Chapter 1 - Financial Accounting & Accounting Standards

Question 1

Essential Characteristics of Accounting

Answer 1

(1) identification, measurement, and communication of financial information
(2) abut economic entities
(3) to interested parties

Question 2

The Financial Statements

Answer 2

Income Statement

Statement of Owners’/Stockholders’ Equity

Balance Sheet

Statement of Cash Flows

Note Disclosures
- extra information about the other financial statements

Question 3

Accounting and Capitol Allocation

Answer 3

Financial Reporting

• what we have currently
• provided to users

Users
- use reports to make their allocation decisions

Capitol Allocation
- we determine how capitol is allocated

Question 4

Objective of Financial Reporting

Answer 4

Provide financial information about reporting entity that is useful to external users

Question 5

Entity Prospective

Answer 5

Companies are separate and distinct from owners

Question 6

Decision Usefulness

Answer 6

Investors interested in company’s ability to

• generate net cash flows
• managements’ ability to protect and enhance cash flows

Question 7

Parties Involved in Standard Setting

Answer 7

• SEC
• AICPA
• FASB

Question 8

SEC

Answer 8

Securities and Exchange Commission

• publicly traded companies
• requires them to adhere to GAAP

Question 9

AICPA

Answer 9

American Institute of Certified Public Accounting

• national professional organization
• Committee on Accounting Procedures (CAP)
  
  • 51 Accounting Research Bulletins (ARBs)
  • 1939-1959
  • problem-by-problem doesn’t work
• Accounting Principles Board
  
  • 31 Accounting Principle Board Opinions
  • 1959-1973
  • didn’t work, adopted Wheat Committee recommendations
• Became the FASB

Question 10

FASB

Answer 10

Financial Accounting Standards Board

• smaller membership
• full-time, remunerated membership
• greater autonomy
• increased independence
• broader representation
• establishes and improves standards

Question 11

FAF

Answer 11

Financial Accounting Foundation

• select FASB members and Advisory Councils
• general oversight

Question 12

FASAC

Answer 12

Financial Accounting Standards Advisory Council

• help FASB with standards

Question 13

GAAP

Answer 13

Generally Accepted Accounting Principles

- most authoritative support
like the Constitution of the U.S.

Question 14

Sources of GAAP

Answer 14

• FASB
• APB Opinions
• AICPA Research Bulletins

Question 15

FASB Codification

Answer 15

• all information from Standards, Opinions, and Bulletins put in one place
• creates one level of GAAP, considered authoritative

Question 16

Financial Accounting Standards Boards Codification Research System (CRS)

Answer 16

• it’s a searchable database online
• easier to find stuff

Framework:

• topic
• subtopic
• section
• paragraph

Question 17

Major Challenge: Expectation GAAP

Answer 17

What public thinks accountants do v. What accountants think they do

Question 18

Major Challenge: Financial Reporting Issues

Answer 18

• non financial measurements
• forward-looking information
• soft assets
  
  • ex. trademarks
• timeliness
• understandability

Question 19

Major Challenge: International Accounting Standards

Answer 19

• U.S. GAAP issued by FASB
• International Financial Reporting Standards (IFRS)
  • issued by International Accounting Standards Board (IASB)

Question 20

Major Challenge: Ethics

Answer 20

• GAAP doesn’t always have answer

- right thing not always easy