Accounting Theories Flashcards
Statement of Financial Accounting Concepts No1.
Establishes and identifies three major objectives of general purpose external financial reporting.
Statement of Financial Accounting Concepts No2.
Defines the characteristics which make accounting information useful.
Relevance
Accounting information must be capable of making a difference in the decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations reducing uncertainty about future events.
Reliability
Investors, creditors and other users must be able to depend on accounting information to accurately represent the economic conditions or events that it purports to describe.
Three Ingredients of Relevence
Predictive value
Feedback value
Timeliness
Three Ingredients of Reliability
Verifiability
Representational faithfulness
Neutrality
Comparability
Indicates that the information can be compared to other data in order to identify similarities and differences and allow users to make meaningful comparison between enterprises.
Consistency
A goal of this concept is comparison of one company’s information from one period to the next.
Cost/Benefit of Accounting Information
The cost/benefit pervasive constraint states that unless the benefit to be derived exceed the costs of providing that information, it should not be provided.
Materiality
Is a consideration if it is probable that a person relying on certain information will be influenced in making investment or credit decisions by an error or omission.
Asset
Probable future economic benefits obtained or controlled by a particular enterprise as a result of past transactions or events.
Liabilities
Probable future sacrifices of economic benefits arising from present obligation of a particular enterprise to transfer assets or provide services to other enterprises in the future as a result of past transactions or events.
Equity
Residual interest in the assets of an enterprise that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.
Investment by owners
Increases in net assets of a particular enterprise resulting from transfers to it from other enterprise of something of value to obtain or increase ownership interest (or equity) in it.
Distributions to owner
Decrease in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners.
Comprehensive Income
The change in equity (net assets) of an enterprise, during a period, from transactions and other events and circumstances from non owner sources.
ACS 220 requires ________.
The disclosure of comprehensive income
Revenue Recognition
Revenue is recognized when it is earned, measurable and collectible, that is when the income earning process is complete and an exchange has taken place.
Matching
Dictates that efforts and expenses be matched with the revenue of the period.
Unit of Measure
Comparability and understandability of financial information are enhanced if it is presented in terms of a common denominator.
Separate Entity
Information is reported as if the business were separate from its owners, customers, employees, and creditors.
Objectivity
Information should be free from bias on the part of the individual who prepared the information.
Periodicity
Because of the need for timely information, accounting information is reported for set time intervals.
ASC 825 requires _________.
All entities to disclose the fair value of many financial instrument.
Fair Value Definition ASC 820
“Fair value is the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.”
Government Accounting Standards Board (GASB)
Primary standards setter for state, local governments and all public not for profit entities.
The International Accounting Standards Board (IASB)
Its purpose is to write International a Financial Reporting Standards (IFRS) which will establish an International GAAP.
Securities and Exchange Commission (SEC)
It has oversight over public companies that are listed on a stock exchange.
Financial Accounting Standards Board (FASB)
Primary standard setting body in the US today.
