Audio book Chapter 1 Flashcards
What are the concept Statements?
They are not GAAP they are a theoretical frame work for forming the standards.
Concept Statement 1: Objectives of financial reporting by Business enterprises
Financial statement should provide information that is useful to present and potential investors, creditors and others in making rational decisions
1) should provide info useful in investing and credit decisions
2) info useful in accessing the amounts, timing, and cash flows.
3) Info about enterprise resources, claim to those resources, and change to those resources.
Concept statement 2: qualitative characteristics in accounting information.
1) Relevance: the capacity for information to make a difference in a decision, Must be timely and it must have predictive value or feedback value or both.
Timely- info available when it is needed to make the decision
Predictive value- information could be used to forecast future information
Feedback value- info could be used to confirm or correct information
2)Reliability: Information is free from error and not favoring a specific entity and it a faithful representation
Verifiable- Different entities reporting similar or same information could verify information or have the same measurements
Representational Faithfulness- there is agreement between the information and what it reports to represent. the information has Validity.
Neutral- Information is Bias it does not favor any side
Secondary Qualities of concept 2
Comparability and Consistency
What are the two constraints provided By concept 2
Cost Benefit- cost less for the accounting info than the benefit it provides
Materiality- the information is large enough to make a difference in the statement.
Concept statement 6 Element of accounting: this one was a replacement of 3
Assets Liabilities
Equity Investments by owner
Distributions to owner Comprehensive income
Revenues Expenses
Gaines losses
When could an item be recognized in the financial statement
When it meets the qualities of reliability and relevance and it could be classified as on of the elements then it could be reported in an income statement.
accumulated comprehensive income is reported ?
In the balance sheet under the equity section. it is for elements that do not meet all the qualities to be reported in the income statement.
Concept statement 5 Recognition and measurement of business enterprises
Items that should be disclosed in a full set of financial statements.
Financial position = Balance Sheet
Earning for the period = Income statement
Comprehensive income for the period
Cash flows during the period = Statement of Cashflows
investment in and out during the period to owner= statement of changes in owners equity
Recognition is?
is when the item is recognized in the financial statement. This includes in words and numbers.
1) Item must meet the definition of an element.
2) Item must be Measurable
3) Must have reliability
4) Must be relevant
In order to be reported in the financial statement.
When are Revenues and Gains recognized?
When the are realizable and earned.
Economic losses and expenses should be recognized ?
when economic benefits are consumed or it become evident that a loss or lack of benefit
Measurement methods in the financial statement.
1 Historical cost 2 Current cost 3 Current market value= Fair value 4 net present value 5 future value of cash flows
Concept statement 7
How and when to use future value of cash flows and the expect cash flows accounting measurements
When observable future values are not available accountant could use estimates of cash flows and the present value techniques to determine the carrying amount of an asset or liability. When it is uncertain should use expected furture value. concept seven provides guidelines of techniques of estimating and forecasting future cash flows. The expected present value of cash flow should be used when the timing of income is uncertain.
What are publicly traded companies under the SEC required to be reported under?
Under GAAP which requires for the Accrual basis of accounting to be used.
What two concepts does Accrual basis of accounting rely on ?
Revenue Recognition: Should be recognized when the product is sold or the service is rendered not when the cash is received.
Matching:Expense should be recorded when expensed not when paid. In other words they have to be matched with the revenue.
When is revenue recognized in accrual accounting
When it is realized: when goods or something similar is exchanged for cash or something similar and it is probable that collection will happen.
and earned: when the earnings process is complete and a exchange took place.Both of these requirement are met on the sale date when title transfers over to the buyer.
What are Installment sales?
Sales that are meant to be paid in installments. This type of sale would increase the probability of noncollectable debt. this is why you would recognize the sale and cogs on the date of sale but deffer the profit recognized . it is usually current asset on the year that it would be collected. the differed revenue is reported as unearned revenue on the balance sheet. this classifies as a liability. if interest is received it would be under interest revenue.
Cost recovery Method?
is only used when is is highly unlikely for you to receive payments. Under this method revenue is not recognized until you receive enough payments to cover the cost.
When do you recognized revenue when a right of return exist?
could only be recognized on sale date when
1 the price is fixed on sale date
2 the buyer has to pay
3 the obligation does not change during theft or any damage to the property
4 its not with a party that just established sales revenue
5 the seller has not significant obligation for performance for resale of the product
6 the amount of future returns could be reasonably estimate
All conditions must be met. if not the sale is not recognized until the return date has expired.
When should Sales of Franchises be recognized?
1 the frinchisor has no obligations or intent to return unpaid debt.
2 all services and obligations by the franchisor are preformed
3 no other material conditions or obligations exist.
if a large franchise fee is initially required and small fees are received throughout the life. then a portion of the initial fee should be recorded as unearned revenue and amortized over the life of the franchise.
If a portion of the fee is required for tangible assets than a portion of the fee should be assigned to the fair value of the assets. and recognized as revenue before or after the revenue associated with the initial services.
Continuing franchise fees should be recognized as revenue when they are recieved and related cost should be when they are incurred
When to recognized revenue when the franchisee have the option for a bargain purchase? for Franchise
First recognize a portion of the revenue as differed. this is then an adjustment to the selling price when the items are sold to the franchisee.
When should service revenue be recognized?
1 When the service is complete
2 times service are performed if there are multiple incidents with similar value.
When they are uncertain you could use the cost recovery method or the installment of sale.
Sale of Real estate?
At the sale date (other then retail land sale) when
1 the sale is not for consignment
2 the buyer shows a commitment to pay
3 sellers receivable or not going under subordination.(controlled by another part)
4 risk and rewards of the assets have been transferred
Accounting Errors are?
mistakes that happen measurement. presentations, recognition, or disclosure in financial statements.
Types of error
1 Mathematical
2 mistakes in apply GAAP
3 oversight of misuse of facts when the financial statements where prepared.
Example of an error: Change of accounting principle from GAAP to not GAAP
How many periods do accounting errors affect?
A classification error only one
An error failure to adjust information or not recording certain inventory could affect two periods.
Change in accounting principle requires ?
retrospective application to all prior periods. unless it is impossible to do so. Change affects the opening balance of retained earnings for the period, only direct effect in change of principle are recognized in retrospective adjustments
What are some examples of direct affects of change in principals?
1 Change in inventory Valuation methods
2 Related changes to accounts such as differed taxes
In-direct affects to change in accounting principals are?
Effects on profit sharing payments or royalty payments
Theses types of changes are reported in the current period in which they are made
