1 | Environment & Theoretical Structure Flashcards
What is the primary focus of financial accounting?
The information needs of investors and creditors.
What is the Accounting equation?
Assets = Liabilities + Owner’s Equity
Name the three providers of financial information.
1) profit-oriented companies
2) non-profit entities (government, charities, schools)
3) households
Name 8 external user groups of financial information.
1) investors
2) Creditors (banks, bond holders, other lenders)
3) employees
4) labor unions
5) customers
6) suppliers
7) government regulatory agencies (IRS, SEC)
8) Financial intermediaries (financial analysts, stockbrokers, mutual fund managers, credit-rating organizations)
What is a capital market?
An efficient mechanism developed when investors/creditors allocate privately owned productive resources to private enterprises that will best use it to provide goods/services most desired by society.
What are Initial Market Transactions?
The initial issuance of stocks/bonds to create new cash by a corporation to individuals/entities who want to invest.
What are secondary market transactions?
The subsequent transfer of stocks/bonds (after initial market) between investors/creditors. The issuing corporation receives no new money but this market is essential for efficient allocation if resources & helps establish market price for additional shares/bonds.
Cash Basis Accounting
What is Net Operating Cash Flow?
The difference between cash receipts and cash disbursements from providing goods/services.
Accrual Accounting
What is Net Income/loss?
The difference between revenues and expenses.
Accrual Accounting
What is the measure of resources provided by business operations called?
Revenue
Accrual Accounting
What is the measure of resources sacrificed to earn Revenue?
Expenses
What does GAAP stand for?
Generally Accepted Accounting Principles
What is GAAP?
A dynamic set of broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.
Early US Standard Setting:
What does CAP stand for?
Committee on Accounting Procedures
1938-1959
Early US Standard Setting:
What does AIA stand for?
American Institute of Accountants.
Early US Standard Setting:
What does AICPA stand for?
American Institute of Certified Public Accountants.
Early US Standard Setting:
What does APB stand for?
Accounting Principles Board
1959-1973
Early US Standard Setting:
What does FASB stand for?
Financial Accounting Standards Board
1973-present
How many full-time members does FASB have?
Seven
What does FAF stand for?
Financial Accounting Foundation
FASB’s parent organization
What does SFAS stand for?
Statements of Financial Accounting Standards.
What are SFAFs (Statements of Financial Accounting Standards)?
Specific Accounting standards issued by FASB
What is the FASB Accounting Standards Codification?
All accounting pronouncements integrated and topically organized in a searchable online database.
(FASB standards, interpretations, & SEC pronouncements)
What does ACS stand for?
Accounting Codification System
What does ASU stand for?
Accounting Standards Update
New Accounting Standards issued by FASB
What are the 7 steps if the FASB Standard Setting Process?
1) Receive request/recommendation
2) Chairman decides whether to add it to agenda
3) Board deliberates request/recommendation @ one or more public meeting
4) Board issues exposure draft
5) Board holds public round table meeting on exposure draft
6) Staff analyzes comments/letters from public & board deliberates
7) Board issues accounting standards update
What is the role of an external auditor?
To express an opinion on the compliance of financial statements with GAAP
What is the Conceptual Framework of Accounting (aka The Accounting Constitution)?
A coherent system of interrelated objectives and fundamentals (underlying concepts of accounting) that is intended to lead to consistent standards and that prescribed the nature, function, and limits of financial accounting and reporting.
The Conceptual Framework:
What is the objective?
To provide financial information that is useful to capital providers.
The Conceptual Framework:
What are the ten elements?
Assets Liabilities Equity Investments by owners Distributions to owners Revenues Expenses Gains Losses Comprehensive Income
The Conceptual Framework:
What are the two Fundamental Qualitative Characteristics?
Relevance: Predictive, confirmatory, material
Faithful representation: completeness, neutrality, free from error
The Conceptual Framework:
What are the four Enhancing Qualitative Characteristics?
1) Comparability (including consistency)
2) verifiability
3) Timeliness
4) understandability
The Conceptual Framework:
What are the Constraints on Qualitative Characteristics?
Cost effectiveness
The Conceptual Framework:
What are the 4 Assumptions of the Recognition, Measurement, & Disclosure Concepts?
1) Economic entity
2) Going concern
3) Periodicity
4) Monetary unit
The Conceptual Framework:
What are the 4 Principles of the Recognition, Measurement, & Disclosure Concepts?
