FARWiley Flashcards
(175 cards)
1
Q
WhatisthemainpurposeoftheSecuritiesandExchange Commission(SEC)?
A
The main purpose of the SEC is to promote efficient allocation of capital by maintaining open, and fair securities markets.
2
Q
What comprises United States Generally Accepted Accounting Principles?
A
The Financial Accounting Standards Board (FASB), Accounting Standards Codification comprise authoritative US GAAP for publically traded companies. Securites and Exchange Commission (SEC) pronouncements are also GAAP.
3
Q
WHat is the role of the Financial Accounting Foundation (FAF)?
A
The FAF exercises oversight of the Financial Accounting Standards Board (FASB), appoints the members of the FASB and ensures funding.
4
Q
What is the Financial Accounting Standards Board?
A
THe FASB establishes financial accounting standards for business entities.
5
Q
What is the role of the Financial Accounting Advisory Council (FASAC)?
A
The FASAC provides guidance on major policy issues, project priorities, and the formation of task forces.
6
Q
What are the first three steps the Financial Accounting Standards Board (FASB) uses when issuing a new accounting standard?
A
- Considers whether to add a project to its agenda in consultation with the Financial Accounting Foundation (FAF)
- Conducts research
- Holds a public hearing on the topic.
7
Q
What are the final 3 steps in the standard-setting process?
A
- Evaluate research and comments from interested parties and issue an exposure draft.
- Solicit additional comments
- Finalize new accounting guidance and issue Accounting Standards Updates (ASUs)
8
Q
How do user groups influence the outcome of the Financial Accounting Standards Board (FASB) standards?
A
Users influence standards by providing input during the due process procedure.
9
Q
What is the American Institute of Certified Public Accountants? (AICPA)
A
The AICPA is the professional organization for participating CPAs.
10
Q
What does the Securities and Exchange Commission (SEC) do?
A
It administers the US securities laws, most notably the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as others.
11
Q
What topics does the Financial Accounting Standards Board (FASB) Accounting Standards Codification not include?
A
- Other comprehensive basis of accounting
- Tax basis of accounting
- Cash Basis
- Regulatory accounting principles
12
Q
What purposes does the Financial Accounting Standards Board (FASB) Accounting Standards Codification serve?
A
The FASB Accounting Standards Codification is the sole source of authoritative US generally accepted accounting principles for nongovernmental entities, except for the Securities and Exchange Comission guidance.
13
Q
What are long term assets?
A
Assets that are not classified as current assets. Long-term assets are reported on the balance sheet and represent a company’s property, equipment, and other capital assets (reduced by depreciation) expected to be usable for more than one year.
14
Q
What is the Accounting Principles Board?
A
The entity that published 31 opinions, some of which are now part of the Codification.
15
Q
What is the classification of assets that are in the form of cash, or will be consumed within one year or the operating cycle of the business, whichever is longer?
A
The classification is current assets.
16
Q
What are the seven key components of the general-purpose external financial reporting?
A
- Income Statement
- Balance sheet
- Statement of cash flows
- Statement of retained earnings
- Statement of comprehensive income
- Footnote disclosures
- Auditor’s opinion
17
Q
When is revenue recognized under the accrual basis of accounting?
A
Revenues are recognized when earned and collection is reasonably assured, regardless of period of cash collection.
18
Q
When are expenses recognized under accrual accounting?
A
Expenses are recognized when incurred, regardless of the period of cash payment.
19
Q
Which agency enforces generally accepted accounting principles (GAAP)?
A
The Securities and Exchange Commission (SEC)
20
Q
What body developed generally accepted accounting principles (GAAP)?
A
The Financial Accounting Standards Board (FASB)
21
Q
What does generally accepted accounting principles (GAAP) address?
A
Recognition, measurement, and disclosure
22
Q
What approach is used when financial statements are prepared?
A
The all-inclusive approach
23
Q
Where and how are prior-period adjustments shown?
A
They are shown on the statement of retained earnings as adjustments to the beginning balance of retained earnings in the year that the error is discovered.
