FAR 1

Question 1

Generally Accepted Accounting Principles (GAAP)-

Answer 1

The rules of financial reporting for business enterprises. GAAP are also called “accounting standards.”

Question 2

GAAP primarily address three aspects of financial reporting:

Answer 2

1) Recognition-A recognized item is recorded in an account and ultimately affects the financial statements.
2) Measurement-Concerns the dollar amount assigned to an item.
3) Disclosure-Many unrecognized amounts are reported in the footnotes to complete the portrayal of the firm’s financial position and performance.

Question 3

Financial Accounting Standards Board (FASB)-

Answer 3

The FASB is currently the standard-setting body in the United States.

Question 4

Securities & Exchange Commission (SEC)-

Answer 4

The federal government agency that administers the securities laws of the U.S. These laws affect firms that issue debt & equity securities to the public. Such firms register with the SEC and are “registrants.”

Question 5

American Institute of Certified Public Accountants (AICPA)-

Answer 5

The national professional organization for practicing CPAs and has had a great impact on accounting principles over the years. The mission of the AICPA is to provide its members with resources, information, & leadership so that they may in turn provide valuable services for the benefit of their clients, employers, and the general public.

Question 6

The objective of general purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers.

Answer 6

Useful information includes:

1) The amount, timing, & uncertainty of an entity’s cash flows.
2) Ability of the entity to generate future net cash inflows.
3) An entity’s economic resources (assets) and claims to those resources (liabilities) which provides insight into the entity’s financial strengths & weaknesses, and its liquidity and solvency.
4) The effectiveness with which management has met its stewardship responsibilities.
5) The effect of transactions and other events that change an entity’s economic resources and the claims to those resources.

Question 7

Relevance (primary characteristic)-

Answer 7

Information is relevant if it makes a difference to decision makers in their role as capital providers. Information is relevant when it has predictive value, confirmatory value, or both.

Question 8

Predictive Value-

Answer 8

Information has predictive value if it assists capital providers in forming expectations about future events.

Question 9

Confirmatory Value-

Answer 9

Information has confirmatory value if it confirms or changes past (or present) expectations based on previous evaluations.

Question 10

Faithful Representation (primary characteristic)-

Answer 10

Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement.

Question 11

Enhancing Characteristics-

Answer 11

These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented.

Question 12

Historical Cost-

Answer 12

Assets & Liabilities are recorded at historical cost, that is, their cash equivalent amount at the time or origination.

Question 13

Net realizable value-

Answer 13

This value is used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value.

Question 14

Current Replacement Costs-

Answer 14

This value represents how much you would have to pay to replace an asset. Current replacement costs would represent current market value form the buyer’s perspective.

Question 15

Current Market Value-

Answer 15

This value is also referred to fair value. It is the price that would be received to sell an asset (or the price to settle a liability) in an orderly transaction between market participants at the measurement date.

Question 16

Amortized Costs-

Answer 16

This value is historical cost less the accumulated amortization or depreciation of the asset.

Question 17

Net Present Value-

Answer 17

This is the value determined from discounting the expected future cash flows.

Question 18

Materiality-

Answer 18

Transactions that are material in amount will be accounted for in strict accordance with the appropriate accounting procedures. Those that are immaterial in amount will be handled in the most expedient way possible.

Question 19

Cost Effectiveness-

Answer 19

This constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 20

Fair Value-

Answer 20

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 21

Cash Flows from Operating Activities-

Answer 21

This category reports cash inflows and cash outflows that relate to items that enter into the determination of net income. Inflows-Cash from customers, Dividends (from investment), and interest. Outflows-Cash to suppliers, to employees, interest, and income taxes.

Question 22

Cash Flows from Investing Activities-

Answer 22

This category reports cash inflows and cash outflows that relate to “investment in” and disposal of noncash assets. Inflows-Sale of Long Term assets, collections of loan principle, disposal of debt & equity securities, & sale of other productive assets. Outflows-purchase of long term assets, lending to others, Investment in Debt & Equity Securities, and purchase of other productive assets.

Question 23

Cash flows from Financing Activities-

Answer 23

This category reports cash inflows and cash outflows that relate to how the entity is financed. Inflows-Sale of own stock and proceeds from borrowing. Outflows-Repurchase own treasury stock, paying back lenders (principal only), and payment of dividends.

Question 24

Direct Method (of presenting Cash Flow from Operating Activities)-

Answer 24

The direct method reports the components of cash flow from operating from operating activities as individual items of gross receipts of cash (from revenue activities) and gross payments of cash (from expenses incurred). Each item in the income statement is adjusted form an accrual basis to cash basis.

Question 25

Indirect Method (of presenting Cash flow from Operating Activities)-

Answer 25

The indirect method of presenting begins with Net Income (accrual basis) and adjusts for items that entered into computing Net Income, but did not affect cash by the same amount.