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
What is the going concern assumption?
Business will operate indefinitely
What is the periodicity assumption
allows company life to be divided into artificial the periods to provide timely info
Monetary unit assumption
Financial statement elements to be measured in a specific currency
Economic entity assumption
Activities of the entity are to be kept separate from the owners personal life
What are four key accounting practices that often are referred to as principles in current GAAP
Revenue recognition, expense recognition, measurement, full disclosure
Measurement
Historical cost, Net realizable value, current cost, present value, future value
What are two advantages of basing valuation of assets on their historical cost
Verifiable and objective
Describe how revenue recognition relates to transfer of goods and services
Revenue is recognize when customer own item or receives service
Assets
Economic benefits owned by the business
Liabilities
Obligations to other entities
Equity
The owners’ interest in assets after subtracting liabilities
Investments by owners
Any owner contribution to the company
Comprehensive income
All changes in equity besides owners investments