24
Q
What are the items in other comprehensive income?
A
Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities.
25
Name the two different formats of presentation for the balance sheet.
1. account form
| 2. report form
26
How are assets presented on the balance sheet?
Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment)
27
How are liabilities presented on the balance sheet?
Liabilities are shown in order of maturity. Current liabilities are presented first, and then long-term liabilities are presented.
28
How is owner's equity presented on the balance sheet?
In order of permanence
29
What are current liabilities
Liabilities that are due in the upcoming year or the operating cycle whichever is longer; and which will be met through the transfer of a current asset or the creation of another current liability.
30
How are long-term assets and liabilities defined?
By exclusion from current assets and current liabilities.
31
What is the purpose of the statement of cash flows?
To explain the change in cash and cash equivalents that has occurred during the past accounting year.
32
What are cash equivalents?
Short-term investments that are convertible into a know and fixed amount of cash and have an original maturity to the purchaser of three months or less.
33
What are the categories that are listed on the statement of cash flows?
- operating
- investing
- financing
34
What are the major areas in the Financial Accounting Standards Board (FASB) Accounting Standards Codification?
- General principles 100
- Presentation 200
- Assets 300
- Liabilities 400
- Equity 500
- Revenue 600
- Expense 700
- Broad transactions 800
- Industry 900
35
What is the lowest structure of the Financial Accounting Standards Board (FASB) Accounting Standards Codification?
The lowest structure is the paragraphs
36
What is the highest structure of the FASB Accounting Standards Codification
The highest level is the areas
37
How are changes to the FASB Accounting Standards Codification accomplished?
Through Accounting Standards Updates (ASUs)
38
What is the reason for the FASB Accounting Standards Codification?
To put all accounting guidance in one place.
39
What are the primary qualitative characteristics of financial information?
Faithful representation and Relevance (FARR)
40
What are the ingredients of Relevance?
- Predictive value
- Confirmatory value
- Materiality
41
What is predictive value?
To be relevant, accounting information should assist financial statement users in making predictions about future events.
42
What is confirmatory value?
To be relevant, accounting information should assist decision makers in confirming past predictions.
43
What are the ingredients of faithful representation?
- Completeness
- Free from material error
- Neutrality
44
What is completeness
Information is complete if it includes all data necessary to be faithfully represented.
45
What does it mean to be free from error?
Information if free from error if it is truthful.
46
What is neutrality?
To be neutral, accounting information must be free of bias.
47
List the enhancing qualitative characteristics of financial information.
- Comparability
- Verifiability
- Timeliness
- Understandability
48
What is comparability?
The quality of information that enables users to identify similarities and differences between sets of information.
49
What is verifiability?
Information is verifiable if different knowledgeable and independent observers can reach similar conclusions
50
What is timeliness?
To be relevant, accounting information must be received in time to make a difference to the decision maker.
51
What is understandability?
Information is understandable if the user comprehends it with reasonable effort and diligence.
52
What are the objectives of financial reporting?
To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions.
53
Who is the target audience of financial statements?
Decision makers; mainly potential investors, creditors, and regulators.
54
What is the entity assumption?
We assume there is a separate accounting entity for each business organization.
55
What is the going-concern assumption?
In the absence of information to the contrary, a business is assumed to have an indefinite life (i.e. that is, it will continue to be a going concern)
56
What is the unit of measurement assumption?
Assets, liabilities, equities, revenues, expenses, gains, losses and cash flows are measured in terms of the monetary unit of the country in which the business is operated.
57
What is the concept of capital maintenance?
Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.
58
What is the time period assumption?
The indefinite life of the business is broken down into smaller time frames, typically a year, for evaluation purposes and reporting purposes.
59
What does the historical cost accounting principle state?
Assets and liabilities are recorded at historical cost (i.e. that is their cash equivalent amount at time of origination). This value is the market value of the item on the date of acquisition.
