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FAR - my notes > 1.1 Conceptual Framework > Flashcards

1.1 Conceptual Framework Flashcards

1
Q

GAAP rules address

A

Recognition

Measurement

Disclosure

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2
Q

4 FASB framework assumptions

4 principles

A

ASSUMPTION

entity assumption

going concern

unit of measure

time period assumption

PRINCIPLES

measurement

revenue recognition

expense recognition (matching)

full disclosure (adequate disclosure)

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3
Q

Name the 4 Enhancing Qualitative Characteristics

A
  1. Comparability - between sets of info
  2. Verifiability - by different users
  3. Timeliness - in time to make a difference
  4. Understandability

CUT like a V

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4
Q

Who do the objectives of financial reporting focus on?

A

The USERS of the financial information (the financial statements)

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5
Q

What is the objective of financial reporting?

A
  • objective of general-purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers.
  • Useful information includes: -
  1. amount, timing, and uncertainty of cash flows; -
  2. Ability to generate future net cash inflows; -
  3. economic resources (assets) and claims to those resources (liabilities) that provides insight into financial strengths and weaknesses, and its liquidity and solvency; -
  4. The effectiveness with which management has met its stewardship responsibilities; -
  5. effect of transactions and other events that change an entity’s economic resources and the claims to those resources.
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6
Q

6 SUBSECTION

of Conceptual Framework

A
  1. Objective of financial reporting
  2. Qualitative characteristics of accounting information
  3. Accounting assumptions
  4. Basic accounting principles
  5. Cost constraint
  6. Elements of financial statements
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7
Q

What are the 4 accounting assumptions?

A
  1. Entity Assumption – each business org is a separate entity. Is separate from owners. Owners own shares, don’t own entity’s assets
  2. Going-Concern Assumption (Continuity Assumption) – business assumed to have an indefinite life, beyond life of owners
  3. Unit-of-Measure Assumption – measure using monetary unit of country where operate
  4. Time Period Assumption – indefinite life of business broken into smaller time frames (year and shorter) for evaluation/reporting
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8
Q

What is Comprehensive Income?

A

All changes in equity (net assets) other than “owner” sources (investments and distributions)

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9
Q

Can an entity’s revenue result from a decrease in a liability from primary operations?

A

Yes (think unearned revenue)

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10
Q

Define Revenue

A

Revenue refers to increases in assets or the extinguishment of liabilities stemming from the delivery of goods or the provision of services -

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11
Q

Who authorized the Financial Accounting Standards Board to establish accounting standards in the US?

A

Securities and Exchange Commission (SEC)

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12
Q

What was the Wheat Committee responsible for?

A

The formation of FASB 1971 - prior was AICPA

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13
Q

What steps does FASB take to issue a new accounting standard?

A
  1. Considers whether to add a project to its agenda (with FAF)
  2. Conducts research on the topic and issues a Discussion Memorandum detailing the issues surrounding the topic;
  3. Holds public hearings on the topic;
  4. Evaluates the research and comments from interested parties and issues an Exposure Draft - the initial accounting standard;
  5. Solicits additional comments, modifies the Exposure Draft if needed;
  6. Finalizes the new accounting guidance and approves with a majority vote
  7. Issues an Accounting Standards Update (ASU).
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14
Q

Waht is an investment by owners?

A

Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest

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15
Q

What type of companies are required to submit their financial statements to the SEC?

A

Publicly-held entities

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16
Q

When do you recognize a financial statement element and how do you measure it?

A

a) It meets the DEFINITION of an element (asset, liability) b) The element is capable of being MEASURED in MONETARY TERMS c) The item is RELEVANT and FAITHFULLY REPRESENTED (it’s useful)

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17
Q

In present value accounting measurements

what is the difference between the Traditional and Expected approaches?

A

Used to measure cash flows: -

Traditional approach uses the single most likely cash flow amounts (risk/uncertainty: included in interest rate)

  • uncertainty/risk captured by risk premium interest rate

Expected Approach uses the weighted average of the different possibilities (risk free rate, uncertainty in: timing and amount of possible cash flows)

  • uncertainty captured by:
    • timing: weighted estimate of years
    • amount: weighted estimate of amount of cash flow
18
Q

Under accrual accounting, when are revenue or gains recognized?

A

When they are earned (earnings process is complete) and realizable (cash or a claim to cash has been received)

19
Q

What are losses?

