Module 1 - Chapter 6 Flashcards
Bias
Exists when accounting measurements are consistently too high or too low.
Business entity concept
The specific unit for which accounting information is gathered.
Business entities have a separate existence from owners, creditors, employees, customers, other
interested parties, and other businesses.
Comparability
A qualitative characteristic of accounting information; when information is comparable, it reveals differences and similarities that are real and are not the result of differing accounting treatments.
Completed-contract method
A method of recognizing revenue on long-term projects under
which no revenue is recognized until the period in which the project is completed; similar to recognizing revenue upon the completion of a sale.
Completeness
A qualitative characteristic of accounting information; requires disclosure of all significant information in a way that aids understanding and does not mislead; sometimes called
the full disclosure principle.
Conservatism
Being cautious or prudent and making sure that net assets and net income are not overstated.
Consistency
Requires a company to use the same accounting principles and reporting practices through time.
Cost-benefit consideration
Determining whether benefits of including information in
financial statements exceed costs.
Cost principle
See Exchange-price principle.
Transfers of resources are recorded at prices agreed on
by the parties at the time of the exchange.
Earning principle
The requirement that revenue be substantially earned before it is
recognized (recorded).
Exchange-price (or cost) principle
Transfers of resources are recorded at prices agreed on
by the parties at the time of the exchange.
Feedback value
A qualitative characteristic that information has when it reveals the relative success of users in predicting outcomes.
Financial reporting objectives
The broad overriding goals sought by accountants engaging
in financial reporting.
Full disclosure principle
Information important enough to influence the decisions of an
informed user of the financial statements should be disclosed.
Gain and loss recognition principle
Gains may be recorded only when realized, but losses should be recorded when they first become evident.
Going-concern (continuity) assumption
The assumption that an entity will continue to operate indefinitely unless strong evidence exists that the entity will terminate.
Historical cost
The amount paid, or the fair market value of a liability incurred or other resources surrendered, to acquire an asset and place it in a condition and position for its intended use.
Installment basis
A revenue recognition procedure in which the percentage of total gross margin recognized in a period on an installment sale is equal to the percentage of total cash from the sale that is received in that period.
Liquidation
Terminating a business by ceasing business operations and selling off its assets.
Matching principle
Expenses should be recognized as they are incurred to produce revenues.
Materiality
A modifying convention that allows the accountant to deal with immaterial (unimportant) items in an expedient but theoretically incorrect manner; also a qualitative characteristic specifying that financial accounting report only information significant enough to
influence decisions or evaluations.
Modifying conventions
Customs emerging from accounting practice that alter the results
obtained from a strict application of accounting principles; conservatism is an example.
Money measurement
Use of a monetary unit of measurement, such as the dollar, instead of physical or other units of measurement—feet, inches, grams, and so on.
Neutrality
A qualitative characteristic that requires accounting information to be free of measurement method bias.
Percentage-of-completion method
A method of recognizing revenue based on the estimated stage of completion of a long-term project. The stage of completion is measured by comparing actual costs incurred in a period with total estimated costs to be incurred in all periods.
Period costs
Costs that cannot be traced to specific products and are expensed in the period incurred.
Periodicity (time periods) assumption
An assumption of the accountant that an entity’s life can be divided into time periods for reporting its economic activities.
Predictive value
A qualitative characteristic that information has when it improves users’ abilities to predict outcomes of events.
Product costs
Costs incurred in the acquisition or manufacture of goods. Product costs are accounted for as if they were attached to the goods, with the result that they are charged to expense when the goods are sold.
Qualitative characteristics
Characteristics that accounting information should possess to be
useful in decision making.
Realization principle
A principle that directs that revenue is recognized only after the seller acquires the right to receive payment from the buyer.
Relevance
A qualitative characteristic requiring that information be pertinent to or affect a decision.
Reliability
A qualitative characteristic requiring that information faithfully depict for users what it purports to represent.
Representational faithfulness
A qualitative characteristic requiring that accounting statements on economic activity correspond to the actual underlying activity.
Revenue recognition principle
The principle that revenues should be earned and realized
before they are recognized (recorded).
Stable dollar assumption
An assumption that the dollar is a reasonably stable unit of
measurement.
Timeliness
A qualitative characteristic requiring that accounting information be provided at a time when it may be considered before making a decision.
Verifiability
A qualitative characteristic of accounting information; information is verifiable when it can be substantially duplicated by independent measurers using the same measurement
methods.
