GAAP Governing Bodies and Qualities

Question 1

What is Generally Accepted Accounting Principles(GAAP)?

Answer 1

The set of accepted industry rules, practices and guidelines for financial accounting Includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements

Question 2

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

Answer 2

It Sets ethical standards for the CPA profession and also sets U.S. auditing and GAAP standards .It also develops and grades the Uniform CPA Examination

Question 3

What is the Financial Accounting Standards Board(FASB)?

Answer 3

It establishes and improves standards of financial accounting by non-governmental entities(GAAP).

Question 4

What is the Securities and Exchange Commission(SEC)?

Answer 4

It enforces federal securities laws and regulating the securities industry.This also regulates the stock market and the preventing of corporate abuse of investors.

Question 5

What is the SEC Authority?

Answer 5

Is enforcement authority granted by the Congress.It bring’s civil enforcement actions against individuals and companies who: Commit accounting fraud,Provide false information,Engage in insider trading , and Violate securities laws.They also bring criminal enforcement actions to prosecute individuals and companies for criminal offenses.

Question 6

What is SEC Objectives?

Answer 6

It maintains fair,orderly and efficient markets and ensures that securities industry professionals deal fairly with their customers.Another is that they ensure that corporations make all material information about themselves public and facilitates capital formation for corporations.

Question 7

What is Securities?

Answer 7

Securities are notes,stock,treasury stock,security future and bonds.They also include debentures,certificate of interest and participation in any profit-sharing agreements.

Question 8

What is the Securities Act of 1933?

Answer 8

It requires that investors receive financial/significant information concerning securities offered for public sale and prohibits deceit, misrepresentations, and fraud in the sale of securities.

Question 9

What is the Securities Act of 1934?

Answer 9

It empowers the SEC with broad authority over the securities industry it also includes the power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, self-regulatory organizations (New York Stock Exchange, American Stock Exchange, NASDAQ).Lastly it empowers SEC to require periodic reporting by companies with publicly traded securities (GAAP).

Question 10

What is the Governmental Accounting Standards Board(GASB)?

Answer 10

The GASB was established in 1984 to establish and improve standards of state and local governmental accounting and financial reporting (GAAP).

Question 11

What is the Objective of Financial Information?

Answer 11

It provides useful, understandable information to users of financial statements for decision making. It is for presents and potential investors and creditors and other users in making rational investment, credit, and similar decisions.Also it is for present and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective cash receipts.It is for informing users about the: economic resources of an enterprise; the claims to those resources (obligations);
the effects of transactions, events, and circumstances that cause changes in resources and claims to those resources.

Question 12

What is the Objective of Financial Information?

Answer 12

Decision Usefulness for the quality of being useful to decision making.The understand-ability users must understand the information within the context of the decision being made.

Question 13

What is the Primary Qualities?

Answer 13

It relates to the matter at hands and talks about the quality and the state of reliability.

Question 14

What is Relevance?

Answer 14

Is capable of making a difference in the decision making of the user. It also must have predictive or feedback value. It predicts and forecasts for users about the outcome of events of a company. It also provides feedback value for users to confirm or correct prior expectations of a company. Must be presented in a timely manner. Provides current information to users to help with decision making. Must be verifiable. Able to be proven; not subject to opinion. Must be a faithful representation. An Agreement between the accounting numbers and supporting documentation. Must be reasonably free from error. No mistakes or inaccuracies should be found in the financial statements. Must be reasonably free from bias; should be neutral. Lastly, Accounting information should not favor any groups or companies but be a true and factual representation of a company’s financial position.

Question 15

What is Reliability?

Answer 15

Information is reasonably free from error and bias.The quality state of being reliable.It is neutral and prudent.

Question 16

What is Secondary Qualities?

Answer 16

Secondary Qualities include comparability which is the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena.It also includes consistency the conformity from period to period with unchanging policies and procedures. Lastly,Information about a particular enterprise gains greatly in usefulness if it can be compared with similar information.

