Get questions and answers for Accounting

What do we mean when we say that accounting is a means rather than an end?

Accounting is sometimes described as the language of business. What is meant by this description?

What kinds of organizations, in addition to businesses, use accounting information?

What is the primary distinction between financial accounting and managerial accounting?

Describe the relatioliship among the accounting process, accounting information, decision makers, and economic activities.

What are some examples of nonfinancial information that is often used by management in performing its duties?

What is an accounting system and what is the primary objective of such t system?

What do we mean when we say that an accounting system needs to be “cost-effective”?

What are the- three basic functions of every accounting -system?

Who designs and installs accounting systems?

Generally describe and give several examples of external users of accounting information?

What are the two primary -external groups to which financial accounting information is directed?

What do we mean when we say that investors and creditors are interested in a company’s “cash flow prospects”?

When you invest your savings in a company, what is the difference between the return on your investment and the return of your investment?

Going from general to specific, what are the three primary objectives of financial accounting information?

What are time three primary financial statements with which we communicate financial accounting- information?

Do the terms financial reporting and financial statements mean the same thing? Explain

Is externally reported financial information always precise and accurate?

What do we mean when we say that financial accounting information is “general-purpose?

How does management’s explanation enhance the usefulness of financial accounting information?

What are several examples of internal, management-prepared information that ordinarily would not be communicated externally?

What are some examples of internal users of accounting information?

What is meant by a database warehousing approach for the creation of useful accounting information for internal management?

What are the three primary ways enterprises use their management accounting information?

Why does management accounting information need to be timely?

Is management accounting information primarily historical or future oriented? How does that compare with financial accounting information?

How does accounting information assist management in measuring efficiency and effectiveness?

How is management accounting information a means to an end?

Why is- it important for accounting information to have the quality of integrity?

What is meant by generally accepted accounting principles, and how do these principles add to the integrity of financial accounting information?

What is an internal control structure, and how does it add to the integrity of accounting information?

What is an audit, and how does it add to the integrity of accounting information?

Differentiate broadly between financial accounting and managerial accounting.

Differentiate between “financial statements” and “financial reporting.”

How does accounting help the capital allocation process?

What are some of the major challenges facing the accounting profession?

What are the major objectives of financial reporting?

Of what value is a common set of standards in financial accounting and reporting?

What is the likely limitation of “general-purpose financial statements”?

In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?

What was the Committee on Accounting Procedure, and what were its accomplishments and failings?

For what purposes did the AICPA in 1959 create the Accounting Principles Board?

Distinguish among Accounting Research Bulletins, Opinions of the Accounting Principles Board, and Statements of the Financial Accounting Standards Board.

If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?

In what ways was it felt that the statements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?

How are FASB discussion memoranda and FASB exposure drafts related to FASB “statements”?

Distinguish between FASB “statements of financial accounting standards” and FASB “statements of financial accounting concepts.”

What is Rule 203 of the Code of Professional Conduct?

Rank from the most authoritative to the least authoritative, the following three items: FASB Technical Bulletins, AICPA Practice Bulletins, and FASB Standards.

The chairman of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and lawyers rely less on rules and law and more on professional judgment and conduct.” Explain his comment.

What is the purpose of FASB Staff Positions?

Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.

What is the purpose of the Governmental Accounting Standards Board?

What are some possible reasons why another organization, such as the Governmental Accounting Standards Board, should not issue financial reporting standards?

What are the sources of pressure that change and influence the development of accounting principles and standards?

Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by “economic consequences”? What dangers exist if politics play too much of a role in the development of financial reporting standards?

If you were given complete authority in the matter, how would you propose that accounting principles or standards should be developed and enforced?

One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?

What is the “expectations gap”? What is the profession doing to try to close this gap?

The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?

A number of foreign countries have reporting standards that differ from those in the United States. What are some of the main reasons why reporting standards are often different among countries?

How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?

Financial Accounting) Omar Morena has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting.
(a) Differentiate between financial accounting and managerial accounting.
(b) One part of financial accounting involves the preparation of financial statements. What are the financial statements most frequently provided?
(c) What is the difference between financial statements and financial reporting?

