching principle is to a. Provide full disclosure b. Record expenses in the period that related revenues are recognized c. Provide timely information to decision makers d. Promote comparability between financial statements of different periods 6. The separate entity assumption states that, in the absence of contrary evidence, all entities will survive indefinitely a. True b. False 43 CHAPTER 1 Environment and Theoretical Structure of Financial Accounting the class. The mission of your group is to explain how the concepts of relevance and faithful representation relate to this issue. Required Each group member should consider the question independently and draft a tentative answer prior to the class ses- sion for which the case is assigned In class, each group will meet for 10 to 15 minutes in different areas of the classroom. During that meeting. group members will take turns sharing their suggestions for the purpose of arriving at a single group treatment. After the allotted time, a spokesperson for each group (selected during the group meetings) will share the group's solution with the class. The goal of the class is to incorporate the views of each group into a consensus answer to the question munication 1-7 inting urd setting Case 1-8 tors ability One of your friends is a financial analyst for a major stock brokerage firm. Recently she indicated to you that she had read an article in a weekly business magazine that alluded to the political process of establishing accounting standards. She had always assumed that accounting standards were established by determining the approach that conceptually best reflected the economics of a transaction. Required: Write a one to two page article for a business journal explaining what is meant by the political process for estab lishing accounting standards. Be sure to include in your article a discussion of the need for the FASB to balance accounting considerations and economic consequences It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' faimess, which is determined by the extent to which they are prepared in compliance with GAAP. Some feel that it is impossible for an auditor to give an independent opinion on a company's financial state. ments because the auditors' fees for performing the audit are paid by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns. Required: How might an auditor's ethies be challenged while performing an audit? Generally accepted accounting principles do not require companies to disclose forecasts of any financial variables to external users. A friend, who is a finance major, is puzzled by this and asks you to explain why such relevant information is not provided to investors and creditors to help them predict future cash flows. Required: Explain to your friend why this information is not routinely provided to investors and creditors Mary McQuire is trying to decide how to invest her money. A friend recommended that she buy the stock of one of two corporations and suggested that she should compare the financial statements of the two companies before making a decision. Required: 1. Do you agree that Mary will be able to compare the financial statements of the two companies? 2. What role does the auditor play in ensuring comparability of financial statements between companies? Concepts Statement 8 includes a discussion of the cost effectiveness constraint. Assume that the FASB is consid ering revising an important accounting standard. Required: 1. What is the desired benefit from revising an accounting standard? 2. What are some of the possible costs that could result from a revision of an accounting standard? 3. What does the FASB do in order to assess possible benefits and costs of a proposed revision of an accounting