Chapter One Flashcards
Cash Basis Accounting
measurement of cash receipts and cash payments from transactions (related to providing goods and services)
accrual basis accounting
measurement of revenues and expenses, regardless of when cash is received or paid
Accrued basis of accounting relates to ___
net income or net loss
cash basis of accounting relates to _____
net operating cash flow
GAAP
Generally Accepted Accounting Principles: broad and specific guidelines; companies should follow when measuring and reporting info in financial statements and related notes
GAAP is related to the development of
Financial Accounting and reporting standards
GAAP facilitates decisions made by who? and what are they comapring?
decision making by investors and creditors by allowing them to compare financial information among companies
hierarchy of standard setting authority
Congress –> SEC –> private sector (CAP –> APB –> FASB)
CAP
1938-1959
Committee on Accoutning Procedure
APB
1959-1973
Accounting Principles Board
failed because of lack of independence which is what led to FASB
FASB
What is FASB responbile for?
1973-present
nongovernment/private
responsible for developing/improving GAAP
SEC
securities and exchange commission:
who created: by Congress
why: in response to stock market crash of 1929
goal: restore investor confidence
what they do: responsible for setting ACTG standards for **publicly traded companies **
what kind of authority: statutory authority
1933 Securities Act
applies to initial offerings of securities (stocks and bonds)
purpose: restore confidence in investors
1934 Securities Exchange Act
applies to secondary market transactions; mandates reporting requirements for companies whose securities are publicly traded
purpose: restore confidence in investors
more details about FASB
Who establishes it?
members of what organization support it?
how many m
established by US accounting standards (GAAP); supported by Financial Accounting Foundation (FAF); seven full time members
EITF
Are they considered part of GAAP?
Emerging Issues Task Force; created in 1984; identifies financial reporting issues and attempts to resolve them without involving the FASB; addresses implementation issues; speeding up the standard setting process; EITF rulings are ratified by the FASB and are considered part of GAAP
GASB
Government Accounting Standards Board: develops accounting standards for governmental units such as states and cities
FASB Accounting Standards Codification
Only source of _____
only source of authoritative nongovernmental US GAAP: also includes portions of SEC accounting guidance
ASU
Accounting Standards Update: any new standard issued by FASB
IASC
International Accounting Standards Committee: formed in 1973 to develop global accounting standards
IASB
created by IASC: International Accounting Standards Board (2001)
role of IASB
What does IASB endorse?
to develop a single set of high quality, understandable, and enforceable global acct standards; endorsed 41 International Acct Standards (IASs)
what new standards were issued by IASB
IFRS - International Financial Reporting Standards
Sarbanes-Oxley Act
increased the pressure on lawmakers to pass measures that would restore credibility and investor confidence in the financial reporting
created because of acct scandals with Enron and Arthur Andersen
principles based vs rules based
follows objectives-oriented (stresses professional judgement)
Conceptual Framework
Accounting Constitution
objectives
elements
FS
qualitative characteristics
recognition and measurement concepts
constraints
Conceptual framework is disseminated by FASB through _____
Statments of Financial Accoutning Concepts (SFACs)
hierarchy of QC
decision usefulness –> relevance and faithful representation
decision usefulness –> comparability/consistency, verifiability, timeliness, understandability
comparability/consistency
ability to helps users see similarities and differences
measure and reported the same way in each time period
comparability: important for making interfirm comparisons
consistency: applying same acct practices over time
verifiability
implies a consensus (general agreement) among different measures
timeliness
info that is available to users early enough to allow its use in the decision process
understandability
users must understand the info within the context of the decision being made
key constraint
cost effectiveness: perceived benefit of increased decision usefulness exceeds the anticipated cost of providing that info
relevance
one of the primary decision-specific qualities that make accounting info useful
predictive value
confirmatory value
materiality
“pertinent to the decision at hand”
predictive value
falls under relevance for QC
confirmation of investor expectations about future cash generating ability
helps users predict a company’s future cash flows
confirmatory value
confirmation of investor expectations about future cash generating ability
confirm or change prior assessments regarding a company’s cash flow generating ability
“info confirms expectations”
materiality
falls under relevance of QC
has qualititave or quantitative characteristics that make it matter for decision making
concerns the relative size of an item and its effect on decisions
faithful representation
