FAR 1 - Accounting Standards and Conceptual Frameworks

Question 1

Who has legal authority to establish U.S. generally accepted accounting principles (GAAP)?

Answer 1

SEC - however, SEC has allowed accounting profession to establish GAAP and self-regulate.

Question 2

What is the single source of authoritative nongovernmental US. GAAP?

Answer 2

FASB Accounting Standards Codification

Question 3

What literature is the FASB Accounting Standards Codification composed of?

FEDPRIA

Answer 3

FEDPRIA

1) Financial Accounting Standards Board (FASB)
2) Emerging Issues Task Force
3) Derivative Implementation Group Issues
4) Accounting Principles Board Opinions
5) Accounting Research Bulletins
6) Accounting Interpretations
7) American Institute of Certified Public Accountants (AICPA)

Question 4

What SEC standards are included in the FASB Accounting Standards Codification?

Answer 4

Regulation For Accounting Is Emerging

1) Regulation S-X
2) Financial Reporting Releases (FRR)
3) Accounting Series Releases (ASR)
4) Interpretative Releases (IR)
5) Staff Accounting Bulletins (SAB)
6) EITF Topic D and SEC Staff Observer Comments

Question 5

What did Financial Accounting Foundation (FAF) create?

Answer 5

The FAF created the PCC.

The FAF created the Private Company Council (PCC) to improve standard setting for privately held companies in the U.S. The goal of PCC is provide alternatives to U.S. GAAP, to make private company financial statements more relevant, less complex, and cost-beneficial.

Question 6

Are Accounting Standards Updates authoritative?

Answer 6

No, Accounting Standards Updates are not authoritative. Instead, Accounting Standards Updates provide background information, update the codification, and describe the basis for conclusion on changes in the codification.

Question 7

Who created International Accounting Stands Board (IASB)?

Answer 7

International Financial Reporting Standards (IFRS) Foundation

Question 8

What is the purpose of IASB?

Answer 8

The purpose of IASB is to develop a single set of high-quality, global accounting standards.

Question 9

In addition to the IASB, the IFRS created International Financial Reporting Interpretations Committee (IFRIC) which does what?

Answer 9

The International Financial Reporting Interpretations Committee (IFRIC) provides guidance on new financial reporting issues not addressed in the IFRS, and assists the IASB in achieving international convergence.

Question 10

What is included in International Financial Reporting Standards?

Answer 10

1) IFRSs
2) IASs
3) Interpretations developed by the IFRIC and former SIC

Question 11

Are the Statements of Financial Accounting Concepts (SFAC) GAAP or Non-GAAP?

Answer 11

SFAC is not GAAP but provided basis for financial accounting principles (Basic Reasoning)

Question 12

What is the Objective of General Purpose Financial Reporting?

Answer 12

To provide financial information about the reporting entity that is useful to primary users of the financial reports and make decisions.

Question 13

Who are the primary users (external users) of financial reports?

Answer 13

The primary users are investors, lenders, and other creditors.
- Regulators and public members who are not investors, lenders, and other creditors are not primary users.

Question 14

Financial information needed by primary users includes what?

Answer 14

1) Resources - Assets
2) Claims against the entity - Liabilities
3) Efficiency - Turnover
4) Effectiveness - Profit

Question 15

What is the purpose of providing financial information?

Answer 15

It needs to help investors, lenders, and other creditors in making decisions about the reporting entity

Question 16

What are the qualitative characteristics?

Answer 16

Relevance and Faithful Representation

Question 17

What are the characteristics of Relevance?

Answer 17

Relevance - Makes a difference to the user

1) Predictive Value - can be used to predict future outcomes
2) Confirming Value - it provides feedback about evaluations previously made by users
3) Materiality - could affect users decisions

Question 18

What are the characteristics of Faithful Representation?

Answer 18

Faithful Representation - Reliable

1) Completeness - Nothing omitted that would impact the decision - making of a user
2) Neutrality - information is free from bias
3) Freedom From Error - No material errors or ommisions

Question 19

What are Enhancing Qualitative Characteristics?

Answer 19

Compare and verify in time to understand

1) Comparability - Allow users to compare different items among various periods, consistency.
2) Verifiability - Different people would reach similar conclusion on the information presented.
3) Timeliness - Information is made available early enough to impact the decision making of users
4) Understandability - Information is easy to understand

Question 20

What is the pervasive constraint on the information provided in financial reporting?

Answer 20

Cost Constraint

Benefit > Cost

The benefits of reporting financing information must be greater than the costs of obtaining and presenting the information.

Question 21

What is in full set of financial statements?

Answer 21

1) Statement of financial position (balance sheet)
2) Statement of earnings (income statements)
3) Statement of comprehensive income
4) Statement of cash flows
5) Statement of changes in owners’ equity

Question 22

How is information on balance sheet measured?

Variety of ways

Answer 22

1) Historical cost - PP&E
2) Current cost - Inventory
3) Net realizable value - A/R
3) Current market value - Marketable securities
4) Present value of future cash flows - LT debt “bonds”

Question 23

What are the fundamental assumptions of U.S. GAAP?

Answer 23

1) Entity Assumption - Entity is separate entity from owner
2) Going concern assumption - The entity will continue to operate in the foreseeable future
3) Monetary Unit Assumption - Everything is measured in money
4) Prediodicty Assumptions - Economic activity can be divided into time periods - years, quarters, etc.
5) Historical Cost Principle - Financial information is based on cost, not current market value.
6) Revenue Recognition Principle - Entity should recognize revenue when it is earned and realizable
7) Matching Principle - All expenses incurred to generate a specific amount of revenue in a period are matched against that revenue
8) Accrual Accounting - Revenue are recognized when they are earned and expenses recognized in the same period related to that revenue
9) Full Disclosure Principle - Need footness for completeness
10) Conservatism Principle - Wait for good news until you can prove it, but bad news book immediately.
a) Recognize revenue/gains when earnings process is complete
b) Recognize expenses/losses immediatey

Question 24

What are the fundamental assumptions of IFRS?

Answer 24

1) Going Concern

Question 25

What are the elements of financial statements? SFAC No.5

REG ALE needs ID

Answer 25

1) Comprehensive Income - net income plus other comprehensive income

REG ALE needs ID

2) Revenue - operating
3) Expenses - operating
4) Gains - non-operating - SP > BV
5) Losses - non operating - SP
6) Investment by Owners
7) Distributions to Owners

Question 26

What are the elements of financial statements for IFRS? SFAC No.5

Answer 26

1) Assets
2) Liabilities
3) Equity
4) Income (including revenues and gains)
5) Expenses (including expenses and losses)
6) Capital maintenance adjustments - increase and decrease from the revaluation or restatement of assets and liabilities (revaluing inventory from book cost)

Question 27

What are the five elements of present value measurements?

Answer 27

1) Estimate of future cash flow
2) Expectations about timing variations of future cash flows
3) Time value of money
4) The price of bearing uncertainty
5) Other factors