FAR - Framework/Overview - FASB, Role/Standard Setting, FASB/Standard Setting

Question 1

What comprises United States Generally Accepted Accounting Principles (GAAP)?

Answer 1

(FASB) Accounting Standards Codification and (SEC) pronouncements

Question 2

What does the Securities and Exchange Commission (SEC) do?

Answer 2

1) Administers US securities laws
2) Securities Act of 1933
3) Securities Exchange Act of 1934

Question 3

What is the American Institute of Certified Public Accountants (AICPA)?

Answer 3

Professional organization for participating CPAs.

Question 4

What is the role of the Financial Accounting Foundation (FAF)?

Answer 4

1) oversight of (FASB)
2) appoints FASB members
3) ensures funding.

Question 5

First three steps the (FASB) uses when issuing a new accounting standard?

Answer 5

1. Considers to add a project to agenda in consultation with (FAF);
2. Research
3. Public hearing

Question 6

What are the final three steps in the standard setting process?

Answer 6

1. Evaluate research/comments, issue exposure draft
2. Additional comments
3. Finalize acct guidance/issue Acct standards Update (ASU).

Question 7

What is the main purpose of the (SEC)?

Answer 7

Promote efficient allocation of capital by maintaining open, orderly, and fair securities markets.

Question 8

What is the role of the Financial Accounting Advisory Council (FASAC)?

Answer 8

guidance on major policy issues, project priorities, and the formation of task forces.

Question 9

How do user groups influence the outcome of the (FASB) standards?

Answer 9

providing input during the due process procedure.

Question 10

What is the primary protection for investors against fraudulent financial reporting by corporations?

Answer 10

requirement that financial must be audited.

Question 11

The FASB is a(n)

Answer 11

PRIVATE SECTOR BODY - The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.

Question 12

TRUE/FALSE:

It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

Answer 12

TRUE

SEC requires that all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP.

Question 13

TRUE/FALSE

GAAP are laws

Answer 13

FALSE

GAAP are principles that are set by a private sector body - the FASB, not proposed and adopted by legislative bodies.

Question 14

TRUE/FALSE

Only publicly traded companies must comply with GAAP.

Answer 14

FALSE

all companies that rely on external sources of capital require financial statements and, therefore, must comply with GAAP.

Question 15

What is the operating procedure for issuing a new (FASB) statement?

Answer 15

new statement issued only after a majority vote (4/7) by the members of the FASB.

Question 16

What group currently writes the Generally Accepted Accounting Principles?

Answer 16

The FASB is currently the rule-making body for GAAP.

Question 17

TRUE/FALSE

New GAAP should be neutral and not favor any particular reporting objective.

Answer 17

TRUE

One of the objectives of the FASB in setting standards is to develop rules that are unbiased.

Question 18

TRUE/FALSE

GAAP should result in the most conservative possible financial statements.

Answer 18

FALSE

Many GAAP principles require accounting that is not the most conservative possible alternative.

Question 19

TRUE/FALSE

GAAP should have little or no cost of compliance.

Answer 19

FALSE

FASB admits that many of their principles impose a significant compliance cost on firms.

Question 20

TRUE/FALSE

The interests of the reporting firms will be a primary consideration when developing new GAAP.

Answer 20

FALSE

The FASB creates standards for the benefit of investors and creditors who want accurate and unbiased information.

Question 21

Generally Accepted Accounting Principles may be described as

Answer 21

GAAP governs what is included in financial statements/how it is presented. GAAP is concerned with what accounts, their amounts, and disclosure

Question 22

Accounting standards, the term “negative economic consequences” includes:

Answer 22

negative economic consequences (cause earnings to fall) become a focal point for arguments against the proposed standard.

Question 23

The purpose of financial accounting is to provide information primarily for which of the following groups?

Answer 23

decision making of investors and creditors.

Question 24

TRUE/FALSE

Managerial accounting has a past focus and financial accounting has a future focus.

Answer 24

FALSE

The opposite is true. Managerial accounting is generally focused on the future, and financial accounting is focused on recording past events.

