Generally Accepted Accounting Principles may be described as:

Generally Accepted Accounting Principles may be described as:

A. The standards used in preparing financial statements.
B. The rules used in preparing tax returns.
C. Guidelines for establishing a strong system of internal control.
D. Guidelines for keeping a business entity profitable and solvent.
A. The standards used in preparing financial statements.

GAAP governs what is included in financial statements, and to a reasonable extent, how it is presented. GAAP is concerned with what accounts are included in financial statements, their amounts, and additional information that must be disclosed but which is not included in those accounts.

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The FASB is a(n):

A. Private sector body.
B. Governmental unit.
C. International organization.
D. Group of accounting firms.
A. Private sector body.

The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.

What is the primary protection for investors against fraudulent financial reporting by corporations?

A. Criminal statutes.
B. The requirement that financial statements be audited.
C. The fact that all firms must report the same way.
D. The integrity of management.
B. The requirement that financial statements be audited.

The audit of the financial statements by independent third parties is the primary protection. The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the financial statements.
However, even the audit of financial statements is not a perfect protection as indicated by the frequency of fraud and audit failure.

What group currently writes the Generally Accepted Accounting Principles?

A. Internal Revenue Service.
B. Securities and Exchange Commission.
C. Financial Accounting Foundation.
D. Financial Accounting Standards Board.
D. Financial Accounting Standards Board.

The FASB is currently the rule-making body for GAAP. The Board has codified well over one hundred Statements of Financial Accounting Standards, and Interpretations of those standards. The FASB is a private-sector body, the third such body serving as the entity which creates GAAP for U.S. businesses. The FASB has no authority to enforce GAAP, however.

In reference to proposed accounting standards, the term “negative economic consequences” includes:

A. The cost of complying with GAAP.
B. The inability to raise capital.
C. The cost of government intervention when not in compliance with GAAP.
D. The failure of internal control systems.
B. The inability to raise capital.

A proposed standard may cause firm earnings to fall, for example when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans.
As a result, negative economic consequences become a focal point for arguments against the proposed standard.

Which of the following statements best describes the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement?

A. The emerging issues task force must approve a discussion memorandum before it is disseminated to the public.
B. The exposure draft is modified per public opinion before issuing the discussion memorandum.
C. A new statement is issued only after a majority vote by the members of the FASB.
D. A new FASB statement can be rescinded by a majority vote of the AICPA membership.
C. A new statement is issued only after a majority vote by the members of the FASB.

At least four of the seven members of the FASB must vote in favor of a proposed Statement of Financial Accounting Standards.

The purpose of financial accounting is to provide information primarily for which of the following groups?

A. Government.
B. Internal Revenue Service.
C. Financial Accounting Standards Board.
D. Investors and creditors.
D. Investors and creditors.

The purpose of financial reporting is to provide information relevant to the decision making of investors and creditors.
These individuals and firms make decisions about allocating resources across thousands of firms. Investment and credit decisions are the primary focus of financial reporting.

Choose the correct statement about GAAP.

A. GAAP are laws.
B. Only publicly traded companies must comply with GAAP.
C. It is a violation of SEC regulations for publicly traded companies to depart from GAAP.
D. Firms may not restate financial statements previously issued.
C. It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

The SEC requires that all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP.

The FASB has maintained that:

A. The interests of the reporting firms will be a primary consideration when developing new GAAP.
B. GAAP should have little or no cost of compliance.
C. New GAAP should be neutral and not favor any particular reporting objective.
D. GAAP should result in the most conservative possible financial statements.
C. New GAAP should be neutral and not favor any particular reporting objective.

One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another.

Which of the following is true regarding the comparison between managerial and financial accounting?
A. Managerial accounting is generally more precise.
B. Managerial accounting has a past focus and financial accounting has a future focus.
C. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.
D. Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.
D. Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.

Managerial accounting is for internal use, and as such, does not follow GAAP. Financial accounting is for external users and must follow GA