Accounting Principals Flashcards
What are the primary qualitative characteristics of financial information?
Faithful representation and relevance (FARR)
What are the ingredients of relevance?
Predictive value
Confirmatory value
Materiality
List the enhancing qualitative characteristics of financial information.
Comparability
Verifiability
Timeliness
Understandability
What does it mean to be free from error?
Information is free from error if it is truthful.
What is neutrality?
To be neutral, accounting information must be free of bias.
What are the ingredients of faithful representation?
Completeness
Free from material error
Neutrality
Who is the target audience of financial statements?
Decision makers; mainly potential investors, creditors, and regulators
What is confirmatory value?
To be relevant, accounting information should assist decision makers in confirming past predictions.
What is understandability?
Information is understandable if the user comprehends it with reasonable effort and diligence.
What are objectives of financial reporting?
To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions
What is predictive value?
To be relevant, accounting information should assist financial statement users in making predictions about future events.
What is comparability?
The quality of information that enables users to identify similarities and differences between sets of information.
What is timeliness?
To be relevant, accounting information must be received in time to make a difference to the decision maker.
What is verifiability?
Information is verifiable if different knowledgeable and independent observers can reach similar conclusions.
What is completeness?
Information is complete if it includes all data necessary to be faithfully representative.
How do we measure a revenue?
Revenue is measured as the cash equivalent amount of the good or service provided.
What are revenues?
Revenues are increases in assets or extinguishment of liabilities stemming from delivery of goods or from providing services—the main activities of the firm.
What does the historical cost accounting principle state?
Assets and liabilities are recorded at historical cost (i.e., that is, their cash equivalent amount at time of origination). This value is the market value of the item on the date of acquisition.
When should a company recognize revenues?
Revenues are recognized when they are earned and collectibility is reasonably assured.
What is the full disclosure principle?
Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.
What is the unit of measurement assumption?
Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated.
What is the entity assumption
We assume there is a separate accounting entity for each business organization.
What is the time period assumption?
The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.
What is the matching principle?
Recognize expenses only when expenditures help to produce revenues.
What is the concept of capital maintenance?
Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.
What is the going‐concern assumption?
In the absence of information to the contrary, a business is assumed to have an indefinite life (i.e., that is, it will continue to be a going concern).
When does realization occur in the accounting period?
When:
Goods or services have been provided. Collectibility of cash is assured. Expenses of providing goods and services can be determined.
