F1-Accounting Standards and Conceptual Frameworks

Question 1

What are the Standard-Setting bodies int the United States?

Answer 1

SEC (Securities Exchange Commission)
CAP (Committee on Accounting Procedures (part of AICPA))
APB (Accounting Principles Board)
FASB (Financial Accounting Standards Board)

Question 2

Who has legal authority to establish US GAAP

Answer 2

The SEC has ultimate authority, but has allowed the profession to mostly self-regulate

Question 3

What role did the CAP play in determining standards?

Answer 3

The committee on accounting procedure was a part time committee of the AICPA that set GAAP from 1939-1959

Question 4

What role did the APB play in determining standards?

Answer 4

The Accounting Principles Board was a part time committee of the AICPA that determined GAAP from 1959-1973.

Question 5

What role does the FASB play in determining Standards?

Answer 5

The Financial Accounting Standards Boards is a full-time organization established in 1973. It has determined GAAP since then. It has SEVEN full-time members who serve for FIVE-year terms and may be reappointed to ONE additional five-year term.

Question 6

As of 2009, what is the single source of authoritative nongovernmental US GAP?

Answer 6

The FASB Accounting Standards Codification

Question 7

What seven types of literature that had been issued by various standards setters makes up The Codification?

Answer 7

FEDPRIA

1) FASB-Statements of financial accounting standars, interpretations, technical bulletins, staff positions, staff implementation guides, and statement examples.
2) EITF- (Emerging Issues Task Force)
3) Derivative Implementation Group Issues
4) Accounting Principles Board Opinions
5) Accounting Research Bulletins
6) Accounting Interpretations
7) AICPA (American Institute of CPA)-Statements of position, auditing and accounting guides, practice bulletins, and technical inquiry service.

There are also are some things from the SEC in the codification.

Question 8

Are Accounting Standards Updates issued by the FASB authoritative literature?

Answer 8

NO, they provide background information, update the Codification, and describe the basis for conclusions on changes in the codification.

Question 9

What is the IASB?

Answer 9

The IASB is the International Accounting Standards Board. Was established in 2001 as part of the IFRS (International Financial Reporting Standards) foundation. The purpose of the IASB is to develop a single set of high quality, global accounting standards.

It has 15 full-time members and 2 part time members.

Question 10

Whit is the IFRC?

Answer 10

The International Financial Reporting Interpretations Committee. established in 2002 to replace the interpretations committee (SIC). Provides guidance on new issues not addressed in the IFRS and international convergence.

Question 11

What are the SFAC’s in relation to Conceptual Frameworks?

Answer 11

The Statements of Financial Accounting Concepts issued by the FASB. They provide Basic Reasoning of financial accounting concepts for business and nonbusiness enterprises. Will eventually converge with IASB framework to form the Conceptual Framework for Financial Reporting.

Question 12

What is the Objective of General Purpose Financial Reporting?

Answer 12

The Purpose is disclose the entity’s performance.

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to the PRIMARY USERS of General Purpose Financial Reports in making decisions about providing resources to the reporting entity.

Question 13

What are Primary Users?

Answer 13

Primary users of general purpose financial reporting (GPFR) are existing and potential investors, lenders, and other creditors.

Question 14

What is expected of General Purpose Financial Reporting (GPFR)?

Answer 14

Financial information needed includes info about the resources (assets) of the entity, the claims against (liabilities) the entity, and how efficiently and effectively the entity’s management and governing board have discharged their responsibility to use those resources.

This information is used by primary users to assess the reporting entity’s prospects for future net cash inflows to the entity.

Question 15

What are the Qualitative characteristics of useful financial information?

Answer 15

Relevance and Faithful Representation. Both of these things must be present for information to be useful.

Question 16

What makes information relevant?

Answer 16

Passing Confirms Money

Predictive Value-needs to be used to help predict future outcomes.
Confirming Value- provides feedback about previous evaluations.
Materiality- entity specific aspect of relevance. Material if an error of the info could affect decisions made by users.

Question 17

What is required for Faithful Representation?

Answer 17

Completeness, Neutrality, and Free from Error.

Question 18

What characteristics enhance qualitative characteristics? In other words what enhances the usefulness of information that is relevant and faithfully represented?

