Intermediate Accounting, Vol 1, 4e (Lo/Fisher)
Chapter 1 Fundamentals of Financial Accounting Theory
Learning Objective 1
1) Which statement is NOT correct?
A) Financial accounting is the process of providing information to external parties.
B) Accounting is about the communication of financial information.
C) Accounting is the production of information about an enterprise and the transmission of that
information to those who need the information.
D) Financial accounting is the process of providing information to internal parties.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
2) How does an accountant decide on the appropriate method of accounting for a business transaction?
A) Evaluating if the particular method is consistent with the conceptual framework.
B) Ensuring that the accounting method agrees with that selected by other companies.
C) Evaluating whether the selected method differs from the underlying economics.
D) Testing the selected method for numerical accuracy and consistency.
Answer: A
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
3) Which statement is correct?
A) Financial reporting is the process of preparing information for internal parties.
B) Financial reporting involves issuing financial statements to external parties.
C) Financial reporting provides the same information as management accounting.
D) Financial reporting is based on rules issued by the CPA or IASB.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
4) Which is NOT a question that financial accounting theory can answer?
A) Why do companies provide financial information to external parties?
B) Why do all companies use the same accounting policies?
C) Why is certain disclosure mandatory in financial reporting?
D) What is the role of financial accounting and reporting?
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
1
Copyright © 2020 Pearson Canada, Inc.
, 5) Why is financial information required?
Answer:
• Governmental bodies issue proclamations requiring companies to provide financial information.
• Quasi-governmental organizations issue proclamations requiring companies to provide financial
information.
• Accounting organizations such as the CPA or IASB issue proclamations requiring companies to
provide financial information.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
6) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these
accounting activities related to each other?
Answer: Financial reporting is the process by which enterprises provide information to external parties.
Managerial accounting, on the other hand, involves reporting within the enterprise.
Tax accounting is the reporting of taxable amounts to the government revenue authorities.
What ties all the branches of accounting together is the idea that some people have information that
others need.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
7) Discuss three reasons why it is important to understand accounting theory.
Answer:
• In order to make the best decisions possible, external investors as well as internal managers need to
interpret financial and accounting information about the state of the business.
• There is a misunderstanding that accounting standards are simply proclamations issued by
government or quasi-governmental regulatory agencies such as the International Accounting Standards
Board (IASB) that have no economic benefit to society.
• Rather, financial reporting is an economic good and is therefore subject to the laws of supply and
demand. Accounting standards reflect and respond to, although imperfectly, the demand for financial
information and the ability of enterprises to supply that information. Financial accounting theory helps
us to understand the complexities in the production and consumption (use) of accounting information.
Viewed in this way, financial information can be, and is, a subject of rigorous economic analysis.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
8) Explain the meaning of generally accepted accounting principles (GAAP).
Answer: GAAP refers to broad principles and conventions of general application as well as rules and
procedures that determine accepted accounting practices.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
2
Copyright © 2020 Pearson Canada, Inc.
Chapter 1 Fundamentals of Financial Accounting Theory
Learning Objective 1
1) Which statement is NOT correct?
A) Financial accounting is the process of providing information to external parties.
B) Accounting is about the communication of financial information.
C) Accounting is the production of information about an enterprise and the transmission of that
information to those who need the information.
D) Financial accounting is the process of providing information to internal parties.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
2) How does an accountant decide on the appropriate method of accounting for a business transaction?
A) Evaluating if the particular method is consistent with the conceptual framework.
B) Ensuring that the accounting method agrees with that selected by other companies.
C) Evaluating whether the selected method differs from the underlying economics.
D) Testing the selected method for numerical accuracy and consistency.
Answer: A
Diff: 3 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
3) Which statement is correct?
A) Financial reporting is the process of preparing information for internal parties.
B) Financial reporting involves issuing financial statements to external parties.
C) Financial reporting provides the same information as management accounting.
D) Financial reporting is based on rules issued by the CPA or IASB.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
4) Which is NOT a question that financial accounting theory can answer?
A) Why do companies provide financial information to external parties?
B) Why do all companies use the same accounting policies?
C) Why is certain disclosure mandatory in financial reporting?
D) What is the role of financial accounting and reporting?
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
1
Copyright © 2020 Pearson Canada, Inc.
, 5) Why is financial information required?
Answer:
• Governmental bodies issue proclamations requiring companies to provide financial information.
• Quasi-governmental organizations issue proclamations requiring companies to provide financial
information.
• Accounting organizations such as the CPA or IASB issue proclamations requiring companies to
provide financial information.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
6) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these
accounting activities related to each other?
Answer: Financial reporting is the process by which enterprises provide information to external parties.
Managerial accounting, on the other hand, involves reporting within the enterprise.
Tax accounting is the reporting of taxable amounts to the government revenue authorities.
What ties all the branches of accounting together is the idea that some people have information that
others need.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
7) Discuss three reasons why it is important to understand accounting theory.
Answer:
• In order to make the best decisions possible, external investors as well as internal managers need to
interpret financial and accounting information about the state of the business.
• There is a misunderstanding that accounting standards are simply proclamations issued by
government or quasi-governmental regulatory agencies such as the International Accounting Standards
Board (IASB) that have no economic benefit to society.
• Rather, financial reporting is an economic good and is therefore subject to the laws of supply and
demand. Accounting standards reflect and respond to, although imperfectly, the demand for financial
information and the ability of enterprises to supply that information. Financial accounting theory helps
us to understand the complexities in the production and consumption (use) of accounting information.
Viewed in this way, financial information can be, and is, a subject of rigorous economic analysis.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
8) Explain the meaning of generally accepted accounting principles (GAAP).
Answer: GAAP refers to broad principles and conventions of general application as well as rules and
procedures that determine accepted accounting practices.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 1.1 Explain the sources of demand and supply of accounting information.
2
Copyright © 2020 Pearson Canada, Inc.