A

Decreases in equity as a result of transactions that are not part of the company’s main or central operations and that do not result from expenses or distributions made to owners of the entity.

20
Q

Relative to International Financial Reporting Standards, is U.S. GAAP more principle-based or rule-based?

A

Rule-based

21
Q

What organization was created by the FASB and charged with evaluating existing GAAP to determine if there are requirements, including disclosures, from which nonpublic entities should be exempt; or simplified accounting approaches that may be applied to transactions or financial statements that will reduce the costs of reporting without diminishing the quality/value of information?

A

Private Company Council (PCC)

22
Q

When are Revenues recognized?

A

Revenues are recognized when EARNED - the earnings process (the provision of goods or services to the customer) is complete - and REALIZABLE - an exchange has taken place, typically cash collected, but it may include a promise to pay in the future (ala a receivable).

23
Q

What is the primary objective of accounting?

A

To measure income

24
Q

What are the 2 Levels of Authority within the FASB codification?

A

Authoritative

  1. Accounting stds codification
  2. SEC

Non-Authoritative

25
Q

What are the Secondary Constraints of Financial Reporting?

A

Consistency - Year vs. Year Comparability - Company vs. Company

26
Q

What is an accrued liability?

A

Expense that has been incurred but not paid Example: rents payable

27
Q

What is a gain?

A

Increase in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

28
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

29
Q

What are accrued expenses?

A

Those incurred but not paid. Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale) Period costs - Expenses amortized and recognized with the passage of time

30
Q

FS - Recognition/Measurement Criteria (4)

A
  1. Definition – defin of FS element is met
  2. Measurability – there is an attribute to be measured and cost used
  3. Relevance – info in FS is capable of influencing decisions; timely, predictive ability, feedback value, material
  4. Faithful representation: info is complete, neutral, free from material error
31
Q

How does Conservatism affect the recording of accounting transactions?

A

When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company least optimistic

32
Q

What are the Qualitative Characteristics of Financial Reporting?

A

RELEVANCE - makes a difference to the user Includes:

  1. Predictive Value - Future Trends
  2. Confirming Value - Past Predictions
  3. Materiality - Could affect User Decisions

FAITHFUL REPRESENTATION

  1. Completeness - Nothing omitted that would impact the decision-making of a user
  2. Neutrality - Information is presented is without bias
  3. Free from Error - No material errors or omissions
33
Q

What are the ten Elements of Financial Statements?

A
  1. Assets – probable future benefit
  2. Liabilities – probable future sacricfieces of economic benefit
  3. Equity – residual interest in firm’s assets = net assets
  4. Investments by Owners – increases in net assets of an entity from transfers by owners
  5. Distributions to Owners – decreases in Net assets of entity to owners
  6. Comprehensive Income – accounting income plus certain holding gains/losses
  7. Revenues – increases in A/settle L
  8. Expenses – decreases in A / incr liabilitiesprovide benefit to firm
  9. Gains – increases in equity or net assets, from
    1. Gain contingencies are not recognized
  10. Losses – decreases in equity or net assets, from no benefit provided ot firm
34
Q

What do a full set of financial statements include?

A
  1. Balance Sheet - Financial Position at End of Year
  2. Income Statement - Earnings for Year
  3. Statement of Cash Flows - Cash Flows during Year
  4. Statement of Changes in Owners’ Equity - Investments by and Distributions to Owners during year
  5. Statement of Comprehensive Income (with IS or separate)
35
Q

What is a deferral?

A

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense) cash activity before economic event

36
Q

What is an accrual?

A
  • Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
  • Economic event before cash activity
37
Q

What is meant by Allocation?

A

Spreading a cost over more than one period (i.e. depreciation)

38
Q

What is meant by Matching?

A

Recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized

39
Q

What is meant by Realization?

A

Converting non-cash resources into cash or a claim to cash

40
Q

What is meant by Recognition?

A

Booking an item in the financial statements

41
Q

What is the pervasive constraint that overrides the usefulness of information?

A

Cost vs. Benefit (cost to present shouldn’t exceed benefit)

42
Q

When does realization occur?

A

Goods or services have been provided (seller performance is substantially complete); Collectibility of cash is assured - revenue is realizable (buyer performance is complete or assured); Expenses of providing goods and services can be determined. This criterion becomes important when service or production is provided over an extended period of time.

FAR - my notes (6 decks)

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