Chapter 1 Flashcards
What is the function and primary focus of financial accounting?
To provide information to investors and creditors
What mechanism fosters efficient allocation of resources in the U.S.
Capital markets
identify two important variables to consider when making investment decisions
Rate of return; uncertainty or risk, of that specific return
What must a company do in the long run to provide a return to investors and creditors
Generate a profit
What is the primary objective of financial accounting?
Generate financial reports to convey a company’s performance to external parties
Define net operating cash flows briefly explain why periodic net operating cash flows may not be a good indicator of future cash operating flows
Companies can pay or receive cash that relates to other periods, does not provide enough
information
Why should all companies follow GAAP in reporting to external users
To ensure transparency and consistency
Explain the roles of the sec and the FASB in setting accounting standards
FASB sets standards
Sec-oversees FasB
Explain the role of the auditor in financial reporting process
To add credibility; examine financial statements; make sure GAAP is applied appropriately
List at least three key provision of the sarbanes oxley act of 2002
Regulate auditors; addresses conflicts of interests for securities analysts; provides stiff criminal penalties for violators
What are adverse economic consequences of new Or changed accounting standards
Con cause a redistribution of wealth causing companies to charge their behavior.
Why does the FASB undertake a series of elaborate information-gathering steps before issuing a substantiative accounting standard
To acquire information from stakeholders and anticipate adverse economic effects.
What is the purpose of the FASB’S conceptual framework
To provide an underlying foundation for accounting standards
How do relevance and faithful representation relate to financial accounting information
Usefulness; relevance - can affect A user’s judgement; faithful representation- not biased accurate
What are four basic assumptions underlying GAAP
The economic entity assumption The going concern as The periodicity assumption The monetary unit assumption
