ACCT 2313 D102 Financial Accounting
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Free ACCT 2313 D102 Financial Accounting Questions
Which of the following is NOT one of the three objectives of financial accounting outlined in the FASB's conceptual framework?
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Financial accounting information should include all numerical information, whether relevant or not to communicate a full picture, and must be faithfully representative
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Financial accounting information should help predict cash flows
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Financial accounting information should be useful to external users such as investors and creditors in making decisions
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Financial accounting information should inform users about economic resources, claims to resources and changes in resources and claims.
Explanation
Explanation:
The FASB conceptual framework emphasizes that financial accounting information should be relevant and faithfully represent economic phenomena, aiding users in predicting cash flows and understanding economic resources, claims, and changes in both. Including all numerical information regardless of relevance is contrary to the qualitative characteristic of relevance, as extraneous data can obscure meaningful information and reduce decision-usefulness.
Correct Answer:
Financial accounting information should include all numerical information, whether relevant or not to communicate a full picture, and must be faithfully representative.
One objective of financial reporting is to provide
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information about the investors in the business entity
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information about the liquidation values of the resources held by the enterprise
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information that is useful in assessing cash flow prospects.
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information that will attract new investors.
Explanation
Explanation:
A primary objective of financial reporting is to provide information that helps users, particularly investors and creditors, assess the amount, timing, and uncertainty of future cash flows. This information enables stakeholders to make informed decisions regarding investment, lending, and resource allocation. While knowing liquidation values or attracting new investors may be secondary considerations, the core purpose focuses on the decision-usefulness of financial information in evaluating future cash flow prospects.
Correct Answer:
information that is useful in assessing cash flow prospects
Under what circumstances must fair value be applied to investments in equity securities according to accounting standards?
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When ownership exceeds 50%
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For investments in equity securities with ownership less than 20%
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For all investments regardless of ownership percentage
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Only for publicly traded companies
Explanation
Explanation:
According to U.S. GAAP, investments in equity securities where ownership is less than 20% and there is no significant influence must generally be measured at fair value, with changes in fair value recognized in net income. This treatment reflects the assumption that such investments are held primarily for returns through dividends or price appreciation. Ownership above 20% often indicates significant influence, requiring the equity method, while ownership above 50% typically results in consolidation.
Correct Answer:
For investments in equity securities with ownership less than 20%
Which of the following fair value hierarchy represents inputs other than the quoted prices included within the specific level that are observable for the asset, liability, either directly or indirectly
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Level 2
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Level 1
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Level 4
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Level 3
Explanation
Explanation:
Level 2 inputs in the fair value hierarchy represent inputs that are not directly quoted prices for identical assets in active markets but are still observable, either directly or indirectly. These may include quoted prices for similar assets in active markets or quoted prices for identical assets in markets that are not active. The reliance on observable inputs enhances reliability while still requiring some degree of adjustment or interpretation compared to Level 1 inputs.
Correct Answer:
Level 2
Which of the following accurately describes the primary purpose of a balance sheet?
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To summarize the revenues and expenses over a specific period of time
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To provide a snapshot of a company's financial position at a specific point in time
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To report the cash inflows and outflows from operating activities
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To detail the changes in stockholders' equity over a fiscal year.
Explanation
Explanation:
The balance sheet is a financial statement that reports a company’s financial position at a single point in time. It presents assets, liabilities, and shareholders’ equity, showing what the company owns and owes. Unlike the income statement or statement of cash flows, which cover a period of time, the balance sheet is a snapshot on a specific date. This allows users to evaluate liquidity, solvency, and capital structure.
Correct Answer:
To provide a snapshot of a company's financial position at a specific point in time
Financial accounting is the communication of information about a business or other type of organization so that:
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Individuals can know when the newest model electronic device will come to market
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Individuals can assess its financial health and future prospects
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Individuals can assess if management of the organization is honest
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Individuals can have greater insight into the competitive nature of the industry
Explanation
Explanation:
The primary purpose of financial accounting is to communicate reliable and standardized information about a company’s financial performance and position. This information helps external users such as investors, creditors, and regulators assess the company’s financial health and future prospects, including its ability to generate cash flows and meet obligations. It does not predict product launches or provide guarantees of managerial honesty but instead focuses on useful decision-making information.
Correct Answer:
Individuals can assess its financial health and future prospects
What is the primary purpose of a contra account in financial accounting?
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To increase the balance of the primary account
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To provide a detailed breakdown of the primary account
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To reduce the balance of the primary account
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To record transactions that are unrelated to the primary account
Explanation
Explanation:
A contra account is used to offset or reduce the balance of a related primary account while still maintaining a clear record of the original amounts. For example, accumulated depreciation is a contra asset account that reduces the balance of property, plant, and equipment, and allowance for doubtful accounts is a contra account that reduces accounts receivable. This provides more transparency in reporting by showing both the gross and net amounts.
Correct Answer:
To reduce the balance of the primary account
Which principle in the FASB Conceptual Framework dictates that revenue should be recognized when it is earned and realizable, regardless of when cash is received?
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Expense Recognition Principle
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Measurement Principle
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Revenue Recognition Principle
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Full Disclosure Principle
Explanation
Explanation:
The principle that requires revenue to be recognized when it is earned and realizable, not necessarily when cash is received, is the Revenue Recognition Principle. This principle is essential to the accrual basis of accounting. It ensures that revenue is matched to the period in which it is generated through the company’s activities, providing a more accurate picture of performance. For example, if a company delivers goods or services in December but receives payment in January, the revenue is recorded in December.
Correct Answer:
Revenue Recognition Principle
GAAP regarding fair value accounting for investments in equity securities will generally apply to an investment when the percentage of ownership of another company is:
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20% to 50%.
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Exactly 100%
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Less than 20%
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Over 50%.
Explanation
Explanation:
Under GAAP, investments in equity securities where the investor owns less than 20% of the voting stock of another company are typically accounted for using fair value accounting. This is because such an ownership interest is considered too small to exert significant influence. Between 20% and 50%, the equity method is generally used since significant influence is presumed. More than 50% ownership indicates control, which requires consolidation accounting. Exactly 100% is a full ownership situation, also requiring consolidation, not fair value.
Correct Answer:
Less than 20%
Which one of the following statements correctly defines liabilities?
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Liabilities are present obligations of a reporting entity to transfer economic resources as a result of past events
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Liabilities are present economic resources controlled by the entity because of past events.
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Liabilities are the residual interest in the assets of an entity after deducting all its liabilities.
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Liabilities are commonly known as the obligations of the entity
Explanation
Explanation:
Liabilities are defined as present obligations arising from past events that require an entity to transfer economic resources, such as cash, goods, or services. They represent legal or constructive duties that are enforceable and are settled through outflows of resources. This definition emphasizes the link between past events and the current obligation, distinguishing liabilities from assets, equity, or residual interests.
Correct Answer:
Liabilities are present obligations of a reporting entity to transfer economic resources as a result of past events.
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