Introduction to Intermediate Accounting

Self Test

Key Things to Know

Self Test

b

Easy Test

h

Medium Test

1. The purpose of financial accounting is

a. to provide financial information to internal users
b. to provide financial information to external users
c. to provide operational information to external users
d. to provide operational information to internal users

Answer
B. Financial accounting is the recording, summarizing and reporting of financial information to external users (outside the company). This information may also be used by internal management but it is generated for external users. It provides financial information and not operational information.
2. Financial Accounting provides information used

a. for allocating capital
b. by internal management only
c. to repay loans
d. all of the above

Answer
A. Financial accounting provides information that is used primarily by investors and creditors to allocate capital. Investors and creditors are external.
3. An objective of financial accounting and reporting is to provide information

a. to internal management
b. about revenues and expenses
c. on the cash basis of accounting
d. to access cash flows

Answer
D. The objective of financial accounting and reporting is to provide useful information to investors and creditors (external users) related to cash flows, economic resources and the use of economic resources.
4. Under the accrual basis of accounting

a. revenues are recognized when earned
b. expenses are recognized when paid
c. revenues and expenses are recognized as the cash is received and paid
d. none of the above

Answer
A. Under the accrual basis of accounting revenues are recognized when earned and expenses are recognized when incurred. When cash is collected or paid is not relevant. The accrual basis of accounting is required by GAAP.
5. Under the cash basis of accounting

a. revenues are recognized when earned
b. expenses are recognized when incurred
c. revenues and expenses are recognized as the cash is received and paid
d. none of the above

Answer
C. Under the cash basis of accounting revenues and expenses are recognized as cash is collected and paid. This method does not comply with GAAP.
6. The accounting method that best matches revenues and expenses is

a. the accrual basis
b. the cash basis
c. the tax basis
d. the matching basis

Answer
A. Under the accrual basis of accounting revenues are recognized when earned and expenses are recognized when incurred. This matches revenue earned with the expenses incurred in support of the earnings process.
7. The accrual method

a. does not match revenues with expenses
b. records transactions based on cash flows
c. is required by GAAP
d. is optional

Answer
C. The accrual method is required by GAAP because it most represents the result of economic transactions during a particular period of time.
8. Generally accepted accounting principles are

a. required by law for all companies
b. only used by companies that are seeking funds from investors
c. a broad consensus of how transactions should be accounted for
d. only applicable to and used by public companies

Answer
C. GAAP is an ever-changing set of broad principles and guidance that provides a consensus at a particular time on how business transactions should be recorded and reported. It is only legal authority for public companies that are regulated by the SEC; however, it is applicable to and used by the most companies.
9. The Securities Exchange Commission has legal authority over

a. all companies
b. all public companies
c. all international companies
d. all companies that borrow funds from banks

Answer
B. The SEC has legal authority, established by Congress, over all publicly traded companies only.
10. The history of accounting standard setting bodies follows which order?

a. FASB, SEC, CAP
b. CAP, APB, FASB
c. SEC, FASB, CAP
d. ABP, AICPA, CAP

Answer
B. The standard setting bodies were established in the following order: Committee on Accounting Procedures (CAP), Accounting Principles Board (APB), and most recently and still current Financial Accounting Standards Board (FASB).
11. How many board members does the Financial Accounting Standards Board (FASB) have?

a. 5
b. 7
c. 9
d. 10

Answer
B. There are 7 voting board members on the FASB.
12. FASB establishes an accounting standard

a. by examining facts and then establishing the standard
b. after obtaining input from financial and accounting professionals
c. after the SEC establishes a standard practice
d. independent of outside input on issues

Answer
B. FASB identifies an issue, proposes a solution and then asks for comments from professionals that will be impacted by the new standard. The FASB does not establish a standard until a general consensus is reached by those impacted. The SEC adopts FASB standards as guidelines that public companies must comply with.
13. An examination of accounting records to determine if the records and financial reports are in accordance with generally accepted accounting standards is called

a. a fiscal examination
b. a presentation of financial information
c. a validation of accounts
d. an audit

Answer
D. This is the technical definition of an audit. The audit opinion states whether or not the financial statements are materially stated in accordance with GAAP. It does not state that the financial statements are 100% accurate.
14. The government agency with legal authority over financial reporting of U.S. public companies is called the

a. Financial Accounting Standards Board (FASB)
b. International Accounting Standards Board (IASB)
c. Federal Trade Commission (FTC)
d. Securities Exchange Commission (SEC)

Answer
D. The SEC has legal authority over public companies accounting and reporting. FASB provides accounting guidance and has no legal authority. The IASB provides guidance for international countries and has no legal authority (similar to FASB). The Federal Trade Commission does not provide accounting guidance or regulate financial reporting.
15. The goal of the International Accounting Standards Board is to

a. develop a set of high-quality global accounting standards
b. promote the use of global accounting standards
c. converge national and international accounting standards
d. all of the above

Answer
 D. The stated goals of the International Accounting Standards Board (IASB) consist of all of the items listed.