CHAPTER 1 Flashcards
The Financial Reporting Environment
How are amendments incorporated into the FASB Accounting Standards Codification?
The FASB follows a due process procedure before issuing final pronouncements. This procedure includes (1) identifying issues, (2) adding a project to the technical agenda, (3) public meetings, (4) publication of an exposure draft (and possibly a Discussion Paper), (5) another public meeting if needed, (6) staff analysis and FASB redeliberation with stakeholder input, and (7) a FASB vote on a final draft proposal. If a majority of the seven board members approves, an Accounting Standards Update is issued to amend the ASC.
The significant characteristics of the state and local governmental environment to be considered when establishing financial reporting objectives include all of the following except
- Taxpayers have expectations about the services received but also want the maximum services for the minimum taxes
- The representative form of government and the separation of powers are primary characteristics of governmental structure
- Intergovernmental revenues flow among national, state, county, and city governments.
- EXCEPT: The similarities between governments at the same level.
According to the FASB’s conceptual framework, an entity’s revenue may result from a(n
Decrease in a liability from primary operations.
(Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity’s ongoing major or central operations. Thus, a revenue may result from a decrease in a liability from primary operations, for example, by delivering goods that were paid for in advance)
rental revenue should be recognized as realized and earned?
Revenues should be recognized when they are realized or realizable and earned. The most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers. Rental revenue should be recognized evenly over the period of time during which the asset is being rented.
According to the FASB’s conceptual framework, a department store ordinarily recognizes revenue when
Revenues should be recognized when they are realized or realizable and earned. Revenues are realized when products, merchandise, or other assets are exchanged for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, such as receipt of merchandise by the customers
characteristic of nongovernmental not-for-profit entities (NFPs)
The operating environments of NFPs and business entities are similar in many ways. Both produce and distribute goods and services using scarce resources.
smaller reporting company with respect to market value, as established by the U.S. Securities and Exchange Commission, includes companies with less than exactly what amount in public equity float?
The definition of a smaller reporting company pertains to an issuer that is not an investment company, an asset-backed issuer (as defined in SEC Sec. 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and has less than $75 million in public equity float.
stakeholders of NFPs include
Stakeholders are individuals or groups that can affect or be affected by the organization’s actions, objectives, or policies. They include managers, constituents, oversight bodies, and resource providers
Form 10-Q must be filed within
Form 10-Q is the quarterly report of operations and financial condition to the SEC.
It must be filed within (1) 40 days of the last day of the first three fiscal quarters by large accelerated filers ($700 million or more in publicly held stocks)
and accelerated filers ($75 million to $700 million) and
(2) 45 days by nonaccelerated filers (less than $75 million). An entity required to file Form 10-K also must file Form 10-Q for each of the first three quarters.
the following reports would a company file to meet the U.S. Securities and Exchange Commission’s requirements for unaudited, interim financial statements reviewed by an independent accountant?
Form 10-Q is the quarterly (interim) report of operations and financial condition to the U.S. Securities and Exchange Commission (SEC). Interim financial information must be reviewed by an independent accountant if it is not audited.
FASB’s conceptual framework, which of the following is an essential characteristic of an asset?
One of the three essential characteristics of an asset is that the transaction or event giving rise to the entity’s right to or control of its assets has already occurred. It is not expected to occur in the future. A second essential characteristic of an asset is that an entity can obtain the benefits of and control others’ access to the asset. The third essential characteristic is that an asset must embody a probable future benefit that involves a capacity to contribute to future net cash inflows
Continuation of an accounting entity in the absence of evidence to the contrary is an example of the basic concept of
Going concern: A basic feature of financial accounting is that a business is assumed to be a going concern in the absence of evidence to the contrary. The going-concern concept is based on the empirical observation that many entities have an indefinite life.
Financial Accounting Standards Board
1 .Recognized as authoritative by the SEC and the AICPA
- Helps to increase understanding of, and confidence in, financial information on the part of users of financial reports.
