Chapter 1

Question 1

What are the essential characteristics of accounting?

Answer 1

The identification, measurement, and communication of financial information about economic entities to interested parties.

Question 2

What are the major financial statements in accordance to GAAP? (5)

Answer 2

1. Income Statement
2. Statement of Owners’ or Stockholder’s Equity
3. Balance Sheet
4. Statement of Cash Flows
5. Note disclosure

Question 3

What is the purpose of information presented in notes to financial statements?

Answer 3

The provide disclosure required by GAAP

Question 4

How does Accounting assist in the efficient use of scarce resources?

Answer 4

Capital allocation

Question 5

Capital allocation

Answer 5

The process of determining how and at what cost money is allocated among competing interests

Question 6

An effective process of capital allocation is critical to a healthy economy, which

Answer 6

Promotes productivity
Encourages innovation
Provides an efficient and liquid market for buying and selling securities

Question 7

What is the objective of financial reporting?

Answer 7

Provide financial information about the reporting entity that is useful to:
-Present and potential equity investors
-lenders
-and other creditors
in making decisions in their capacity as capital providers

Question 8

General Purpose Financial Statements

Answer 8

• Provide financial reporting information to a wide variety of users
• provide the most useful information at the least cost

Question 9

Who are the primary users of general purpose financial statements

Answer 9

Equity investors and Creditors

Question 10

Entity Perspective

Answer 10

Companies viewed as separate and distinct from their owners

Question 11

Decision-Usefulness

Answer 11

Investors are interested in assessing the company’s:

• ability to generate net cash flows
• management’s ability to protect and enhance the capital providers’ investments

Question 12

Three parties that are involved in standard setting

Answer 12

• SEC (Securities and Exchange Commission)
• AICPA (American Institute of Certified Public Accountants)
• FASB - (Financial Accounting Standards Board)

Question 13

SEC

Answer 13

• Security Exchange Commissions
• Established by federal governmen
• oversee accounting and reporting for public companies
• encourage private standards setting body
• requires public companies to adhere to GAAP
• oversight
• enforcement authority

Question 14

AICPA

Answer 14

American Institute of Certified Public Accountants
-national professional organization
Established the following:
-Committee on Accounting Procedure (no longer exists)
-Accounting Principles Board (no longer exists)
-Resulted in a new board (FASB)

Question 15

FASB

Answer 15

Financial Accounting Standards Board

• Financial Accounting Foundation (selects members of the FASB, funds exercises, general oversight)
• FASB- Mission to establish and improve standards of financial accounting and reporting
• Financial Accounting Standards Advisory Council- Consult on major policy issues

Question 16

What are the differences between FASB and APB?

Answer 16

FASB has:

• smaller membership
• increased autonomy
• full-time, remunerated membership
• increased independence
• broader representation

Question 17

What is the first step taken in the establishment of a typical FASB statement:

Answer 17

Topics are identified and placed on the Board’s agenda

Question 18

What are the five steps of the due process system of FASB

Answer 18

1. Topics are identified and placed on the board’s agenda.
2. R&A conducted and preliminary views of pros and cons issued
3. Public hearing on proposed standard
4. Board evaluates research and public response and issues exposure draft
5. Board evaluates responses and changes exposure drafts, if necessary. Final standard issued.

Question 19

GAAP

Answer 19

• has substantial authoritative support
• Major sources: FASB standards, interpretations, and staff positions
• APB opinions
• AICPA Accounting Research Bulletins

Question 20

Which of the following Accounting pronouncements is the most authoritative?

Answer 20

AICPA Accounting Principles Board Opinion

Question 21

FASB codification

Answer 21

• provides all the authoritative literature to a related topic in one place
• creates one level of GAAP

Question 22

Expectations gap

Answer 22

what the public thinks accountants should do vs what accountants thinks they can do

Question 23

What are some financial reporting challenges?

Answer 23

• non-financial measurements
• forward-looking info
• soft assets- walmart’s expertise in supply chain
• timeliness
• understandability