FINANCIAL ACCOUNTING RESEARCH
TEST BANK, Chapter 10
Multiple Choice
Choose the best answer for each of the following questions:
1. Deferred tax assets represent:
a. future deductions.
b. contingent assets.
c. future includable income.
d. unearned revenue.
Answer: a
Rationale:
Deferred tax assets represent future tax deductions that a company expects to realize as a
result of temporary differences between accounting and tax rules, such as expenses
recognized for financial reporting purposes but not yet deductible for tax purposes.
2. In the United States, GAAP comes under the purview of the:
a. Financial Accounting Standards Board (FASB).
b. IRS.
c. Securities and Exchange Commission (SEC).
d. All of the above.
Answer: a
Rationale:
Generally Accepted Accounting Principles (GAAP) in the United States are developed and
maintained by the Financial Accounting Standards Board (FASB), which establishes
standards for financial reporting by public and private companies.
3. Which of the following are goals of the International Accounting Standards Board (IASB)?
a. To develop a single set of high quality, understandable and enforceable international
financial reporting standards.
b. To create a single source of U.S. GAAP for private companies.
c. To bring about convergence of national accounting standards and IFRS.
d. Only (a) and (c).
e. Only (a) and (b).
Answer: d
Rationale:
The primary goals of the International Accounting Standards Board (IASB) are to develop a
single set of high-quality, understandable, and enforceable international financial reporting
standards (IFRS) and to promote convergence between national accounting standards and
IFRS.
4. The main advantage of the Accounting Standards Codification (ASC) is:
a. convergence of national accounting standards and IFRS.
b. a shift from national accounting to international accounting.
c. a shift from a standards-based model of organization to one based on topical area.
d. all of the above.
Answer: c
Rationale:
The main advantage of the Accounting Standards Codification (ASC) is the shift from a
standards-based model of organization to one based on topical area. This reorganization
makes it easier for users to navigate and access relevant accounting guidance.
5. Which of the following represents the correct Codification structure?
a. Sections-Subsections-Topics-Subtopics.
b. Topics-Subtopics-Sections-Subsections.
c. Code Sections and FASB Topics.
d. None of the above.
Answer: b
Rationale:
The correct Codification structure is Topics-Subtopics-Sections-Subsections. Topics are
broad subject areas, Subtopics provide more specific guidance within Topics, Sections
contain the actual authoritative guidance, and Subsections further categorize the content
within Sections.
6. Which statement is CORRECT regarding the SEC?
a. It has standards-setting authority over public companies.
b. It is authorized to oversee the functioning of U.S. capital markets.
c. It has issued a number of forms of guidance on accounting principles.
d. All of the above.
Answer: d
Rationale:
The Securities and Exchange Commission (SEC) has standards-setting authority over public
companies, it oversees the functioning of U.S. capital markets, and it has issued various
forms of guidance on accounting principles through its pronouncements and regulations.
7. Which of the following International Accounting Standards deals with accounting for
income taxes?
a. IAS 29
b. ASC 740
c. SFAS 109
d. IAS 12
Answer: d
Rationale:
International Accounting Standard (IAS) 12, "Income Taxes," deals with the accounting
treatment for income taxes and provides guidance on the recognition, measurement,
presentation, and disclosure of income tax-related matters in financial statements.
8. To assist with citation of the Accounting Standards Codification, the FASB created a
numerical system that uses which of the following formats?
a. Topics that track Code section numbers.
b. Standards with heading numbers based on release date.
c. Topics identified by a three-digit number between 105-999.
d. None of the above.
Answer: c
Rationale:
The FASB created a numerical system for the Accounting Standards Codification (ASC) in
which Topics are identified by a three-digit number between 105-999. This system facilitates
the citation and reference of specific accounting standards within the Codification.
9. Most research using the Codification is expected to be performed using the:
a. Browse function
b. Search function
c. Go To function
d. Find function
Answer: a
Rationale:
The Browse function is typically the preferred method for conducting research within the
Accounting Standards Codification (ASC). It allows users to navigate through the
Codification's hierarchical structure to locate relevant accounting guidance efficiently.
