Chap 1 Flashcards
Differentiate broadly between financial accounting and managerial accounting
Financial accounting - a process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. Users of these financial reports include investors, creditors, managers, unions, and government agencies.
Managerial accounting - a process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company’s operations.
Differentiate between “financial statements” and “financial reporting.”
Financial statements - a principal means through which a company communicates its financial information to ppl outside it. Generally there are four basic types of financial statements: (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners’ or stockholders’ equity.
Financial reporting other than financial statements may take various forms. Examples include the president’s letter and supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and descriptions of a company’s social or environmental impact.
How does accounting help the capital allocation process?
To help the capital allocation process run effectively, a company’s financial performance must be measured accurately, and fairly on a timely basis, so that the right managers and companies are able to attract investment capital. Unreliable and irrelevant information leads to poor capital allocation, which adversely affects the securities markets.
Capital allocation
The process of determining how and at what cost money is allocated among competing interests.
What is the objective of financial reporting?
The objective of general-purpose 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.
Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Information that is decision-useful to capital providers (investors) may also be helpful to other users of financial reporting who are not investors.
Briefly explain the meaning of decision-usefulness in the context of financial reporting.
Investors are interested in financial reporting because it provides information that is useful for making decisions. When making these decisions, investors are interested in assessing (1) the company’s ability to generate net cash inflows and (2) management’s ability to protect and enhance the capital providers’ investments.
Of what value is a common set of standards in financial accounting and reporting?
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. This common set of standards in financial accounting and reporting is called generally accepted accounting principles (GAAP). Preparing financial statements according to GAAP contributes to the comparability of accounting information.
What is the likely limitation of “general-purpose financial statements”?
General-purpose financial statements are not likely to satisfy the specific needs of all interested parties. Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied uses.
In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the develop-ment of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector.
What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
The Committee on Accounting Procedure (CAP) was appointed by the American Institute of CPAs (AICPA) in 1939, at the urging of the SEC. The CAP composed of practicing CPAs, issued 51 Accounting Research Bulletins between 1939 and 1959. These bulletins dealt with a variety of accounting problems. But, the Committee’s problem-by-problem approach failed to provide a well-defined and well-structured body of accounting theory that was so badly needed. The Committee was replaced in 1959 by the Accounting Principles Board.
For what purposes did the AICPA create the Accounting Principles Board?
The major purposes of the Accounting Principles Board (APB) were to (1) advance the written expression of accounting principles, (2) determine appropriate practices, and (3) narrow the areas of difference and inconsistency in practice. To achieve its basic objectives, its mission was to develop an overall conceptual framework to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements were issued.
Accounting Research Bulletins
Accounting Research Bulletins were pronouncements on accounting practice issued by the Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been recognized as accepted accounting practice unless superseded in part or in whole by an opinion of the APB or an FASB standard.
Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates
APB Opinions were issued by the Accounting Principles Board during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized as accepted practice and constitute the requirements to be followed by all business enterprises.
Accounting Standards Updates are pronouncements issued by the Financial Accounting Standards Board (FASB) that are incorporated into the FASB codification and therefore represent the accounting profession’s authoritative pronouncements on financial accounting and reporting practices.
If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
The explanation should note that generally accepted accounting principles or standards have “substantial authoritative support.” They consist of accounting practices, procedures, theories, concepts, and methods which are recognized by a large majority of practicing accountants as well as other members of the business and financial community. Bulletins issued by the Committee on Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”.
In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
It was believed that FASB Statements would carry greater weight than APB Opinions because of significant differences between the FASB and the APB, namely: (1) The FASB has a smaller membership, (2) full-time compensated members; (3) the FASB has greater autonomy, (4) increased independence; (5) the FASB has broader representation than the APB.