- Establishes accounting concepts and standards for financial accounting and reporting and provides guidance on implementation of standards.
SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements,
required elementS of every present value measurement
(1) estimates of future cash flows;
2) expected variability of their amount and timing;
(3) the time value of money based on the risk-free interest rate;
(4) the price of uncertainty inherent in an asset or liability; and
(5) other factors, such as lack of liquidity or market imperfections.
Changes in the estimated cash flows used in a present value measurement may be addressed by revising the interest amortization plan. This method is the alternative to a fresh-start remeasurement. The FASB’s preferred expected cash flow approach to revision of the plan is to
Changes in estimated cash flows may result in (1) a fresh-start measurement or (2) a change in the plan of interest amortization. Given no re-measurement, the interest amortization plan may be revised using a catch-up method. Adjusting the carrying amount to the present value of the remaining cash flows discounted at the original rate is preferred by the FASB.
GASB’s conceptual framework qualitative characteristic
Reliability generally is high for initial amounts of assets and liabilities, but allocation of certain amounts to periods may decrease reliability.
Reliability also is improved when a valuation method, e.g., present value, is available that is (1) verifiable, (2) representationally faithful, and (3) reasonably free of bias. Moreover, reliability does not indicate certainty or precision. Also, reliability is inversely correlated with uncertainty.
Objectives of financial reporting is applicable to governmental entities to provide information
Providing information for assessing service efforts and accomplishments is one of the objectives that serves to assist in evaluating the operating results of a governmental entity.
objectives of financial reporting is applicable to NFP’S
About economic resources, obligations, net resources, and changes in them
Useful in assessing management stewardship and performance.
Useful in making resource allocation decisions
the following most likely are not identified by the GASB as users of financial reporting for state and local governmental-type activities
- .Investors and creditors who provide financing to governmental entities are users of financial reporting for governmental-type activities.
- Legislative and oversight bodies who represent citizens are users of financial reporting for governmental-type activities.
- Citizens.
capital maintenance approach
financial capital maintenance approach requires that comprehensive income be determined by finding the change in equity (net assets) after adjusting for investments by, and distributions to, owners. However, this approach does not provide the detail of the transaction approach to income determination under which each component of income is measured and reported
Materiality and relevance are both defined by
Both materiality and relevance are characteristics defined by their ability to influence or make a difference to a decision maker. Materiality is an entity-specific aspect of relevance based on the nature, magnitude, or both of the items to which the information relates in the context of an individual entity’s financial report.
hich of the following is considered a pervasive constraint by the FASB’s conceptual framework? A. Verifiability. B. Conservatism. C. Cost. D. Timeliness.
Answer (C) is correct.
Cost is a pervasive constraint on the information provided by financial reporting. The benefits of financial information should exceed the costs of repo
The significant characteristics of the state and local governmental environment to be considered when establishing financial reporting objectives include all of the following except
A. The similarities between governments at the same level.
B. The representative form of government and the separation of powers.
C. The prevalence of intergovernmental revenues.
D. The relationship of taxpayers to services received.
Answer (A) is correct.
The dissimilarity of functions of similarly designated entities (e.g., city, county, or state) at the same level of government is a characteristic of the governmental environment. For example, within a state, a function (e.g., financing construction) may be performed by (1) a self-sufficient special district or (2) a similar entity that is financially dependent on the government that created it.
What is the underlying concept that supports the immediate recognition of a contingent loss? A. Consistency. B. Matching. C. Conservatism. D. Substance over form.
Answer (C) is correct.
Under the conservatism constraint, when alternative accounting methods are appropriate, the one having the less favorable effect on net income and total assets is preferable. However, conservatism does not permit a deliberate understatement of total assets and net income. Furthermore, SFAC 5 describes “a general tendency to emphasize purchase and sale transactions and to apply conservative procedures in accounting recognition.” Recognition of a contingent loss has a less favorable effect on net income than nonrecognition.
