exam 1 Flashcards
1
Q
Who created the international accounting standards
A
IASB (international accounting standards board)
2
Q
name of 4 financial statements
A
balance sheet, income statement, statement of cash flow, statement of SE,
3
Q
what is the objective of financial accounting?
A
-provide useful information so that interested parties can make informed decisions
4
Q
Who uses financial accounting and who are the primary users of financial statements?
A
-MICSG- managers, investors, creditors, suppliers, government.
5
Q
what is the entity asumption perspective?
A
A company prepares financial statements separate from the owner’s financial statements. Assets and liabilities are seperate.
6
Q
What is the GAAP and what does it stand for?
A
Generally Accepted Accounting principles. Set of standardized rules that PUBLIC companies following when preparing financial statements.
7
Q
Why do we need GAAP?
A
- Comparability of FS
- Increases the understandability of FS
8
Q
Three parties involved in standard-setting?
A
SEC, AICPA, FASBY
9
Q
What year was SEC established?
A
1934
10
Q
Years of AICPA
A
1939-1973
11
Q
Year FASB was created?
A
1973
12
Q
What created SEC?
A
1934 securities exchange Act
13
Q
How does SEC accomplish its mission/ undertake to maintain efficient markets?
A
- Oversees the creation of accounting standards
- enforcement of accounting standards
- Requires all public companies to file financial statements w SEC
14
Q
What are the two AICPA organizations that established GAAP?
A
- Committee on Accounting Procedure
- Accounting Principles Board
15
Q
What is the AICPA’s current role?
A
- no longer establishes GAAP
- Professional Organization
- Develops and grades CPA exam
16
Q
What types of pronouncements do FASB issue?
A
- Update GAAP
- Accounting standards updates
- implement guidance through (EITF) - Not GAAP
- financial accounting concepts that the board uses to develop standards
17
Q
Where can you find all the authoritative literature on us GAAP?
A
FASB codification
18
Q
What is the FASB codification?
A
- +++synthesizes and integrates existing gap+++++
- single place where all the authoritative literature related to a particular topic
- established in 2009
- simplifies access to all authoritative GAAP
19
Q
What is included in the FASB codification
A
- SABS, ARBs, APB opinions, FASB standards
- FASB staff positions and FASB interpretations
20
Q
Challenges in financial reporting:
A
expectations gap, financial reporting issues, international financial accounting standards, ethics, political envirnment
21
Q
what is the expectations gap?
A
what the public thinks the accountant SHOULD do is not always what accountants think they CAN do
ex. Fraud
22
Q
What year was SOX passed?
A
2002
23
Q
Why was SOX passed?
A
in response to a series of accounting scandals (Worldcom, enron)
24
Q
What’re some of the changes (4) SOX made?
A
- CEOs and CFOS personally certify the financial statement and disclosures are complete
- Audit partners are required to rotate every 5 yrs
- Creation of PCAOB (public company accounting oversight board)
- Requires a code of ethics for senior financial advisors
25
What is SOX-section 404?
Public companies must attest to the effectiveness of their internal controls over financial accounting
26
Whatre internal controls?
System of checks and balances design to prevent fraud and errors
27
In what ways (4) is mandatory financial reporting deficient?
- Lack of forward-looking info.
- not timely
- lack of understandability
- lack of info on non financial measurements
28
How have companies attempted to overcome the deficiencies of financial reporting?
- Companies voluntarily disclose info (conference calls)
- Fair value accounting to make it more timely.
- FASB is working on addressing the complexity and understandability of FS.
29
In what ways are the GAAP codification standards updated/ amended?
majority vote
30
Why do we need international financial recording/accounting standards?
- costly for persons in one country to learn another countries standards.
- costly for companies to prepare financial statements using different forms of GAAP.
31
What are the international accounting standards called?
IFRS- international financial recording standards
32
Who establishes IFRS?
IASB- international accounting standards board
33
Whatre the benefits of IFRS?