Question 25

TRUE/FALSE

Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.

Answer 25

TRUE

Managerial accounting - internal use, does not follow GAAP. Financial accounting -external use, and must follow GAAP.

Question 26

Deferred Revenue

Answer 26

When cash is received before the revenue is actually earned, this is deferred revenue

1. Example is when a customer buys a gift card- they’ve given the company money but the company hasn’t earned it yet- this is a liability to the company

Question 27

Accrued Revenue

Answer 27

When revenue is earned before cash is received, this is accrued revenue (accounts receivable)- this is an asset to the company

1. Example is a customer buying items on credit- the company has given the customer the merchandise, but the company has not received actual cash yet

Question 28

Deferred Expense

Answer 28

When cash is paid before expense is incurred, this is a deferred expense and is an asset to the company

1. Example is prepaid rent or prepaid insurance

Question 29

Accrued Expense

Answer 29

When an expense is incurred before cash is paid, this is an accrued expense and is a liability to the company

1. Example is salaries payable- employees are working for two weeks before they are paid, so the company books ‘salaries payable’

Question 30

What are current liabilities?

Answer 30

Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer and which will be met through the transfer of a current asset or the creation of another current liability.

Question 31

How are liabilities presented on the balance sheet?

Answer 31

order of maturity. Current presented first, and then, long-term are presented.

Question 32

What are cash equivalents?

Answer 32

Short-term investments convertible into a known and fixed amount of cash and maturity of three months or less.

Question 33

What are the items in other comprehensive income?

Answer 33

1) Avail-for-sale unrealized gains/losses
2) certain pension cost adjustments
3) foreign currency translation adjustments
4) hedging unrealized gains/losses

Question 34

How are assets presented on the balance sheet?

Answer 34

order of decreasing liquidity, most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant and equipment).

Question 35

How is owner’s equity presented on the balance sheet?

Answer 35

In order of permanence.

Question 36

What approach is used when financial statements are prepared?

Answer 36

all-inclusive approach.

Question 37

Where and how are prior period adjustments shown?

Answer 37

Statement of Retained Earnings - adjustments to the BOY of retained earnings in the year that the error is discovered.

Question 38

How are changes to the Financial Accounting Standards Board (FASB) Accounting Standards Codification accomplished?

Answer 38

Accounting Standard Updates (ASU)

Question 39

What is the reason for the Financial Accounting Standards Board (FASB) Accounting Standards Codification?

Answer 39

All acct guidance in a single location

Question 40

What is the lowest structure of the Financial Accounting Standards Board (FASB) Accounting Standards Codification?

Answer 40

Paragraphs

Question 41

What is the highest structure of the Financial Accounting Standards Board (FASB) Accounting Standards Codification?

Answer 41

Areas

Question 42

What is Accounting Standards Codification (ASC)?

Answer 42

Compilation and reorganization of all GAAP Sources.

Question 43

What are Accounting Standard Updates (ASUs)?

Answer 43

How updates to GAAP are communicated, ASUs are NOT GAAP

Question 44

Goals of ASC?

Answer 44

1) simplify structure/accessibility of GAAP
2) all acct guidance in one location
3) reduce time/effort for research
4) reduce risk of noncompliance with GAAP
5) facilitate updating GAAP
6) assist with IFRS convergence

Question 45

TRUE/FALSE?

The Codification is the sole source of U.S. GAAP, other than SEC GAAP, for nongovernmental entities.

Answer 45

TRUE

The Codification significantly changes how U.S. GAAP is organized and accessed and includes all authoritative GAAP for nongovernmental entities except for publicly traded firms. It also contains a significant amount of SEC guidance for publicly traded firms.

Question 46

TRUE/FALSE

International accounting standards are not included in the FASB Accounting Standards Codification.

Answer 46

TRUE

IFRS are not U.S. GAAP and thus are not included in the Codification.

Question 47

TRUE/FALSE

The purpose of the codification is to make the accounting standards uniform.

Answer 47

FALSE