60
What are revenues
Revenues are increases in assets or extinguishment of liabilities from delivery of goods or services- the main objective of the firm.
61
When should a company recognize revenues?
Revenues are recognized when they are earned and collectability is reasonably assured.
62
When does realization occur in the accounting period?
When:
- Goods or services have been provided
- Collectability of cash is assured
- Expenses of providing goods and services can be determined
63
How do we measure a revenue?
Revenues is measured as the cash equivalent amount of the good or service provided.
64
What is the matching principle?
Recognize expenses only when expenditures help to produce revenues.
65
What is the full disclosure principle?
Financial Statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.
66
Define "cost effectiveness"
This constraint on generally accepted accounting principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.
67
What is the constraints to setting accounting standards?
Cost effectiveness (or cost-benefit)
68
What is cost effectiveness
This constraint on generally accepted accounting principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.
69
What is conservatism?
Conservatism (also called prudence) is the reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when Generally Accepted Accounting Principles (GAAP) provides a choice from among recognition or measurement methods.
70
List the elements included in a full set of financial statements.
- Balance Sheet
- Income Statement
- Statement of comprehensive income
- Statement of cash flows
- Statement of owner's equity
71
What are the four criteria that must be met to be recognized and measured in a financial report?
1. Definition
2. Measurability
3. Relevance
4. Faithful representation
72
What does a fresh start measurement do?
Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g. mark-to-market accounting and recognition of asset impairments)
73
List the elements which a present value measurement that fully captures economic differences should include.
- An estimate of future cash flows
- Expectations about variations in amount or timing of those cash flows.
- Time value of money as measured by the risk-free rate of interest
- The price for bearing the uncertainty inherent in the asset or liability
- Any other relevant factors
74
Define "fair value" for accounting purposes.
The price that would be received to sell an asset or paid to transfer a liability in orderly transaction between market participants at the measurement date.
75
For purposes of the fair value definition, what are the assumed characteristics of market participants?
Buyers and sellers that are:
- Independent of the reporting entity
- Acting in their economic best interest
- Knowledgeable of the asset or liability and the transaction involved
- Able and willing, but not compelled, to transact for the asset or liability
76
What are the major purposes intended to be accomplished by the fair value framework?
TO provide a framework for the use of fair value in generally accepted accounting principles (GAAP) so as to:
- Achieve increased consistency and comparability in fair value measurements and
- Expand disclosure when fair value measurements are used.
77
Describe fair value measurement inputs
Inputs can be observable or unobservable.
Observable inputs are based on market data from independent sources.
Unobservable inputs are the entity's assumptions about the factors that impact determination of fair value.
78
What purpose does the fair value hierarchy serve?
To prioritize the inputs to valuation techniques used to measure fair value.
79
What are the three levels of the fair value hierarchy and what does each consist of?
Level 1: highest level, are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued
Level 2: are observable for assets and liabilities, either directly or indirectly other than quoted prices described in level 1
Level 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available.
80
What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobservable inputs (i.e. level 3 inputs)
- Reconciliation of beginning and ending balances
- Description of the valuation process used
- Quantitative information about the unobservable inputs used
- Narrative description of the sensitivity of fair value to changes in unobservable inputs
- Unrealized gains/losses for the period and where reported
81
Distinguish between assets and liabilities measured at fair value on a recurring basis and nonrecurring basis
Assets and liabilities measured at fair value on recurring basis are adjusted to fair value period after a period. Assets and liabilities measured at fair value on a nonrecurring basis are adjusted to fair value only at the time of a particular event (e.g. significant modification of debt)
82
What significant fair value disclosures are required only in annual statements?
The methods and significant assumptions used to estimate fair value.
83
What types of comparisons are fair value option disclosures intended to facilitate?
1. Between entities that choose different measurement methods for similar assets and liabilities
2. Between assets and liabilities in the financial statements of an entity that selects different measurement for similar assets and liabilities.
84
What purpose do Accounting and Auditing Enforcement Releases (AAER) serve?
