Chapter 1 Terms and Questions

Question 1

Financial Accounting

Answer 1

Chiefly concerned with providing financial information to various external users.

Question 2

Financial Reporting

Answer 2

Process of providing info to external users.

Question 3

Capital Markets

Answer 3

Composite of all investors and creditors.

Question 4

Corporation

Answer 4

Acquires capital from investors in exchange for ownership interest and by borrowing from creditors.

Question 5

Initial Market Transactions

Answer 5

Corporation sells shares of stocks or bonds to individuals or other entities that want to invest in it.

Question 6

Secondary Market Transactions

Answer 6

Transfers of stocks and bonds between individuals and institutions.

Question 7

Net Operating Cash Flow

Answer 7

Difference between cash receipts and payments from transactions related to providing goods and services to customers during a reporting period.

Question 8

Generally Accepted Accounting Principles

Answer 8

GAAP. A set of broad and specific guidelines for companies to following when measuring and reporting financial information in statements and notes.

Question 9

Securities and Exchange Commission

Answer 9

SEC. Created 1934, Congress gave authority to set accounting and reporting standards for companies whose securities are publicly traded. Has delegated task of setting standard to private sector.

Question 10

Committee on Accounting Procedure

Answer 10

CAP. First private sector body to assume task of setting accounting standards.

Question 11

American Institute of Accountants

Answer 11

AIA. CAP was a committee of this. Renamed American Institute of Certified Public Accounts (AICPA) in 1957.

Question 12

Accounting Principles Board

Answer 12

APB. Replaced CAP in 1959. Issues 31 Accounting Principles Board Opinions (APBOs), Interpretations and four Statements. Many ARBs and APBOs represent authoritative GAAP.

Question 13

Financial Accounting Standards Board

Answer 13

FASB. Seven full-time members. Includes members from various constituencies concerned with accounting standards. Supported by Financial Accounting Foundation (FAF), parent organization. Selects members of FAF and Financial Accounting Standards Advisory Council (FASAC).

Question 14

Emerging Issues Task Force

Answer 14

EITF. Improve financial reporting by narrowly defining financial accounting issues within GAAP framework. Addresses implementation issues, speeds up standard-setting process and allow FASB to focus on long-term issues. Rulings ratified by FASB, added to GAAP.

Question 15

International Accounting Standards Committe

Answer 15

IASC. Developed 1973 to develop global accounting standards. Reorganized 2001 to create a new standard-setting body called International Accounting Standards Board (IASB). Issued 41 IASs which IASB endorsed.

Question 16

International Financial Reporting Standards

Answer 16

IFRS. Standards issued by the IASB.

Question 17

Auditors

Answer 17

Independent Intermediary to help ensure that management has appropriately applied GAAP in preparing company financial statements.

Question 18

Certified Pubblic Accountants

Answer 18

CPAs. Licensed by states to provide audit services.

Question 19

Principles-based, Objectives-oriented

Answer 19

An approach to standard-setting that stresses professional judgment instead of following a list of rules.

Question 20

Institute of Management Accountants

Answer 20

IMA. Primary national organization of accountants working in industry and government.

Question 21

Institute of Internal Auditors

Answer 21

National organization of accountants providing internal auditing services for their own organizations.

Question 22

Conceptual Framework

Answer 22

Has been described as an “Accounting Constitution” that provides underlying foundation for U.S. accounting standards.

Question 23

Decision usefulness

Answer 23

Requires that information is relevant and is faithfully represented.

Question 24

Relevant

Answer 24

Information is predictive and has confirmatory value.

Question 25

Material

Answer 25

Information is material if it has an effect on decisions.

Question 26

Faithful representation

Answer 26

Agreement between a measure or description and the phenomenon it purports to represent.

Question 27

Complete

Answer 27

Includes all information necessary.

Question 28

Comparability

Answer 28

Similar items are treated the same way and different items are treated differently.

Question 29

Consistency

Answer 29

Measured and reported the same way in each time period.

Question 30

Verifiable

Answer 30

Different measurers would reach a consensus about whether information is faithfully represented.

Question 31

Timely

Answer 31

Info is available to users early enough to allow them to use it in their decision process.

Question 32

Understandability

Answer 32

Users can comprehend information.

Question 33

Cost effectiveness

Answer 33

Benefit of increased decision usefulness exceeds the costs of providing that information.

Question 34

What are the 4 basic assumptions underlying GAAP?

Answer 34

Economic entity, going concern, periodicity, monetary unit.

Question 35

Economic entity

Answer 35

All economic events can be identified with a particular economic entity.

Question 36

Going concern

Answer 36

In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.

Question 37

Periodicity

Answer 37

Life of a company can be divided into artificial time periods to provide timely information to external users.

Question 38

Monetary unit

Answer 38

In the US, financial statement elements should be measured in terms of the US dollar.

Question 39

Revenue/Expense Approach

Answer 39

Emphasize principles for recognizing revenues and expenses with some assets and liabilities recognized as necessary to make the balance sheet reconcile with the income statement. Accounting for sales transaction focus on whether revenue has been earned and if so record an asset associated with revenue. Identify expenses necessary to earn that revenue and then adjust assets and liabilities accordingly.

Question 40

Asset/Liability Approach

Answer 40

First recognize assets and liabilities that exist a balance sheet date and secondly recognize and measure revenues, expenses gains and lose needed to account for the changes in these assets and liabilities from the previous measurement date.