Accounting Principles Flashcards
What are the common rules that apply to financial statements distributed by a U.S. company?
Accounting principles, generally accepted accounting principles (GAAP), or US GAAP
These rules allow external users to make comparisons between companies’ financial statements.
Who has developed and maintained US GAAP since 1974?
Financial Accounting Standards Board (FASB)
The FASB is a non-government, not-for-profit organization.
What is the Accounting Standards Codification?
An electronic database containing the official accounting standards applicable to financial reporting of U.S. companies
Launched by the FASB in 2010.
What is the role of the Securities and Exchange Commission (SEC) in relation to U.S. corporations?
U.S. corporations with capital stock trading on a stock exchange must comply with SEC regulations
The SEC is a U.S. government agency.
What is the economic entity assumption?
Keeps business transactions of a sole proprietorship separate from the sole proprietor’s personal transactions
Financial statements can also be prepared for a group of separate legal corporations controlled by one corporation.
What does the monetary unit assumption state for U.S. companies?
Allows expression of a company’s assets as dollar amounts, assuming the U.S. dollar does not lose purchasing power over time
This affects how historical costs are reported.
What does the going concern assumption imply?
The accountant believes that the company will not be liquidated in the foreseeable future
This allows for reporting most assets at their historical cost.
What is the time period (or periodicity) assumption?
Assumes a company’s ongoing operations can be divided into distinct time periods
This is often done in months, quarters, and years.
What does the cost principle state?
Transactions are recorded at the cash (or equivalent) amount at the time of the transaction
Most valuable assets may not be recorded or reported under this principle.
What is required by the full disclosure principle?
A company must provide sufficient information for an intelligent user to make informed decisions
This often includes disclosures and schedules in the notes to the financial statements.
When should revenues be recognized according to the revenue recognition principle?
When they are earned
This can occur before, at the time of, or after receiving payment.
What is the matching principle or expense recognition?
Expenses are recognized based on a cause-and-effect relationship with revenues
If unclear, expenses are reported in the period they are used up.
Define materiality in accounting.
An accounting principle can be ignored if the amount is insignificant
Large companies may expense inexpensive equipment immediately.
What does the conservatism principle dictate?
Choose the alternative that results in less net income or a smaller asset amount when there are two acceptable ways to record a transaction
This principle is used when doubt exists.
What is meant by consistency and comparability in accounting?
Accounting principles must be applied consistently from period to period, and financial statements should be comparable across companies in the same industry
Changes must be disclosed if justified.
Why is relevance and timeliness important for financial statements?
Financial statements should be distributed as soon as possible after the accounting period to enhance relevance
This often requires estimating some amounts.
What is required for objectivity and reliability in accounting?
Accountants must be unbiased and financial statements may require auditing for assurance
This is to ensure the amounts reported are objective and reliable.
What is included in a complete set of financial statements?
- Income statement
- Statement of comprehensive income
- Balance sheet
- Statement of stockholders’ equity
- Statement of cash flows
- Notes to the financial statements
Each component provides integral information about the company’s financial affairs.
What does the accrual method of accounting require?
Revenues and expenses must be reported when they are earned or incurred, not when cash is received or paid
This method enhances the completeness of financial statements.
Under the accrual method, when are revenues reported?
When they were earned
This can happen before, at the time of, or after receiving payment.
How are expenses reported under the accrual method?
During the accounting period in which they were incurred
This includes expenses caused by revenues, expired expenses, and those with no future economic benefit.
What does the cost principle state regarding asset reporting?
Assets are recorded at their cost at the time of the transaction and typically not adjusted for inflation or market value
This means a company’s land bought at $50,000 will still be reported at that cost, regardless of its current market value.
What is the market value of the land mentioned?
$300,000
At what value will the company report the land on its balance sheet?
$50,000
How does a company report its inventory?
At its cost, not at the sales value
What principle prevents a company from recording talented employees as assets?
The cost principle
Can a company report internally developed brands and logos as assets?
No
What must happen if an asset’s fair value drops below its book value?
The asset’s book value may have to be decreased and an impairment loss reported on the income statement
What are liabilities?
A company’s obligations resulting from a past transaction
List some typical liabilities reported on the balance sheet.
- Accounts payable
- Notes or loans payable
- Wages payable
- Interest payable
- Taxes payable
- Customer deposits
- Deferred revenue
What are examples of amounts owed by a company at the end of each accounting period?
- Interest on loans payable
- Electricity and gas charges
- Wages for hourly paid employees that have been earned but not yet processed
- Repair work done by a contractor
What method must be complied with for recording obligations and related expenses?
The accrual method of accounting
What is stockholders’ equity?
The difference between a corporation’s assets and liabilities
What is owner’s equity?
The difference between a sole proprietorship’s assets and liabilities
Why might reported stockholders’ equity not indicate a corporation’s market value?
Most of a company’s assets are reported at cost or lower
What does the full disclosure principle require?
Sufficient financial information must be presented for informed decision-making
What are some items commonly disclosed in the notes to the financial statements?
- Summary of significant accounting policies
- Leases
- Income taxes
- Employee benefit plans
- Stock options
- Commitments and contingencies
True or False: Financial statement reporting and income tax reporting are presented with the same complexities.
False
Who should you consult for assistance with specific accounting and tax circumstances?
Accounting and tax professionals
