Question 1

Financial engineering
Explain the practice of financial engineering and how it relates to fraudulent financial reporting.

Accepted Answer

Financial engineering is a process whereby a business arrangement or transaction is structured legally such that it meets the company's financial reporting objective within GAAP. This is often done by using complex legal arrangements and financial instruments. This produces a transaction or item that may have the form of one kind of transaction or item when the substance is something different. Enron was involved in many transactions of this type. Since the substance of these arrangements is to obscure the real nature of the transactions or items involved, they are potentially fraudulent.

Question 2

Which of the following best describes why a conceptual framework is necessary?

Accepted Answer

A)   to build all standards and rules upon a common foundation and increase financial statement users' understanding and confidence
B)   to make financial statement preparation an automated process requiring no human intervention
C)   to completely eliminate the potential for companies to exercise professional judgement in preparation of financial information
D)   to decrease the comparability of different companies' financial statements A

Question 3

Gains are defined as

Accepted Answer

A)   increases in economic resources resulting from an entity's ordinary activities.
B)   decreases in economic resources resulting from an entity's ordinary activities.
C)   the residual interest remaining after liabilities are deducted from assets.
D)   increases in equity resulting from an entity's peripheral or incidental transactions. D

Question 4

Application of the full disclosure principle

Accepted Answer

A)   is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
B)   is violated when important financial information is buried in the notes to the financial statements.
C)   is demonstrated by the inclusion of information such as contingencies.
D)   requires that the financial statements be consistent and comparable.

Question 5

Matching concept
A concept is a group of related ideas. Matching could be considered a concept because it includes ideas related to both revenue recognition and expense recognition. Briefly explain the theory behind
a) revenue recognition and
b) expense recognition.

Accepted Answer

The answer of Matching concept
A concept is a group of...

Question 6

Valuing assets at their liquidation values rather than their cost is inconsistent with the

Accepted Answer

A)   periodicity assumption.
B)   historical cost principle.
C)   matching principle.
D)   economic entity assumption.

Question 7

Accounting terminology - fill in the blanks
Fill in the blanks below with the accounting term(s) that best completes each sentence.
1. A soundly developed conceptual framework is a ______ set of standards and rules. ______ and ______ are the fundamental qualitative characteristics that make accounting information useful for decision making.
2. Enhancing qualitative characteristics are ______, ______, ______ and ______.
3. Liabilities have three essential characteristics:
 1. They reprecent a_________,2. the entity has a_______________,and 3.______________ 
4. While consolidated financial statements are prepared from the perspective of the ______, taxes are paid from the perspective of the ______.
5. Collectibility is one of the three conditions of the revenue recognition principle. Assuming the other two conditions are met, revenue should only be recognized if collectibility is ______.
6. The ______ stipulates that anything that is relevant to decisions should be included in the financial statements.
7. A company's Management Discussion and Analysis (MD&A) is an example of ______.
8. A ______- based approach, as used in Canadian GAAP and IFRS, is sometimes criticized for being too ______.
9. Under the ______ principle, ______ incurred during a particular period are matched with ______ earned during that same period.
10. The ______ is based on the assumption that a business enterprise will continue to operate for the foreseeable future.
11. One of the assumptions of the ______ is valuation at a particular point in time.
12. ______ is defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
13. Standard setters have given companies the option to use ______ instead of historical costs.

Accepted Answer

The answer of Accounting terminology - fill in the blanks
Fill...

Question 8

The overriding criterion by which accounting information can be judged is that of

Accepted Answer

A)   usefulness for decision making.
B)   freedom from bias.
C)   timeliness.
D)   comparability.

Question 9

Representational faithfulness includes

Accepted Answer

A)   completeness, neutrality, and comparability.
B)   neutrality, completeness, and understandability.
C)   relevance, completeness, and freedom from material error.
D)   neutrality, completeness, and freedom from material error.

Question 10

The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the

Accepted Answer

A)   economic entity assumption.
B)   monetary unit assumption.
C)   fair value principle.
D)   going concern assumption.

Question 11

Market-based measure versus entity-specific measure
Fair value is a market-based measure, as opposed to an entity-specific measure. Explain the difference between an entity-specific value and a market-based value.

Accepted Answer

The answer of Market-based measure versus entity-specific measure
Fair value is...

Question 12

Materiality refers to

Accepted Answer

A)   the tangible nature of an item.
B)   representational faithfulness.
C)   the decision-making relevance of a piece of information.
D)   None of these describe materiality.

Question 13

Current value measurement bases
Identify three current value measurement bases in the IFRS conceptual framework.

Accepted Answer

The answer of Current value measurement bases
Identify three current value...

Question 14

Financial reporting pressures caused by budgets
Explain why budgets might exert negative influence into accounting decisions. Offer some examples to illustrate where this might be the case.

Accepted Answer

The answer of Financial reporting pressures caused by budgets
Explain why...

Question 15

Which basic assumption may NOT be followed when a firm in bankruptcy reports financial results?

Accepted Answer

A)   economic entity assumption
B)   going concern assumption
C)   periodicity assumption
D)   monetary unit assumption

Question 16

Under ASPE, where there is a significant uncertainty with respect to the measurement of an item,

Accepted Answer

A)   do not record anything in the financial statements.
B)   recognize the item in the financial statements and disclose the measurement uncertainty in the notes to the financial statements.
C)   do not record anything in the financial statements but disclose the measurement uncertainty in the notes to the financial statements.
D)   record the maximum amount in the financial statements.

Question 17

Timeliness is increased by

Accepted Answer

A)   quarterly reporting.
B)   comparative financial statements.
C)   representational faithfulness.
D)   annual reporting.

Question 18

Which of the following serves as the justification for the periodic recording of depreciation expense?

Accepted Answer

A)   association of efforts (expense)  with accomplishments (revenue) 
B)   minimization of income tax liability
C)   immediate recognition of an expense
D)   systematic and rational allocation of cost over the periods benefited

Question 19

Which of the following statements regarding liabilities is true?

Accepted Answer

A)   They must arise through a contractual obligation.
B)   They may be attributable to a future transaction or event.
C)   The duty or responsibility obligates the entity.
D)   The entity often has reasonable discretion to avoid the obligation.

Question 20

You want to improve the qualitative characteristics of your firm's financial statements. Which of the following options would most likely improve the timeliness of your company's financial statements?

Accepted Answer

A)   increasing the number of disclosures
B)   changing the timing of when revenues are recognized
C)   increasing the frequency of statements from annually to quarterly
D)   decreasing the useful life of property, plant, and equipment from ten years to five

Exam 2: Conceptual Framework Underlying Financial Reporting

Financial engineering Explain the practice of financial engineering and how it relates to fraudulent financial reporting.