A304 Exam 2 Prep Questions and All
Correct Answers 2025-2026 Updated.
In order to provide financial statement users with the most __________ and ___________
information about the firm's assets, liabilities, and therefore equity, US GAAP requires firms to
____________________________ assets and liabilities in the financial statements - Answer
Relevant; faithfully represented; use a variety of different approaches to value
What are the fundamental qualities of financial reporting? - Answer Financial reporting must
be relevant and faithfully represented
Relevant - Answer Information that can influence a user's decision
Faithfully Represented - Answer Complete, neutral, and free from error
Some assets and liabilities are measured based on _____________ and others on
______________ because there is often a balancing act between these two qualities - Answer
Relevant information; faithful information
Financial accounting amounts are a function of three things: - Answer Economics,
measurement error, and bias
Economics - Answer Report the underlying economics
How can measurement error impact accounting quality? - Answer Many amounts require
estimates, such as collectability of AR or depreciation lives. Good faith estimates can be too high
or low. However, these estimates made by managers increase the relevance of the financial
statements
How can bias impact accounting quality? - Answer Managers can misuser their discretion to
bias the reported amounts. Biased estimates can make the company more profitable or less
risky. They can also result in personal gain for the managers
Both measurement error and bias decrease ______________ - Answer Faithful representation
,What would happen if we eliminated manager discretion and instead all firms had to estimate
5% uncollectible AR? - Answer This would result in faithful representation since the amount of
uncollectible AR could be mathematically calculated but it would be less relevant because 5% is
only relevant for firms that estimate 5% uncollectible amounts
What are the valuation alternatives? - Answer Historical cost (original cost), adjusted historical
cost, market value (fair value), present value, and net realizable value
Historical Cost - Answer This is also known as original cost. It is the amount paid plus any costs
required to prepare the asset for its intended use
Examples of Historical Cost - Answer Land, prepaid assets, intangible assets with indefinite
lives
Adjusted Historical Cost - Answer These are historical costs adjusted downward as these assets
are consumed
Examples of Adjusted Historical Cost - Answer Buildings, equipment, intangible assets with
limited lives
Market Value - Answer This is also called fair value. It is the selling price of an asset or amount
that would be paid to settle a liability on the date of measurement
Examples of Market Value - Answer Most investments
Present Value - Answer This calculated present value of expected future cash flows is used to
approximate the fair value of some assets and liabilities
Examples of Present Value - Answer Long-term receivables and long-term payables
Net Realizable Value - Answer A hybrid form of historical cost and fair value
Examples of Net Realizable Value - Answer Inventory (lower of cost or market) or accounts
receivable (original amount less estimate of uncollectible accounts)
, What are some examples of assets that cannot be valued? - Answer Internally developed
intangible assets and research & development costs
Changes in asset or liability balances affect stockholders' equity, but not all affect ____________
- Answer Net income
The opportunity for ______________ and _______________ are important factors, among
others, that must be included in firm valuation - Answer Future growth; profitability
The revenue recognition principle requires that revenues be recorded: - Answer 1. When the
company transfers goods and services to customers
2. In the amount the company expects to be entitled to receive
Companies use a variety of methods to motivate businesses and consumers to buy their
products and make payments for their purchases, including: - Answer 1. Allowing consumers
to use credit cards to pay for purchases
2. Providing business customers direct credit and discounts for early payment
3. Allowing returns from all customers under certain circumstances
The methods that a company uses to motivate businesses and consumers to buy their products
and make payments for their purchases affect the way companies compute _______________ -
Answer Net sales revenue
Why do retailers accept credit cards? - Answer 1. To increase customer traffic
2. To avoid the costs of providing credit directly to customers
3. To lower risks due to bad checks
4. To avoid losses due to fraudulent credit card sales (normally the credit card company absorbs
any losses)
5. To receive money faster
Credit Card Discount - Answer When credit card sales are made, the company must pay the
credit card company a fee for the service it provides. This fee is called a Credit Card Discount
Companies may offer a ______________ as an early payment incentive - Answer Sales
discount
Correct Answers 2025-2026 Updated.