- cuts costs for investors who want to invest outside of country
- cuts costs for companies who provide info for international investors.
34
Whatre the negatives (4) of IFRS?
- too much wiggle room
- enforcement varies across countries
- switching to IFRS can be costly for companies who arent looking to raise international capital
- countries have the ability to ajust IFRS to fit country specific needs
35
Where do we stand today with IFRS?
- us companies thatre listen on the US stock exchange file using the US GAPP
- International companies thatre listed on the US stock exchange may file using IFRS
36
Challenges of international financial accounting standards?
- enforcement is still a crucial element to the investors' decision
- even if financial statements are prepared using the same standards, investors may not rely on them if they do not trust them
37
Whatre some ethical challenges in financial reporting??
- difficult to know what to do in specific circumstances
- sometimes there is no specific guidance for the situation you have encountered
- If you're uncomfortable with an accounting position, it is best you advise the interested parties not to take it
38
When did the FASB start the conceptual framework?
1976
39
What is the 1st level of conceptual framework?
The objective (why) of financial accounting
40
What is the 2nd level (2 parts) of the conceptual framework?
Qualitative characteristics of accounting info. and Elements of FS
41
What is the 3rd level (3 parts) of the conceptual framework?
Assumptions (4), Principles (4), Constraints-- the HOW of FS
42
What are the two qualitative characteristics in the conceptual framework?
1. Fundamental Qualities
| 2. Enhancing Qualities
43
What are the fundamental qualities identified by the FASB?
(RR)
1. Relevance
2. Faithful representation
44
What are the enhancing qualities identified by the FASB?
VCUT
- verifiability
- comparability
- understandability
- timeliness
45
What are characteristics of relevant info?
CPM
-confirmatory value
- predictive value
- materiality
46
What does ~~predictive value~~ mean and what characteristic does it fall under?
Means info has value as an input to the predictive processes used by investors to form their own expectations about the future
-relevance under fundamental qual.
47
What does ~~confirmative value~~ mean and what characteristic does it fall under?
means info. helps users confirm or correct prior expectations
-relevance under fundamental qual.
48
What does ~~materiality~~ mean and what characteristic does it fall under?
means: does the info. have an impact on a decision-maker?
| - relevance under fundamental qual.
49
What is faithful representation with financial statements?
| What qual. characteristic does it fall under?
The numbers and descriptions match what really existed or happened
-Fundamental
50
What are the characteristics of faithful representation?
CNF
- completeness
- neutrality
- free from error
51
Enhancing qualities are (def):
- complementary to the fundamental characteristics
| - distinguished more useful info. from less useful info.
52
What makes information comparable?
-info is measured and reported in a similar manner for different companies
53
What makes information verifiable?
-independent measurers, using the same methods, obtain similar results
54
What makes information timely?
-info is available to decision-makers before it loses it capacity to influence decisions
55
What makes information understandable?
-the quality of info. allows reasonably informed users to see signficance
56
What elements are associated with the income statement?
-revenues, expenses, gains, losses
57
What elements are associated with the balance sheet?
assets, liabilities, equity
- investments by owners
- distribution to owners
- comprehensive income
58
TRUEor FALSE? Statements of Financial Accounting Concepts establish GAAP?
F
59
Fill in the blank. ______________________ are a system of checks and balances designed to prevent and detect fraud and errors.
internal controls
60
What are the two general classifications of expenses discussed in class and the book?
period and product
61
A company has a factory building that originally cost the company $250,000. The current fair value of the factory building is $3 million. The president would like to report the differenceas a gain. The write-up would represent a violation of which accounting assumption or principle?
historical cost principle
62
TRUE or FALSE? The economic entity assumption means that economic activity can be identified with a particular legal entity.
F
63
TRUEor FALSE? Timeliness and neutrality are two ingredients of relevance
F
64
Liabilities are listed on the balance sheet in order of _______________________________.
maturity
65
The passage of a new FASB Accounting Standards Update requires the support of how many FASB members?
