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Financial Accounting Chapter 2 exercises
Terms in this set (42)
Why is financial accounting compared to the painting of a portrait?
The purpose of a portrait is to capture a likeness of the artist's model. If well painted, this picture should enable individuals to estimate future stock prices, dividend payments, and cash flows. Accounting even has specific terms (such as representational faithfulness) that can serve as the basis for appropriate decisions. and presents fairly that is used to indicate that financial information successfully provides a reasonable likeness of the reporting organization.
Why is the information reported by financial accounting not exactly correct or accurate?
The numbers are not perfect: there are estimates of future stock prices, dividend payments, and cash flows. Accounting even has specific terms (such as representational faithfulness) that can serve as the basis for appropriate decisions.
In reference to a misstatement, what is meant by materiality?
The magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by that omission or misstatement.
How is materiality determined?
by the probable influence of the facts upon the underwriter in forming their opinion of the disadvantages of the proposed contract
What is a misstatement?
Errors or frauds that cause reported financial information to differ from the approach required by an official standard for reporting such as the U.S. Generally Accepted Accounting Principles (U.S. GAAP) or International Financial Reporting Standards (IFRS).
When is a misstatement considered fraud?
When it is deemed an intentional misstatement; it can result from misappropriation of assets (theft) or fraudulent financial reporting.
Why do uncertainties exist in accounting?
organizations face numerous uncertain outcomes, such as the settlement of litigation or the collection of a receivable
What challenges do uncertainties create for financial accountants?
no technique exists to report uncertain events in precise terms.
What are several examples of uncertainties faced by businesses that can impact the financial reporting process?
settlement of litigation or the collection of a receivable
Why is financial accounting compared to a language?
Because a set terminology exists and structural rules and principles are applied
What is U.S. GAAP?
U.S. Generally Accepted Accounting Principles, 25000 pages long
Why is U.S. GAAP so important to the capital market system in the United States?
The existence of financial accounting standards is essential to ensure that all communicated information is understood properly. Both the accountants within the reporting organization and the decision makers analyzing the resulting financial statements must understand those rules.
How has U.S. GAAP developed over the years?
Why is there a push to accept International Financial Reporting Standards (IFRS) as the universal standards for financial accounting?
The Financial Accounting Standards Board (FASB) has held the authority to develop U.S. GAAP since 1973. The existence of financial accounting standards is essential to ensure that all communicated information is understood properly. Both the accountants within the reporting organization and the decision-makers analyzing the resulting financial statements must understand those rules.
What is an "asset" and provide several examples?
An asset is a probable future economic benefit that an organization either owns or controls. They are made up of buildings, cash, inventory which is a current asset bought or manufactured for the purpose of selling in order to generate revenue, etc
What is a "liability" and provide several examples?
A more formal definition of a liability is that it is a probable future sacrifice of economic benefits arising from present obligations, but more often liabilities can be viewed as the debts of the organization.
What is meant by the term "net assets?"
total assets minus total liabilities: also known as owners equity
What is meant by the term "revenue"?
This asset inflow into the business results from a sale
What is meant by the term "expense"?
An expense is an outflow or reduction in net assets that was incurred by an organization in hopes of generating revenue
True or False: Financial accounting is often compared to a photograph because it represents a precise likeness of the subject.
True or False: In order for investors to properly evaluate the financial information of a business or other organization, it is vital that the financial information be exact.
True or False: If a company reports equipment costing $122,756,255, that is the amount that it actually did cost.
True or False: Materiality depends on the size of the organization.
True or False: A material misstatement that is made in a set of financial statements is acceptable as long as there is only one.
True or False: A corporation reports sales of $33,453,750, when the actual figure was $33,453,843. This information contained a misstatement.
True or False: A misstatement has to be caused by fraud.
True or False: One business has a misstatement of $10,000 that is caused by fraud. It also has another misstatement of $10,000 that is caused by error. If one of these misstatements is material, then they both are.
True or False: Companies face many uncertainties when preparing their financial statements.
True or False: Uncertainties exist in financial accounting because many reported events will not find final resolution for an extended period of time.
True or False: The reporting of a pending lawsuit is relatively simple.
True or False: Only accountants need to understand the terminology that is found in accounting.
True or False: Most countries require companies that operate within their borders to follow U.S. GAAP in preparing their financial statements.
True or False: IFRS has been in wide use in many countries since 1976.
True or False: Most companies in the U.S. are owned and operated by the U.S. government.
True or False: U.S. GAAP enables outside parties to obtain the financial information they need to make informed decisions regarding the investment in certain businesses, thus enabling that business to operate and grow.
True or False: Creation of U.S. GAAP is primarily done by the U.S. government.
True or False: There are large numbers of businesses and individuals who promote the idea of the U.S. adopting IFRS.
True or False: Adoption of IFRS has been gaining momentum since the 1970s but still faces significant hurdles and modifications before it will be adopted in the U.S.
True or False: For a business or other organization, an employee is an example of an asset.
True or False: A liability is defined as a probable future economic benefit that an organization owns or controls.
True or False: A sales transaction is normally considered revenue even if cash is not collected until the following year.
True or False: The purchase of a building for $2.4 million is recorded as an expense.
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