(Objectives of Financial Reporting) Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company’s response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has issued seven Statements of Financial Accounting Concepts, and she believes that these concept statements could be used to support the company’s response to the Preliminary Views. She has prepared a rough draft of the response citing Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises.” Instructions
(a) Identify the three objectives of financial reporting as presented in Statement of Financial Accounting Concepts No. 1 (SFAC No. 1).
(b) Describe the level of sophistication expected of the users of financial information by SFAC No. 1.(CMA adapted)

(Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the crises affecting many of our financial institutions in the United States. It is estimated that the savings and loan (S&L) debacle of the 1980s, for example, ended up costing $500 billion ($2,000 for every man, woman, and child in the United States). Some argue that if the S&Ls had been required to report their investments at market value instead of cost, large losses would have been reported earlier, which would have signaled regulators to close those S&Ls and, therefore, minimize the losses to U.S. taxpayers. Explain how reported accounting numbers might affect an individual’s perceptions and actions. Cite two examples.

(Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.
Instructions
Comment on the appropriateness of this viewpoint.

(AICPA’s Role in Rule-Making) One of the major groups involved in the standard-setting process is the American Institute of Certified Public Accountants. Initially it was the primary organization that established accounting principles in the United States. Subsequently it relinquished its power to the FASB.
(a) Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.
(b) Speculate as to why these two organizations failed. In your answer, identify steps the FASB has taken to avoid failure.
(c) What is the present role of the AICPA in the rule-making environment?

(FASB Role in Rule-Making) A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees) “. . . will become the established authority for setting accounting principles under which corporations report to the shareholders and others” (AICPA news release July 20, 1972).
Instructions
(a) Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.
(b) Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements.

(Politicization of GAAP) Some accountants have said that politicization in the development and acceptance of generally accepted accounting principles (i.e., rule-making) is taking place. Some use the term “politicization” in a narrow sense to mean the influence by governmental agencies, particularly the Securities and Exchange Commission, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on).
(a) The Committee on Accounting Procedure of the AICPA was established in the mid- to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard-setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer.
(b) What arguments can be raised to support the “politicization” of accounting rule-making?
(c) What arguments can be raised against the “politicization” of accounting rule-making? (CMA adapted)

(Models for Setting GAAP) Presented below are three models for setting GAAP.
1. The purely political approach, where national legislative action decrees GAAP.
2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
3. The public/private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.
(a) Which of these three models best describes standard-setting in the United States? Comment on your answer.
(b) Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
(c) Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

(GAAP Terminology) Wayne Rogers, an administrator at a major university, recently said, “I’ve got some CDs in my IRA, which I set up to beat the IRS.” As elsewhere, in the world of accounting and finance, it often helps to be fluent in abbreviations and acronyms. Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term.
(a) AICPA
(b) CAP
(c) ARB
(d) APB
(e) FAF
(f) FASAC
(g) SOP
(h) GAAP
(i) CPA
(j) FASB
(k) SEC
(l) IASB

(Accounting Organizations and Documents Issued) Presented below are a number of accounting organizations and types of documents they have issued. Match the appropriate document to the organization involved. Note that more than one document may be issued by the same organization. If no document is provided for an organization, write in “0.”
Organization Document
1. _____ Accounting Standards Executive Committee (a) Opinions
2. _____ Accounting Principles Board (b) Practice Bulletins
3. _____ Committee on Accounting Procedure (c) Accounting Research Bulletins
4. _____ Financial Accounting Standards Board (d) Financial Accounting Standards
(e) Statements of Position

(Accounting Pronouncements) Standard-setting bodies have issued a number of authoritative pronouncements. A list is provided on the left, below, with a description of these pronouncements on the
right.
Match the description to the pronouncements.
1. _____ Staff Positions
2. _____ Interpretations (of the Financial Accounting Standards Board)
3. _____ Statement of Financial Accounting Standards
4. _____ EITF Statements
5. _____ Opinions
6. _____ Statement of Financial Accounting Concepts
(a) Official pronouncements of the APB.
(b) Sets forth fundamental objectives and concepts that will be used in developing future standards.
(c) Primary document of the FASB that establishes GAAP.
(d) Provides additional guidance on implementing or applying FASB Standards or Interpretations.
(e) Provides guidance on how to account for new and unusual financial transactions that have the potential for creating diversity in financial reporting practices.
(f) Represent extensions or modifications of existing standards.

(Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required. Answer the following questions.
(a) What, if any, is the ethical issue involved in this case?
(b) Is the financial vice president acting improperly or immorally?
(c) What does Weller have to gain by advocacy of early implementation?
(d) Which stakeholders might be affected by the decision against early implementation? (CMA adapted)

(Securities and Exchange Commission) The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organized into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority.
(a) Explain from where the Securities and Exchange Commission receives its authority.
(b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.
(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

(Financial Reporting Pressures) Presented below is abbreviated testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is testifying in hopes of receiving no prison time when he is ultimately sentenced.
Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting?
A. I can’t recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had problems with the entries, David Myers had informed him, and we were considering resigning.
He said that he respected our concerns but that we weren’t being asked to do anything that he believed was wrong. He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the costs were so high. He did say he believed that the initial statements that we produced, that the line costs in those statements could not have been as high as they were, that he believes something was wrong and there was no way that the costs were that high.
I informed him that I didn’t believe the entry we were being asked to do was right, that I was scared,
and I didn’t want to put myself in a position of going to jail for him or the company. He responded that he didn’t believe anything was wrong, nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail, not me.
He asked that I stay, don’t jump off the plane, let him land it softly, that’s basically how he put it. And he mentioned that he had a discussion with Bernie Ebbers asking Bernie to reduce projections going forward and that Bernie had refused.
Q. Mr. Normand, you said that Mr. Sullivan said something about don’t jump out of the plane. What did you understand him to mean when he said that?
A. Not to quit.
Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future?
A. Yes, he made a comment that from that point going forward we wouldn’t be asked to record any entries, high-level late adjustments, that the numbers would be the numbers.
Q. What did you understand that to be mean, the numbers would be the numbers?
A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we wouldn’t be asked to be recording any more late entries.
Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate. Did he ask you to conduct any analysis to determine whether the line cost numbers were accurate?
A. No, he did not.
Q. Did anyone ever ask you to do that?
A. No.
Q. Did you ever conduct any such analysis?
A. No, I didn’t.
Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make?
A. No, he did not.
Q. Did anything else happen during the meeting?
A. I don’t recall anything else.
Q. How did you feel after this meeting?
A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there.
Answer the following questions.
(a) What appears to be the ethical issue involved in this case?
(b) Is Troy Normand acting improperly or immorally?
(c) What would you do if you were Troy Normand?
(d) Who are the major stakeholders in this case?

(Rule-Making Process) In 1973, the responsibility for developing and issuing rules on accounting practices was given to the Financial Accounting Foundation and, in particular, to an arm of the foundation called the Financial Accounting Standards Board (FASB). The generally accepted accounting principles established by the FASB are enunciated through a publication series entitled Statements of Financial Accounting Standards. These statements are issued periodically, and over 160 have been issued. The statements have a significant influence on the way in which financial statements are prepared by U.S. corporations.
(a) Describe the process by which a topic is selected or identified as appropriate for study by the
Financial Accounting Standards Board (FASB).
(b) Once a topic is considered appropriate for consideration by the FASB, a series of steps is followed before a Statement of Financial Accounting Standards is issued. Describe the major steps in the process leading to the issuance of a standard.
(c) Identify at least three other organizations that influence the setting of generally accepted accounting principles (GAAP). (CMA adapted)

(GAAP and Economic Consequences) The following letter was sent to the SEC and the FASB by leaders of the business community.
Dear Sirs:
The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of the new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the Board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach. As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the Year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress. We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nations businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach. We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commissions oversight responsibilities. We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S. businesses in the international marketplace. Very truly yours, (This letter was signed by the chairs of 22 of the largest U.S. companies.) Answer the following questions.
(a) Explain the due process procedures followed by the FASB in developing a financial reporting standard.
(b) What is meant by the term economic consequences in accounting standard-setting?
(c) What economic consequences arguments are used in this letter?
(d) What do you believe is the main point of the letter?
(e) Why do you believe a copy of this letter was sent by the business community to influential members of the United States Congress?

