FAR SEC 1 Flashcards
Financial Statements
Financial statements are the primary method of communicating to external parties information about the results of operations, financial position, and cash flows.
Financial vs. Managerial Accounting
Management accounting information assists management decision making, planning, and control. It is primarily for internal use. It need not follow GAAP but is often derived from financial accounting records.
Securities and Exchange Commission (SEC)
The SEC has the legal authority to establish financial reporting requirements for publicly traded companies (referred to as issuers) in the United States. Issuers are firms that issue stocks and bonds.
The SEC delegated this authority to the FASB.
The SEC enforces those principles by ensuring that issuers meet certain periodic reporting requirements for the disclosure of financial and other information.
Financial Accounting Foundation (FAF)
The FAF is an independent body established by the accounting profession in 1972. FAF overseas the FASB, FASAC, PCC, and EITF.
Financial Accounting Standards Advisory Council (FASAC)
The Financial Accounting Standards Advisory Council (FASAC) advises the FASB on priorities and proposed standards and evaluates its performance.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) establishes financial accounting and reporting standards (i.e., U.S. GAAP) for public and private companies and not-for-profit organizations. The FASB’s Accounting Standards Codification (ASC) is the single source of U.S. GAAP. The FASB updates U.S. GAAP by issuing Accounting Standards Updates (ASUs).
Accounting Standards Codification (ASC)
The FASB’s Accounting Standards Codification (ASC) is the single source of U.S. GAAP.
Accounting Standards Updates (ASUs)
The FASB updates U.S. GAAP by issuing Accounting Standards Updates (ASUs).
The Private Company Council (PCC)
Proposes exceptions to and modifications of U.S. GAAP for private companies and
Advises the FASB on private company issues before new pronouncements are issued.
The Emerging Issues Task Force (EITF)
The Emerging Issues Task Force (EITF) addresses new and unusual accounting issues that require prompt action to avoid differences in accounting treatments. Many consensus positions of the EITF have been included in Accounting Standards Updates (ASUs).
Exposure Draft
An Exposure Draft is published to solicit broad stakeholder responses before voting on the final draft proposal. In some projects, a Discussion Paper also may be issued at an early stage to seek input during the process of drafting the proposal.
ASU to ASC
The FASB votes on a final draft proposal. If a majority of the seven board members approves, an ASU is issued to amend the Accounting Standards Codification (ASC). When an ASU has been incorporated into the FASB’s ASC, it has the status of U.S. GAAP.
Governmental Accounting Standards Board (GASB)
The GASB is a private, not-for-profit, nongovernmental organization established by the FAF as the primary standard setter for state and local governmental entities. (The GASB does not establish GAAP for the federal government.)
Federal Accounting Standards Advisory Board (FASAB)
The FASAB establishes accounting principles for the federal government and issues Statements of Federal Financial Accounting Standards.
FASB’s conceptual framework
The FASB’s conceptual framework is a set of interrelated objectives, qualitative characteristics, elements, and other fundamental concepts. It is described in the Statements of Financial Accounting Concepts (SFACs).
Statements of Financial Accounting Concepts (SFACs)
The FASB’s conceptual framework is a set of interrelated objectives, qualitative characteristics, elements, and other fundamental concepts. It is described in the Statements of Financial Accounting Concepts (SFACs). But SFACs are not authoritative and are not included in the ASC. Instead, they are intended to guide the development and application of U.S. GAAP.
The objective of general-purpose financial reporting
The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors and creditors in making decisions about providing resources to the entity.
Primary users of financial information
Primary users of financial information are current or potential investors and creditors who cannot obtain it directly. Management and regulators are not primary users.
Importance of Future Net Cash Inflows
Primary financial information users’ decisions depend on the expected return. Accordingly, primary users need information that helps them assess the amount, timing, and uncertainty of the entity’s future net cash inflows.
Fundamental Qualitative Characteristics (2 elements)
The two fundamental qualitative characteristics are Relevance and Representational Faithfulness.
Relevance
Relevance is one of two fundamental qualitative characteristics. Information is relevant if it can make a difference in user decisions. To do so, it must be material and have predictive value and/or confirmatory value.
Predictive Value
Information has predictive value if it can be used to generate predictions as an input in a predictive process.
Confirmatory Value
Information has confirmatory value for prior evaluations if it provides feedback that confirms or changes (corrects) them. Predictive value and confirmatory value are interrelated. For example, current revenue may confirm a prior prediction and also be used to predict the next period’s revenue.
Materiality
Information is material if it is probable that an omission or misstatement of an item in a financial report will affect the judgment of a reasonable person who relies on this information. Materiality is entity-specific, whereas relevance is a general idea about what information is useful to investors. Materiality has no specific quantitative threshold. The dollar amount of an item, without regard to the nature of the item, generally is not a sufficient basis for a materiality judgment.