In order to provide financial statement users with the most __________ and ___________
information about the firm's assets, liabilities, and therefore equity, US GAAP requires firms to
____________________________ assets and liabilities in the financial statements - Answer
Relevant; faithfully represented; use a variety of different approaches to value
What are the fundamental qualities of financial reporting? - Answer Financial reporting must
be relevant and faithfully represented
Relevant - Answer Information that can influence a user's decision
Faithfully Represented - Answer Complete, neutral, and free from error
Some assets and liabilities are measured based on _____________ and others on
______________ because there is often a balancing act between these two qualities - Answer
Relevant information; faithful information
Financial accounting amounts are a function of three things: - Answer Economics,
measurement error, and bias
Economics - Answer Report the underlying economics
How can measurement error impact accounting quality? - Answer Many amounts require
estimates, such as collectability of AR or depreciation lives. Good faith estimates can be too high
or low. However, these estimates made by managers increase the relevance of the financial
statements
How can bias impact accounting quality? - Answer Managers can misuser their discretion to
bias the reported amounts. Biased estimates can make the company more profitable or less
risky. They can also result in personal gain for the managers
Both measurement error and bias decrease ______________ - Answer Faithful representation
,What would happen if we eliminated manager discretion and instead all firms had to estimate
5% uncollectible AR? - Answer This would result in faithful representation since the amount of
uncollectible AR could be mathematically calculated but it would be less relevant because 5% is
only relevant for firms that estimate 5% uncollectible amounts
What are the valuation alternatives? - Answer Historical cost (original cost), adjusted historical
cost, market value (fair value), present value, and net realizable value
Historical Cost - Answer This is also known as original cost. It is the amount paid plus any costs
required to prepare the asset for its intended use
Examples of Historical Cost - Answer Land, prepaid assets, intangible assets with indefinite
lives
Adjusted Historical Cost - Answer These are historical costs adjusted downward as these assets
are consumed
Examples of Adjusted Historical Cost - Answer Buildings, equipment, intangible assets with
limited lives
Market Value - Answer This is also called fair value. It is the selling price of an asset or amount
that would be paid to settle a liability on the date of measurement
Examples of Market Value - Answer Most investments
Present Value - Answer This calculated present value of expected future cash flows is used to
approximate the fair value of some assets and liabilities
Examples of Present Value - Answer Long-term receivables and long-term payables
Net Realizable Value - Answer A hybrid form of historical cost and fair value
Examples of Net Realizable Value - Answer Inventory (lower of cost or market) or accounts
receivable (original amount less estimate of uncollectible accounts)
, What are some examples of assets that cannot be valued? - Answer Internally developed
intangible assets and research & development costs
Changes in asset or liability balances affect stockholders' equity, but not all affect ____________
- Answer Net income
The opportunity for ______________ and _______________ are important factors, among
others, that must be included in firm valuation - Answer Future growth; profitability
The revenue recognition principle requires that revenues be recorded: - Answer 1. When the
company transfers goods and services to customers
2. In the amount the company expects to be entitled to receive
Companies use a variety of methods to motivate businesses and consumers to buy their
products and make payments for their purchases, including: - Answer 1. Allowing consumers
to use credit cards to pay for purchases
2. Providing business customers direct credit and discounts for early payment
3. Allowing returns from all customers under certain circumstances
The methods that a company uses to motivate businesses and consumers to buy their products
and make payments for their purchases affect the way companies compute _______________ -
Answer Net sales revenue
Why do retailers accept credit cards? - Answer 1. To increase customer traffic
2. To avoid the costs of providing credit directly to customers
3. To lower risks due to bad checks
4. To avoid losses due to fraudulent credit card sales (normally the credit card company absorbs
any losses)
5. To receive money faster
Credit Card Discount - Answer When credit card sales are made, the company must pay the
credit card company a fee for the service it provides. This fee is called a Credit Card Discount
Companies may offer a ______________ as an early payment incentive - Answer Sales
discount
