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LESSON 2 PRACTICE - CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING TRUE FALSE 1. A soundly developed conceptual framework enables the FASB to issue mora useful and consistent pronouncements over time. 2. A conceptual framework is a coherent system of concepts that flow from an objective 3. The first level of the conceptual framework identifies the recognition, measurement, and disclosure concepts used in establishing accounting standards 4. The second level of the conceptual framework provides the qualitative characteristics that make accounting information useful and the elements of financial statements. 5. Although the FASB has developed a conceptual framework, no Statements of Financial Accounting Concepts have been issued to date. B. The objective of financial reporting is the foundation of the conceptual framework 7. Users of financial statements are assumed to need no knowledge of business and financial accounting matters to understand information contained in financial statements. 8. Relevance and faithful representation are the two fundamental qualities that make accounting information useful for decision making. 9. The idea of consistency does not mean that companies cannot switch from one accounting method to another. 10. Timeliness and neutrality are two ingredients of relevance. 11. Verifiability and predictive value are two ingredients of faithful representation 12. Revenues, gains, and distributions to owners all increase equily. 13. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. 14. The historical cost principle would be of limited usefulness if not for the going concern assumption 15. The economic entity assumption means that economic activity can be identified with a particular legal entity 16. The expense recognition principle states that debits must equal credits in each transaction. 17. Revenues are recognized in the accounting period in which the performance obligation is satisfied 18. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements. 19. In order to justify requiring a particular measurement or disclosure the benefits to be derived from it must equal the costs associated with it 20. In cost-benefit analysis, costs are generally more difficult to quantify than are benefits. ACCOUNTING CONCEPTS-IDENTIFICATION cases. State the accounting assumption, principle, or constraint that is most applicable in the following 1. All payments less than $25 are expensed as incurred. 2. The company employs the same inventory valuation method from period to period. 3. A patent is capitalized and amortized over the periods benefited. 4. Rent paid in advance is recorded as prepaid rent 5. Financial statements are prepared each year. 6. All significant post-balance sheet events are reported. 7. Personal transactions of the proprietor are distinguished from business transactions. ACCOUNTING CONCEPTS-MATCHING Listed below are several information characteristics and accounting principles and assumptions Match the letter of each with the appropriate phrase that states its application. (items a through k may be used more than once or not at all.) a. Economic entity assumption 9. Expense recognition principle b. Going concem assumption h. Full disclosure principle c. Monetary unit assumption Relevance characteristic d. Periodicity assumption Faithful representation characteristic e Historical cost principle k. Consistency characteristic 1. Revenue recognition principle 1. Stable-dollar assumption (do not use historical cost principle). 2. The performance obligation is satisfied. 3. Numbers and descriptions match what really existed or happened. 4. Yearly financial reports. 5. Accruals and deferrals in adjusting and closing process. (Do not use going concern.) 6. Useful standard measuring unit for business transactions, 7 Notes as part of necessary information to a fair presentation 8. Alfairs of the business distinguished from those of its owners 9: Company assumed to have a long life 10 Valuing assets at amounts originally paid for them. 2 11. Application of the same accounting principles as in the preceding year. 12. Summarizing significant accounting policies. 13. Presentation of timely information with predictive and confirmatory value. ACCOUNTING CONCEPTS-FILL IN THE BLANKS Fill in the blanks below with the accounting principle, assumption, or related item that best completes the sentence. 1. and are the two fundamental qualities that make accounting information useful for decision making, 2. Information that helps users confirm or correct prior expectations has 3. 4. enables users to identify the real similarities and differences in economic events between companies. is the 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 5. Information is if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information 6. The characteristic requires that the same accounting method be used from one accounting period to the next, unless it becomes evident that an alternative method will bring about a better description of a firm's financial situation. 7 means that a company cannot select information to favor one set of interested parties over another & Providing information that is of sufficient importance to influence the judgement and decisions of an informed user is referred to as 9. Corporations must prepare accounting reports at least yearly due to the assumption occurs when the performance obligation is satisfied. 10

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