10. Which of the following statements is CORRECT regarding the FASB Accounting
Standards Codification Research System (CRS)?
a. Subsections represent a collection of related guidance for a specific area.
b. A no-cost basic version is available that allows the user to Browse but not search the
Codification.
c. Keyword searching is not available in the Codification Research System.
d. No cross-referencing to older guidance documents is provided.
Answer: b
Rationale:
The correct statement regarding the FASB Accounting Standards Codification Research
System (CRS) is that a no-cost basic version is available, allowing users to Browse but not
search the Codification. This basic version provides access to the hierarchical structure of the
Codification for navigation purposes.
11. While browsing through Codification structure, all of the two-digit subtopics and threedigit intersection topics are displayed on the:
a. subsection page.
b. general topic landing page.
c. search screen.
d. none of the above.
Answer: b
Rationale:
When browsing through the Codification structure, all of the two-digit subtopics and threedigit intersection topics are displayed on the general topic landing page. This page provides
an overview of the topics and subtopics within a particular area, allowing users to navigate to
specific sections of interest.
12. Which of the following functions provides a printer-friendly version of a document in the
Codification Research System (CRS)?
a. Find function.
b. Go To function.
c. Search function.
d. Page function.
Answer: d
Rationale:
The Page function in the Codification Research System (CRS) provides a printer-friendly
version of a document. This function allows users to view and print the content of a
document in a format suitable for printing or saving for reference.
13. The Go To function works in a similar fashion to a:
a. Cross-reference function.
b. Browse function in a typical tax service.
c. Join Sections function in FASB Accounting Standards CRS.
d. Search by citation in a typical tax service.
Answer: d
Rationale:
The Go To function in the Codification Research System (CRS) works similarly to a search
by citation function in a typical tax service. It allows users to navigate directly to a specific
section or topic within the Codification by entering a citation or reference.
14. Which of the following is an AICPA copyrighted standard?
a. Statements of Financial Accounting Standards
b. Derivatives (Statement 133) Implementation Issues
c. Accounting Research Bulletins
d. EITF Abstracts
Answer: c
Rationale:
Accounting Research Bulletins are copyrighted standards issued by the American Institute of
Certified Public Accountants (AICPA). These bulletins provide guidance on various
accounting topics and are considered authoritative sources of accounting principles.
15. Which of the following is a correct ASC citation?
a. ACS Statement 133.
b. ACS 740-270-25-1.
c. IAS 12.
d. SFAS 109.
Answer: b
Rationale:
The correct ASC citation format includes the Topic, Subtopic, Section, and Paragraph
numbers. Therefore, "ACS 740-270-25-1" is a correct ASC citation.
16. A position taken in a previously filed return or expected to be taken in a future return is
known as:
a. an audit position.
b. a tax position.
c. an uncertain tax position.
d. none of the above.
Answer: b
Rationale:
A position taken in a previously filed return or expected to be taken in a future return is
referred to as a tax position. This encompasses the reporting of items on tax returns and the
related tax treatment applied to those items.
17. Changes to guidance in the Codification are now made through:
a. Accounting Standards Updates.
b. XBRL Elements.
c. issuance of a new Statement of Position.
d. all of the above.
Answer: a
Rationale:
Changes to guidance in the Codification are now made through Accounting Standards
Updates (ASUs), which are issued by the Financial Accounting Standards Board (FASB) to
amend or update the content of the Codification.
18. Accounting Research Manager, an online database to provide accounting, auditing, and
other SEC authoritative literature, is a product of:
a. RIA
b. WG&L
c. CCH
d. Westlaw
Answer: c
Rationale:
Accounting Research Manager is an online database providing accounting, auditing, and
SEC authoritative literature. It is a product of CCH, a leading provider of tax and accounting
information and solutions.
19. Which statement is CORRECT regarding accounting for income taxes in a financial
statement?
a. The income tax provision only includes the taxes paid for that reporting period.
b. Items of income and expense are treated the same for book and tax purposes as reflected
in the financial statement.
c. Accounting for income taxes does not incorporate the deferred tax model.
d. Accounting for income taxes must reflect the differences between financial statement and
tax return reporting.
