,✅ Chapter 1: Financial Accounting and Accounting Standards
Focus: Purpose of financial accounting, GAAP, FASB, SEC, IASB,
ethics in reporting
1.
Which of the following best describes the primary objective of financial
accounting?
A. To compute tax liabilities for regulatory purposes
B. To provide useful information to internal management
C. To provide relevant financial information to external users for
decision-making
D. To monitor internal control effectiveness
✅ Correct Answer: C. To provide relevant financial information to
external users for decision-making
Rationale: Financial accounting is externally focused—designed
primarily to inform investors, creditors, and other stakeholders.
Managerial accounting serves internal users.
2.
Which body currently has the primary responsibility for setting
accounting standards in the United States?
A. Securities and Exchange Commission (SEC)
B. Financial Accounting Standards Board (FASB)
C. American Institute of CPAs (AICPA)
D. Internal Revenue Service (IRS)
,✅ Correct Answer: B. Financial Accounting Standards Board
(FASB)
Rationale: Although the SEC has the legal authority to set accounting
standards, it has delegated that authority to the FASB, an independent
private-sector body.
3.
The conceptual framework developed by the FASB serves which of the
following key functions?
A. It outlines laws to enforce compliance with GAAP
B. It eliminates the need for future accounting standards
C. It provides a foundation for developing consistent accounting
standards
D. It standardizes tax reporting requirements
✅ Correct Answer: C. It provides a foundation for developing
consistent accounting standards
Rationale: The conceptual framework helps ensure that new standards
are logically consistent and based on defined principles, enhancing
comparability and decision usefulness.
4.
Which of the following was a key motivation for the formation of the
International Accounting Standards Board (IASB)?
A. To regulate tax reporting across EU nations
B. To create a global stock exchange
C. To develop a single set of high-quality, globally accepted accounting
standards
D. To replace the FASB in the U.S.
,✅ Correct Answer: C. To develop a single set of high-quality,
globally accepted accounting standards
Rationale: The IASB was formed to promote international convergence
and comparability of accounting standards across jurisdictions.
5.
Which of the following statements best reflects the difference between
GAAP and IFRS?
A. GAAP is rules-based; IFRS is principles-based
B. GAAP applies only to small businesses
C. IFRS includes only cash-based reporting
D. IFRS is required for all U.S. companies
✅ Correct Answer: A. GAAP is rules-based; IFRS is principles-
based
Rationale: GAAP includes detailed rules for specific scenarios, whereas
IFRS offers general principles, leaving more room for interpretation and
judgment.
6.
Which organization enforces accounting standards for publicly traded
companies in the U.S.?
A. FASB
B. AICPA
C. SEC
D. IRS
✅ Correct Answer: C. SEC
Rationale: The SEC enforces compliance with accounting and
,disclosure standards for publicly listed companies, even though FASB
creates the standards.
7.
The Sarbanes-Oxley Act of 2002 primarily addresses which of the
following?
A. Reducing the corporate tax rate
B. Eliminating the use of IFRS in U.S. reporting
C. Enhancing corporate accountability and reducing financial fraud
D. Setting pension fund accounting standards
✅ Correct Answer: C. Enhancing corporate accountability and
reducing financial fraud
Rationale: SOX was enacted after corporate scandals (e.g., Enron) to
restore investor confidence by requiring stronger internal controls and
ethical standards.
8.
Which of the following is not a key component of the FASB's standard-
setting process?
A. Public exposure of proposed standards
B. Conceptual framework reference
C. IRS approval of final standards
D. Stakeholder feedback and roundtables
✅ Correct Answer: C. IRS approval of final standards
Rationale: The IRS governs tax reporting, not financial reporting.
FASB operates independently and does not require IRS approval.
,9.
Which document issued by the FASB represents the culmination of its
formal standard-setting process?
A. Discussion memorandum
B. Exposure draft
C. Statement of Financial Accounting Standards (SFAS)
D. Accounting Standards Update (ASU)
✅ Correct Answer: D. Accounting Standards Update (ASU)
Rationale: ASUs are the official updates that amend the Accounting
Standards Codification (ASC), which is the authoritative source of
GAAP.
10.
The due process system used by the FASB promotes:
A. Uniform application of tax regulations
B. Secret deliberations to protect intellectual property
C. Transparency and stakeholder involvement in standard setting
D. Enforcement of managerial accountability
✅ Correct Answer: C. Transparency and stakeholder involvement
in standard setting
Rationale: FASB’s due process ensures that the public, practitioners,
and companies can provide input, enhancing legitimacy and quality.
11.
, Which of the following groups is considered a primary user of general-
purpose financial statements?
A. Labor unions
B. Internal auditors
C. Investors and creditors
D. Tax authorities
✅ Correct Answer: C. Investors and creditors
Rationale: General-purpose financial statements are designed to meet
the needs of investors and creditors who rely on them for decision-
making.
12.
The Accounting Standards Codification (ASC):
A. Provides tax code explanations for CPAs
B. Replaces all authoritative GAAP literature with a unified structure
C. Is published by the SEC
D. Is used only by governmental entities
✅ Correct Answer: B. Replaces all authoritative GAAP literature
with a unified structure
Rationale: Introduced in 2009, the ASC organizes all existing GAAP
into a single, searchable system to simplify application and research.
13.
