Final Exam - Essay Practice Questions With 100% Correct Verified Solutions.

What is the difference between normative and positive theory? - correct answer Normative theory explain what should be and may/should happen in the future. Positive theory explains what is. It is based on observation of real life scenarios and looks at historical data. Explain how are accounting standards enforced in the US? - correct answer Many acts and measures are put in place to enforce accounting standards in the US. FASB, GASB, and GAAP are three boards that establish accounting standards. Identify and discuss the benefits that can be expected to be derived from the FASB's conceptual framework study. - correct answer Increased efficiency in communication (internally and externally) Allows users to better understand financial information Influence of personal bias is increased Provides a consideration of new alternatives to the fundamental basis of accounting Assists in the development of accounting standards in the future What are 3 different levels of FASB Conceptual Framework Pyramid, briefly explain about the components of each level. - correct answer Objectives: (SFAC No. 8) purpose of financial reporting is useful to current and potential investors and creditors. Fundamentals: Elements and Qualitative Characteristics. Rev.Exp.Gain.Loss.Asset.Liab.Equity.Relevance.Faithful.Representation Implementation Guidelines: Assumptions, principles, and constraints. Economic Entity, going concern, monetary unit periodicity. mearurement, rev. recog. full disclosure. cost, industry, practices. Briefly Compare principles-based and rules-based approaches in accounting standard setting. - correct answer Principle: better able to cope with speed of change of business environment, less voluminous, encourages use of professional judgement with a focus on what is right, and seen as possibly discouraging financial engineering. Rules-based: More workable in large, complex economies and countries, less room for interpretation, provides more guidance for practical implementation, and less need for explanation in financial statements Please define "Scientific Method" of research by identifying its 5 steps: - correct answer 1. Observe/ Pose a question 2. Create a hypothesis 3. Test Hypothesis by demonstration/experimentation 4. Analyze data to get to conclusion (whether desired of undesired) 5. Discuss methodology and significant findings. What are "Beta" and "Systematic Risk" in Capital Asset Pricing Model (CAPM), Define them separately. - correct answer Beta: measure of the parallel relationship of a particular common stock with the overall trend in the stock market. Gauges the stock's volatility to the total stock market Syst. Risk: nondiversifiable portion that is related to overall movements in the stock market and it consequently unavoidable. A firm's financial information can help determine this risk associated with a particular stock. What is Sustainability and what are 3 pillars of that? - correct answer Impact of a business organization's activities on society and is defined as meeting the needs of the present without promising the ability of future generations to meet theirs. 3 pillars: Social Environmental, and Economical Env.: Activities that reduce the environmental impact an organization has. Social: balances the needs of the company with the needs of the community. Econ: Promotes doing business in order to get the best advantage in the current economy. Define "Earning Quality" and "Aggressive Accounting" Separately - correct answer Earning Quality: Correlation between a company's accounting and economic income. Believe economic income is a better predictor or cash flows Aggressive Accounting: Understanding loss or reserve provisions a.) What are the features of Extraordinary Items in accounting? b.) What is the FASB's last position regarding to extraordinary items (ASU 2015-01)? - correct answer EI: Consist of gains or losses from events that were unusual and infrequent in nature that were separately classified, presented, and disclosed on companies' financial statements. Typically explained further in the notes to the financial statements FASB: the update eliminates the concept of Extraordinary items from GAAP. The item must meet two criteria for extraordinary classification: unusual in nature and occurs infrequently. Briefly define calculations and applications (when each of them were required to be disclosed) of three kind of EPs: Primary, Basic, Diluted - correct answer Diluted: calculates EPS if all securities are converted. Not common stock but can be converted to common stock. Calculation: (Net income-Preferred dividends)/Weighted Average number of shares outstanding + dilutive shares Basic: Intended to measure the amount that a share of common stock has earned during an accounting period. Because companies often have numerous stock transitions during the accounting period, the denominator is the arithmetic mean of the number of shares outstanding, weighted by time. (Historical) Calculation = (Net income-preferred dividends)/weighted average of common shares outstanding during the period Primary EPS: intended to display the most likely dilutive effect of exercise or conversion on EPS. It included only the dilutive effects of common stock equivalents. Name at least 4 balance sheet elements with their "measurement bases: (it can be from assets, liabilities, and equity) - correct answer Current assets: Assets that are expected to be sold, used, or otherwise realized in cash within one year/operating cycle of the business after the reporting period. (Cash,Inventory, and accounts receivable) Current liabilities: liabilities that are expected to be settled within one year/operating cycle of the business. (Notes Payable, Accrued Expenses, and Deferred income) Capital: Having more current assets than current liabilities. (Treasury stock, retained earnings, and preferred shares) Noncurrent assets: long term investments of a company that is not able to be realized within one year/operating cycle of the business. (Goodwill, trademarks, and PPE) Define Direct and indirect methods of preparing statement of cash flows separately, focusing on their differences and information each provides. - correct answer The Indirect method of Cash flow uses net income as a base and non-cash expenses like depreciation, non-cash incomes like profit on sale of scraps and net adjustments between current assets and liabilities to produce the overall cash flow statement. The Direct method uses only the cash transactions i.e. cash spent and cash received to produce the statement cash flow. ii. Indirect method - The net income is adjusted to generate the cash flows. Direct method - Reconciliation is done to separate the cash flow from other items. iii. Indirect method - All the factors are taken into account. Direct method - All non-cash transactions like depreciation are ignored. iv. Direct method-discloses information not available elsewhere in the financial statements, whereas Indirect method involves adjusting the net profit or loss for changes in non-cash items and movement in working capital. v. Indirect method - it is easier to prepare though difficult to understand. Direct method - it is a bit difficult to prepare but easier to understand. Define "Impairment" of long-term assets and explain when impairment occurs? - correct answer Typically an impairment is when a company pays more for an asset than what it is worth of the asset losses its value over time (more than expected). Impairment occurs when the price of the asset drops due to damage or change in demand of the asset. Explain the accounting treatment for expenditures required for an existing long-term asset. (When they are Capitalized and when they are expensed?) - correct answer Explain "Entity Theory" and "Proprietary Theory" - correct answer ET: Asstets=equities. no differnece between liabilitites and owners' equity. but require separate line disclosure in the balance sheet. Proprietary theory: net assets belong to the company's owners. Equity=Net worth of owners. Assets-liabilities = Equity. What are the reasons for businesses to issue bonds? - correct answer