4 or majority
66
____________________ means that a company cannot select information to favor one set of interested parties over another.
neutrality
67
The _______________________ assumption suggests that the company will have asufficiently long life to fulfill their objectives and commitments.
going concern
68
The _______________________ assumption suggests that the company can divide its economic activities into artificial time periods.
periodicity
69
Whatre the 4 basic assumptions that underlie the financial accounting structure?
Economic entity assumption
going concern assumption
monetary unit assumption
periodicity assumption
70
What is the going concern assumption?
company will have a sufficiently long life to fulfill their objectives and commitments.
71
What is the periodicity assumption?
company can divide its economic activities into artificial time periods.
72
What is the monetary unit assumption?
Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement
73
Why doesn't inflation violate the monetary unit assumption?
-US economy is stable and if there were periods of high inflation the FASBY would consider inflation accounting
74
4 underlying accounting principles:
- measurement principle (historical cost/FV)
- revenue recog.
- expense recog.
- full disclosure
75
What is the historical cost principle?
Assets and liabilities recorded at aquisition price
76
What assets are accounted for using historical cost?
- Plant, property, equipment
- inventory
- notes receivable
- all assets but financial assets
77
What is the fair value principle?
-assets and liabilities are accounted for and recorded based on current fair market value
level 1: observable inputs-- least subjective (stock)
level 2: inputs other than quotes prices (bonds)
level 3: unobservable inputs-- most subjective (private equity investments)
78
What assets are reported using fair market value?
- financial assets ( ba)nk deposits, stocks, bonds, and loans
- stocks or bonds (investments)
79
Example of product costs:
material, labor, oH
80
Example of period costs:
salaries, administrative costs
81
What is the revenue recognition principle?
that one should only record revenue when it has been earned, not when the related cash is collected
82
What is the expense recognition principle
recognize the expense when work or product is actually contributing to revenue
83
What is the full disclosure principle?
sufficient info. is provided to appropriately influence the judgement and decision making of an informed used
84
The nature and amount of info. included in financial statement mist have...
- sufficient detail into the companies activities to make a difference to users
- sufficiently concise to make the info understandable
85
Where can users find info. about the financial position, income, cash flows, and investments of the company
- financial statements
- notes to FS
- supplementary info.
86
What is the cost constraint?
benefits > costs
87
Whatre come costs of discosure?
- disclosure to competition
- litigation
- collecting and processing info.
88
Whatre some benefits of disclosure?
- managers have access to capital at a lower cost
| - users receive better info. for resource allocation
89
What're the 4 principles of accounting?
Measurement Principle
•Historical cost •Fair value
Revenue recognition•Expense recognition
Full Disclosure
90
What is an account?
Are an organized format used by companies to accumulate the dollar effects of transactions on each financial statement
-Belong to one the following: assets, liabilities, stockholders’ equity, revenues, expenses, gains, and losses
91
Whatre the two T accounts inside of Stockholders’ Equity?
- Common Stock and Additional Paid in Capital
| - Retained Earnings
92
Whatre the two T accounts inside of RE?
REV and expenses
93
What is recorded in the Additional Paid-in Capital account?
The amount of capital contributed by the shareholders less the par value of the stock
94
The equation for common stock?
shares x par value
95
Dividends increase/decrease Retained Earnings?
Decrease so its on left side (debited)
96
Net income increases/decreases Retained Earnings?
Increases so its credited (+)
97
RE (end) =
RE (beg) + NI - div.
98
What is the general journal?
Compilation of individ. journal entries in chronological order
99
What is a general ledger?
All journal entries are posted to the t-accounts in the general ledger.
100
What is a contra-account?
An account that is an offset to, or reduction of, the primary (companion) account
101
What is the quality of information that enables users to confirm or correct prior expectations?
confirmability
