1. Module 9: Basic Theory Flashcards
The power to establish GAAP rests with which organization?
The power to establish GAAP rests with the SEC however, it has essentially allowed the accounting profession to establish GAAP and self-regulate.
What does SFAC stand for?
Statements of Financial Accounting Concepts (SFAC)
• Establish the objectives and concepts for FASB standards.
• Serve as the foundation or basic reasoning of a standard
What are the objectives of financial reporting?
The objectives of financial reporting are to provide:
• Information that is useful to investors, lenders, & other creditors
• Information about entity’s performance
The Objectives provide information useful in
o investment and credit decisions
o assessing future cash flows
o assessing resources, debt and equity claims
What are the four (4) most authoritative sources of GAAP?
Four most authoritative GAAP: B.O.I.S
B - Accounting Research Bulletins (ARBs)
O - Accounting Principles Board Opinions (APBOs)
I - FASB Interpretations (clarify GAAP)
S - FASB Statements of Financial Accounting Standards (not concepts)
What are the characteristics of accounting information?
Characteristics of accounting information: MBUD
• Material – could make a difference in decisions made by users
• Benefits of the information > Costs of providing it
• Understandable to decision makers
• Decision usefulness
What are the two (2) Fundamental qualitative characteristics of accounting information?
The 2 fundamental qualitative characteristic of accounting info are: R-FR
• Relevance- PC
- Predictive value- requires that info be used to predict future outcomes
- Confirmatory value- requires that info either confirms or changes prior evaluations.
• Faithfull Representation- CNF
- Complete- info is presented in a way that users can understand the item being depicted
- Neutral- info is depicted without bias to users
- Free from Error- there are no errors or omissions in the info reported.
What are the enhancing characteristics of accounting information?
The 4 enhancing characteristics of accounting information are:
- Comparability (consistency)- ability to identify & understand similarities and differences between items
- Verifiability- can be verified through different sources
- Timeless- available when needed to make decision
- Understandability- organizing info so it is clearly understandable to anyone with reasonable knowledge.
What is the pervasive constraint in providing accounting information?
The pervasive constraint is the cost-benefit constraint.
The benefits of information should be greater than the costs of information.
What are the two (2) basics views of earnings?
- Asset-liability view – change in the net economic resources of the entity during a period.
- Revenue-expense view- measure by its effectiveness in usig inputs to obtain & sell outputs.
What are the difference between Measurement and Recognition?
Recognition principles establish criteria concerning when and element should be included in the statements.
While
Measurement principles govern the valuation of those elements.
What are the 4 fundamental recognition criteria established by SFAC 5?
The 4 fundamental recognition criteria established by SFAC 5: DMR2 • Definition • Measurability • Relevance • Reliability
If an item meets the definition of an element, can be reliably measured, is capable of making a difference in user decisions, and it is verifiable, neutral, and representationally faithful, it should be included in financial statements.
What are the attributes used to measure assets and liabilities?
Five attributes used to measure assets and liabilities:
• Historical cost – cash or equivalent paid to acquire an asset (property, plant, equipment, and most inventories)
• Current cost- the amount of cash that would have be paid if the same or equivalent asset were acquired currently (some inventories- replacement cost)
• Current market value (FMV)- amount of cash that could be obtained by selling an asset in orderly liquidation. (some investments in marketable securities)
• Net Realizable (settlement) value – the non-discounted amount of cash into which an asset is expected to be converted less direct cost necessary to make the conversion (short-term receivables and some inventories
• Present (discounted) value of future cash flows- the present value of future cash inflows into which an asset is expected to be converted LESS present value of cash outflows necessary to obtain those inflows. (long-term receivables)
What is the Revenue Recognition Principle?
Revenue recognition principle – revenue should be recognized (recorded) when it is earned and when it is realized (you’ve been paid) or realizable (believe you’re going to get paid).
- Earned – Goods – transfer of title, not possession
Services – Are the services substantially complete - Realized or Realizable – claims to cash readily convertible to known amounts
What is the Matching Principle?
Matching Principle – all expenses incurred to generate revenue in a period are matched against that revenue
What is cash-basis accounting?
Cash-basis accounting recognizes income when cash is received and expenses when cash is disbursed.
