module 2-financial accounting Flashcards
financial statements can be misleading if
- expenses are reported as omitted from the financial statement
- liabilities and their related expenses are omitted from the financial statements
- reported revenues are recorded prematurely.
bookkeeping
systematic gathering of financial information
financial accounting
reporting summary financial information to people outside your organization
managerial accouting
reporting confidential financial information to people inside your organization
4 types of accounting
- bookkeeping
- financial accounting
- managerial accounting
- income taxes
Accountants prepare financial statements such as
- an income statement,
- a statement of stockholders’ equity,
- a balance sheet, and
- a statement of cash flows.
Balance sheet
list of organizations assets and an organizations liabilities (provided to investors )
given at a specific point in time
Income statement
report how much money a company is making (provided to investors)
External users of financial accounting
- Owners and prospective owners
- Creditors, lenders, and suppliers.
- employees and their unions.
- Customers
- Governmental units
- General public
Generally accepted accounting principles GAAP
a general set of commonly followed standards and principles for financial accounting
Financial Accounting Standards Board (FASB)
is a private, not- for- profit organization whose primary purpose is to develop GAAP within the United states in the publics interests.
Governmental accounting standards Board (GASB)
it issues statements on accounting and financial reporting in the governmental area.
Securities and Exchange Commission (SEC)
Federal agency that holds primary responsibility for enforcing the federal securities laws and regulating the securities industry. It works closely with FASB in the development of accounting standards`
American accounting Association (AAA)
Has sought to encourage research and study at a theoretical level into the concepts, standards, and principles of accounting
Financial accounting is:
“is historical, reporting what has happened in the past”
4 basic principles of GAAP
- Historical cost principle
- Revenue Recognition Principle
- Matching principle
- Full disclosure Principle
Historical Cost
Requires companies to account and report based on original costs rather than fair market value for most assets and liabilities
Revenue Recognition Principle
The principle requires companies to record when revenue is realized and earned not when cash is received
Matching principle
Expenses have to be matched with revenues as long as it is reasonable to do so.
Full Disclosure
the principle requires amount and kind of information disclosed to be decided based on trade off- analysis
5 basic constraints
- Objectivity principle
- Materiality Principle
- Consistency Principle
- Conservatism
- Cost-benefit relationship
Internacional Accounting Standards committee (IASC)
Foundation was established as an independent, not for profit orga. to develop a globally accepted financial reporting standards
International Financial reporting standards
a common global financial language for business affairs that is understandable and comparable across international boundaries
Differences between IFRS and GAAP
GAAP is rules based and IFRS is principle based.
Similarities between IFRS and GAAP
- Both are guiding principles that help in the preparation and presentation of a statement of accounts.
- Both IFRS and GAAP provide relevance, reliability, transparency, comparability, and understandability of the financial statement.
4 basic assumptions of GAAP
- accounting entity
- going concern
- monetary unit
- time- period principle
