Accounting 360 - Exam 1 Flashcards
FASB stand for?
Financial Accounting Standards Board - private company to set up rules (GAAP)
- granted responsibility from SEC (securities and exchange commission) but SEC has final say
GAAP meaning
Generally Accepted Accounting Principles - CPA exam primarily focused around
- Companies wanting to trade stock on US stock exchange need to issue US GAAP
- Foreign companies use International Financial Reporting Standards –> must understand two different forms of acct. rules and info.
What is Conceptual Framework?
a coherent system of concepts that flow from an objective
- identifies the purpose of financial reporting
What is the main objective of financial reporting?
to provide financial info about the reporting entity that’s useful to potential equity inventors, lenders, and other creditors: usefulness for decision making
Why does the SEC have the costly requirement of firms to “account” financially for their transactions in order for their stock to be traded on US stock exchange?
- investors need info to allocate their scarce resources
- places substantial burden on accounting profession to provide useful info for decision making (Decision-usefulness criterion)
- Investors would leave market without relevant/reliable info. –> reduce long term growth and progress
What does each financial statement provide?
Income statement - success in generating revenues and controlling expenses
Statement of SE - how much compensation had been distributed to owners and has equity increased or decreased
Balance sheet - companies assets and liabilities
Statement of cash flows - where did company attain cash and how was it used (operating, investing and financing presented)
FASB codification?
The documentation of GAAP - organizes all authoritative US GAAP by topic
- simplify users access
- eliminates non-essential info
What are the requirements for an event or transaction to be recognized in the fin. statement?
Must meet the definition of an “element of financial statements” and must be measurable (represent a # with sufficient certainty)
How does a company choose an acceptable accounting method?
By determining which alternative provides the most useful information for decision-making purposes (referred to as decision-usefulness)
- qualitative characteristics contribute to decision usefulness
Qualitative characteristics (MEMORIZE CHART, which qualities are related to which, and what each quality means)
contribute to decision usefulness
- either fundamental, ingredients of fundamentals, or enhancing
Basic assumptions: List and Define
form the building blocks on which financial accounting measurement is based
GEMP
Going-concern assumption: Business entities will have long enough life to justify the use of accruals and deferrals; assume company not go bankrupt
Economic Entity Assumption: economic events can be identified with a particular business entity
Monetary Unit Assumption: The dollar is the most effective means of expressing the effects of economic events
Periodicity Assumption: Activities of an enterprise can be divided into artificial time periods (years or quarters)
Basic Principles: List and Define
FERM
Full disclosure principle: disclose any fact important enough to influence the judgment or decisions of an informed reader (usually referring to footnotes)
Expense recognition (matching) principle: expenses should be matched, if possible, with revenues that those expenses help to generate (accrual acct)
Revenue recognition principle: Generally, revenue is recognized in the period which the performance obligation is satisfied (accrual acct)
Measurement principle: must be representable as a number with sufficient certainty (primary historical cost or fair value) stay consistent
Constraint: List and Define
Cost Constraint: The benefits derived from generating financial accounting information should exceed the costs of providing it
- FASB doesn’t want companies to release info that could harm their future
ex/ companies report R&D b/c if overexposed others could steal and use info.
–> then companies wouldn’t invest in R&D (pharmaceutical)
The accounting information system (define and steps)
The accounting information system collects and processes transaction data and communicates financial information to decision-makers
1. analyze business transactions
2. Journalize the transactions (JE)
3. Post to ledger accounts (T-accounts)
4. Prepare a trial balance
5. Journalize and post adjusting entries: Defferals/Accruals (AJE)
6. Prepare an Adjusted trial balance
7. Prepare financial statements (I/S –> RE statement –> Balance sheet –> Statement of cash flows)
8. Journalize and post closing entries
9. Prepare a Post-closing trial balance
Steps for closing entries
- Close out all revenues, expeses, and dividends accounts
- update R/E from beginning balance to ending balance
