1. d. Correct. Accounting information is the feedback loop allowing decision makers to evaluate past investments. Whether it is a manager, an investor or the economy as a whole, feedback is needed in the form of accounting information to measure performance against a predetermined goal or expectation. . Answers a., b., and c. are all important items but not the best answer to the question.

2. b. Correct. The concept of reliability is defined in a. Consistency is defined in c.

3. a., b., and c. are not the best answer. Answer d is correct. See pages 23 and 24 in the Case Reading.

4. b. Correct. The Securities Acts of 1933 and 1934 brought a high level of regulation to the issuance and trading of securities. Among these regulations is the audit by a certified public accountant. CPA’s have developed an extensive body of principles (GAAP) designed to provide investors with financial information that can be used to make rational investment decisions. Thus GAAP is not the product of a specific act of Congress but indirectly the aforementioned acts combined with the implementation of security laws provided the accounting profession with an impetus to create GAAP.

5.d. Correct.

6. a. Correct. This is the only choice that follows the revenue recognition principle.

7. a. Correct. Answer a. is the only one that does NOT follow the entity concept. The other three are cases of a proper application of the entity concept.

8. a. Correct. The historical cost principle may be less informative at times but the accounting profession has deemed it wise to reference the values of assets to the original exchange price paid at the time of purchase less any systematic depreciation. b is not correct because the carrying value of a liability would always reflect payments made to satisfy the debt. Answer c. is not correct because it violates the fact that historical cost is fixed at the date of purchase; never at any other time.

9. b. Correct. Generally accepted accounting principles are required to be applied to all companies and their financial statements that carry the opinion of a certified public accountant. However, the accounting profession recognizes that the cost of applying GAAP may be too costly in small transactions. If the recording does not cause misleading inferences, it is OK to record a transaction in a way that varies from GAAP. For example, a wastebasket for an office might cost $10 and be expected to be used for ten years. GAAP would mean accounting for the wastebasket by keeping it on the balance sheet for ten years. The amount reported would be its historical cost less the $1 per year depreciation. Materiality states that this small amount is not likely to mislead the reader of financial statements if the waste basket is simply expensed off in the year it was purchased so that accounting for it another nine years in not necessary.

10. d. Correct. For both the decision making by management and then assessment by investors, it is important that financial statements be issued on a periodic basis. For internal purposes, it is quite common for a company to prepare financial statements on a monthly basis. Quarterly and annual financial statements are required of publicly held companies. So if the fiscal year starts on July 1 2002, it will end on June 30, 2003 and financial statements for that period and as of that date will be issued to shareholders.