Beverly Crusher, a new staff accountant, is confused because of the complexities involving accounting standard-setting. Specifically, she is confused by the number of bodies issuing financial reporting standards of one kind or another and the level of authoritative support that can be attached to these reporting standards. Beverly decides that she must review the environment in which accounting standards are set, if she is to increase her understanding of the accounting profession.
Beverly recalls that during her accounting education there was a chapter or two regarding the environment of financial accounting and the development of GAAP. However, she remembers that her instructor placed little emphasis on these chapters.
(a) Help Beverly by identifying key organizations involved in accounting rule-making.
(b) Beverly asks for guidance regarding authoritative support. Please assist her by explaining what is meant by authoritative support.
(c) Give Beverly a historical overview of how rule-making has evolved so that she will not feel that she is the only one to be confused.
(d) What authority for compliance with GAAP has existed throughout the history of rule-making?

The following comments were made at an Annual Conference of the Financial Executives Institute (FEI). There is an irreversible movement towards the harmonization of financial reporting throughout the world. The international capital markets require an end to:
1. The confusion caused by international companies announcing different results depending on the set of accounting standards applied.
2. Companies in some countries obtaining unfair commercial advantages from the use of particular
national accounting standards.
3. The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements.
4. The inefficiency of international companies having to understand and use a myriad of different accounting standards depending on the countries in which they operate and the countries in which they raise capital and debt. Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them.
5. The inefficiency of investment managers, bankers, and financial analysts as they seek to compare financial reporting drawn up in accordance with different sets of accounting standards.
(a) What is the International Accounting Standards Board?
(b) What stakeholders might benefit from the use of International Accounting Standards?
(c) What do you believe are some of the major obstacles to harmonization?

As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the FASB’s Statement of Financial Accounting Concepts No. 1 (CON 1). Instructions
Access the FASB Statements of Financial Accounting Concepts at the FASB website ( HYPERLINK "www.fasb.org" www.fasb.org) and respond to the following items. (Provide paragraph citations.) When you have accessed the documents, you can search them using the search tool in your Internet browser.
(a) Find Statement of Financial Accounting Concepts No. 1. List the ways to access it on the FASB site.
(b) According to CON 1, “. . . financial reporting includes not only financial statements but also other means of communicating information.” What other means are there of communicating information?
(c) According to CON 1, “. . . many people base economic decisions on their relationships to and knowledge about business enterprises and thus are potentially interested in the information provided by financial reporting.” Indicate some of the users and the information they are most directly concerned with in economic decision making.

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

What are the primary objectives of financial reporting as indicated in Statement of Financial Accounting Concepts No. 1?

What is meant by the term “qualitative characteristics of accounting information”?

Briefly describe the two primary qualities of useful accounting information.

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

What is the distinction between comparability and consistency?

Why is it necessary to develop a definitional framework for the basic elements of accounting?

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Revenues, gains, and investments by owners are all increases in net assets. What are the distinctions among them?

What are the four basic assumptions that underlie the financial accounting structure?

The life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period.
(a) This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption.
(b) What has been the effect of this practice on accounting? What is its relation to the accrual system? What influence has it had on accounting entries and methodology?

What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?

The chairman of the board of directors of the company for which you are chief accountant has told you that he has little use for accounting figures based on cost. He believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on cost.

When revenue is generally recognized? Why has that date been chosen as the point at which to recognize the revenue resulting from the entire producing and selling process?

Magnus Eatery operates a catering service specializing in business luncheons for large corporations. Magnus requires customers to place their orders 2 weeks in advance of the scheduled events. Magnus bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Magnus recognize revenue related to its catering service?

What is the difference between realized and realizable? Give an example of where the concept of realizable is used to recognize revenue.

What is the justification for the following deviations from recognizing revenue at the time of sale?
(a) Installment sales method of recognizing revenue.
(b) Recognition of revenue at completion of production for certain agricultural products.
(c) The percentage-of-completion basis in long-term construction contracts.

Jane Hull Company paid $135,000 for a machine in 2005. The Accumulated Depreciation account has a balance of $46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a “right to this gain.” What does the president mean by this statement? Do you agree?

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the matching principle. Indicate the basic nature of each of these types of expenses and give two examples of each.