Answer: d
Rationale:
Accounting for income taxes in financial statements must reflect the differences between
financial statement and tax return reporting. This includes recognizing current and deferred
income tax provisions to account for temporary differences between book and tax income.
20. A wide variety of materials and analysis on accounting topics is provided by LexisNexis
through its:
a. LexisNexis Tax Center
b. Financial Reporting Manager.
c. Accounting Research Manager.
d. CRS.
Answer: a
Rationale:
LexisNexis provides a wide variety of materials and analysis on accounting topics through
its LexisNexis Tax Center. This resource offers comprehensive information and insights to
professionals in the accounting and finance fields, aiding them in research and decisionmaking processes.
21. Which of the following statements is INCORRECT regarding the International Financial
Reporting Standards (IFRS)?
a. The standards are promulgated by the International Accounting Standards Board.
b. IFRS takes into account the financial reporting needs of emerging economies and small
and medium-sized entities.
c. The U.S. has adopted IFRS, and U.S. companies are now subject to the international
standards.
d. All of the above statements are correct.
Answer: c
Rationale:
The statement that the U.S. has adopted IFRS, and U.S. companies are now subject to the
international standards, is incorrect. As of the current state, the U.S. has not fully adopted
IFRS. While there have been efforts to converge U.S. GAAP with IFRS, the Financial
Accounting Standards Board (FASB) and the International Accounting Standards Board
(IASB) have not yet fully aligned their standards. U.S. companies are still primarily subject
to U.S. GAAP, although some multinational corporations may voluntarily use IFRS for their
financial reporting outside the United States.
True or False
Indicate which of the following statements are true or false by circling the correct
answer.
1. Under both U.S. GAAP and IAS, the amount of tax expense reflected in the financial
statements is made up of both current and deferred components.
Answer: True
Rationale:
Both U.S. Generally Accepted Accounting Principles (GAAP) and International Accounting
Standards (IAS) require the recognition of both current and deferred tax expenses in financial
statements. Current tax expense represents taxes payable for the current reporting period,
while deferred tax expense reflects changes in deferred tax assets and liabilities arising from
temporary differences between tax and accounting rules.
2. The deferred tax model of taxes applies to all Federal, state, foreign and local taxes based
on income.
Answer: True
Rationale:
The deferred tax model of taxes applies to all types of taxes, including Federal, state, foreign,
and local taxes based on income. This model accounts for the timing differences between
when income or expenses are recognized for financial reporting purposes and when they are
recognized for tax purposes, resulting in the recognition of deferred tax assets and liabilities.
3. Generally, non-income taxes are recognized in the financial statements in the period in
which they are paid.
Answer: False
Rationale:
Generally non-income taxes are recognized in financial statements in the period those costs
are incurred.
4. Prior to the 1970s, accounting standards were promulgated by groups formed under the
umbrella of the American Institute of Certified Public Accountants (AICPA).
Answer: True
Rationale:
Before the 1970s, accounting standards in the United States were primarily developed and
promulgated by various committees and groups operating under the oversight of the
American Institute of Certified Public Accountants (AICPA). These groups, such as the
Committee on Accounting Procedure (CAP) and later the Accounting Principles Board
(APB), were responsible for issuing accounting standards and guidance.
5. The International Accounting Standards Board (IASB) was formed to deal with the
proliferation of country- or jurisdiction-specific accounting principles.
Answer: True
Rationale:
The formation of the International Accounting Standards Board (IASB) was indeed
prompted by the need to address the challenges posed by the proliferation of country- or
jurisdiction-specific accounting principles and standards. The IASB was established to
develop a single set of high-quality international financial reporting standards (IFRS) that
could be adopted globally, promoting consistency, comparability, and transparency in
financial reporting across borders.
6. The Codification does not include material issued by the SEC applicable to public
companies.
Answer: False
Rationale:
The Codification includes a substantial amount of material issued by the SEC applicable to
public companies.
7. Using the Codification Research System (CRS), a researcher can join Sections to create a
Table of Contents for a particular industry.
Answer: True
Rationale:
In the Codification Research System (CRS), users can join Sections to create a customized
Table of Contents tailored to a specific industry or topic of interest. This functionality allows
researchers to compile relevant accounting guidance from different sections of the
Codification into a single, organized document for easy reference and analysis.