1) Revenue Recognition
2) Expense Recognition
3) Mixed Attribute Measurement
4) Full Discosure
The Conceptual Framework:
What are 6 Financial Statements?
1) Balance Sheet
2) Income Statement
3) Statement of Comprehensive Income
4) Statement if Cash Flows
5) Statement if Shareholders’ Equity
6) Related Disclosures
5)
The Conceptual Framework:
What does Relevance mean?
The information must possess predictive and/or confirmatory value.
The Conceptual Framework:
When is financial information material?
If omitting it or misstating it could affect users’ decisions.
The Conceptual Framework:
When does Faithful Representation exist?
When there is an agreement between a measure/description and the phenomenon it purports to represent. It requires information to be complete, neutral, and free from error.
The Conceptual Framework:
SFAC 8 explicitly rejects conservatism as a desirable characteristic of accounting information, stating that …
… conservatism undermines representational faithfulness by bring inconsistent with neutrality.
The Conceptual Framework:
When is accounting information comparable?
When the information is comparable across different companies and over different time periods.
The Conceptual Framework:
When is accounting information consistent?
When it is measured and reported the same way each period.
The Conceptual Framework:
When is accounting information Verifiable?
When different measures reach consensus about whether it is representationally faithful.
The Conceptual Framework:
Elements
Define Assets.
Probable future economic benefits obtained or controlled by a particular entity as a result if past transactions or events.
The Conceptual Framework:
Elements
Define Liabilities.
Probable
The Conceptual Framework:
Elements
Define Equity (net assets).
Called
The Conceptual Framework:
Elements
Define Investments by owners.
Increases
The Conceptual Framework:
Elements
Define Distributions to owners.
Decreases
The Conceptual Framework:
Elements
Define Comprehensive Income.
The
The Conceptual Framework:
Elements
Define Revenues.
Inflows
The Conceptual Framework:
Elements
Define Expenses.
Outflows.
The Conceptual Framework:
Elements
Define Gains.
Increases
The Conceptual Framework:
Elements
Define Losses.
Represent
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Economic Entity Assumption?
Economic events can be identified specifically worn an economic entity.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Going Concern Assumption?
A business entity will continue to operate indefinitely.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Periodicity assumption?
Allows the life of a company to be divided into artificial time periods to provide timely information.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Monetary unit Assumption?
Financial statement elements should be measured in a particular monetary unit (I.e. US Dollars).
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What are the 4 criteria to recognize an item?
- Definition. Meets definition of an element if the financial statement
- Measurability. Has a relevant attribute measurable reliably
- Relevance. Capable of making a difference in user decision
- Reliability. Representationally faithful, verifiable, and neutral.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Realization Principle?
Revenue should be recognized when the earnings process is virtually complete and collection is reasonably assured.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Matching Principle?
Expenses should be recognized in the period in which they produce revenue.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Historical Cost Principle?
Measure assets/liabilities based on their original transaction value.
What are the 5 Measurement Attributes employed in GAAP?
- Historical Cost
- Net Realizable Value
- Current Cost
- Present/Discounted Value
- Fair Value
Define Net Realizable Value.
The amount of cash an asset will be converted in the ordinary course of business.
Define Current Cost.
The current replacement cost if the item.
Define Present/Discounted Value.
Future cash flies discounted for the time value if money.
Define Fair Value.
The selling price of an item.
The value that is negotiated/fixed/established in an open market.
The Conceptual Framework:
Recognition, measurement, and Disclosure Concepts
What is the Full Disclosure Principle?
Any information useful to decision makers are to be provided in the financial statements, subject to cost effectiveness constraints.
Users, preparers, and auditors participate in the process of establishing GAAP.
Securities Exchange Commission
Primarily represents which group?
Users
Users, preparers, and auditors participate in the process of establishing GAAP.
Financial Executive International
Primarily represents which group?
Preparers
Users, preparers, and auditors participate in the process of establishing GAAP.
American Institute of Certified Public Accountants
Primarily represents which group?
Auditors
Users, preparers, and auditors participate in the process of establishing GAAP.
Institute of Management Accountants
Primarily represents which group?
Preparers
Users, preparers, and auditors participate in the process of establishing GAAP.
Association of Investment Management and Research
Primarily represents which group?
Users
Information has predictive value when…
It is useful in predicting the future.
Which component of the Conceptual framework would allow a company to record the purchase if a $120 printer as an expense rather than capitalizing the printer as an asset?
Materiality