They report the enforcement actions taken against accountants
85
Define "Staff Accounting Bulletins" (SAB)
Bulletins that provide the Security and Exchange Commission's current position on technical issues.
86
Define "Financial Reporting Releases (FRR)"
Formal pronouncements that rank the highest in authority for public companies.
87
When the Securities and Exchange Commission (SEC) finds an accounting irregularity, what happens?
The SEC sends a deficiency letter to a registrant when an accounting irregularity is found.
88
Does the SEC have the authority to penalize firms when financial statements are not in accordance with GAAP?
Yes, it may penalize firms.
89
How many divisions does the Securities and Exchange Commission have?
Four:
1. Division of Corporation Finance
2. Division of Enforcement
3. Division of trading and markets
4. Division of Investment Management
90
What does the SEC strive to do?
Ensure that there is adequate information in the public domain before a company issues or trades securities.
91
Does the SEC have legal authority to prescribe accounting standards to public companies?
Yes, it has that authority.
92
What law prohibits the bribing of foreign officials?
The foreign corrupt policies act of 1977.
93
What information does the 8-K provide?
Significant events affecting the company
94
Within how many days after the end of the quarter does a company need to file the 10-Q?
- 40 days for large accelerated filers and accelerated filers
- 45 for nonaccelerated filers
95
What information does management discussion & analysis (MD&A) cover?
- The firm's financial condition
- Changes in the financial condition
- Results of operations
- Liquidity
- Capital resources and operations
- Indications in trends, significant events, and uncertainties
96
What information does management discussion & analysis (MD&A) provide?
A discussion of important aspects of the firm from the viewpoint of management
97
Within how many days after the fiscal year end of a large accelerated filer does a 10-K need to be filed?
60 days
98
How many years of selected financial data are required by the SEC?
Five years
99
WHat are the steps in the offering process?
1. Issuer
2. Underwriter
3. Dealer
4. Public
100
How many years of cash flow data are required by the SEC?
three years are required
101
How many years of income statement data are required by the SEC?
three years are required
102
How many years of balance sheet data are required by the SEC?
Two years are required
103
What does registration with the SEC require?
Extensive disclosures about the company, management, and the intended use of the proceeds from the issue.
104
Where are the formal rules of the SEC found?
In the Code of Federal Regulations
105
What does the Securities Act of 1934 do?
It requires the trading of securities after they are issued and requires periodic reporting.
106
What does the International Financial Reporting Standards (IFRS) Interpretations Committee do?
The committee serves a similar role to the Financial Accounting Standards Board's Emerging Issues Task Force, except that the IFRS Interpretations Committee's pronouncements (interpretations) are reviewed by the International Accounting Standards Board before they are issued. The IFRS Interpretations Committee reviews issues arising in the context of IFRSs and issues interpretations of those issues.
107
What does the International Financial Reporting Standards (IFRS) Advisory Council do?
The council advises the IASB on priorities and the views of interested organizations on major projects as well as the benefits and costs of proposed standards
108
How long are the terms for board members of the International Accounting Standards Board (IASB)?
5 years renewable one term
109
How long are the terms for the trustees of the International Financial Reporting Standards (IFRS) Foundation?
3 years, renewable one term
110
Who appoints members of the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) Advisory Council, and IFRS Interpretations Committee?
The IFRS Foundation
111
How many members does the International Accounting Standards Board (IASB) have?
16
112
What is IOSCO?
It is the International Organization of Securities Commissions. IOSCO promotes high standards of regulation to ensure transparent and efficient capital markets.
113
Does the International Accounting Standards Board (IASB) have enforcement power over compliance?
No, it does not have enforcement power.
114
What is the fourth objective of the International Financial Reporting Standards (IFRS) Foundation?
To promote and facilitate adoption of IFRs issued by the International Accounting Standards Board (IASB), through the convergence of national accounting standards IFRS
115
What is the third objective of the International Financial Reporting Standards (IFRS) Foundation?
