Accounting Fundamentals and Standards

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Questions and Answers

What is the primary function of accounting as a language?

To facilitate the interchange of goods and services

To create artistic representations of financial data

To translate economic events into words and numbers (correct)

To establish government regulations on commerce

Which accounting technique was notably used by Enron to conceal its financial issues?

Creative accounting (correct)

Fair value accounting

Transparent reporting

Capital investments

What is considered as economic goods in the context of accounting?

Raw materials available for free

Wealth that is employed productively (correct)

Goods that have no associated production costs

Goods traded exclusively within local markets

Why is credit defined as the present use of future goods in accounting?

To encourage immediate transactions Signup and view all the answers

In intra-corporate politics, what role does accounting play?

It reflects and supports the values of special interest groups Signup and view all the answers

What is the overarching objective of establishing accounting standards as influenced by shareholders and creditors?

To enhance the ability to monitor management conduct Signup and view all the answers

What do managers often lobby for regarding accounting standards?

To minimize information costs associated with reporting Signup and view all the answers

How do accounting reports contribute to understanding a company's performance?

They provide insights into financial performance and resource utilization Signup and view all the answers

What is not typically included when establishing realistic product costs?

Administrative expenses Signup and view all the answers

Which entity was established in 1917 to ensure a uniform CPA examination?

American Institute of Accountants Signup and view all the answers

What should not be included in the consolidated earned surplus of the parent company?

Retained earnings created before acquisition Signup and view all the answers

Dividends on which of the following should not be credited to a company’s income?

Treasury stock Signup and view all the answers

During the 1938-1939 period, how many Accounting Research Bulletins did CAP issue?

Twelve Signup and view all the answers

Which aspect of accounting history does NOT contribute to understanding the subject as a social science?

Historical legislative frameworks Signup and view all the answers

Which of the following statements about amounts receivable from officers is true?

They should be shown separately on financial statements. Signup and view all the answers

Which organization was chiefly responsible for issuing accounting standards in the late 1930s?

Committee on Accounting Procedures Signup and view all the answers

What was the primary mission of the Accounting Research Division established in 1959?

To advance the written expression of generally accepted accounting principles Signup and view all the answers

Which organization was established in 1973 to set accounting standards in the U.S.?

Financial Accounting Standards Board (FASB) Signup and view all the answers

What was one reason that led to the dissolution of the Committee on Accounting Practices (CAP)?

It was in disagreement with the SEC regarding its approach to accounting Signup and view all the answers

How did the understanding of income statements evolve during the era of the APB?

It failed to limit alternatives available to management Signup and view all the answers

Which phase in the historical evolution of accounting emphasizes the politicization of accounting standards?

Politicization Phase (1973-Present) Signup and view all the answers

What seminal event is often associated with the historical evolution of accounting?

The invention and dissemination of double-entry bookkeeping Signup and view all the answers

What did the generally accepted view suggest regarding accounting numbers and economic behavior?

They are believed to affect economic behavior significantly Signup and view all the answers

Which of the following issues did the APB address between 1959 and 1973?

Controversial issues in accounting practices Signup and view all the answers

Study Notes

Introduction and Financial Regulatory (Evolution of Double-Entry Bookkeeping)

Accounting history is thousands of years old, tracing back to ancient civilizations using clay tokens to represent goods.
Double-entry bookkeeping emerged in the ancient world due to factors such as the invention of writing, numeral systems, and the rise of trade and capital.
A.C. Littleton (1956) identified seven factors leading to double-entry bookkeeping: the art of writing, arithmetic, private property, money, commerce, capital, and credit.
Double-entry bookkeeping is primarily about balancing debits and credits in accounts, maintaining the fundamental accounting equation (Assets = Liabilities + Equity).
Luca Pacioli (1445-1510) is credited with significantly contributing to double-entry bookkeeping.
His book "Summa de Arithmetica Geometrica, Proportioni et Proportionalita" published in Venice.
His work was based on practices in Venice, Florence, and Milan (13th century) and described the double-entry system's debit and credit methods.
Pacioli emphasized that every entry should have a corresponding, equal entry, and the need for periodic financial statements for managing resources.
Accounting records exist from ancient times (3600 years ago), including records of payments, receipts, and tax collections.
Accounting during the post-Islamic era evolved to "Five Books"

Development of Accounting Principles (In the USA)

Management Contribution Phase (1900-1933): Focus on pragmatic solutions for minimizing taxes, smoothing earnings, and establishing product costs.
Institution Contribution Phase (1933-1959): Rise of the Securities and Exchange Commission (SEC), fostering a need for standardized accounting principles. The Committee on Accounting Procedures (CAP) issued pronouncements.
Professional Contribution Phase (1959-1973): The Accounting Principles Board (APB) and the Financial Accounting Standards Board (FASB) were created to develop and standardize accounting principles.
Politicization Phase (1973-Present): Accounting standards are subject to political influence as these rules affect economic behaviors and interest group politics.

