Shared set · @edaxberg · Financial Accounting
Financial Reporting and Accounting Standards
Explain the purpose of financial reporting, the roles of the FASB/SEC/IASB, and the standard-setting environment.
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1 of 37
A company discloses information in its financial statements specifically to help investors and creditors decide whether to provide resources to the company. Which objective of general-purpose financial reporting does this illustrate?
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To provide financial information useful to present and potential investors, lenders, and other creditors in making decisions about providing resources to the entity
The primary objective of financial reporting, per the conceptual framework, is decision-usefulness for capital providers. It is not to compute taxes, guarantee profits, or report only cash transactions.
2 of 37
An analyst says a disclosure 'has the capacity to make a difference in a decision' because it has predictive value. Which fundamental qualitative characteristic is being described?
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Relevance
Relevance requires that information have predictive value, confirmatory value, or both, and be capable of influencing a decision. Faithful representation, by contrast, concerns whether the information is complete, neutral, and free from error.
3 of 37
Two different auditors, working independently with the same underlying data, arrive at the same reported balance for inventory. Which enhancing qualitative characteristic does this demonstrate?
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Verifiability
Verifiability means that different knowledgeable and independent observers can reach consensus that a depiction is faithfully represented, which is exactly what happens when two auditors agree on the same figure using the same evidence.
4 of 37
A retailer uses FIFO for inventory every year so that its gross profit trend can be tracked meaningfully from one year to the next. Which enhancing characteristic supports this practice?
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Consistency (a component of comparability)
Consistency means using the same accounting methods and procedures period to period, which is a key element supporting comparability across time for the same company.
5 of 37
Although a corporation may operate indefinitely, it still issues quarterly and annual financial statements. Which basic assumption justifies dividing its life into artificial time periods?
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Periodicity assumption
The periodicity (time period) assumption allows a company's economic life to be divided into artificial time periods, such as quarters or years, for reporting purposes.
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- A consulting firm completes a project in November but does not invoice the client or receive cash until January. In which month should the firm recognize the revenue?
- A retailer recognizes the cost of goods sold in the same period it recognizes the related sales revenue. Which principle does this illustrate?
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