1-FASB & Standard Setting Flashcards
How did FASB came into existence
In 1939, AICPA created Committee on Accounting Procedure (CAP) that released 51 Accounting Research Bulletins (ARB)
In 1959, AICPA’s Accounting Principles Board (APB) superseded CAP and released 31 Opinions
In 1971 AICPA created by Wheat Committee which recommended creation of FASB in 1973. FASB is not affiliated to AICPA
What does FASB stand for?
Financial Accounting Standards Board
What does CAP, ARB, APB, FAF, FASAC stand for?
CAP - Committee on Accounting Procedure ARB - Accounting Research Bulletin APB - Accounting Principles Board FAF - Financial Accounting Foundation FASAC - Financial Accounting Standards Advisory Council
What are the three part of Accounting Standard Setting Mechanism in USA?
FAF - Parent Body
FASAC
FASB - Standard Setting Body
What is the mission of the FASB?
- Improve the usefulness of financial reporting;
- Maintain current accounting standards;
- Promptly address deficiencies in accounting standards;
- Promote international convergence of accounting standards;
- Improve the common understanding of the nature and purposes of information in financial reports.
What are the Principles of FASB?
- Accounting standards should be unbiased and not favor any particular industry(or particular reporting objectives) ; standards are for the benefit of financial statement users;
- The needs and views of the economic community should be considered; the views of the accounting profession should not take precedence;
- The process of developing standards should be open to the public and allow due process to provide opportunity for interested parties to make their views known;
- The benefits of accounting standards should exceed their cost.
What is the primary protection for investors against fraudulent financial reporting by corporations?
The requirement that financial statements be audited.
What does the term negative economic consequences mean in terms of proposed accounting standards?
The inability to raise capital. This will happen because the new standard will lower the co’s profitability making it difficult to raise capital thru stocks and bonds.
Difficult example of a investing activity
Collection of a note receivable from a related party.
This is not an Financing activity.
Does FASB accounting standard codification include guidance on other basis of accounting?
No, because other basis are not GAAP.
Which characteristic does interim financial reporting emphasize on?
Timeliness over faithful representation.
What is replacement cost?
It is the price of the item to paid to buy it at current time.
Concept is used in LCM of inventory.
It is the entry price as of today for the item that is already held in the balance sheet.
Which accounting concept is recognized by consolidated FS?
Consolidated FS represents the concept of economic entity ie it includes more than one legal entity
Estimating uncollectible account expense based on the ratio of actual uncollectible account expense and net credit sales from the previous period supports which accounting principle?
Matching Principle - Costs are matched to the period revenue is recognized.
What is net realizable value?
It is the net price to be received after deducting the cost of getting the asset/item ready to be sold.
What is the Acronym for Accounting Assumptions?
Assume Entirely from your GUT
E = Entity G = Going Concern U = Unit of Measurement T = Time period
What is the Acronym for Accounting Principles
HR Full Matching of 401k H = Historical Cost R = Revenue Recognition F = Full Disclosure M = Matching Principle
When is revenue recognized?
Revenue is recognized when it is considered Realized and Earned.
Realized = (Economic Concept)
When Cash or Cash Equivalent received
Earned =
When good or service is provided
Recognized =(Accounting Concept)
When it is recorded on the FS
What is the heart and soul of accrual based accounting?
Matching principle
Matching expenses to revenue for which they were incurred in the same period as the revenue
What is the basis for determination of the FV of non-financial asset?
On the best and highest use of the non financial asset by the market participants (and not the reporting entity)
It is based on hypothetical transactions
It is based on hypothetical exit price.
Which transactions are exempt form using FV measurement?
When payment is based on exchange of shares (share based payment transactions)
When valuing inventory
When firm values it’s investment in a subsidiary(the A and L of the subsidiary will be consolidated in firms BS.) The option of using FV is not available.
When measuring some other minor items
A liability under a lease contract.
A liability under a pension plan.
What is the purpose of purpose of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?
To provide a standard for determining (measuring) FV when the FV measurement is used.
In which instances can firm elect to use FV?
To measure:
A/R
A/P
investment in debt securities HTM (amortized cost is the normal method)
What is an exit price?
The amount at which an asset can be sold.
What is the income approach to valuing FV of an asset?
It is the present value of all the discounted future cash flow discounted. It reduces all future cash flows to one single number.
What is the cost approach of valuing FV of an asset?
when the FV is determined as the amount currently required to replace the service capacity of an asset i.e. it’s current replacement cost.
What is the market approach of valuing FV of an asset
It is based on observable price and other useful information generated by market transactions of identical or similar assets compared to asset being valued.
What is a blockage factor?
When an entity hold significant quantity of the asset (or liability) relative the trading volume in the market of the asset or liability
