Chapter 1

Question 1

What is GAAP-LAND?

Answer 1

an orderly place with well-defined rules

Question 2

Who makes the rules that govern GAAP-LAND?

Answer 2

FASB produces the rules, and SEC has the ultimate authority

Question 3

How did SEC get ultimate authority?

Answer 3

Securities Acts of 1933 and 1934

Question 4

Where do you find GAAP?

Answer 4

Accounting Standards Codification

Question 5

How does the FASB create new rules?

Answer 5

4 of the 7 members need to pass the rule

Question 6

What happens when a new rule is created?

Answer 6

FASB issues an accounting standards update

Question 7

Who lives in GAAP-LAND?

Answer 7

Entrepreneurs and investors (investors work with financial accounting)

Question 8

Define Financial Accounting

Answer 8

Information you give to someone outside the company

Question 9

Define Managerial Accounting

Answer 9

internal business

Question 10

Explain the problem of the lemons

Answer 10

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)

Question 11

Define information asymmetry

Answer 11

when the seller isn’t truthful, or doesn’t give enough information to the buyer

Question 12

What is a CPA and what is required of them (or the third party)?

Answer 12

CPA: Certified Public Accountant
- independent and competent
- issue an opinion to say whether something does or doesn’t go with GAAP

Question 13

What does GAAP, SEC, FASB, ASC, and ASU stand for?

Answer 13

Generally accepted accounting principles

Securities and exchange commission

Financial Accounting Standards Board

Accounting standards codification

Accounting standards update

Question 14

What is the ASC?

Answer 14

Same thing as GAAP, but new within the last 10 years

Question 15

What does SEC require from companies?

Answer 15

File annual reports on Form 10-K and quarterly reports on Form 10-Q

Question 16

Where are forms found and what does it stand for?

Answer 16

Forms are found in the electronic data gathering, analysis, and retrieval (EDGAR)

Question 17

Are smaller companies subject to SEC or GAAP?

Answer 17

No.

Question 18

What are the enforcement mechanisms that keep evil managers from FRAUD-LAND?

Answer 18

Codes of ethic

Standardized set of accounting rules (GAAP)

SEC acts as the enforcer and could put evil managers in jail

Question 19

What is the IASB and where is it located?

Answer 19

International accounting standards board in London

Question 20

What is the IFRS and what is its goal?

Answer 20

International Financial Reporting Standards; create consistent, transparent, and easily comparable financial statements.

Question 21

Can U.S. firms use IFRS when filing with SEC? Can foreign firms that list their stock in the U.S. use IFRS?

Answer 21

Yes and yes

Question 22

What are the notes to the financial statement?

Answer 22

Pages and pages that dig deeper into the financial statements

Question 23

What accounts go on the balance sheet?

Answer 23

Assets, Liabilities, Stockholders’ Equity

Question 24

What accounts go on the income statement?

Answer 24

Revenues and Expenses

Question 25

What is decision usefulness?

Answer 25

Primary objective of GAAP

Question 26

What are the primary characteristics?

Answer 26

Relevance and Representational Faithfulness

Question 27

What are the secondary characteristics?

Answer 27

Comparability
Verifiability
Timeliness
Understandability

Question 28

What are the basic elements of financial statments?

Answer 28

Assets
Liabilities
Equality
Revenues
Expenses