Overview of US GAAP/Conceptual framework of Financial Reporting Flashcards
CPA Exam
What does GAAP address?
Recognition, Measurement, Disclosure
What are seven key components of the general Purpose external financial report?
- Income statement
- Balance sheet
- Statement of cash flows
- Statement of retained earnings
- Statement of comprehensive income
- Footnote disclosures
- Auditor’s opinion
What topics does the Financial Accounting Standards Board (FASB) Accounting Standards Codification not include?
Other comprehensive basis of accounting Cash basis Income tax basis Regulatory accounting principles Governmental accounting standards
When an economic event occurs first you create which type of account?
Accrual Account
When a cash event occurs first you create which type of account?
Deferral Account
Accounting guidance within the Codification has the following structure:
Areas—Topics—Subtopics—Sections—Subsections—Paragraphs
Codification Areas are?
- General principles (100)
- Presentation (200) (does not address recognition or measurement)
- Assets (300)
- Liabilities (400)
- Equity (500)
- Revenue (600)
- Expenses (700)
- Broad transactions (800) (transactions involving more than one area such as interest, and subsequent events)
- Industry (900) (special industry accounting)
Goals of the Codification?
- Simplify the structure and accessibility of authoritative GAAP.
- Provide all authoritative literature in a single location.
- Reduce the time and effort required to research an accounting issue.
- Reduce the risk of noncompliance with GAAP.
- Facilitate updating of accounting standards.
- Assist the FASB with research and convergence (IFRS) efforts.
Primary Qualitative Characteristics of Accounting Information are?
- Relevance
2. Faithful representation
Relevance has what Fundamental Qualities?
a. Predictive value—relevant information is used by investors to form their own expectations about the future
b. Confirmatory value—relevant information also helps users confirm or correct prior expectations
c. Materiality—information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information
Faithful representation has what Fundamental Qualities?
a. Completeness—all the information that is necessary for faithful representation is provided
b. Neutrality—a company cannot select information to favor one set of interested parties over another
c. Free from error—more accurate (faithful) representation of a financial item
What are the enhancing qualities of Qualitative Characteristics?
- Comparability (Consistency): information that is measured and reported in a similar manner for different companies is considered comparable
- Verifiability: occurs when independent measurers, using the same methods, obtain similar results
- Timeliness: having information available to decision-makers before it loses its capacity to influence decisions
- Understandability: the quality of information that lets reasonably informed users see its significance
What are the Accounting Assumptions?
E-GUT
- Economic Entity
- Going Concern
- Unit of Measure (Monetary Unit)
- Time Period (Periodicity)
Economic Entity:
company keeps its activity separate from its owners and other businesses
Going Concern:
company to last long enough to fulfill objectives and commitments
Unit of Measure (Monetary Unit)
money is the common denominator
Time Period (periodicity)
company can divide its economic activities into time periods
Accounting Principles
REM’D (sleep)
- Revenue Recognition Principle
- Expense Recognition Principle
- Measurement Principle
- Full Disclosure Principle
Measurement Principle
the most commonly used measurements are based on historical cost and fair value
Revenue Recognition Principle
generally occurs when earned, realized or realizable
Expense Recognition Principle
Recognize expenses only when expenditures help to produce revenues
Full Disclosure Principle
providing information that is of sufficient importance to influence the judgment and decisions of an informed user
a. Financial Statements
b. Notes to the Financial Statements
c. Supplementary information
Expenses should be recognized when?
The time period the entity derives a benefit
Historical Cost is used in?
Land - At the time of origination, assets and liabilities are recorded at the market value of the item on the date of acquisition, usually the cash equivalent
Net Book Value is used in?
Plant and Equipment - This value is historical cost less the accumulated amortization or depreciation of the asset
Net Realizable Value is used in?
AR - This value is used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value
Replacement Cost is used in?
Inventory - This value represents how much you would have to pay to replace an asset
Net Present Value (NPV) is used in?
Bonds - This is the value determined from discounting the expected future cash flows
Fair Value is used in?
Investments - This value is also referred to as current market value.
Cost Constraint
The cost constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit. Firms may not omit disclosures if they are material and mandated by GAAP.
Assets
Resources that have probable future benefits to the firm, controlled by management, resulting from past transactions.
Liabilities
Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities as a result of past transactions or events
Equity
Net assets. Equity is primarily comprised of past investor contributions and retained earnings.
Investments by Owners
Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest
Distributions to Owners
Decreases in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners. (Dividends)
Comprehensive Income
Accounting income (transaction based) plus certain holding gains and losses and other items. It includes all changes in equity (Net Assets) other than investments by owners and distributions to owners.
Revenues
Increases in assets or settlements of liabilities of an entity by providing goods or services
Expenses
Decreases in assets or incurrences of liabilities of an entity by providing goods or services. Expenses provide a benefit to the firm
Gains
Increases in equity or net assets from peripheral or incidental transactions
Losses
Decreases in equity or net assets from peripheral or incidental transactions. Losses provide no benefit to the firm.
List the elements included in a full set of financial statements
Balance sheet Income statement Statement of comprehensive income Statement of cash flows Statement of owner's equity
Discounted Cash Flows
Single cash flow value discounted at the risk-adjusted rate
Expected Cash Flows
probability-weighted cash flows are discounted using the risk free rate.
Conservatism
Suppression of positive info under conditions of uncertainty but requires reporting of negative info when negative outcome is likely
Earnings
A performance measure concerned primarily with cash-to-cash cycles. Asset inflows exceed asset outflows.
Comparability
an enhancing quality that interacts with relevance and faithful representation to contribute to the usefulness of information. Qualitative quality of BOTH Relevance and Faithful Representation
Realization
The process of converting noncash resources and rights into cash or claims to cash.
