I. Conceptual F&FR Flashcards
The content presented throughout FAR is based on ?
The AICPA Blueprint Specifications
The basic set of financial statements are:
- 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
users of the financial statements:
investors creditors competitors employees and regulatory bodies
Financial statement information is used to
make informed decisions regarding allocation of resources.
Financial information is disseminated in many forms including
- news releases
- for future securities offerings
- filings with the Securities and Exchange Commission (SEC), and
- annual reports to shareholders.
Generally Accepted Accounting Principles (GAAP):
The rules of financial reporting for business enterprises.
GAAP are also called
accounting standards
What GAAP Addresses?
GAAP is a set of reporting rules to address three aspects of financial reporting:
Three aspects of financial reporting:
(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.
Recognition & Realization difference?
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.
Financial Accounting Standards Board (FASB)—
The FASB is currently the standard-setting body in the United States.
The Securities and Exchange Commission (SEC)
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).
The American Institute of Certified Public Accountants (AICPA)
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.
What is CAP (Committee of Accounting Procedure) ?
In 1939, the AICPA appointed its Committee on Accounting Procedure (CAP), the first private sector body charged with the responsibility of promulgating GAAP.
What is ARBs (Accounting Research Bulletins?
CAP issued 51 Accounting Research Bulletins (ARBs). To the extent that an ARB has not been rescinded or superseded, it constitutes GAAP.
Accounting Principles Board (APB)?
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.
What is Wheat Committee?
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
When FASB assumed the role of standard setter
In 1973, the FASB assumed the role of standard setter for the accounting profession. The FASB is not affiliated with the AICPA.
FASB # of members?
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
Current accounting standard-setting mechanism in the United States?
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)
Financial Accounting Foundation (FAF)—the parent body
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.
Financial Accounting Standards Advisory Council (FASAC):
FASAC—Provides guidance on major policy issues, project priorities, and the formation of task forces.
The mission of the FASB (in brief) is to:
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.
SEC sends
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.
