Test Prep Test Prep Certifications FINANCIAL-ACCOUNTING-AND-REPORTING Questions & Answers

• Question 161:

  According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?

  A. Historical cost.

  B. Replacement cost.

  C. Net realizable value.

  D. Present value of future cash flows.

  Correct Answer: D

  Choice "d" is correct. The present value of future cash flows is used to measure long-term receivables or payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows.

  SFAC 5 para. 67 Choice "a" is incorrect. Historical cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "b" is incorrect. Replacement (or current) cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "c" is incorrect. Net realizable value can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory.

• Question 162:

  According to the FASB conceptual framework, which of the following situations violates the concept of reliability?

  A. Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits.

  B. Financial statements are issued nine months late.

  C. Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results.

  D. Financial statements include property with a carrying amount increased to management's estimate of market value.

  Correct Answer: D

  Choice "d" is correct. Management's estimate of market value lacks verifiability, which is a component of reliability. SFAC 2 para. 89 Choice "a" is incorrect. Communicating data on segments to analysts does not violate the concept of reliability. Choice "b" is incorrect. Issuing financial statements nine months late violates timeliness, which is a component of relevance, not reliability. SFAC 2 para. 56 Choice "c" is incorrect. Neglecting to report results of new projects violates full disclosure, not reliability.

• Question 163:

  According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:

  A. Generally accepted accounting principles.

  B. Reporting on management's stewardship.

  C. The need for conservatism.

  D. The needs of the users of the information.

  Correct Answer: D

  Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting stem from the informational needs of the external users of the information. SFAC 1 para. 28 Choice "a" is incorrect. Generally accepted accounting principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around. Choice "b" is incorrect. Information concerning management's stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1 para. 50 Choice "c" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97