Introduction to Intermediate Accounting

Easy Test

1. Adequate internal controls will

a. prevent all errors from occurring
b. prevent material misstatement of financial statements
c. prevent employee fraud from collusion
d. all of the above

Answer
B. An adequate internal control system will prevent material misstatements from occurring on financial statements. It will not prevent all errors or employee fraud that occurs with collusion.
2. The company’s auditor is responsible for

a. the financial statements
b. giving an opinion on the accuracy of the financial statements
c. giving an opinion on the whether the financial statements comply with generally accepted accounting standards
d. making sure financial statements are provided timely

Answer
C. The auditor is responsible for giving an opinion on whether the financial statements are materially presented in accordance with GAAP. The auditors do not review all transactions and will not give an opinion on the accuracy of the statements. The company’s management is responsible for the financial statements.
3. The “accounting concepts” issued by FASB

a. establish the theory and basis for future guidance issued
b. define how business operates
c. are not used when establishing reporting guidance
d. establish the baseline for good internal controls

Answer
A. FASB established the accounting concepts to provide the theory and baseline for establishing all future guidance. The accounting concepts apply to accounting and reporting guidance.
4. Preliminary drafts of guidance that FASB is working to provide are called

a. initial drafts
b. opinion drafts
c. response drafts
d. exposure drafts

Answer
D. Preliminary drafts that FASB issues to get a response from the accounting industry are called exposure drafts.
5. The Securities Exchange Commission

a. has no legal authority over privately held companies.
b. has authority over all publicly traded companies
c. issues its own accounting guidance
d. all of the above

Answer
B. The SEC has authority over the financial accounting and reporting for publicly held companies only. The SEC adopts GAAP and also issues its own guidance (Financial Reporting Releases) applicable only to public companies when considered necessary.
6. Generally Accepted Accounting Principles are most useful for

a. comparing one company to another
b. determining if a company can repay liabilities
c. determining if a company will be able to increase income
d. international companies

Answer
A. GAAP requires that all companies follow similar accounting methods and financial reports which allows for comparability among companies.
7. The Public Company Accounting Oversight Board (PCAOB) is responsible for

a. establishing accounting guidance
b. auditing the auditors to ensure they follow auditing standards
c. providing accounting objectives as opposed to specific rules
d. ensuring management complies with GAAP

Answer
B. The Public Company Accounting Oversight Board (PCAOB) was established by Congress to ensure that auditors followed auditing standards when they conduct an audit of a public company and to support an issued opinion.
8. The International Standards Board (IASB)

a. does not issue accounting guidance
b. has authority to enforce accounting standards
c. was established before FASB
d. none of the above

Answer
D. The IASB issues accounting guidance in the form of International Financial Accounting Standards. They do not have any authority to enforce issued standards and was established after FASB (2001).
9. The Accounting Principles Board

a. was the governing body prior to FASB
b. was criticized for not being independent
c. provided guidance on a part time basis
d. all of the above

Answer
D. The Accounting Principles Board (APB) replaced by FASB because it was part time and not responsive enough and perceived to be biased.
10. Under the accrual method of accounting revenues are recognized when

a. earned
b. you believe you will be paid
c. both a. and b.
d. neither a. or b.

Answer
C. Under the accrual method of accounting revenues are recorded when earned and you believe that you will be paid (earned).