Answer 18

Comparability & Consistency
Verifiability
Timliness
Understandability

Question 19

What is the cost restraint in Financial Reporting?

Answer 19

Benefits of reporting the information must be greater than the cost of obtaining and presenting the info.

Question 20

What are the characteristics of a non-business organization?

Answer 20

1) Significant portion of resources come from contributions and grants.
2) Their operating purposes are other than to provide goods or services for profit.
3) They lack ownership interests that can be sold, transferred, or redeemed.

Question 21

What is SFAC no. 5?

Answer 21

Recognition and Measurement of Financial Statements

Question 22

What makes up a full set of financial statments

Answer 22

1) Statement of Financial Position (balance sheet)
2) Statement of Earnings (Income Statement)
3) Statement of Comprehensive Income
4) Statement of Cash Flows
5) Statement of Changes in Owner’s Equity

Question 23

What is recognition?

Answer 23

Recognition is the process of formally recording or incorporating an item in the financial statements of an entity and classifying it as an asset, liability, equity, revenue, or expense.

Question 24

What are some ways (and exampls) that things can be measured for assets and liabilities?

Answer 24

Historical cost- PP&E
Current Cost-Inventory
Net Realizable Value-AR
Current Market Value-Marketable securities
Present Value of Future Cash Flows-LT Debt/Bonds

Question 25

What are the 10 Fundamental Assumptions of US GAAP?

Answer 25

1) Entity Assumption- (corp not individual)
2) Going Concern Assumption (will operate for forseeable future)
3) Monetary Unit Assumption
4) Periodicity Assumption-years/quarters
5) Historical Cost Principle- General rule info is accounted for and based on cost, not CMV.
6) Revenue Recognition Principle
7) Matching Principle
8) Accrual Accounting
9) Full Disclosure- the footnotes are required for completeness and full disclosure
10) Conservatism Principle

Question 26

When should revenue be recognized?

Answer 26

When it is earned and when it is realized or realizable.

Question 27

When is a revenue earned?

Answer 27

When the entity has substantially accomplished what it must to be entitled to the benefits represented by the revenues.

Question 28

Revenue Realized or Realizable?

Answer 28

Revenue is realized when you have already been paid and realizable when you have the expectation of receiving the revenue. Will be accrued in that case.

Question 29

What is the matching principle?

Answer 29

All expenses incurred to generate a specific amount of revenue in a period are matched against that revenue.

Question 30

What is the conservatism Principle?

Answer 30

The method that is least likely to overstate the assets and understate liabilities in the current period should be selected. IE defer good news and book expense now.

Question 31

What are the only 2 assumptions of the IASB framework?

Answer 31

1) Accrual Basis Accounting

2) Going Concern

Question 32

What are the elements of the financial statements?

Answer 32

REGL ALE need ID

Income Statment= Revenues, Expenses, Gains (non-op), Losses (non-op)

Balance Sheet= Assets, Liabilities, Equity

Investment by Owners (stock)
Distribution to Owners (dividend)

Question 33

What is comprehensive income?

Answer 33

Net Income + Other Comprehensive Income

All differences between beginning equity and ending equity other than transactions with owners.

The income derived from equity investments.

Question 34

IFRS can put PP&E at Market Value? T or F

Answer 34

TRUE

Question 35

Does GAAP need to be followed for Managerial Accounting…Internal Accounting?

Answer 35

NO

Question 36

What are the Five Elements of Present Value Measurement?

Answer 36

1) Estimate of Future Cash Flow (there is uncertainty)
2) Expectations about timing variations of future cash flows (timing will vary)
3) Time value of Money (risk free rate of interest)
4) The price for bearing uncertainty (credit risk)
5) Other factors (ie liquidity, market imprefections)

Question 37

If fair value cannot be determined what should be done?

Answer 37

The objective should be to obtain an estimate of fair value (present value of future cash flows)

Question 38

What are the two approaches to Present Value?

Answer 38

1) Traditional Approach- One discount rate used to take PV of future cash flow stream. Used when A&Ls have a contractual cash flows not expected to vary.
2) Expected Cash Flow Approach- You apply risk free rate to the expected cash flows. Example would be warranties of products.