CPA FAR - The Financial Reporting Enviroment Flashcards
How are amendments incorporated into the FASB Accounting Standards Codification?
The FASB follows a due process procedure before issuing final pronouncements. This procedure includes (1) identifying issues, (2) adding a project to the technical agenda, (3) public meetings, (4) publication of an exposure draft (and possibly a Discussion Paper), (5) another public meeting if needed, (6) staff analysis and FASB redeliberation with stakeholder input, and (7) a FASB vote on a final draft proposal. If a majority of the seven board members approves, an Accounting Standards Update is issued to amend the ASC.
What are the Statements of Financial Accounting Concepts intended to establish?
SFACs do not establish accounting and reporting requirements. They are nonauthoritative guidance for nongovernmental entities. SFACs describe the objectives, qualitative characteristics, elements, and other fundamental concepts that guide the FASB in developing sound accounting principles.
According to Statements of Financial Accounting Concepts, predictive value relates to
Relevance is a general idea that is a fundamental qualitative characteristic of useful financial information. It is the capacity of information to make a difference in a decision. It must have (1) predictive value and/or (2) confirmatory value. Moreover, materiality is a related concept that is entity-specific.
According to the FASB’s conceptual framework
A representation is perfectly faithful if it is (1) complete (containing what is needed for user understanding), (2) neutral (unbiased in its selection or presentation), and (3) free from error (but not necessarily perfectly accurate). Relevant information is able to make a difference in user decisions. To do so, it must have predictive value and/or confirmatory value.
Which of the following accounting concepts states that an accounting transaction should be supported by sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures and conclusions?
Verifiability is a qualitative characteristic that enhances relevance and faithful representation. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented.
Relevance
Relevance is a fundamental qualitative characteristic. Information is relevant if it can make a difference in user decisions.
Assets
Assets are probable future economic benefits obtained or controlled by an entity as a result of a past transaction or event. One of the three essential characteristics of an asset is that the transaction or event giving rise to the entity’s right to or control of its assets has already occurred. It is not expected to occur in the future. A second essential characteristic of an asset is that an entity can obtain the benefits of and control others’ access to the asset. The third essential characteristic is that an asset must embody a probable future benefit that involves a capacity to contribute to future net cash inflows.
comprehensive income
According to the FASB’s conceptual framework, comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.
According to the FASB’s conceptual framework, which of the following attributes should not be used to measure inventory?
The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.
Expenses
Expenses should be recognized when a benefit has been consumed. The consumption of benefit may occur when (1) the expenses are matched with the revenues, (2) they are allocated on a systematic and rational basis to the periods in which the related assets are expected to provide benefits, or (3) the cash is spent or liabilities are incurred for goods and services that are used up either simultaneously with the acquisition or soon after. An example of a cost that (1) cannot be directly related to particular revenues but (2) is incurred to obtain benefits that are exhausted in the same period in which the cost is incurred is salespersons’ monthly salaries.
Matching
Matching credit loss expense with related revenues is an application of the matching principle. Matching is synonymous with associating cause and effect. It is based on a direct relationship between the expense and the revenue.
When credit loss expense is estimated on the basis of net credit sales, a cost (credit loss expense) is directly associated with a revenue of the period (net credit sales). This practice applies the expense recognition principle of associating cause and effect, also known as matching
Periodicity
A basic feature of the financial accounting process is that information about the economic activities of the business should be issued at regular intervals. These time periods should be of equal length to facilitate comparability. They also should be of relatively short duration, e.g., 1 year, to provide business information useful for decision making.
Conservatism
Under the conservatism constraint, when alternative accounting methods are appropriate, the one having the less favorable effect on net income and total assets is preferable. However, conservatism does not permit a deliberate understatement of total assets and net income. Furthermore, SFAC 5 describes “a general tendency to emphasize purchase and sale transactions and to apply conservative procedures in accounting recognition.” This tendency is a response to uncertainty.
In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency
Of the environment in which the subsidiary primarily generates and expends cash.
A government entity is required to include a statement of cash flows in which of the following financial statements?
Proprietary fund financial statements.
Going concern.
A basic feature of financial accounting is that a business is assumed to be a going concern in the absence of evidence to the contrary. The going-concern concept is based on the empirical observation that many entities have an indefinite life.
Going concern.
A basic feature of financial accounting is that a business is assumed to be a going concern in the absence of evidence to the contrary. The going-concern concept is based on the empirical observation that many entities have an indefinite life.
The management’s discussion and analysis (MD&A) section of an annual report (Form 10-K)
Covers three financial aspects of a firm’s business: liquidity, capital resources, and results of operations.
The MD&A section is included in SEC filings. It addresses in a nonquantified manner the prospects of a filer. The SEC examines it to determine that management has disclosed material information affecting future results. Disclosures about commitments and events that may affect operations or liquidity are mandatory. Thus, the MD&A section pertains to liquidity, capital resources, and results of operations.
