Fundamental Acct Concepts

Question 1

Describe the image of the GAAP pillars.

Answer 1

Question 2

What are the general categories, or pillars, of the GAAP?

Answer 2

1) Qualitative characteristics (fundamental and enhancing)
2) Assumptions
3) Principles

Question 3

FASB

Answer 3

Financial Accounting Standards Board

Question 4

What are “enhancing qualitative characteristics” of the GAAP?

Answer 4

Comparability (and Consistency)
Verifiability
Timeliness
Understandability

Question 5

What does “relevance” refer to, what category does it fall under in the GAAP pillars?

Answer 5

-Relevance is a “fundamental” - Qualitative Characteristic
-Accounting information is said to be relevant if it is capable of making a difference in a business decision
-accomplished by helping users predict future events or by providing feedback about prior expectations.
-relevant information must also be provided in a timely manner.

Question 6

What does “economic entity” refer to, what category does it fall under in the GAAP pillars?

Answer 6

Economic Entity Assumption
-This assumption - each company is accounted for separately from its owners.
-seems obvious as a share holder rolls eyes

Question 7

What are “principles” of the GAAP?

Answer 7

Historical cost
Revenue recognition
Expense recognition
Conservatism

Question 8

What are “fundamental qualitative characteristics” of the GAAP?

Answer 8

Relevance
Faithful Representation

Question 9

What does “time-period” refer to, what category does it fall under in the GAAP pillars?

Answer 9

Time-period Assumption
-This assumption allows the life of a company to be divided into artificial time periods so that net income can be measured
-ie monthly, quarterly, annually
-without this assumption, a company’s income could only be reported at the end of its life

Question 10

What does “understandability” refer to, what category does it fall under in the GAAP pillars?

Answer 10

-Understandability is an “enhancing” - Qualitative Characteristic
-Users with a reasonable understanding of accounting and business should be able to comprehend the meaning of the information.

Question 11

What does “expense recognition” refer to, what category does it fall under in the GAAP pillars?

Answer 11

Expense Recognition Principle
-Principle requires that an expense be recorded/reported in the same period as the revenue that it helped generate
-also referred to as the “matching principle”
-may or may not be in the same period that cash is paid

Question 12

What does “verifiability” refer to, what category does it fall under in the GAAP pillars?

Answer 12

-Verifiability is an “enhancing” - Qualitative Characteristic
-Information is verifiable when independent parties can agree on the measurement of the activity
-When multiple independent observers can reach a general consensus, there is implication that the information faithfully represents the economic event

Question 13

What does “going-concern” refer to, what category does it fall under in the GAAP pillars?

Answer 13

Going-Concern Assumption
-This assumption states that a company will continue to operate long enough to carry out its existing commitments.
-Essential for valuing assets and liabilities

Question 14

What does “conservatism” refer to, what category does it fall under in the GAAP pillars?

Answer 14

Conservatism Principle
-Principle states that accountants should not overstate assets and income when they prepare financial statements
-should not lead to biased financial information
-should never be used to justify the deliberate understatement of assets or income

Question 15

What are “assumptions” of the GAAP?

Answer 15

Economic Entity
Going-Concern
Time-Period
Monetary Unit

Question 16

What “pervasive constant” binds all the qualitative characteristics together?

Answer 16

The Cost Constraint - the benefit received from accounting information should be greater than the cost of providing that information

Question 17

What does “historical cost” refer to, what category does it fall under in the GAAP pillars?

Answer 17

Historical Cost Principle
-This principle requires the activities of a company are initially measured at their cost.
-Example-equipment is valued at its purchase price
-Criticized for not taking into account market value - FASB is developing standards to use market value with certain assets

Question 18

What is an accounting cycle?

Answer 18

Prof answer - an orderly process that is based on a series of steps and conventions designed to prevent mis-statements, errors, and/or fraud.
Book answer - the procedures that a company uses to transform the results of its business activities into financial statements

Question 19

What does “comparability” refer to, what category does it fall under in the GAAP pillars?

Answer 19

-Comparability is an “enhancing” - Qualitative Characteristic
-Comparable information allows external users to identify similarities and differences between two or more items.
-Information is useful when it can be compared with similar information about other companies (or similar info about the same company from a previous time period)
-Consistency is included within comparability
-Consistency can be achieved when a company applies the same accounting principles for the same items over time
-Comparability should be viewed as the goal and Consistency helps to achieve the goal

Question 20

GAAP

Answer 20

Generally Accepted Accounting Principles

Question 21

What does “revenue recognition” refer to, what category does it fall under in the GAAP pillars?

Answer 21

Revenue Recognition Principle
-This principle is used to determine when revenue is recorded and reported
-Revenue is to be recognized, or recorded, in the period in which the company satisfies its obligation
-Generally when service is performed or goods delivered

Question 22

What does “timeliness” refer to, what category does it fall under in the GAAP pillars?

Answer 22

-Timeliness is an “enhancing” - Qualitative Characteristic
-Information is timely if it is available to users before it loses its ability to influence decisions

Question 23

What does “monetary unit” refer to, what category does it fall under in the GAAP pillars?

Answer 23

Monetary Unit Assumption
-This assumption requires that a company account for and report its financial results in monetary terms.
-This implies that certain nonmonetary items (such as brand loyalty) are not reported on a financial statement as they can’t be measured in monetary terms

Question 24

What does “faithful representation” refer to, what category does it fall under in the GAAP pillars?

Answer 24

-Faithful representation is a “fundamental” - Qualitative Characteristic
-Accounting information should be a faithful representation of the real-world economic event it is intended to portray
-Faithfully represented data should be:
–Complete - including all necessary information for the user to understand the event
–Neutral - unbiased
–Free from error - as accurate as possible