I. Conceptual F&FR

Question 1

The content presented throughout FAR is based on ?

Answer 1

The AICPA Blueprint Specifications

Question 2

The basic set of financial statements are:

Answer 2

• The statement of financial position,
• The income statement or the statement of comprehensive income
• The statement of shareowners’ equity, and
• The statement of cash flows

Question 3

users of the financial statements:

Answer 3

investors
creditors
competitors
employees and 
regulatory bodies

Question 4

Financial statement information is used to

Answer 4

make informed decisions regarding allocation of resources.

Question 5

Financial information is disseminated in many forms including

Answer 5

• news releases
• for future securities offerings
• filings with the Securities and Exchange Commission (SEC), and
• annual reports to shareholders.

Question 6

Generally Accepted Accounting Principles (GAAP):

Answer 6

The rules of financial reporting for business enterprises.

Question 7

GAAP are also called

Answer 7

accounting standards

Question 8

What GAAP Addresses?

Answer 8

GAAP is a set of reporting rules to address three aspects of financial reporting:

Question 9

Three aspects of financial reporting:

Answer 9

(1) Recognition—A recognized item is recorded in an account and ultimately affects the financial statements.

(2) Measurement—Concerns the dollar amount assigned to an item.
(3) Disclosure—Many unrecognized amounts are reported in the footnotes to complete the portrayal of the firm’s financial position and performance.

Question 10

Recognition & Realization difference?

Answer 10

Recognition is an accounting concept that indicates that the item is recorded on the financial statements. In contrast,
Realization is an economic concept that indicates that cash is paid or received. GAAP focuses on accrual accounting and therefore is concerned with recognition more than with realization.

Question 11

Financial Accounting Standards Board (FASB)—

Answer 11

The FASB is currently the standard-setting body in the United States.

Question 12

The Securities and Exchange Commission (SEC)

Answer 12

Is the federal government agency that administers the securities laws of the United States.
These laws affect firms that issue debt and equity securities to the public.
Such firms register with the SEC and are called registrants.
The financial statements of these firms must be filed with the SEC and
must be audited by independent third parties (CPA firms).

Question 13

The American Institute of Certified Public Accountants (AICPA)

Answer 13

Is the national professional organization for practicing CPAs and has had a great impact on accounting principles over the years.
The mission of the AICPA is to provide its members with resources, information, and leadership so that they may in turn provide valuable services for the benefit of their clients, employers, and the general public.

Question 14

What is CAP (Committee of Accounting Procedure) ?

Answer 14

In 1939, the AICPA appointed its Committee on Accounting Procedure (CAP), the first private sector body charged with the responsibility of promulgating GAAP.

Question 15

What is ARBs (Accounting Research Bulletins?

Answer 15

CAP issued 51 Accounting Research Bulletins (ARBs). To the extent that an ARB has not been rescinded or superseded, it constitutes GAAP.

Question 16

Accounting Principles Board (APB)?

Answer 16

In 1959, the AICPA created the Accounting Principles Board (APB), another committee, to take over the work of CAP. The APB is the second private sector group designated to formulate GAAP. Members were required to be CPAs. The APB issued 31 opinions, many of which remain as GAAP, in whole or in part.

Question 17

What is Wheat Committee?

Answer 17

In 1971, the AICPA appointed the Wheat Committee, which recommended the formation of yet another private sector body—the FASB—to take over the reins from the APB

Question 18

When FASB assumed the role of standard setter

Answer 18

In 1973, the FASB assumed the role of standard setter for the accounting profession. The FASB is not affiliated with the AICPA.

Question 19

FASB # of members?

Answer 19

The FASB operated with seven Board members from its inception in 1973 until 2008 when the Board was reduced to five members

The Board membership increased back to seven in early 2011

Question 20

Current accounting standard-setting mechanism in the United States?

Answer 20

There are 3 parts of the current accounting standard-setting mechanism in the United States.

1- Financial Accounting Foundation (FAF)—the parent body
2- Financial Accounting Standards Advisory Council (FASAC)
3- Financial Accounting Standards Board (FASB)

Question 21

Financial Accounting Foundation (FAF)—the parent body

Answer 21

FAF—Appoints the members of the FASB and its advisory councils, ensures adequate funding for the FASB, and exercises oversight over the FASB. Funding sources include fees levied on publicly traded firms under the Sarbanes-Oxley Act, contributions, and publication sales. The trustees of the FAF are appointed from organizations with an interest in accounting standards.

Question 22

Financial Accounting Standards Advisory Council (FASAC):

Answer 22

FASAC—Provides guidance on major policy issues, project priorities, and the formation of task forces.

Question 23

The mission of the FASB (in brief) is to:

Answer 23

1- Improve the usefulness of financial reporting
2- Maintain current accounting standards
3- Promptly address deficiencies in accounting standards
4- Promote international convergence of accounting standards
5- Improve the common understanding of the nature and purposes of information in financial reports.

Question 24

SEC sends

Answer 24

A deficiency letter to a registrant when an accounting irregularity is found. If the firm disagrees, the SEC may issue a “stop order“ preventing trading in the firm’s securities until the disagreement is resolved.
Outright violations of the securities laws may result in criminal sanctions against managers, or fines against the company.

Question 25

Facts in Brief about the FASB

Answer 25

1- Seven full-time members with renewable (for one additional term) and staggered 5-year terms.
2- Subject to FAF policies and oversight.
3- Members cannot have employment or investment ties with other entities.
4- Members need not be CPAs although typically the public accounting profession is represented; also the preparer (reporting firm) and investor communities are represented.

Question 26

FASB’s Emerging Issues Task Force (EITF)

Answer 26

This group was formed to consider emerging reporting issues and to accelerate the process of establishing rulings on such issues. In this sense, the EITF acts as a “filter“ for the FASB, enabling the FASB to focus on more pervasive issues. When a consensus of the 15 members is reached on an issue, no further action by the FASB is required. EITF pronouncements are included in GAAP. If the EITF is unable to reach a consensus, the FASB may become involved, ultimately revising an existing standard or adopting a new one.

Question 27

Statements of Financial Accounting Concepts (SFACs)

Answer 27

The FASB considers its conceptual framework, the collection of Statements of Financial Accounting Concepts (SFACs), a “constitution“ or underlying set of theoretical concepts in its deliberations.