Ch 1 The Environment and Conceptual Framework of Financial Reporting Flashcards
decision-usefulness
provide useful information for decision-making
financial statements
balance sheet, income statement, statement of cash flows, statement of stockholders’ equity
financial reporting
the financial information a company provides to help users with capital allocation decisions about the company
GAAP
common set of standards and procedures
Securities and Exchange Commission
SEC, a federal agency to help develop and standardize financial information presented to stockholders
Financial Accounting Standards Board
FASB, the major standard-setting organization in the private sector
FAF
Financial Accounting Foundation (FAF)
Financial Accounting Standards Advisory Council
FASAC, consults with FASB on major policy and technical issues and helps select task force members
financial accounting standards
accounting standards updates
American Institute of the Certified Public Accountants
AICPA, the national organization of practicing certified public accountants
conceptual framekwork
establishes the concepts that underlie financial reporting
objective of financial reporting
serves as the foundation of the conceptual framework
general-purpose financial statements
help users who lack the ability to demand all the financial information they need from a company and therefore must rely on the information provided in financial statements
qualitative characteristics
helps distinguish better (more useful) information from inferior (less useful) information for meeting the objective of financial reporting
predictive value
accounting information that helps users form their own expectations about the future
confirmatory value
accounting information that helps users confirm or correct prior expectations
materiality
a company-specific aspect of relevance; information is material if omitting it or misstating it would influence decisions that users make on the basis of the reported financial information
faithful representation
the numbers and descriptions match what really existed or happened
completeness
all the information that is necessary for faithful representation is provided
neutrality
a company cannot select information to favor one set of interested parties over another
free from error
information that is more accurate because there are no errors
comparability
enables users to identify the real similarities and differences in economic events between companies
consistency
when a company applies the same accounting treatment to similar events, from period to period
verifiability
when independent measurers, using the same methods, obtain similar results
timeliness
having information available to decision-makers before it loses its capacity to influence decisions
understandability
the quality of information that lets reasonably informed users see its significance
assets
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
liabilities
probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
equity
residual interest in the assets of an entity that remains after deducting its liabilities; in a business enterprise, the equity is the ownership interest
investments by owners
increases in net assets (equity) of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it; assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise
distributions to owners
decreases in net assets (equity) of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners; distributions to owners decrease ownership interests (or equity) in an enterprise
comprehensive income
change in net assets( equity) of an entity during a period from transactions and other events and circumstances from nonowner sources; it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners
revenues
inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
expenses
outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations
gains
increases in net assets (equity) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by ownerso
losses
decreases in net assets (equity) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except hose that result from expenses or distributions to owners
economic entity assumption
economic activity can be identified with a particular unit accountability
going concern assumption
the company will have a long life
monetary unit assumption
money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis
periodicity assumption
a company can divide its economic activities into artificial time periods
historical cost principle
GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price
fair value principle
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
performance obligation
when a company agrees to perform a service or sell a product to a customer
revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied
expense recognition principle
related to net changes in assets and earning revenues
product costs
material, labor, and overhead
period costs
salaries and other administrative expenses
full disclosure principle
the nature and amount of information included in financial reports reflects a series of judgmental trade-offs
notes to financial statements
amplify or explain the items presented in the main body of the statements
supplementary information
includes details or amounts that present a different perspective from that adopted in the financial statements
cost constraint
weighing the costs of providing the information against the benefits that can be derived from using it
expectation gap
what the public thinks accountants should do vs what accountants think they can do