exist when there is agreement between a measure or description and the phenomena it purports to represent
completness
neutrality
free from error
completeness
falls under FR in QC
depiction is complete if it includes all info necessary for faithful representation
neturality
under FR of QC
implies freedom from bias
free from error
falls under FR of QC
info contains no errors or omissions
elements of FS
assets
liabilities
equity (net assets)
investments by owners
distribution to owners (dividends)
comprehensive income
revenues
expenses
gains
losses
assets
probable future economic benefits obtained as a result of past transactions
liabilities
probable future sacrifices of econ benefits arising from obligations of a particular entity to transfer assets/provide services (result of present or future transactions)
equity (net assets)
stockholder’s equity - residual interest in the assets of an entity that remain after deducting liabilities (net worth of business)
investments by owners
increases in equity of a particular business enterprise resulting transfer to it from other entities of something of value to obtain ownership interests in it (purchasing shares of stock, would not be securities because not a direct contribution to capital)
distribution to owners
dividends
decreases in equity resulting from transfers to owners
comprehensive income
NI + OCI
change in equity of a business enterprise during a period from transactions and other events and circumstances from non owner sources
all change in equity during period expect those resulting from investments by owners and distributions to owners
OCI - gain/loss on foreign exchange translation (adjustments), pension adjustments, unrealized profit/loss, revaluation surplus, AFS
revenues
revenue recognition principle
inflows of assets or settlements of liabilities resulting from providing a product or service to a customer
rent, sale, service
expenses
outflows or other using up of assets or incurrences of liabilities from delivering g/s
gains
increases in equity from peripheral or incidental transactions
losses
represent decreases in equity arising from peripheral or incidental transactions
four basic assumptions underlying GAAP
economic entity
going concern
periodicity
monetary unit
economic entity
presumes that econ events can be identified specifically with an econ entity
going concern
anticipates that a business entity will continue to operate indefinitely
periodicity
allows life of a company to be divided into artificial time periods to provide timely information
monetary unit
in US FS is the US dollar
recognition, measurement, and disclosure concepts
recognition - process of admitting info into FS
(there is general recognition criteria)
Usually referring to revenue and expense recognition principle
measurement - process of associating numerical amounts with the elements
disclosure - process of including additional pertinent info in the FS and accompanying notes
general recognition critera
definition, measurability, relevance, reliability
expense recognition
four approaches:
exact cause and effect relationship
example: COGS
by associating an expense with the revenues recognized in a specific time period:
example: salaries expense
by a systematic and rational allocation to specific time periods
example: depreciation expense
in the period incurred, without regard to related revenue
example: adv expense
GAAP currently employs a ______ measurement model
“mixed attribute”
1) historical cost
2) net realizable value
3) current cost
4) present value
5) fair value
historical cost
GAAP measurement
original transaction value adjusted for depreciation and amortization
example: land
net realizable value
GAAP measurement
Selling price less costs of completion,
disposal, and/or transportation.
example: AR after uncollectible
current cost
GAAP measurement
the cost that would be incurred to purchase or
reproduce the asset
problem: appraisal
present value
GAAP measurement
the current value of future cash flows,
calculated by applying the time value of money
example: liability at present value of future cash payments
KNOW PV and FV formulas!
fair value
GAAP measurement
the price that would be received to sell assets or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date
example: investment at FV
market approach for FV
valuation based on mkt info
income approach for FV
Estimates future amounts and then
mathematically converts those amounts to a single present
value.
cost approach for FV
example in class for land
Estimates the amount that would be
required to buy or construct an asset of similar quality and
condition
fair value optional in reporting
GAAP gives a company the option to choose whether to report specified
financial assets and liabilities at fair value
reduces volatility (unpredictability) in reported earnings without having to comply to complex standards
usually helps with international acct standards
full disclosure principle
requires that the financial reports
should include any information that could affect the decisions
made by external users
parenthetical/modifying comments (face of FS)
disclosure notes (convey add insights)
supplemental schedules/tables (primary FS)
purpose of Financial accounting
to enable users (internal or external) make decisions
primary users
creditors (lenders) and investors (stockholders)
