Ch. 1 Flashcards
What is financial accounting?
Is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties.
Users of the financial reports include who?
Investors creditors managers unions and government agencies
What is managerial accounting?
It is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control and evaluate a company’s operations.
What are financial statements used for?
Company’s use them to communicate financial information
Financial statements include
Income retained earnings balance sheet and statement of cash flows.
Financial reporting
Some info is better provided or can be provided by financial reporting other than the formal financial statements
Resources are what?
Limited
How can you determine whether a business thrives?
The efficient use of resources
What is the capital allocation process??
Financial reporting:
Is the financial info a company provides to help users with capital allocation descisions about the company
Users
(present and potential)
Investors and creditors use financial reports to make their capital allocation decisions
Capital allocation
Process of determining how and at what cost money is allocated among the competing interests.
What is the objective of financial reporting?
Is to provide financial information about the reporting entity that is useful to present and potential equity investors,lenders and other creditors in decisions about providing resources to the entity.
General purpose financial statements
Provide financial information to a wide variety of users.
General purpose financial statements provide what?
The least cost the most useful information possible.
The objective of financial reporting identifies?
Investors and creditors as the primary users for General purpose financial statements.
Entity perspective
Is part of the objective General purpose financial reporting, companies are viewed as separate and distinct from their owners using the perspective.
Decision usefulness
Investors are interested in financial reporting bc it provides info that is useful for making decisions.
Investors are interesting in assessing
1) the companies ability to generate net cash inflows
2) managements ability to protect and enchance the capital providers investments
Objective of accrual accounting is
That it ensures that a company records events that change its financial statements in the periods in which events occur rather than only in periods in which it receives cash.
Under accrual accounting companies
Recognizes revenues when it provides the goods or services rather than when it receives cash.
Recognizes expenses when it incurs them rather than when it pays them.
General purpose financial statements
Is created to meet the needs (for info of various types ) and satisfy the stewardship reporting responsibilities of management
GAPP
Generally accepted means either that an authoritative accounting rule making body has established a principle of reporting in w given area or that over time a given practice has been accepted appropriate bc of its universal application.
SEC (securities and exchange commission) was established because
Stock market crashed in 1929, and the nation went into Great Depression and there was calls for increased government regulation of businesses especially financial institutions and the stock market.
SEC was established to
Help develop and standardize financial information presented to stockholders
SEC encouraged the creation of a private standard setting body because it believed
That the private sector had the appropriate resources and talent to achieve the task. (Issue accounting standards)
Accounting standards is developed as private sector through
AICPA or the FASB.
SEC relies on who to develop the accounting standards
FASB
SECS mandate is to what
Establish accounting principles.
AICPA (American institute of certified public accountants)
National professional organization of practicing certified public accountants has been important contributor to delveopment of GAAP.
CAP ( committee on accounting procedure) was appointed by AICPA and CAP was composed of what?
Practicing CPAs, issued 51, accounting research bulletins. Dealt with variety of accounting problems
The bulletins of CPA failed so what was created next?
accounting principles board
Accounting principles board (APB) purpose is to
- Advance the written expression of accounting principles
- Determine appropriate practices
- Narrow the areas of diff and inconsistency in the practice.
How were the major purposes of the APB achieved ?
Develop conceptual framework to assist in the problems
Wheat committee
Known for the chair Francis wheat, the group examined the organization and operation of APB and determined necessary changes to attain better results.
APB was replaced with
Financial accounting standards board (FASB)
Resulted by the wheat committee recommendations done by AICPA
Wheat committee recommendation resulted in the creation of standard setting structure composed of three organizations
Financial accounting foundation (FAF)
FASB
Financial accounting standards advisory council (FASAC)
The members of FASB was selected by whom?
FAF
FASB
Purpose is to establish and improve standards of financial accounting and reporting for guidance and education of the public which includes issuers auditors and users of financial information.
What is the difference between FASB AND APB
- Smaller membership- FASB has 7 members, replacing the large 18 member APB
- Full time remunerated membership- FASB members well paid, full time appointed renewable 5 year terms. the APB members volunteered their part time work.
- Greater autonomy- APB was senior committee on the AICPA. FASB is not part of any single professional organization. It is appointed by FAF.
- Increased independence - APB members retained their private positions with firms, companies or institutions. FASB members must sever all ties.
- Broader representation - all APB members were required To be CPAs and members of AICPA. It is not necessary to be a CPA to be a member of FASB.
FASAC PURPOSE IS
To consult on major policy issues technical issues project priorities and selection and organization of task forces.
FASB relies on two basic premises, what are they
- Should be responsive to the needs and view points of the entire economic community
- Should operate in full view of public through due process system
due process
Pg. 11
Accounting standard updates
Used for FASB to issue accounting pronouncements
Accounting standards updates are what
Establishes GAAP
Updates amend accounting standards codification , each update explains how the codification has been amended.n
The second type of update is
Emerging issues task force , provides implementation guidance within. The framework of the codification to reduce diversity on a timely basis.
EITF was designed to what
Minimize the need for FASB to spend time and effort addressing narrow implementation application or other emerging issues.
Statements of finAncial accounting concepts is issued to be part of
(DOES NOT ESTABLISH GAPP)
Conceptual framework
The role of AICPA in standard setting is now what
Diminished
Who is the leader of developing the auditing standards through the auditing standards board
AICPA
Sarbanes Oxley act requires public company accounting oversight board o oversee what
Development of auditing standards.
GAAP is composed of what
APB opinions FASB standards and AICPA research bulletins.
Why was the FASB codification created?
To provide in one place all of the authoritive literature related to a particular topic.
(B4 ppl were not sure if the had the right GAAP and determining what was authoritative and what was not)
Codification explains what
GAAP is and it does not create a new GAAP. AND IT CREATES A ONE LEVEL OF GAAP which is considered authoritative.
Financial accounting standards board codification research system was Developed to
Provide easy access to the codification, it is an online system
Sarbanes Oxley act was passed bc
In response to a string of accounting scandals.
This law increased the resources for SEC TO COMBAT fraud and curb poor reporting practices.
Sarbanes act introduced changes to structure of accounting profession such as
Established PCAOB
Implements stronger independence rules for auditors
Require CEOS and CFOS to certify financial statements and disclosures are accurate and complete
Requires audit committees to be compromised of independent members
Requires codes of ethics
Public company accounting oversight board
PCAOB has oversight and enforcement authority and establishes auditing quality control and independence standards and rules.
Sarbanes requires public companies to
Attest to the effectiveness of their. Internal. Controls over financial reporting
Internal controls
System of checks and balances designed to prevent and detect fraud and errors.
Expectations gap
Is what public thinks accountants should do and what accountants think they can do.
What are some of the financial reporting issues
Non financial measurements Forward looking info Soft assets Timeliness Understandability
There are 2 sets of rules accepted for international use
GAPP and international financial reporting standards (IFRS) issued by London based international accounting standards board
