US GAAP Concepts & Framework

Correct answer: A. Consider Codification guidance for similar or related transactions and apply it by analogy

ASC 105 establishes the Codification as the sole source of authoritative U.S. GAAP for nongovernmental entities, and when a transaction is not specifically addressed, standard practice under the Codification's own framework directs preparers to first look at Codification guidance for similar or related transactions and apply it by analogy, before turning to any non-authoritative source. IFRS, academic writing, or other professional literature may only be considered as non-authoritative help after Codification analogy has been exhausted, and even then it is not adopted directly as GAAP, which is why treating IFRS as automatically authoritative is wrong. Deferring entirely to the auditor's recommendation without the entity performing its own analysis does not represent applying the accounting hierarchy and risks reaching a conclusion nobody can support with Codification reasoning. Materiality is a separate judgment made once an appropriate accounting policy has been identified; it is not a shortcut for skipping the analysis altogether or omitting disclosure by default.

Source: FASB Accounting Standards Codification: ASC 105-10, Generally Accepted Accounting Principles — Overall

Correct answer: A. Completeness, neutrality, and freedom from material error

SFAC 8 defines faithful representation as requiring information to be complete, meaning it includes everything a user needs to understand the phenomenon depicted; neutral, meaning free from bias in its selection or presentation; and free from material error, meaning as accurate as can reasonably be achieved, which together make the first option correct. Predictive value and confirmatory value are instead the two components that make information relevant, the other fundamental characteristic, not faithful representation, so pairing them with faithful representation describes the wrong concept despite sounding similarly foundational. Comparability and timeliness are enhancing qualitative characteristics under SFAC 8, meaning they improve the usefulness of information that is already relevant and faithfully represented, but they are not themselves components of faithful representation. Materiality is an entity-specific aspect of relevance rather than of faithful representation, and conservatism is not one of the qualitative characteristics named in SFAC 8's current framework, so the fourth option mixes concepts that do not belong together.

Source: FASB Statement of Financial Accounting Concepts No. 8 (SFAC 8), Chapter 3 — Qualitative Characteristics of Useful Financial Information

Correct answer: A. Management

ASC 205-40 places the going concern evaluation duty on management, requiring an assessment at each annual and interim reporting period of whether known or reasonably knowable conditions and events, considered in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued, or available to be issued for entities that do not file with a regulator. Auditors separately perform their own going-concern evaluation under auditing standards and report on management's conclusion and disclosures, but that auditing requirement sits on top of management's ASC 205-40 duty rather than replacing it, which is why attributing the evaluation to the auditor alone is incorrect. The audit committee oversees financial reporting and the audit process but is not the party the accounting standard assigns to perform the evaluation itself. The SEC is a regulator that reviews filings after they are made public, not the party responsible for making the going concern assessment at the reporting date.

Source: FASB Accounting Standards Codification: ASC 205-40, Presentation of Financial Statements — Going Concern

Correct answer: B. As an error correction, requiring restatement of the prior-period financial statements

ASC 250 distinguishes error corrections, which fix mistakes such as mathematical errors, data-entry mistakes, or misapplication of GAAP that existed in previously issued statements, from changes in accounting estimate or changes in accounting principle. Because the useful life used was simply wrong due to a data-entry error rather than a genuine reassessment of the asset's expected life, this qualifies as an error, and ASC 250 requires restating the prior-period financial statements to correct it, making the second option correct. The first option misclassifies a data-entry mistake as a legitimate re-estimate, which would only apply if new information had genuinely changed management's judgment about the asset's useful life going forward, not if the original figure was simply keyed in incorrectly. The third option confuses this with a voluntary or mandated change in accounting principle, which is corrected through retrospective application, a mechanism reserved for switching between acceptable methods, such as FIFO to weighted-average, not for fixing mistakes. The fourth option understates the requirement, because disclosure alone is insufficient when the underlying reported numbers were factually wrong and must actually be corrected.

Source: FASB Accounting Standards Codification: ASC 250, Accounting Changes and Error Corrections