Overview of US GAAP

Question 1

Financial Accounting is tasked to provide relevant information to what type of users?

Answer 1

Ans: investors, Creditors, Competitors, Employees, and regulatory bodies.

Question 2

Financial Statement information is used to make informed decisions with respect to?

Answer 2

Ans: allocation of resources.

Question 3

How is financial information disseminated

Answer 3

Ans: news releases, prospectus for future securities, fillings with the securities exchange commission (SEC), and annual reports to shareholders.

Question 4

What are footnotes?

Answer 4

Ans: supplementary information to explain the amounts disclosed in financial information.

Question 5

Define GAAP

Answer 5

Ans: rules of financial reporting for business enterprises.

Question 6

What are the GAAP’s three features in financial reporting?

Answer 6

Ans: recognition, measurement, and disclosure.

Question 7

What organizations create Accounting Standards (AS)?

Answer 7

Ans: FASB (only private companies), SEC (public companies), and AICPA.

Question 8

What is FASB?

Answer 8

Ans: is a privately funded and independent organization that issues AS and promulgates GAAP.

Question 9

What is SEC?

Answer 9

Ans: federal government agency that administers the US security laws that effects firms who issue debt and equity securities to the public.

Question 10

What is registrant?

Answer 10

Ans: firms that are registered with SEC. These firms must file financial statements to SEC, but their FS must be audited by independent third parties (CPA Firms).

Question 11

How pervasive is SEC’s authority?

Answer 11

Ans: SEC generally oversees the public sector but ( at times) the private sector. SEC could reverse or modify AS.

Question 12

What is AICPA?

Answer 12

Ans: a national professional organization for practicing CPAs. Its one mission is to provide members with resources, information, and leadership. It had founded organizations that established accounting standards in US.

Question 13

1939

Answer 13

AICPA appointed Committee on Accounting procedure (CAP), the first private sector body changed with the responsbility of promulgating GAAP. CAP created 51 Accounting research Bulletins (ARB).

Question 14

1959

Answer 14

AICPA created the Accounting Principles Board (APB) another committee, to take over the work of CAP. APB member must have CPAs. APB had issued 31 opinions.

Question 15

APB’s criticisms

Answer 15

Ans: slow developed accounting standards, unresponsive to controversial issues, CPAs were not independent ( still worked in firms), the board did not create new AS instead responded to long-existing controversial accounting issues(?).

Question 16

1973

Answer 16

Ans: In 1973, FASB assumed the role of creating AS for the accounting profession. Before this change, 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 17

What organizations make up the accounting standard setting mechanism?

Answer 17

Ans: FAF, FASB, and FASAC

Question 18

FAF

Answer 18

Ans: Appoints the members of FASB and its advisory councils, ensures adequate funding for FASB from PCAOB firms(?), and exercises oversight over FASB(?).

Question 19

FASAC

Answer 19

Ans: provides guidance on major policy issues, project priorities, and formation of task force(?).

Question 20

What are the five objectives of FASB

Answer 20

Ans: Improve the usefulness of financial reporting, maintain current AS, promote international convergence of AS, Improve the common understanding of the financial background ,and improve the purpose of information in financial goals.

Question 21

What are the requirements and guidelines for joining FASB

Answer 21

Ans: Seven full time members have five year terms including one additional term, members cannot have employment or investment ties with other entities, members need not be CPAs.
But, a public accounting profession is represented; a preparer ( reporting firm), and investor communities are represented.

Question 22

What are FASB’s principles in promulgating GAAP?

Answer 22

Ans:
Accounting Standards must have unbiased standards and not favor any particular industry or financial statement users

The needs and views of the economic community should be considered and views of accounting profession should not take precedence.

The process of developing standards should be open to public and allow due process to provide opportunity for interested parties to make their views known.

The benefits of accounting standards should exceed cost

Question 23

The process of issuing AS

Answer 23

Ans:

1) Add Agenda
2) Consult with FAF
3) FASB receives many requests from its constituents including the SEC, auditing firms, investors, and reporting firms to address new financial reporting issues and clarifying existing standards
4) Conducts research on the topic and issues a discussion memorandum detailing the issues surrounding the topic; the FASB’s conceptual framework plays a role
5) holds public hearings on the topic
6) Exposure draft ( accounting standards) that evaluates the research and comments from parties of interest.
7) Finalizes the new accounting guidance and approves with a majority vote ( 4 of 7).

Question 24

EITF

Answer 24

Ans: This group is formed to consider emerging reporting issues and to accelerate the process of establishing rulings on such issues. EITF has a statement, but FASB rewrites AS.

Question 25

Statements of Financial Accounting Concepts (SFACS)

Answer 25

Ans: A constitution or underlying set of theoretical concepts in its deliberations.

Question 26

How do user groups influence the outcome of FASB standards

Answer 26

Ans:

1) Making their views public through financial press
2) Providing input during the due process procedure
3) Putting pressure on the SEC directly to change a proposed standard or through the us congress.

Question 27

What is a deficiency letter

Answer 27

Ans:

SEC’s letter that addresses irregularity in a registrant’s financial statement.