Introduction to Intermediate Accounting

Medium Test

1. The main purpose of FASB is to

a. establish accounting guidance that results in financial statements that provide the true economic situation of a company
b. review opinions that the auditor provides
c. review accounting methods that public companies are using to prepare financial statements
d. none of the above

Answer
A. The purpose of FASB is to establish accounting and reporting guidance for the United States that results in financial statements that do not misrepresent the financial position of the company.
2. The Public Company Accounting Oversight Board (PCAOB) was established

a. to provide accounting standards
b. to provide auditing standards
c. to oversee the SEC
d. to oversee FASB

Answer
B. The PCAOB was established to regulate public company auditors and provide auditing standards.
3. A benefit of standardizing guidance provided by FASB and the IASB is

a. comparability among financial statements
b. net income for most companies will increase
c. preparing tax returns will be much less complicated
d. all of the above

Answer
A. Financial statements are more comparable when companies use consistent standards. Tax rules are not consistent with GAAP.
4. The SEC

a. is prohibited from releasing accounting guidance without approval of the FASB
b. limits guidance that the FASB can establish
c. adopts FASB and also provides its own guidance that may override or add to FASB guidance
d. does not have legal authority

Answer
C. The SEC issues their own guidance called “Financial Reporting Releases” (FRR). This guidance is specifically directed to public companies. The SEC has adopted all guidance that is considered GAAP, unless overridden by a FRR. The SEC was established by congress and is the only standard setting body that has legal enforcement authority. FASB is independent of the SEC.
5. The cash basis of accounting

a. matches revenue and expenses over a short period of time only
b. matches revenue and expenses over a very long period of time
c. records revenues when earned and expenses when incurred
d. none of the above

Answer
B. The cash basis of accounting does match revenues and expenses over a long period of time. Over time, all revenues must be collected in cash and all expenses must be paid in cash.
6. One objective of financial accounting is to provide information to investors and creditors that have

a. 5 to 10 years of experience using financial statements
b. a reasonable understanding of business and economics
c. no understanding of business and economics
d. experience making loans and investments

Answer
B. The objective is to provide information to investors and creditors that have a reasonable understanding of business.
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
D. Companies who seek to raise capital from international investors must provide financial information in a way that meets their specific requirements. Only public companies are required to follow the SEC requirements which includes US GAAP. IFRS is not required in all international countries.
8. “Fairly presented in accordance with GAAP”, a term stated in an audit opinion means

a. users of the financial information would not be misled when relying on the information to make a financial decision.
b. all transactions are recorded in accordance with GAAP
c. all amounts are accurate with no errors
d. all GAAP rules are followed with no exceptions

Answer
A. The auditor’s opinion that the financial statements are fairly presented in accordance with GAAP means that the user of the financial statements can rely on the information to make a decision. Amounts that are not significant enough to matter may not be recorded in accordance with GAAP. Immaterial errors may exist as the auditors do not audit 100% of a company’s transactions.
9. Privately held companies are

a. legally required to follow GAAP
b. never audited by public accounting firms
c. not legally required to follow GAAP
d. required to have an internal controls audit

Answer
C. The SEC legally requires only publicly traded companies to follow GAAP. Private companies may provide information that is not in accordance with GAAP if investors and creditors allow it. Most investors and creditors will not provide capital to companies that do not follow GAAP when preparing financial information. A lender or investor may require a private company to have an audit as part of the agreement to provide capital.
10. The accounting standards codification

a. is a listing of the laws that all companies must follow
b. is the foundational baseline for all generally accepted accounting standards
c. was written and provided in 2010.
d. provides the total body of generally accepted accounting guidance

Answer
D. The accounting standards codification (ASC) is a data base of all accepted accounting data provided by FASB. The accounting guidance was accumulated over the past 100 or so years. Only public companies are legally required to follow GAAP and SEC requirements. The concept statements provide the foundation for all other accounting guidance.