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When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:
a. Reliability
b. Materiality
c. Legal Entity
d. Economic Entity

d. Economic Entity


According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:
a. Allocation
b. Matching
c. Realization
d. Recognition

d. Recognition


According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?
a. Replacement cost
b. Current market value
c. Historical cost
d. Net realizable vale

a. Replacement cost


On December 31, 20X2, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 20X2, the net realizable value of the equipment was below historical cost.

What is the appropriate measurement basis for equipment included in Brooks' December 31, 20X2, Balance Sheet?

a. Historical cost
b. Current reproduction cost
c. Net realizable value
d. Current replacement cost

c. Net realizable value


Reporting inventory at the lower of cost or market is a departure from the accounting principle of :
a. Historical cost
b. Consistency
c. Conservatism
d. Full disclosure

a. Historical Cost


Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?
a. Going Concern
b. Periodicity
c. Monetary unit
d. Economic Unit

c. Monetary unit


Fundamental qualities on FASB Conceptual Framework

Relevance and Faithful Representation


Ingredients of Relevance fundamental qualities in FASB Conceptual Framework

Predictive value
Confirmatory value


Ingredients of Faithful Representation fundamental qualities in FASB Conceptual Framework

Free from Error


Enhancing Qualities of FASB Conceptual Framework



Predictive Value

Information has predictive value if it assists capital providers in forming expectations about future events.


Confirmatory Value

Information has confirmatory value if it confirms or changes past (or present) expectations based on previous evaluations.



Information that is material will impact a user's decision. Materiality is somewhat pervasive throughout the objectives of financial reporting in the sense that the financial statments should present material information because it is decision useful. Materiality is an attribute of relevance.



Information is relevant if it makes a difference to decision makers in their role as capital providers. Information is relevant when it has predictive value, confirmatory value, or both.


Faithful Representation

Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that faithfully represents an economic phenomenon portrays the economic substance of the phenomenon. Information is representationally faithful when it is complete, neutral, and free from material error. Faithful representation replaces reliability as a primary qualitative characteristic.



Information is complete if it includes all data necessary to be faithfully representative.



Information is neutral when it is free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior.


Free from Error

Information is free from error if there are no omissions or errors.



The quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances comparability.



Information is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the information.



Information is timely if it is received in time to make a difference to the decision maker. Timeliness can also enhance the faithful representation of information.



Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have reasonable understanding of business and accounting and are willing to study the information with reasonable diligence.



Reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when GAAP provides a choice from among recognition or measurement methods. Guideline that is used to limit the reporting of aggressive accounting information. Used to avoid misleading internal and external users of the financial statments. Also called prudence.


What is the underlying concept governing the GAAP pertaining to recording Gain contingencies?
a. Conservatism
b. Relevance
c. Consistency
d. Faithful Representation

a. Conservatism


According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
a. Consistency
b. Cost-benefit
c. Relevance
d. Representational Faithfulness

b. Cost-benefit


Fair Value

Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.


Which of the following statements is correct regarding fair value measurement?
a. Fair value is a market-based measurement
b. Fair value is an entity-specific measurement
c. Fair value measurement does not consider risk
d. Fair value measurement does not consider restrictions

a. Fair value is a market-based measurement


A company owns land and a building that houses its manufacturing operations. When the company purchased the manufacturing facility 10 years ago, the purchase price allocated to the land account was $120,000. The manufacturing facility is located in an area that was once the site of many factories. The owners of many of the neighboring factories have recently sold their facilities to residential real estate developers. The company's land is also suitable for residential development. The estimated current value of the land as part of the manufacturing facility is $150,000. The estimated current value of the land as an undeveloped investment is $130,000, and the current value of the land as part of a residential development would be $180,000. What is the fair value of the land?
a. $120,000
b. $130,000
c. $150,000
d. $180,000

d. $180,000


For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, "Fair Value Measurement," least likely to apply?
a. Determination of the fair value to be assigned to land acquired in a business combination
b. Determination of the fair value of a bond liability for applying the fair value option
c. Determination of the fair value of legal services received in exchange for an entity's common stock
d. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred

c. Determination of the fair value of legal services received in exchange for an entity's common stock.


Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?
a. $76
b. $80
c. $81
d. $82

c. $81

When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. The second market is more advantageous because it has the higher selling price. In addition, fair value excludes transaction cost; therefore, the valuation of the asset would be $81. The response of $80 is incorrect because it includes transaction costs.