Module 1 - Chapter 1 & 2 - Fundamentals of Financial Accounting Theory & Conceptual Framework

Which statement is NOT correct? Question options: 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. - ANS d) Financial accounting is the process of providing information to internal parties. Which is NOT a question that financial accounting theory can answer? Question options: 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? - ANS b) Why do all companies use the same accounting policies? Which statement best explains "information asymmetry"? Question options: a) Information asymmetry means that there is uncertainty about the future. b) Information asymmetry means that some people have more information than others c) Information asymmetry means that external parties need financial information. d) Information asymmetry means information is material to a decision maker. - ANS b) Information asymmetry means that some people have more information than others Which statement best explains "moral hazard"? Question options: a) The term refers to a situation where one party has an information advantage over another. b) The term refers to the need external parties have for financial information. c) The term refers to the fact that some people have more information than others. d) The term refers to a situation where one party cannot observe the actions of another party. - ANS d) The term refers to a situation where one party cannot observe the actions of another party. Which of the following statements is correct about financial information? Question options: a) All users require the same kind of information. b) Forward looking information is useful for evaluating management stewardship. c) Trade-offs are necessary in accounting. d) Historical cost information is useful for pricing the value of a company's shares. - ANS c) Trade-offs are necessary in accounting. Which of the following is NOT an example of management motivation to improve the financial statements? Question options: a) To make it likely that the firm will meet regulatory requirements b) To provide stronger bargaining position in merger negotiations c) To obtain higher compensation through profit-sharing agreements d) To improve the firm's bargaining position relative to the employee union - ANS d) To improve the firm's bargaining position relative to the employee union Which statement appropriately explains the meaning of "publicly accountable enterprise"? Question options: a) Firms without equity, debt or other securities traded in public markets. b) Firms with equity, debt or other securities traded in public markets. c) Firms with assets and liabilities that provide goods and services in public markets. d) New firms entering the public markets to provide goods and services. - ANS b) Firms with equity, debt or other securities traded in public markets. Which statement best explains the semi-strong form of the efficient securities market hypothesis? Question options: a) A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. b) A market in which the prices of securities traded in that market reflect all information, whether publicly or privately known. c) A market in which the prices of debt securities traded in that market reflect all information that is privately known about those securities. d) A market in which the prices of equity securities traded in that market reflect all information that is privately known about those securities. - ANS a) A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. Which of the following best describes the importance of qualitative characteristics as part of the conceptual framework of financial reporting? Question options: a) Relevance and representational faithfulness must always be present. b) Representational faithfulness may be traded off. c) Timeliness is a fundamental qualitative characteristic. d) All of the above. - ANS a) Relevance and representational faithfulness must always be present. Schmidt Ltd. aims to improve the qualitative characteristics of its financial statements. You are the owner and have been presented with the options shown below. Which of these options would most likely improve the comparability of your company's financial statements? Question options: a) The restatement of its financial statements from Canadian GAAP to US GAAP for its American investors. b) The preparation of monthly financial statements. c) The introduction of a policy that specifies how Schmidt's capital assets should be amortized. d) The use of foreign-trained accountants. - ANS a) The restatement of its financial statements from Canadian GAAP to US GAAP for its American investors. Enhancing qualitative characteristics are an essential part of the conceptual framework of accounting. These include, among others, timeliness. Which of the items below would be most indicative of timeliness? Question options: a) The preparation of quarterly financial statements. b) The preparation of annual financial statements.