Accounting Principles and Decision Making
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Questions and Answers

Which of the following is not an example of a decision of informed judgement that a potential investor would make from accounting information?

  • Comparative analysis of competitors
  • Probability of success of a new product development (correct)
  • The current financial status of the company
  • Future cash flow projections

What is an object of financial reporting by business enterprises?

Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and changes in those resources and claims to them.

Examples of how investors, predictors, and others commonly use reported earnings figures and related information include all of the following except:

  • Estimating future dividends
  • Estimating the number of employees the firm will hire during the next year (correct)
  • Assessing market competition
  • Evaluating company performance

What is most true about the origins and traditions of auditing?

<p>Auditing evolved as a response to the needs of absentee owners of large corporations who had entrusted their money in the hands of managers they could not directly control.</p> Signup and view all the answers

Major classifications of accounting activity would not include:

<p>Tax accounting (A)</p> Signup and view all the answers

What does the ethical concept of independence mean for an accountant employed?

<p>An accountant employed by an auditing firm cannot own any stock in the company being audited.</p> Signup and view all the answers

Which of the following is not required of an accounting entity related to financial reporting?

<p>A financial statement presenting the amount that the entity expects to earn next year (C)</p> Signup and view all the answers

Who is qualified to express an auditor's opinion about an entity's financial statements?

<p>A Certified Public Accountant.</p> Signup and view all the answers

Which of the following is not an objective of financial reporting described in FASB Concepts Statement No. 1?

<p>To measure the current market value of the business enterprise (B)</p> Signup and view all the answers

What statement about the Financial Accounting Standards Board is correct?

<p>The FASB follows a due process procedure that permits input from interested parties before a standard is issued.</p> Signup and view all the answers

Flashcards

What is the object of financial reporting?

Financial reporting aims to provide information about:

  • The economic resources an enterprise owns.
  • The claims against those resources (liabilities and equity).
  • Changes in these resources and claims.

Which decision is NOT made from accounting information?

This decision is based on qualitative factors and market analysis, not directly derived from accounting information. Accounting focuses on financial data.

Why did auditing evolve?

Auditing emerged to address the need for independent verification of financial statements. Absentee owners needed assurance their invested funds were managed properly.

What is NOT a major classification of accounting activity?

Tax accounting involves preparing tax returns and complying with tax laws. It is a separate focus from general accounting practices.

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What does independence mean for an accountant?

Independence means an accountant cannot have any personal or financial ties that could compromise their judgment while auditing a firm.

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What is not a requirement of financial reporting?

Financial reporting focuses on historical data and results, not future predictions. Estimating future earnings is beyond the scope of traditional financial reporting.

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Who can express an auditor's opinion?

A Certified Public Accountant (CPA) possesses the necessary qualifications and license to audit financial statements and issue an opinion on their accuracy.

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What is NOT an objective of financial reporting?

Financial reporting aims to provide information useful for a variety of purposes, not just market valuation. Other objectives include financial performance and position.

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What is correct about the FASB?

The FASB follows a process where all interested parties can provide input before issuing a new accounting standard. This ensures a fair and transparent system.

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What is NOT a common use of earnings figures?

Investors, creditors, and analysts rely on reported earnings figures to make informed decisions about a company's financial health and potential. However, these figures don't predict the number of employees a company will hire.

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Study Notes

Decision Making and Accounting Information

  • Investors make informed judgments based on accounting information, except for evaluating the probability of success for new product development.

Financial Reporting Objectives

  • Financial reporting aims to provide insights into an enterprise's economic resources, claims to those resources, and any changes to these.

Use of Reported Earnings

  • Investors and analysts utilize reported earnings to make various assessments, but estimating future employee hires is not common.

Origins of Auditing

  • Auditing originated from the necessity of absentee owners of large corporations seeking assurance about the management of their funds.

Classifications of Accounting Activity

  • Major classifications of accounting include financial accounting, national accounting, and cost accounting.

Ethical Independence in Accounting

  • The ethical principle of independence requires auditors not to hold stock in the companies they audit to maintain objectivity.

Requirements of Accounting Entities

  • Accounting entities are not required to present forecasts of expected earnings in their financial statements.

Auditor Qualifications

  • Certified Public Accountants (CPAs) are authorized to express opinions on the financial statements of entities.

Financial Reporting Objectives According to FASB

  • FASB Concepts Statement No. 1 does not aim to measure the current market value of a business enterprise as part of financial reporting objectives.

FASB Procedure for Standards

  • The Financial Accounting Standards Board (FASB) adheres to a due process that includes gathering input from stakeholders before issuing new standards.

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Description

This quiz covers fundamental concepts in accounting, including decision making based on accounting information, financial reporting objectives, and the classifications of accounting activities. It also delves into the ethical considerations auditors must follow to maintain independence. Test your understanding of these critical accounting principles.

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