1-FASB & Standard Setting

Question 1

How did FASB came into existence

Answer 1

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In 1959, AICPA’s Accounting Principles Board (APB) superseded CAP and released 31 Opinions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

Question 2

What does FASB stand for?

Answer 2

Financial Accounting Standards Board

Question 3

What does CAP, ARB, APB, FAF, FASAC stand for?

Answer 3

CAP - Committee on Accounting Procedure
ARB - Accounting Research Bulletin
APB - Accounting Principles Board
FAF - Financial Accounting Foundation
FASAC - Financial Accounting Standards Advisory Council

Question 4

What are the three part of Accounting Standard Setting Mechanism in USA?

Answer 4

FAF - Parent Body
FASAC
FASB - Standard Setting Body

Question 5

What is the mission of the FASB?

Answer 5

1. Improve the usefulness of financial reporting;
2. Maintain current accounting standards;
3. Promptly address deficiencies in accounting standards;
4. Promote international convergence of accounting standards;
5. Improve the common understanding of the nature and purposes of information in financial reports.

Question 6

What are the Principles of FASB?

Answer 6

1. Accounting standards should be unbiased and not favor any particular industry(or particular reporting objectives) ; standards are for the benefit of financial statement users;
2. The needs and views of the economic community should be considered; the views of the accounting profession should not take precedence;
3. 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;
4. The benefits of accounting standards should exceed their cost.

Question 7

What is the primary protection for investors against fraudulent financial reporting by corporations?

Answer 7

The requirement that financial statements be audited.

Question 8

What does the term negative economic consequences mean in terms of proposed accounting standards?

Answer 8

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.

Question 9

Difficult example of a investing activity

Answer 9

Collection of a note receivable from a related party.

This is not an Financing activity.

Question 10

Does FASB accounting standard codification include guidance on other basis of accounting?

Answer 10

No, because other basis are not GAAP.

Question 11

Which characteristic does interim financial reporting emphasize on?

Answer 11

Timeliness over faithful representation.

Question 12

What is replacement cost?

Answer 12

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.

Question 13

Which accounting concept is recognized by consolidated FS?

Answer 13

Consolidated FS represents the concept of economic entity ie it includes more than one legal entity

Question 14

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?

Answer 14

Matching Principle - Costs are matched to the period revenue is recognized.

Question 15

What is net realizable value?

Answer 15

It is the net price to be received after deducting the cost of getting the asset/item ready to be sold.

Question 16

What is the Acronym for Accounting Assumptions?

Answer 16

Assume Entirely from your GUT

E = Entity
G = Going Concern
U = Unit of Measurement
T = Time period

Question 17

What is the Acronym for Accounting Principles

Answer 17

HR Full Matching of 401k
H = Historical Cost
R = Revenue Recognition
F = Full Disclosure
M = Matching Principle

Question 18

When is revenue recognized?

Answer 18

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

Question 19

What is the heart and soul of accrual based accounting?

Answer 19

Matching principle

Matching expenses to revenue for which they were incurred in the same period as the revenue

Question 20

What is the basis for determination of the FV of non-financial asset?

Answer 20

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.

Question 21

Which transactions are exempt form using FV measurement?

Answer 21

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.

Question 22

What is the purpose of purpose of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?

Answer 22

To provide a standard for determining (measuring) FV when the FV measurement is used.

Question 23

In which instances can firm elect to use FV?

Answer 23

To measure:

A/R
A/P
investment in debt securities HTM (amortized cost is the normal method)

Question 24

What is an exit price?

Answer 24

The amount at which an asset can be sold.

Question 25

What is the income approach to valuing FV of an asset?

Answer 25

It is the present value of all the discounted future cash flow discounted. It reduces all future cash flows to one single number.

Question 26

What is the cost approach of valuing FV of an asset?

Answer 26

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.

Question 27

What is the market approach of valuing FV of an asset

Answer 27

It is based on observable price and other useful information generated by market transactions of identical or similar assets compared to asset being valued.

Question 28

What is a blockage factor?

Answer 28

When an entity hold significant quantity of the asset (or liability) relative the trading volume in the market of the asset or liability