Chapter 3 Flashcards
Accounting Information System definition
The system of collecting and processing transaction data and communicating financial information to decision-makers
Accounting transactions definition
Events that require recording in the financial statements because they affect assets, liabilities, or stockholder’s equity
Comparability definition
Ability to compare the accounting information of different companies because they use the same accounting principles
Consistency definition
Use of the same accounting principles and methods from year to year within a company
Cost constraint definition
Constraint that weighs the cost that that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available
Economic entity assumption definition
An assumption that every economic entity can be separately identified and accounted for
Fair value principle definition
Principle that states that the assets and liabilities should be reported at fair value (the price that would be received if an asset was sold or the amount that would be required to be paid to settle a liability)
Faithful representation
Information that accurately depicts what really happened and is complete, neutral, and free from error
Financial accounting standards board
The primary accounting standard-setting body in the US
Full disclosure principle definition
Principle that dictates that companies disclose circumstances and events that make a difference to financial statement users
Generally Accepted Accounting Principles
A set of accounting standards that have substantial authoritative support and which guide accounting professionals
Going Concern Assumption definition
The assumption that the company will continue in operation for the foreseeable future
Historical Cost Principle
Principle that states that companies should record assets at their cost
International Accounting Standards Board (IASB)
An accounting standard-setting body that issues standards adopted by many countries outside of the US
International Financial Reporting Standards (IFRS)
Accounting standards, issued by the IASB, that have been adopted by many countries outside of the US
Materiality definition
Whether an item is large enough to likely influence the decision of an investor or creditor.
Monetary Unit assumption definition
An assumption that requires that only those things that can be expressed in money are included in the accounting records
Periodicity Assumption definition
An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business
Public Company Accounting Oversight Board
The group charged with determining auditing standards and reviewing the performance of auditing firms
Relevance definition
The quality of information that indicates the information makes a difference in a decision
Securities and Exchange Commission (SEC)
The agency of the US government that oversees US financial markets and accounting standard-setting bodies
Timely definition
Information that is available to decision makers before it loses the capacity to influence decisions
Understandability definition
Information presented in a clear and concise fashion, so that users can interpret it and comprehend its meaning
Verifiable definition
The quality of information that occurs when independent observers, using the same methods, obtain similar results.
What is the primary objective of financial reporting?
To provide information that is useful to investors and creditors for making decisions about providing capital.
What are the two fundamental qualities?
- Relevance
2. Faithful representation
What two types of value confirm information’s relevance?
- Predictive value
2. Confirmatory value
Predictive value definition
Information that helps provide accurate expectations about the future
Confirmatory value definition
Information that confirms or corrects prior expectations
________ is company specific
Materiality
What are the three characteristics of faithful representation
- Complete
- Neutral
- Free from error
Complete definition
Nothing important has been omitted
Neutral definition
Is not biased toward one position or another
What are the 4 enhancing qualities?
- Comparability
- Verifiability
- Timely
- Understandability
The SEC requires that large public companies provide their annual reports to investors and creditors within _____ days of their year-end
60
What is another type of comparability?
Consistency
Fiscal year definition
An accounting period that is one year long
Why do many companies choose to end their accounting year when inventory or operations are at a low point?
- Compiling accounting information requires much time and effort by managers, so they would rather do it when they aren’t as busy operating the business
- Inventory is easier and less costly to count when volume is low
What are the 4 key assumptions?
- Monetary Unit Assumption
- Economic Entity Assumption
- Periodicity Assumption
- Going Concern Assumption
What are caveats related to the monetary unit assumption?
- The currency is stable
2. Inflation
What are the two measurement principles?
- Historical cost principle
2. Fair value principle
When is fair value used over historical cost?
When assets are actively traded
- IE investment securities
In general, which measurement principle is more often used?
Historical cost
What are the two qualities that make accounting information useful for decision-making?
- Relevance
2. Faithful represenation
What are the 5 factors that shape an accounting information system?
- The nature of the company’s business
- The types of transactions
- The size of the company
- The volume of data
- The information demands of management and others
What does EDP stand for and what is it?
Electronic Data Processing Systems are computerized accounting systems
Transaction Analysis definition
The process of identifying the specific effects of economic events on the accounting equation.
Expanded accounting equation
Assets = Liabilities + common stock + Revenues - Expenses - Dividends
When is revenue recognized?
When it is performed
When are expenses recorded?
When they are incurred
What are the 3 important points covered in the Summary of Transactions?
- Each transaction is analyzed in terms of its effect on assets, liabilities, and SE
- The two sides of the equation must always be equal
- The cause of each change in revenues or expenses must always be indicated
When are adjustments made?
At the end of each accounting period before the financial statements can be finalized
Where is a net loss reflected?
Retained earnings statement
Conceptual Framework Definition
- A body of interrelated objectives and fundamentals
- The objectives identifies the purposes of financial reporting
- The fundamentals are the underlying concepts that help achieve those objectives
What is the important (purpose) of the conceptual framework?
Establish standard-setting bodies to issue MORE USEFUL AND CONSISTENT PRONOUNCEMENTS OVER TIME
Describe the 3 levels of the conceptual framework
- Objective of financial reporting
- Qualitative characteristics and elements
- Recognition, measurement, and disclosure concepts
What are the 10 basic elements?
- Assets
- Liabilities
- Equity
- Investment by owners
- Distribution to owners
- Comprehensive income
- Revenues
- Expenses
- Gains
- Losses
What are the three ingredients to relevance?
- Predictive value
- Confirmatory value
- Materiality
What are the 4 basic principles of accounting?
- Measurement
- Revenue recognition
- Expense recognition
- Full disclosure
When I see “received cash in advance”, which bucket does that fall into on the transaction summary?
Unearned service revenue
