Test Bank-Ch01 PDF

Accounting Theory and Analysis
11th Edition
Test Bank
By
Richard G. Schroeder
University of North Carolina at Charlotte
Myrtle W. Clark
University of Kentucky
Jack M. Cathey
University of North Carolina at Charlotte
Financial Accounting Theory & Analysis: Text and Cases

Test Bank, Chapter 1 Page 1
Chapter 1
Multiple Choice:
1. Which of the following bodies has the ultimate authority to issue accounting
pronouncements in the United States?
a. Securities and Exchange Commission
b. Financial Accounting Standards Board
c. International Accounting Standards Committee
d. Internal Revenue Service
Answer b
2. Who has been given credit or developing the double-entry system of

bookkeeping?
a. Francis Wheat
b. Fra Luca Pacioli
c. A. C. Littleton
d. William Paton
Answer b
3. Which of the following is the professional organization of university accounting

professors?
a. American Accounting Association
b. American Institute of Certified Public Accountants
c. American Institute of Accountants
d. Financial Executives Institute
Answer a
4. Which of the following is a public sector accounting standard setter?

a. FASB
b. SEC
c. APB
d. CAP
Answer a
5. Which of the following types of pronouncements now establishes generally

accepted accounting principles?
a. Statements of Concepts
b. Statements of Financial Accounting Standards
c. APB Opinions
d. Accounting Standards Updates
Answer d

6. Which of the following types of pronouncements are intended to establish the
objectives and concepts that the FASB will use in developing standards of
financial accounting and reporting?
a. Statements of Concepts
b. Statements of Financial Accounting Standards
c. APB Opinions
d. Accounting Standards Updates
Answer a
7. Which of the following is not a consequence of the standards overload problem to

small businesses?
a. If a small business omits a GAAP requirement from audited financial statements, a

qualified or adverse opinion may be rendered.
b. Small businesses do not need to keep financial records
c. The cost of complying with GAAP requirements may cause a small business to forgo
the development of other, more relevant information.
d. Small CPA firms that audit smaller companies must keep up to date on all the same
requirements as large international firms, but they cannot afford the specialists that
are available on a centralized basis in the large firms.
Answer b
8. Some accountants maintain that accounting standards are as much a product of

political action as they are of careful logic or empirical findings. This belief is an
example of the concept of
a. Standard setting as a political process
b. Standards overload
c. Economic consequences
d. The role of ethics in accounting
Answer a
9. The impact of accounting reports on various segments of our economic society is

the definition of the concept of
a. Standard setting as apolitical process
c. Economic consequences
d. The role of ethics in accounting
Answer c
10. Which of the following is a source of nonauthoritative accounting guidance and

literature?
a. Financial Accounting Standards Board Statements
b. Financial Accounting Standards Board Interpretations
c. Financial Accounting Standards Board Technical Bulletins
d. Practices that are widely recognized and prevalent either generally or in the industry
Answer d

11. Which of the following companies was involved in an accounting failure that
caused the public accounting firm Arthur Andersen to gout of business?
a. Goldman Sachs
b. Wachovia
c. Enron
d. AIG
Answer c
Essay
1. What is the difference between normative and positive theory?
Normative theories explain what should be, whereas positive theories explain what is.
Ideally, there should be no such distinction, because a well-developed and complete
theory encompasses both what should be and what is.
2. Why is the development of a general theory of accounting important
The development of a general theory of accounting is important because of the role

accounting plays in our economic society. We live in a capitalistic society, which is
characterized by a self-regulated market that operates through the forces of supply and
demand. Goods and services are available for purchase in markets, and individuals are
free to enter or exit the market to pursue their economic goals. All societies are
constrained by scarce resources that limit the attainment of all individual or group
economic goals. In our society, the role of accounting is to report how organizations use
scarce resources and to report on the status of resources and claims to resources.
3. What were the four types of pronouncements originally issued by the FASB prior
to the adoption of the FASB ASC?
1. Statements of Financial Accounting Concepts (SFACs) and conveyed required

accounting methods and procedures for specific accounting issues and officially
created GAAP.
2. Interpretations were modifications or extensions of issues pronouncements. SFACs
are intended to establish the objectives and concepts that the FASB will use in
developing standards of financial accounting and reporting. To date, the FASB has
issued seven
3. Statements of Financial Accounting Standards which differed from Statements of
Financial Accounting Concepts in that they did not establish GAAP. Similarly, they
were not intended to invoke Rule 203 of the Rules of Conduct of the Code of
Professional Ethics. It is anticipated that the major beneficiary of these SFACs will be
the FASB itself. However, knowledge of the objectives and concepts the board uses
should enable financial statement users to better understand the content and
limitations of financial accounting information.

4. Technical Bulletins were strictly interpretive in nature and did not establish new
standards or amend existing standards. They were intended to provide guidance on
financial accounting and reporting problems on a timely basis.
4. Define the following terms

a. Economic consequences
Economic consequences refers to the impact of accounting reports on various segments
of our economic society.
Over the years, the FASB, the SEC, and the AICPA have been criticized for imposing
too many accounting standards on the business community. This standards overload
problem has been particularly burdensome for small businesses that do not have the
economic resources to research and apply all the pronouncements issued by these
authoritative bodies.
5. Discuss the objectives of the International Accounting Standards Board.

The International Accounting Standards Board is an independent private-sector body
that was formed in 1973 to achieve this purpose. Its objectives are:
1. To formulate and publish in the public interest accounting standards to be observed
in the presentation of financial statements and to promote their worldwide
acceptance and observance;
2. To work generally for the improvement and harmonization of regulations, accounting
standards, and procedures relating to the presentation of financial statements.


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Accounting Theory and Analysis

Financial Accounting Theory & Analysis: Text and Cases

2. Who has been given credit or developing the double-entry system of

3. Which of the following is the professional organization of university accounting

4. Which of the following is a public sector accounting standard setter?

5. Which of the following types of pronouncements now establishes generally

Financial Accounting Theory & Analysis: Text and Cases

7. Which of the following is not a consequence of the standards overload problem to

a. If a small business omits a GAAP requirement from audited financial statements, a

8. Some accountants maintain that accounting standards are as much a product of

9. The impact of accounting reports on various segments of our economic society is

10. Which of the following is a source of nonauthoritative accounting guidance and

Financial Accounting Theory & Analysis: Text and Cases

1. What is the difference between normative and positive theory?

2. Why is the development of a general theory of accounting important

The development of a general theory of accounting is important because of the role

1. Statements of Financial Accounting Concepts (SFACs) and conveyed required

Financial Accounting Theory & Analysis: Text and Cases

4. Define the following terms

5. Discuss the objectives of the International Accounting Standards Board.

Financial Accounting Theory & Analysis: Text and Cases

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