8. The main difference between U.S. GAAP and IFRS is that IFRS is much lengthier, with
over 25,000 pages.
Answer: False
Rationale:
The main difference between U.S. GAAP and IFRS is that U.S. GAAP is much lengthier,
with over 25,000 pages. IFRS is about 2,500 pages or 10 percent of the length of U.S. GAAP.
9. The FASB Codification ‘Join Sections’ allows the related sections of a topic to be joined
into a single document so that the guidance across all sections within a topic can be reviewed
at the same time.
Answer: True
Rationale:
The 'Join Sections' feature in the FASB Codification enables users to consolidate related
sections of a topic into a single document. This functionality allows researchers to review all
relevant guidance within a topic simultaneously, facilitating a comprehensive understanding
of the accounting standards and principles applicable to that specific area.
10. The Codification system provides a cross-referencing system that allows researchers to
locate guidance in the Codification using the old guidance or to find the old guidance using
the new Codification reference.
Answer: True
Rationale:
The Codification system includes a cross-referencing feature that allows researchers to locate
guidance by referencing either the old accounting standards or the new Codification
reference. This feature ensures continuity and ease of transition between the previous
accounting standards and the updated Codification, enabling users to access relevant
information seamlessly.
11. Accounting Statements of Position are FASB Pronouncements.
Answer: False
Rationale:
Accounting Statements of Position are AICPA copyrighted standards.
12. ASC 740 requires taxpayers to examine each and every ‘tax position’ taken.
Answer: True
Rationale:
ASC 740, also known as Accounting for Income Taxes, requires taxpayers to evaluate each
tax position taken on their tax returns. Taxpayers must assess the likelihood of sustaining
their positions upon examination by tax authorities and must disclose uncertain tax positions
that do not meet a minimum threshold for recognition. This requirement ensures that
taxpayers appropriately account for and disclose the potential tax implications of their
positions in their financial statements.
13. Accounting Research Manager (ARM) is part of the Codification Research System (CRS)
offering access to accounting, auditing, governmental and SEC authoritative literature.
Answer: False
Rationale:
Accounting Research Manager is not part of the CRS. It is offered by CCH.
14. The application of ACS 740 to an uncertain tax position requires that a tax benefit be
recognized only when it is “more likely than not” to be sustained on the merits.
Answer: True
Rationale:
According to ASC 740, when evaluating uncertain tax positions, a tax benefit should be
recognized in the financial statements only if it is more likely than not that the position will
be sustained upon examination by the taxing authorities based on its technical merits. This
"more likely than not" threshold represents a probability of greater than 50%, indicating a
higher likelihood of the position being upheld. This requirement ensures that tax benefits are
recognized in a manner consistent with the likelihood of their realization, enhancing the
transparency and reliability of financial reporting.
15. Exposure drafts issued for proposed updates of accounting standards in the Codification
are indexed alphabetically.
Answer: False
Rationale:
Exposure drafts issued for proposed updates of accounting standards in the Codification are
indexed numerically.
Short Answers
1. What are the principal objectives of the International Accounting Standards Board (IASB)?
Answer: The principal objectives of the International Accounting Standards Board (IASB)
are:
•
to develop a single set of high quality, understandable, enforceable and globally
accepted International Financial Reporting Standards (IFRS);
•
to promote the use and rigorous application of those standards;
•
to take account of the financial reporting needs of emerging economies and small and
medium-sized entities (SMEs); and
•
to bring about convergence of national accounting standards and IFRS with high
quality solutions.
2. How is the Codification Research System’s “Join Sections” function useful to tax
researchers? Give an example of how it works.
Answer: The Codification Research System’s “Join Sections” function is useful to tax
researchers because it allows the related sections of a topic to be joined into a single
document so that the guidance across all sections within a topic can be reviewed at the same
time. For example, if a review of all the disclosure requirements for Topic 740, Income
Taxes, was desired, a researcher could select Topic 740 and Section 50 (Disclosure) and the
system would generate a list of all the sections of disclosure available within Topic 740. The
desired sections can then be selected and joined into a single document. Drop-down menus
are available when selecting topic and section.