To take into account the special needs of a range of sizes and types of entities in diverse economic settings
116
What is the second objective of the International Financial Reporting Standards (IFRS) Foundation?
To provide the use and rigorous application of those standards.
117
What is the first objective of the International Financial Reporting Standards (IFRS) Foundation?
To develop in the public interest a single set of high-quality, understandable enforceable and globally accepted financial reporting standards. These standards require high quality, transparent, and comparable information in financial reporting to help make economic decisions.
118
What year did the International Accounting Standards Board (IASB) begin taking control of standard setting?
2001 (April)
119
From what entity did the International Accounting Standards Board (IASB) evolve?
The IASB, formed in 2001, evolved from the International Accounting Standards Committee (IASC), which was established in 1973
120
What did the SEC eliminate for foreign companies listed in the United States?
A reconciliation of earnings and equity to US generally accepted accounting principles (Form 20-F) in their financial statements.
121
List the steps of developing International Accounting Standards.
- Add the item to agenda
- Discuss the issue
- Publish a discussion paper if the topic is difficult
- Prepare a vote on the exposure draft
- Issue the exposure draft
- Debate the issue at hand
122
List some examples of simplified recognition and measurement for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS)?
- Goodwill is amortized
- All research and development is expensed
- Categories of investments are reduced
- Less prior year data is required for the first-time adoption
123
What are some omitted topics for small and medium-sized Entities (SMEs) in International Financial Reporting Standards (IFRS)?
- Earnings per share
- Interim financial reporting
- Segment reporting
124
When can revisions happen for small and medium sized entities (SMEs) in International Financial Reporting Standards (IFRS)?
Revisions for SMEs standards happen every three years at most
125
What is simplified for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS)?
- Topics that are irrelevant are eliminated
- Recognition and measurement aspects are simplified
- Disclosures reduced to 10% of those in regular IFRS.
126
Are International Financial Reporting Standards (IFRS) more rules based or principle based?
Principle based
127
Under International Financial Reporting Standards (IFRS), if no standards exist on an accounting issue, what should companies use?
The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework.
128
What is the highest level of international generally accepted accounting principles (GAAP)?
The International Financial Reporting Standards
129
Does accounting income take a transactions-based determination of income or a change in net worth?
Accounting income is transaction based
130
What represent increases in net assets or settlements of liabilities by providing goods and services?
Revenues
131
Define "losses"
Decreases in equity or net assets from peripheral or incidental transactions.
132
Define "gains"
Increases in equity or net assets from peripheral or incidental transactions
133
Define "expenses"
Decreases in net assets or incurrence of liabilities through the provision of goods or services
134
What items are not shown on the income statement?
- Prior period adjustments
- Foreign currency translation adjustments
- Unrealized gains and losses on available for sale (AFS) securities
- Unrecognized pension items
- Cumulative effect of changes in accounting principle
- Unrealized gains and losses on cash flow hedges
135
What is economic income?
The change in the net worth of a business enterprise during an accounting period
136
How are unusual and/or infrequent items reported?
They must be separately reported if material as a component of income from continuing operations.
137
What is the order of income statement presentation?
- Income from continuing operations
- Income from discontinued operations (net of tax)
- Net Income
138
What is operating margin?
The excess of operating revenues over operating expenses
139
What does the multiple-step income statment present?
Includes multiple subtotals of revenues, expenses, gains, and losses
Sales- COGS= Gross Profit; Gross Profit- Operating Expenses= Income from operations; Income from operations +/- Other income/expenses=Income before taxes - taxes=Net Income
140
What does the single-step income statement present?
Total revenues and gains less total expenses and losses
141
What are the types of statements on other comprehensive income?
- Single statement of net income and comprehensive income
| - Two separate statements: a statement of net income and a statement of comprehensive income
142
What is other comprehensive income (OCI) reclassification adjustment?
When an OCI item form a previous year is removed from accumulated other comprehensive income (AOCI)
143
What type of account is accumulated other comprehensive income?
Owner's equity account
144
What are other comprehensive income items?
