1-6 Accounting Principles Flashcards
What are the four accounting principles that apply when recording and reporting financial information?
Measurement Principle
Revenue Recognition Principle
Expense Recognition Principle
Full Disclosure Principle
Measurement Principle
Mixed-attribute measurement model (historical cost, fair value, fair value hierarchy)
Historical Cost
Original Exchange Price
(Verifiable)
May be subject to depreciation, depletion, or amortization
Fair Value
Price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
(Subjective)
The company must disclose the level of reliability of the estimate
Fair Value Hierarchy
The current trend is for accounting standards to allow more valuation of items on the balance sheet at fair value than historical cost
Revenue Recognition Principle
Begins with a contract between the seller and the customer where the seller makes a contractual promise to transfer goods or services to a customer in exchange for consideration (revenue is recognized when the performance obligation is met)
Performance Obligation
The promise to transfer goods or services to the customer (5 step process)
Expense Recognition Principle
- Expense is directly related to the revenue (expense recorded when revenue is recognized)
- Expense is incurred to obtain benefits exhausted within the period (expense is recorded as incurred)
- Expense is incurred to obtain benefits over several periods (expense is allocated systematically and rationally)
Full Disclosure Principle
Provide external users with the accounting information needed to make an informed investment and credit decision
Notes to financial statements
Adding depth to amounts in the financial statements
Supplementary schedules
Not required, but presented for the purpose of additional analysis
Modifying comments on the face of financial statements
Clarify or refer to other parts of the financial statements
What is the purpose of the Fair Value Hierarchy?
To increase consistency and comparability in fair value measurements and related disclosures
Fair Value Hierarchy:
Level 1 Input
The quoted price of an identical asset, such as quoted price of shares of common stock traded on a stock exchange (least subjective, most verifiable)
Fair Value Hierarchy:
Level 2 Input
Includes (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in inactive markets, (3) inputs other than quoted prices that are observable for the asset or liability, and (4) market-corroborated inputs
Fair Value Hierarchy:
Level 3 Input
(Unobservable input) is developed by the company using the best information available, which can include the company’s own data, such as forecasted cash flows
Fair Value Option
This allows companies to elect to present financial assets and liabilities at fair value on the face of the financial statements where fair value presentation is not required
What are the four fundamental recognition criteria?
Definitions
Measurability
Relevance
Reliability
Definitions
The item meets the definition of an element of financial statements
Measurability
The item has a relevant attribute measurable with sufficient reliability
Relevance
Information about the item is capable of making a difference in user decisions
Reliability
Information about the item is representationally faithful, verifiable, and neutral
When does the process of revenue recognition get more complex?
When multiple performance obligations exist
When does the process of revenue recognition get more complex?
When multiple performance obligations exist and there is not a distinctive transaction price
What is the Five Step Revenue Recognition Process?
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
When is management required in the reporting of the financial statements?
- Determination of initial recognition of equipment
- Which method to allocate the cost of equipment
- Select the depreciation method
- Test the equipment for impairment
- Determination of the items to disclose policies