Which of the following is not a characteristic of high-quality financial
reporting?
Focus: Purpose of financial accounting, GAAP, FASB, SEC, IASB,
ethics in reporting
1.
Which of the following best describes the primary objective of financial
accounting?
A. To compute tax liabilities for regulatory purposes
B. To provide useful information to internal management
C. To provide relevant financial information to external users for
decision-making
D. To monitor internal control effectiveness
✅ Correct Answer: C. To provide relevant financial information to
external users for decision-making
Rationale: Financial accounting is externally focused—designed
primarily to inform investors, creditors, and other stakeholders.
Managerial accounting serves internal users.
2.
Which body currently has the primary responsibility for setting
accounting standards in the United States?
A. Securities and Exchange Commission (SEC)
B. Financial Accounting Standards Board (FASB)
C. American Institute of CPAs (AICPA)
D. Internal Revenue Service (IRS)
,✅ Correct Answer: B. Financial Accounting Standards Board
(FASB)
Rationale: Although the SEC has the legal authority to set accounting
standards, it has delegated that authority to the FASB, an independent
private-sector body.
3.
The conceptual framework developed by the FASB serves which of the
following key functions?
A. It outlines laws to enforce compliance with GAAP
B. It eliminates the need for future accounting standards
C. It provides a foundation for developing consistent accounting
standards
D. It standardizes tax reporting requirements
✅ Correct Answer: C. It provides a foundation for developing
consistent accounting standards
Rationale: The conceptual framework helps ensure that new standards
are logically consistent and based on defined principles, enhancing
comparability and decision usefulness.
4.
Which of the following was a key motivation for the formation of the
International Accounting Standards Board (IASB)?
A. To regulate tax reporting across EU nations
B. To create a global stock exchange
C. To develop a single set of high-quality, globally accepted accounting
standards
D. To replace the FASB in the U.S.
,✅ Correct Answer: C. To develop a single set of high-quality,
globally accepted accounting standards
Rationale: The IASB was formed to promote international convergence
and comparability of accounting standards across jurisdictions.
5.
Which of the following statements best reflects the difference between
GAAP and IFRS?
A. GAAP is rules-based; IFRS is principles-based
B. GAAP applies only to small businesses
C. IFRS includes only cash-based reporting
D. IFRS is required for all U.S. companies
✅ Correct Answer: A. GAAP is rules-based; IFRS is principles-
based
Rationale: GAAP includes detailed rules for specific scenarios, whereas
IFRS offers general principles, leaving more room for interpretation and
judgment.
6.
Which organization enforces accounting standards for publicly traded
companies in the U.S.?
A. FASB
B. AICPA
C. SEC
D. IRS
✅ Correct Answer: C. SEC
Rationale: The SEC enforces compliance with accounting and
,disclosure standards for publicly listed companies, even though FASB
creates the standards.
7.
The Sarbanes-Oxley Act of 2002 primarily addresses which of the
following?
A. Reducing the corporate tax rate
B. Eliminating the use of IFRS in U.S. reporting
C. Enhancing corporate accountability and reducing financial fraud
D. Setting pension fund accounting standards
✅ Correct Answer: C. Enhancing corporate accountability and
reducing financial fraud
Rationale: SOX was enacted after corporate scandals (e.g., Enron) to
restore investor confidence by requiring stronger internal controls and
ethical standards.
8.
Which of the following is not a key component of the FASB's standard-
setting process?
A. Public exposure of proposed standards
B. Conceptual framework reference
C. IRS approval of final standards
D. Stakeholder feedback and roundtables
✅ Correct Answer: C. IRS approval of final standards
Rationale: The IRS governs tax reporting, not financial reporting.
FASB operates independently and does not require IRS approval.
,9.
Which document issued by the FASB represents the culmination of its
formal standard-setting process?
A. Discussion memorandum
B. Exposure draft
C. Statement of Financial Accounting Standards (SFAS)
D. Accounting Standards Update (ASU)
✅ Correct Answer: D. Accounting Standards Update (ASU)
Rationale: ASUs are the official updates that amend the Accounting
Standards Codification (ASC), which is the authoritative source of
GAAP.
10.
The due process system used by the FASB promotes:
A. Uniform application of tax regulations
B. Secret deliberations to protect intellectual property
C. Transparency and stakeholder involvement in standard setting
D. Enforcement of managerial accountability
✅ Correct Answer: C. Transparency and stakeholder involvement
in standard setting
Rationale: FASB’s due process ensures that the public, practitioners,
and companies can provide input, enhancing legitimacy and quality.
11.
, Which of the following groups is considered a primary user of general-
purpose financial statements?
A. Labor unions
B. Internal auditors
C. Investors and creditors
D. Tax authorities
✅ Correct Answer: C. Investors and creditors
Rationale: General-purpose financial statements are designed to meet
the needs of investors and creditors who rely on them for decision-
making.
12.
The Accounting Standards Codification (ASC):
A. Provides tax code explanations for CPAs
B. Replaces all authoritative GAAP literature with a unified structure
C. Is published by the SEC
D. Is used only by governmental entities
✅ Correct Answer: B. Replaces all authoritative GAAP literature
with a unified structure
Rationale: Introduced in 2009, the ASC organizes all existing GAAP
into a single, searchable system to simplify application and research.
13.
Which of the following is not a characteristic of high-quality financial
reporting?
