9-16 FAR-Roles and Concepts Flashcards
What is the purpose of the emerging issues task force (EITF)
The EITF is not directly involved with the promulgation of accounting standards. Rather, The EITF was established by the FASB to develop consensus positions about how to account for new financial transactions and events.
When the EITF cannot reach consensus on an issue, the FASB may add the issue to its agenda.
The operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement?
A new statement is issued only after a majority vote by the members of the FASB
-The due diligence aspect of standard setting requires the FASB to solicit and consider views from all interested parties.
-a discussion memorandum, if issued, precedes an exposure draft, which is the proposed accounting standard.
Note : AICPA is an entity separate from the FASB and is not involved with the process of adopting new accounting standards.
The FASB is a(n):
A. Private sector body.
B. Governmental unit.
C. Group of accounting firms.
The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.
What is GAAP concerned with ?
GAAP governs what is included in financial statements, and to a reasonable extent, how it is presented. GAAP is concerned with what accounts are included in financial statements, their amounts, and additional information that must be disclosed but which is not included in those accounts.
In reference to proposed accounting standards, the term “negative economic consequences” includes:
A. The cost of complying with GAAP.
B. The inability to raise capital.
C. The cost of government intervention when not in compliance with GAAP.
D. The failure of internal control systems.
B
Refers to the potentially negative effects of proposed standards, including a reduced ability to raise capital, and higher capital costs.
Such concerns are raised by firms when faced with Exposure Drafts calling for accounting principles that will reduce the firms’ earnings. They worry that lower earnings, for example, will cause their stock to fall in price.
- ie when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans.
As a result, negative economic consequences become a focal point for arguments against the proposed standard.
Choose the correct statement about GAAP.
A. GAAP are laws.
B. Only publicly traded companies must comply with GAAP.
C. It is a violation of SEC regulations for publicly traded companies to depart from GAAP.
D. Firms may not restate financial statements previously issued
C
GAAP are “principles” that are set by a private sector body - the FASB. They are not proposed and adopted by legislative bodies-NOT laws
-Essentially, all companies that rely on external sources of capital require financial statements and, therefore, must comply with GAAP.
ie, a privately-held firm may require a loan. In order to obtain the loan, the firm must present audited financial statements.
-The SEC requires that all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP
What is the primary protection for investors against fraudulent financial reporting by corporations?
A. Criminal statutes.
B. The requirement that financial statements be audited.
C. The fact that all firms must report the same way.
D. The integrity of management.
B
The audit of the financial statements by independent third parties is the primary protection. The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the financial statements.
-by independent third parties is the primary protection, because independent third-party CPAs provide a more objective opinion of the accuracy of the statements
-even the audit of financial statements is not a perfect protection as indicated by the frequency of fraud and audit failure
.
Does FASB have authority to enforce GAAP?
NO
The FASB is currently the rule-making body for GAAP
-The SEC has
-The IRS is the entity that enforces the income tax laws. the ultimate authority for setting GAAP
-The FAF “Financial Accounting Foundation” is part of the overall organization of which the FASB is a part. The FAF exercises oversight over the FASB and appoints its members but does not actually develop accounting principles
The FASB has maintained that:
A. The interests of the reporting firms will be a primary consideration when developing new GAAP.
B. GAAP should have little or no cost of compliance.
C. New GAAP should be neutral and not favor any particular reporting objective.
D. GAAP should result in the most conservative possible financial statements.
c
One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
Compared to the accrual-basis method of accounting: Savor’s cash pretax income is:
100,000 in cash-basis pretax income for 1999. At December 31, 1999, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 1998, balances.
cash pretax is $116,000 LOWER than accrual
Dec 31-99 A/R -UP meaning for accrued sales $10K
A/P -DOWN meaning more paid out in cash $6K
* Both have a negative effect on Cash
Y&’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
A. $125,000
B. $135,000
C. $165,000
D. $175,000
Cash-based operating expenses $150,000 Prepaid Expenses \+ beginning of the year prepaid expenses, $10,000. - end of the year prepaid expenses, $(15,000). =$( 5,000) prepaid exp impact on cash bases Accrual items \+ end of the year accrued expenses, $25,000. - beginning of the year accrued expenses, ( 5,000). =$20,000 Accrued exp paid next year Accrual-based operating expenses, $150,+$20,000-$5,000=$165,000
In analyzing a company’s financial statements, which financial statement would a potential investor use primarily to assess the company’s liquidity and financial flexibility?
A. Balance Sheet.
B. Income Statement.
C. Statement of retained earnings.
D. Statement of Cash Flows
a. Balance Sheet
The balance shows the relative magnitude of assets and liabilities and, therefore, the ability to pay obligations in the near and longer term. It also shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change
-Income Statement primarily reports a measure of the performance of the entity for a period of time.
-Statement of Cash Flows primarily reports cash flows in the past: the sources and outflows of cash categorized by operating, financing, and investing.
It also explains why operating cash flow is different from net income.
Although a trend of cash flows would provide useful information as to liquidity
Bird Corp.’s trademark was licensed to Brian Co. for royalties of 15% of the sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year.
Bird received the following royalties from Brian:
March 15 September 15
20X4 $5,000 $7,500
20X5 $6,000 $8,500
Brian estimated that the sales of the trademarked items would total $30,000 for July through December 20X5.
In Bird’s 20X5 Income Statement, the royalty revenue should be:
$13,500 need to take estimated sales into consideration when recording royalty revenue.
Sept 15 $8,500+ (estimated rev 30K*.15=$4,500=$13,500
March 15 September 15 20X4 $5,000 $7,500 20X5 $6,000 $8,500
20X5 royalty revenue is the amount earned in 20X5, regardless of when it is received.
The September receipt of $8,500 accounts for the royalties earned the first half of 20X5. Royalties for the second half are estimated to be .15($30,000) = $4,500.
Although this is an estimate, if reliable, it provides relevant information. Waiting for the exact amount is not justified in this case. The small increase in reliability does not justify postponing recognition in 20X5. Thus, total royalty revenue for 20X5 is $13,000, which equals $8,500 + $4,500.
Which of the following would be reported as an investing activity in a company’s statement of cash flows?
A. Collection of proceeds from a note payable.
B. Collection of a note receivable from a related party.
C. Collection of an overdue account receivable from a customer.
D. Collection of a tax refund from the government.
B - Collection on a note receivable from a related party is an investing activity.
The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.
Note-Proceeds from a note payable is a financing activity.
In Dart Co.’s year two single-step Income Statement, as prepared by Dart’s controller, the section titled “Revenues” consisted of the following:
Sales $250,000
Purchase discounts (3,000)
Recovery of accnts w/ off (10,000)
Total revenues $263,000
In its year two single-step Income Statement, what amount should Dart report as total revenues?
- $250,000
Total revenue is only the $250,000 in sales.
You do not include :
- purchase discounts
- recovery of accounts written off
