Chapter 1--The Nature of Accounting Flashcards
What is a proprietorship?
Unincorporated business with one sole owner
What happens when the owner of a proprietorship dies?
The proprietorship dissolves
Who usually manages a proprietorship?
The owner
Is there a legal distinction between proprietorship and owner?
No
Who is responsible for the totality of the debt of the proprietorship?
The owner
Is there an accounting distinction between proprietorship’s finances and the owner’s finances?
Yes
What kind of businesses tend to be proprietorships?
Small businesses; often in retail or service
What is a partnership?
Unincorporated business organization owned by two or more individuals
What happens when an owner of a partnership dies?
The partnership dissolves
Is there a legal distinction between the partnership and her owners?
No
Is there an accounting distinction between the finances of a partnership and those of her owners?
Yes
How are partnership profits and losses distributed between the owners?
Any way the owners choose
What kind of businesses tend to be partnerships?
Small businesses; often in retail or service
What is a corporation?
A legal entity created in accordance with the laws of a US state
What kinds of businesses tend to be corporations, and why?
Larger businesses, both for limited liability, and to raise money by trading shares
How is ownership of a corporation organized?
According to shares in the company, held by shareholders
What is a public corporation?
A corporation whose shares are traded widely and, thus, have many owners
What is a private corporation?
A corporation whose shares are not traded in markets and, thus, have relatively fewer owners
What happens to a corporation after an owner dies?
The corporation continues on
What is a corporation’s owner liable for?
Only his investment in the corporation; nothing more
Why and since when has the United Nations been involved in accounting and its disclosure?
To control the impact of multinational enterprises (MNEs) and multinational corporations (MNCs) on the economies and quality of life of newly-developing countries; since 1972
How has the UN Centre on Transnational Corporations been involved in accounting and its disclosure?
Examined the international activities of MNEs and the development of codes of conduct to encourage social responsible behavior
How has the UN’s Group of Experts on International Standards of Accounting and Reporting been involved in accounting and its disclosure?
Created a list of minimum financial and non-financial disclosures that should be included in MNE annual reports
What influence do the UN, OECD, and IASC have upon worldwide accounting?
Political influence; they lack enforcement power
Why and since when has the Organization for Economic Cooperation and Development been involved in accounting and its disclosure?
1976: Code of Conduct for MNEs that included guidelines for disclosures in annual reports;
1998: Issued a report on strengthening financial systems, with greater transparency and accountability (due to East Asian financial crisis)
Why and since when has the International Accounting Standards Committee been involved in accounting and its disclosure?
IASC develops and issues international accounting and reporting standards. It is active since 1973, and in more than 100 countries.
What are the IASC’s two objectives?
- To formulate and publish accounting standards to be used in the presentation of financial statements and to promote their worldwide acceptance
- To work for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements
How many international accounting standards has the IASC issued?
Over 35
Why are IASC accounting standards so widely accepted around the world?
Because they weight the benefits of greater uniformity in financial reporting (conformity) with the need to be aware of the costs involved with changing accounting methods (flexibility)
What three areas have the IASC focused upon to date?
- To promulgate standards for financial reporting processes that are clearly arbitrary or unsound;
- To persuade countries that do not currently have their own financial reporting standards on an issue to use the IASC standard;
- To work with those countries that have their own standards (and whose standards give several options) to narrow the options down; which would help move world-wide financial reporting practices towards a more harmonized and uniform system
Why and since when has the International Organization of Securities Commissions and Similar Organizations been involved in accounting and its disclosure?
To ease the requirements for multinational securities offerings and the use of common prospectuses; since 1987
What is the IOSCO’s reciprocal approach?
The prospectus issued by the issuer country would be accepted for offerings in all the other countries where the shares were being offered
What is the IOSCO’s common prospectus approach?
All countries offering securities would agree on disclosure standards that would be usable by all the countries
Why and since when has the International Federation of Accountants been involved in accounting and its disclosure?
To encourage a consistently high level of professionalism among accountants around the world; since 1977. It focuses on managerial accounting, auditing, professional ethics, and accounting education.
When was the Securities and Exchange Commission chartered, and what does it do?
1934; prescribes the form and content of financial reports public corporations release
How does the SEC develop generally-accepted accounting practices?
By working with private organizations
When did the American Institute of Certified Public Accountants found the Committee on Accounting Procedure, what did it do, what replaced it when, and why?
1938; released bulletins in response to specific accounting problems. Replaced in 1959 with the Accounting Principles Board, to provide more theoretical and general accounting practices.
Was the APB successful?
No, because it lacked dedication,independence and productivity. It did release 31 opinions that formed the basis of generally-accepted accounting practice.
What replaced the APB, when? How was it different?
The Financial Accounting Standards Board, in 1973. FASB is completely separate from AICPA, and has full-time members with no ongoing conflicts of interest.
How does FASB develop GAAP?
For a given accounting issue, a discussion memorandum is circulated for comment. Based on this comment, FASB creates an exposure draft of the new GAAP, which is circulated for at least 30 days for additional comment. The draft is then voted upon for inclusion.
How has the American Accounting Association helped develop accounting principles?
By describing theoretical statements describing how accounting should be, not how it is.
In what documentation do the US GAAP live?
In the FASB’s six Statements of Financial Accounting Concepts
GAAP: Economic Entity
Accounting reports are prepared for, and pertain to, specific economic entities (e.g.: proprietorship, partnership, corporation)–One firm, one set of books
GAAP: Going Concern
Financial statements are prepared under the assumption that the economic entity will continue operations for the foreseeable future–a firm has value beyond the liquidation value of its assets
GAAP: Monetary Concept
Transactions are defined by monetary values, so they can be compared usefully to those of other economic entities, or from other periods (inflation of money distorts this slightly)
GAAP: Accounting Period
Investors and analysts need periodic measures of economic performance and financial position, so arbitrary periods are determined for reporting
GAAP: Matching
All expenses incurred to generate revenues should be recognized during the same period as those revenues. Expenses that cannot be easily matched to particular revenues (e.g.: periodic expenses like administrative salary) are matched to the period in which the benefits from these costs are used.
GAAP: Conservatism
The consequences of accidentally understating net income are less harmful than those of accidentally overstating it, so potential errors in revenue should be understated, and potential errors in expenses should be overstated.
According to FASB, what is the better accounting choice when there is doubt?
The one that–subject to cost considerations–produces information most useful for decision making
FASB: Making Accounting Information Useful–Understandability
Accounting information should be understandable to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.
FASB: Making Accounting Information Useful–Relevance
Relevant accounting information improves decision-makers’ capacities to predict, or confirms or corrects earlier expectations.
FASB: Making Accounting Information Useful–Reliability
Assures that information is reasonably free from error and bias and faithfully represents what it purports to represent. Reliable information is complete and verifiable.
FASB: Making Accounting Information Useful–Comparability
Allows quantitative assessment of the similarities and differences among enterprises
FASB: Making Accounting Information Useful–Consistency
The quality resulting from unchanging accounting methods that allow information from the same firm to be compared over time
GAAP concept: Materiality
If an item is not large enough to influence the users of a financial statement, it should not be reported
GAAP concept: Cost Effectiveness
The benefits of providing a certain level of accounting information must outweigh the costs
What are the steps of the accounting process?
- Identifying economic events or transactions that affect the financial standing of a firm
- These transactions are measured and a dollar value is assigned to them
- These transactions are recorded
- These transactions are classified and summarized
- These transactions are reported in financial statements