- Unrealized gains and losses on securities available for sale
- Unrecognized pension gains and losses
- Foreign currency translation adjustments
- Certain derivative gains and losses
145
What is net income plus or minus other components of comprehensive income?
Comprehensive income
146
What are the two ways of reporting comprehensive income?
1. As a separate statement of comprehensive income
| 2. As part of the income statement
147
What is comprehensive income?
Net income plus or minus unrealized gains and losses on securities available for sale, unrealized pension cost, certain unrealized gains and losses on derivatives, and foreign currency translation adjustments
148
What is the main purpose of disclosing comprehensive income?
TO report the net change in equity in a single amount
149
What is equation for comprehensive income?
Net income + Other comprehensive income items
150
What are the forms of the statement of comprehensive income?
- Single Statement
| - Two statements
151
Name the four major sections in the direct method cash flow statement
1. Operating Cash Flows
2. Investing cash flows
3. Financing cash flows
4. Reconciliation of net income and net operating cash flows
152
What is the cash flow category for collections of principal amounts on loans made to other entities?
The category is investing
153
Name the two formats permitted for the statement of cash flows
Indirect and Direct
154
What is the indirect method on the statement of cash flows
It reconciles net income to cash flows from operating activities
155
What is the direct method of cash flows
This method presents actual inflows and outflows from cash operations. It must also disclose the indirect method (reconciliation of net income to cash cash flows from operations) as a supporting schedule
156
What is the cash flow category for interest paid and received?
This category is operating activities
157
What is the cash flow category for principal payments on short-term and long term loans from financial institutes or dealers made to acquire plant assets?
The category is financing
158
What is the cash flow category for principal payments on short term and long term loans from financial institutes made to acquire inventory for resale?
The category is financing
159
What is the cash flow category for principal payments on short term and long term loans from suppliers made to acquire inventory for resale?
The category is operating
160
What is the cash flow category for loans made to other entities
The category is investing
161
What is the cash flow category for dividends paid?
The category is financing
162
What is the cash flow category for purchasing of securities available for sale?
The category is investing
163
What is the cash flow category for purchases of trading securities?
The category is operating
164
What are some examples of cash outflows classified as financing activities
- Repurchase of own stock
- Paying back lenders (principal only)
- Payment of dividends
165
What are some examples of cash inflows classified as financing activities?
- Sale of own stock
| - Proceeds from borrowing
166
What are some examples of cash outflows classified as investing activities?
- Purchase of long term assets
- Lending to others
- Investment in debt and equity securities held to maturity and available for sale
- Purchase of productive assets (not inventory)
167
What are some examples of cash inflows classified as investing activities?
- Sale of long term assets
- Collection on loan principal
- Disposal of help to maturity (HTM) and Available for sale (AFS) debt and equity securities
- Sale of productive assets (not inventory)
168
Where are non-cash investing and financing activities reported?
They are reported on the face of the statement of cash flows or as a separate disclosure
169
Where is the cash affect on foreign currency translation reported?
It is reported as a separate part of the reconciliation of the change in cash and cash equivalents during the period.
170
Using the indirect method for reporting cash flows from operations, should a decrease in unearned revenue be added to or subtracted from accrual based net income?
A decrease in unearned revenue should be subtracted
171
Using the indirect method for reporting cash flows from operations, should an increase in accounts payable be added to or subtracted from accrual-based net income?
An increase in accounts payable should be added
172
Using the indirect method for reporting cash flows from operations, should a decrease in inventory be added to or subtracted from accrual-based net income?
A decrease in inventory should be added
173
Using the indirect method for reporting cash flows from operations should an increase in accounts receivable be added to or subtracted from accrual-based net income?
An increase in accounts receivable should be subtracted
174
What is the purpose of the operating section of the statement of cash flows under the direct method?
The purpose is to show all cash inflows and outflows for operating activities
175
What is the purpose of the operating section of the statement of cash flows under the indirect method?
The purpose is to adjust accrual net income to net cash flow from operating activities
