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Intermediate Accounting > Financial Reporting Environment > Flashcards

Financial Reporting Environment Flashcards

1
Q

Explain FASB due process system

A
  1. topics are identified and placed on agenda
  2. research is done and preliminary pros and cons issues
  3. public hearing on standard
  4. exposure draft
  5. accounting standard update
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2
Q

What is FASB Codification

A

provides all authoritative literature related to a topic
simplifies user access to all authoritative US GAAP
eliminates nonessential info
organized into one online system
replaces “house of GAAP”

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3
Q

how is codification organized

A

Topic –> subtopics –> sections —> paragraphs

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4
Q

Why is reliable financial reporting important

A

helps investors to compare income and assets of different companies. Also helps investors to assess amounts, timing and uncertainty of future cash flows from dividends, interest & proceeds

overall, it allows investors to assess risk & reward–> use resources more efficiently

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5
Q

What is the SEC

A

securities and exchange commission: administers many acts, requires companies to have file audits
can prescribe accounting practices and standards
relays to FASB for all

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6
Q

objective of financial reporting

A

to provid financial info that is useful to present to equity investors, lenders and other creditors in making decisions about providing resources

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7
Q

Purpose of general purpose of financial statements

A

provide users who have some basis of financial knowledge some information about financial status of an econ entity

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8
Q

qualitative characterisitcs

A

distinguish better information from less useful information

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9
Q

fundamental qualities

A

relevance and faithful representation

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10
Q

Relevance

A

must be capable of making a difference in a decision

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11
Q

Ingredients of relevance

A

predictive value, confirmatory value, materiality

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12
Q

predictive value

A

helps users form own expecations about future ex/ uses pasts income performance to predict the amount, timing and uncertainty of future cash flows

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13
Q

confirmatory value

A

helps users confirm or correct prior expectations ex/ year end financial statements help confirm or change past expectations

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14
Q

materiality

A

info that is omitting or misstating would influence decision making- must make a difference - assessing is difficult bc size and importance (relative size)

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15
Q

faithful representation

A

numbers and descriptions match what actually happened

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16
Q

Ingredients of faithful representation

A

completeness, neutrality, free from error

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17
Q

Completeness

A

all the info that is necessary is provided ex/ omission causes information to be false or misleading - failing to provide correct info on assets

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18
Q

Neutrality

A

company can not select info to favor one party over another ex/ in notes suppressing info about lawsuits

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19
Q

free from error

A

accurate (faithful) representation of a financial item

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20
Q

Enhancing qualities

A

comparability, verifiability, timeliness, understandability

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21
Q

Comparability

A

enables users to identify real similarities and difference in econ events between companies

Consistency- when company applies same accounting treatment to similar events from period to period

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22
Q

what must a company do if it wants to change accounting methods?

A

demonstrate why adopted method is preferable, disclose in notes, nature and effect of accounting change, what period it was changed, justification for it

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23
Q

Verifiability

A

when independent measurers obtain similar results ex/ two auditors arrive at same quantity for inventory

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24
Q

Timeliness

A

having information available to decision-makes before it loses its capacity to influence decisions

25
Q

Understandability

A

Quality of information that lets reasonably informed users see its significance - must have some reasonable knowledge

26
Q

FASB 10 elements

A

assets, liabilities, equity, investment by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses

27
Q

Assets

A

provides, or will provide future economic benefit - obtained or controlled by company

28
Q

Liabilities

A

probable future sacrifices of econ benefit from present obligations - ex/ lawsuit , unearned revenue (obligation to provide services)

29
Q

Equity

A

residual interest in assets of an entity after deducting liabilities

30
Q

Balance sheet accounts

A

assets, liabilities, equity

31
Q

FASB two distinct groups

A

resources and claims at a moment in time: assets, liabilities, equity
affects a company during a period of time:
investment by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses

32
Q

Equity accounts

A

owners investment, owner distribution, comprehensive income

33
Q

owner investments

A

owners are contributing something of value for which owners receive something of value, could be cash for stock, or could be land

34
Q

Owner distributions

A

decrease of equity resulting in transfers to owners: most often cash dividends - but could be property dividends

35
Q

Comprehensive income

A

change in equity during a period, except investment by owners and distributions by owners
ex Gains and losses, pension plan, foreign currency adjustments, other investments: these are not reported on income statement

36
Q

income statement elements

A

revenues, expesnes, gains, losses

37
Q

revenues

A

inflows or enhancement of assets, settlements of its liabilities

38
Q

expenses

A

using up of assets, incurring liabilities
Using up assets: rent expense . decrease in inventory,
Occurrence of liabilities: accounts payable / expensive - expense bc we have an obligation to pay

39
Q

gains

A

increase of net assets, not core business

40
Q

losses

A

decreases of net asset, not core business

41
Q

economic entity assumption

A

economic activity is separate and distinct from owners - does not mean legal entity

42
Q

going concerns assumption

A

company will have a long life

43
Q

monetary unit

A

relevant, simple, universally available -inflation and deflation are ignored

44
Q

periodicity

A

company can divide economic activity into artificial time periods

45
Q

Principles of accounting

A

measurement, revenue recognition, expense recognition, full disclosure

46
Q

measurement principle

A

‘mixed attribute’ that permits uses of various measurement bases: common used are historical cost and fair value

47
Q

historical cost

A

beneficial bc it is verifiable - title, deed etc
can also use it for liabilities- agreed upon value for AP, bonds, notes

48
Q

fair value

A

market based measure

49
Q

when would you use fair value over historical cost

A
  • building/ land/ equipment that decline in value
    -inv decline in value- fair measure to determine cost
    -equity investments
    -fair value to measure assets and financial laibiliies- ex/ receivables

fair value has better insight into company asset / liabilities and better as assessing future cash flows

50
Q

fair value hierarchy lvl 1

A

obseravable, quoted prices, least subjective

51
Q

fair value level 2

A

more subjective- evaluating similar assets in active markets

52
Q

revenue recognition

A

when services are provided

53
Q

expense recognition

A

matching efforts w/ accomplishments

54
Q

product costs

A

material, labor, overhead –> attached to product, carry the cost into future periods

55
Q

period costs

A

expense in the immediate period, not attached to revenue

56
Q

full disclosure

A
  • does it make a difference to users? can you condense it enough to make info understandable?
    found in three places: main body of statements, notes in statements, supplementary info
57
Q

notes to financial statement

A

explain items in the main body of the statement: can be partially or totally narrative, does not need to be an element

58
Q

sarbanes oxley act

A

increased resources for SEC to combat fraud/ poor reporting
-establish overside PCAOB (enforcement and establishing auditing, q control, independence standards, rules)
-CFO/CEO personally certify financial statements are accurate, forfeit bonuses when acct restatemetn
-audit committee must be independent members
-large public companies must document the effectiveness of internal controls

59
Q

expectation gap

A

what publci thinks accountants should do vs what accountants think they can do

Intermediate Accounting (5 decks)

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