Question 17

What is Comparability?

Answer 17

The purpose of comparison is to detect and explain similarities and differences. Accounting information should be comparable across different companies and over different time periods.

Question 18

What is Consistency?

Answer 18

Consistent use of accounting principles from one accounting period to another enhances the utility of financial statements to users. It also is a quality of the relationship between two accounting numbers

Question 19

What is the Hierarchy of Qualitative Information?

Answer 19

The characteristics of information that make it a
desirable commodity guide the selection of preferred
accounting policies from among available alternatives. They can be viewed as a hierarchy of qualities,
with usefulness for decision making of most importance. Without usefulness, there would be no benefits
from information to set against its costs. .An important limitation of the hierarchy is that while it does distinguish between primary and other qualities, it does not assign priorities among qualities.

Question 20

What is a Constraint?

Answer 20

A constraint is a limit, regulation, or confinement within prescribed bounds.Refers to the accounting guidelines that border the Hierarchy of Qualitative Information.

Question 21

What is Cost Effectiveness Constraint?

Answer 21

Also called Cost Benefit Constraint .It is the cost of providing accounting information should not exceed the benefit of the information it is reporting.

Question 22

What is Materiality Constraint?

Answer 22

Material means big enough to make a difference in the user’s decision-making process.It States that the requirements of any accounting principle may be ignored when there is no effect on the decisions of the user of financial information.

Question 23

What is Conservatism Constraint?

Answer 23

Conservatism helps the accountant choose between 2 equally likely alternatives.It Requires the accountant to record the transaction using the less optimistic choice.

Question 24

What are Concepts?

Answer 24

Concepts are the ground rules of accounting that should be followed when preparing financial statements.

Question 25

What is Recognition Concept?

Answer 25

It states that an item should be recognized (recorded) in the financial statements when:It can be defined by GAAP assumptions and principles,It can be measured,it is relevant to decision-making by users and is reliable.

Question 26

What is Measurement Concept?

Answer 26

States that every transaction is measured by the stated unit of measurement, such as the dollar.Also stated that the procedure of valuing assets, liabilities, equity, revenue, and expenses as defined by GAAP.

Question 27

What are Assumptions?

Answer 27

Assumptions are agreed upon rules of accounting, and are basic, understood beliefs.

Question 28

What is Economic Business Entity Assumption?

Answer 28

All of the business transactions should be separate from the business owner’s personal transactions.Also there should be no co-mingling of personal funds with business funds.

Question 29

What is Going Concern Assumption?

Answer 29

Financial statements are prepared under the assumption that the company will remain in business indefinitely unless there is sufficient evidence otherwise.Also If there is evidence that a company may possibly have a going concern issue, this must be disclosed in the financial statements.

Question 30

What is Monetary Unit Assumption?

Answer 30

Assumes that a stable currency is going to be the unit of record.The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation.

Question 31

What is Time Period Assumption?

Answer 31

The entity’s that activities are separated into periods of time such as months, quarters or years.Are Transactions that must be accounted for within the time period they occur regardless of when cash is exchanged.

Question 32

What are Principles of Accounting?

Answer 32

Principles are accounting rules used to prepare, present, and report financial statements.Principles dictate how events should be recorded and reported.

Question 33

What is Cost Principle?

Answer 33

Assets are recorded at historical cost, not fair market value.

Question 34

What is Full Disclosure Principle?

Answer 34

All information pertaining to the operations and financial position of the entity must be reported within the period of time in question.The Circumstances and events that make a difference to financial statement users should be disclosed.

Question 35

What is Revenue Recognition Principle

Answer 35

Revenue is earned and recognized upon product delivery or service completion, without regard to when cash is actually received. Also called accrual basis accounting

Question 36

What is Matching Principle?

Answer 36

The costs of doing business are recorded in the same period as the revenue they help generate, regardless of when the money is actually paid.Also called the accrual basis accounting.