Accounting and its Role in Capitalism

Capitalism emerged in the late 18th century, partially due to the neglect of middle-class officials and favoritism towards merchants and trade guilds.
Double-entry bookkeeping facilitated economic expansion: shifting focus from substance to profit; empowering entrepreneurs through integrated systems; assuring accuracy and order with its duality (double entry) technique; separating business and personal assets to establish the enterprise's autonomous existence.
Accounting in relation to capitalism is seen as an economic and political system in which trade and industry are controlled by private owners for profit.

Relevance of Accounting History

Accounting history provides insights into the origins of double-entry bookkeeping, the evolution of modern accounting, the formation of accounting problems over time, historical contexts, and past methodologies to assist present practices.
Historical developments can offer context for decisions in accounting policy, practice, and pedagogy.

Limitations of Accounting History

Historical inquiry is conditional and not definitive; information may be incomplete or reveal only probable factors rather than certain causes, subject to judgmental processes constrained by time.

Development of Accounting in Malaysia

Companies' financial regulations existed prior to 1957, under the Companies Ordinance (etc).
Malaysian Institute of Certified Public Accountants (MICPA) and Malaysian Institute of Accountant (MIA) were formed.
Companies Act 1965 was established.
Financial Reporting Foundation (FRF) and Malaysian Accounting Standard Board (MASB).
Convergence to International Financial Reporting Standards (IFRS) in 2012.

Accounting Theory

Accounting theory's main functions and objectives: explanation and evaluation of accounting principles, problem-solving, forecasting future impacts of events, investigating and explaining events, prediction and justification of the profession, and evaluation of current practice and guidance for future practice.
Different approaches to accounting theory: inductive, deductive, ethical, sociological, economic, eclectic, and more..
Accounting theories evolved through periods including: a pre-theory period (refined existing practice); a general scientific period (explaining existing practice); a normative period (ideal practice); and a positive era (explaining and predicting accounting practices).

Formulation and Verification of Accounting Theory

Theory must have semantic (relating to real world), syntactic (logical structures), and pragmatic (affecting people's behavior) elements.
Pragmatic aspects of accounting theory, focusing on observable accountant behavior in specific situations or user's responses to the accounting output and their use of information.
Traditional historical cost accounting (HCA) as interpreted within syntactic theory, with limitations.
Normative accounting theory - prescribing how accountants should behave
Positive accounting theory (PAT) - descriptive (explaining and predicting).

Regulatory Approach of Accounting Theory

Regulation is seen as prescribed rules by an authoritative direction.
Different theories of regulation exist, including public interest theory, capture theory, economic interest group theory, and the bushfire theory.
Free-market perspective - where regulation isn't necessary given market forces and other mechanisms to motivate firms to provide useful information.
Information asymmetry, market failures, power disparity and uneven distribution of power within markets highlight the importance of regulation.
Accounting regulation, a political process that is affected by the interplay of lobbying by interest groups and various stakeholders.

Malaysia Reporting Regime

Regulatory bodies like the Financial Reporting Foundation (FRF), Malaysian Accounting Standards Board (MASB), Companies Commission of Malaysia (SSM), Securities Commission Malaysia (SC), Bank Negara Malaysia (BNM), and Bursa Malaysia each play a specific role.
The interaction of these bodies and their enforcement mechanisms ensure compliance to accounting standards.
Disclosure requirements, corporate governance mechanisms, and their enforcement ensure investor confidence and market efficiency.

Conceptual Framework Discussion

Conceptual Framework sets out fundamental principles to guide standard setting in financial reporting and promotes internationally comparable and high-quality financial information.
A practical tool that assists in developing standards, accounting policies, and user understanding.
Key components include objectives, qualitative characteristics of information, cost constraint, reporting entity, elements of financial statements, recognition measurement and disclosure. Different measurement bases, such as historical cost and current value measurement bases (fair value, value in use), are discussed.
Historical cost accounting, current cost accounting (CCA) and Exit Price Accounting (EPA) methods and criticisms of each method are considered, with emphasis on practicality and decision-making support.

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Description

Explore essential concepts and techniques in accounting with this quiz. Test your knowledge on the primary functions of accounting, notable techniques used in financial concealment, and the importance of established standards influenced by stakeholders. Ideal for accounting students and professionals alike.