Chapter 1 Flashcards
Functions of accounting
Transaction processing
Decision support
Governmental reporting
Purpose of financial accounting
To provide relevant information to external users
Specifically profits oriented companies to investors and creditors
Gains
Increases in equity
Losses
Decreases in equity
Purpose of comprehensive income
To report other changes in shareholders equity during the period that were not the result of transactions with owners.
Capital markets
Composite of all investors and creditors and fosters the efficient allocation of resources.
Cash basis accounting
Revenue is recognized when cash is received.
Expenses are recognized when cash is paid.
Accrual accounting
Revenue is recognized when earned
Expenses are recognized when incurred.
GAAP Generally accepted accounting principles
Concepts, principles and procedures developed to meet the needs of external users.
How was sec created
As a result of the stock market crash of 1929, congress passed SEC
Hierarchy of standard setting authority
Congress sec private sector and FASB
SEC
Created to develop and standrdize financial information presented to stockholders
Must follow rules of GAAP
FASB
Sets out to improve corporate accounting practices by enhancing guidelines set out for accounting reports. Identifying and resolving issues in a timely manner and creating a uniform standard across the financial markets.
CAP committee on Accounting procedures
The first of the private sector to establish accounting standards
APB
Replaced CAP but was never able to create a conceptual framework
EITF
Attempts to identify financial reporting issues and solve the problems without the help of GAAP
Due process
- Board reviews recommendations and requests
- FASB decides rather to add the project to the agenda.
- The board deliberates at one or more political meeting
- Board issued an exposure draft
- Board holds a public round table
- Staff analysis letters and discussions
- The board issues an update explaining amendments to the accounting standards codification
Fundamental qualitative characteristics
Relevance and faithful representation
Relevance
One of the primary decision-specific qualities that make accounting information useful made up of predictive value and feedback value and timeliness
Faithful representation
Agreement between a measure and the phenomenon it purports to represent
Assumptions
Economic entity
Going concern
The periodicity
Monetary unit
Economic entity
All economic events can be identified specifically
Going concern
In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely
Periodicity
Allows the life of the company to be so divided into artifices time periods to provide timely information
Monetary
Measurement scale used in financial statements
Realization principle: REVENUE
Revenue should be recognized when the earnings process is virtually complete and collection is reasonable assured
Matching principle: EXPENSE
Expenses should be recognized in the period in which they produce revenues
Measurement
Historical cost Bet realizable value Current cost Present or discounted value of future cash flows Fair value
Historical cost
Measures assets and liabilities based on their original transaction
Net realizable value
The amount of cash into which an asset is expected to be converted in the ordinary course of business
Current cost
Some inventories are reported at their current replacement cost
Present value
Based measurement on future cash flows discounted for the time value of money
Fair value
Bases measurement on the price that would be received to sell assets or transfer liabilities in an orderly market transaction
Full disclosure principle
The financial reports should include any information that could affect the decisions made by external users
