Chapter 1 Flashcards
What is GAAP-LAND?
an orderly place with well-defined rules
Who makes the rules that govern GAAP-LAND?
FASB produces the rules, and SEC has the ultimate authority
How did SEC get ultimate authority?
Securities Acts of 1933 and 1934
Where do you find GAAP?
Accounting Standards Codification
How does the FASB create new rules?
4 of the 7 members need to pass the rule
What happens when a new rule is created?
FASB issues an accounting standards update
Who lives in GAAP-LAND?
Entrepreneurs and investors (investors work with financial accounting)
Define Financial Accounting
Information you give to someone outside the company
Define Managerial Accounting
internal business
Explain the problem of the lemons
Challenges that come from a seller trading information to the buyer; an example of this is selling a car; the information can’t be fully trusted, so a third party is brought in (auditor)
Define information asymmetry
when the seller isn’t truthful, or doesn’t give enough information to the buyer
What is a CPA and what is required of them (or the third party)?
CPA: Certified Public Accountant
- independent and competent
- issue an opinion to say whether something does or doesn’t go with GAAP
What does GAAP, SEC, FASB, ASC, and ASU stand for?
Generally accepted accounting principles
Securities and exchange commission
Financial Accounting Standards Board
Accounting standards codification
Accounting standards update
What is the ASC?
Same thing as GAAP, but new within the last 10 years
What does SEC require from companies?
File annual reports on Form 10-K and quarterly reports on Form 10-Q
Where are forms found and what does it stand for?
Forms are found in the electronic data gathering, analysis, and retrieval (EDGAR)
Are smaller companies subject to SEC or GAAP?
No.
What are the enforcement mechanisms that keep evil managers from FRAUD-LAND?
Codes of ethic
Standardized set of accounting rules (GAAP)
SEC acts as the enforcer and could put evil managers in jail
What is the IASB and where is it located?
International accounting standards board in London
What is the IFRS and what is its goal?
International Financial Reporting Standards; create consistent, transparent, and easily comparable financial statements.
Can U.S. firms use IFRS when filing with SEC? Can foreign firms that list their stock in the U.S. use IFRS?
Yes and yes
What are the notes to the financial statement?
Pages and pages that dig deeper into the financial statements
What accounts go on the balance sheet?
Assets, Liabilities, Stockholders’ Equity
What accounts go on the income statement?
Revenues and Expenses
What is decision usefulness?
Primary objective of GAAP
What are the primary characteristics?
Relevance and Representational Faithfulness
What are the secondary characteristics?
Comparability
Verifiability
Timeliness
Understandability
What are the basic elements of financial statments?
Assets
Liabilities
Equality
Revenues
Expenses