3. Even with the Codification, the “Financial Accounting Standards Board (FASB) is not the
only standard setting authority in the United Sates.” Explain.
Answer: The Financial Accounting Standards Board (FASB) is not the only standard setting
authority in the United Sates. While it is the single source of authoritative U.S. GAAP for
private companies, the SEC has authority over public companies. For companies registered
with the U.S. Securities and Exchange Commission (SEC), the SEC has the primary
standard-setting authority, although it continues to rely on the private standard setters. The
SEC has issued a number of its own guidance pronouncements, such as Regulation S-X, Staff
Accounting Bulletins and others documents which impact public company accounting
standards. A portion of the SEC guidance is available in the ASC as supplemental material.
Essay Question
4. Explain the basic principles of accounting for deferred taxes.
Answer: Many items of income and expense are not treated the same for financial statement
or ‘book’ purposes as they are for tax purposes. Intuitively, one might assume that a company
would account for income taxes on an ‘as paid’ basis, reflecting the amount of income tax
liability actually owed to all jurisdictions for a particular period of time. However, such an
income tax number would not meaningfully reflect the income tax expense associated with
the pre-tax income presented on the financial statements.
A corporation’s financial statements must follow the matching principle in which the
expenses related to earning income are reported in the same period as the income, without
regard to when the expenses are actually paid. Therefore, under both U.S. GAAP and the
IAS, the amount of tax expense reflected in a financial statement is made up of both current
and deferred components. While the current tax expense theoretically represents the taxes
actually payable to (or a refund receivable from) the government, the deferred tax expense (or
benefit) represents the future tax cost (or savings) connected with income reported in the
current-period financial statements. Differences between the book and tax basis of items
affecting income tax are recorded as deferred tax assets (representing future deductions) or
deferred tax liabilities (representing future includable income). Consequently, tax
professionals need to be capable of identifying not only the tax treatment of income and
expense items but also the financial statement treatment for those items.
5. What is meant by “tax position”? Explain the requirements of ASC 740 for the reporting of
tax positions.
Answer: A “tax position” is defined as a position taken in a previously filed return or
expected to be taken in a future return. Transactions that create deferred tax assets and
liabilities are tax positions. Transactions that create permanent book/tax differences (or no
differences at all) also are tax positions.
ASC 740 requires taxpayers to examine each and every ‘tax position’ to determine the proper
treatment in the financial statement. Under ACS 740, tax benefits may be recognized in
financial statements only when it is determined that it is ‘more likely than not’ that the tax
position will be sustained on its technical merits or when the position is ultimately settled via
an audit, negotiation, or a court decision. ASC 740 also requires that the taxpayer distinguish
between ‘highly certain’ and ‘uncertain’ positions. In determining whether this threshold is
met, taxpayers must assume that the tax position will be examined (audited) by the taxing
authorities. Ultimately, the conclusion regarding the financial statement recognition takes into
account the tax law technical merits, facts, and circumstances of the position.
6. “A sound understanding of financial accounting is essential for tax professionals.”
Answer: For businesses that are required to prepare financial statements in accordance with
U.S. Generally Accepted Accounting Principles (GAAP) or International Accounting
Standards (IAS), the computation of income tax expense requires expertise in accounting for
income taxes under these standards. Increasingly, tax professionals are finding that an
understanding of financial accounting for income taxes is a required competency.
The likelihood of a tax professional being ask to prepare, review, or audit the income tax
‘provision’ reflected in the balance sheet, income statement, and footnotes of financial
statements has grown substantially since the passage of the Sarbanes-Oxley Act. Simply put,
it is no longer enough to understand tax planning and compliance without also gaining a
deeper understanding of accounting for income taxes under the financial reporting guidance
framework applicable to businesses both in the United States and abroad.
It is important that the differences between financial statement reporting and tax return
reporting be identified and reflected properly in the income tax provision. Consequently, tax
professionals need an understanding of how to research not only the tax law but also how to
research financial accounting rules related to businesses.
Test Bank for Federal Tax Research
Roby B. Sawyers, Steven Gill, Debra Sanders, William A. Raabe, Gerald E. Whittenburg
9781111221645, 9781337282987, 9781285439396
