Role and Standard Setting Flashcards
SEC requirements in regards to GAAP
SEC requires that all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP.
What is GAAP
Generally Accepted Accounting Principles that govern financial statements, and to a reasonable extent how they are presented.
Why was the Emerging Issue Task Force Established?
Established by FASB to develop consensus positions about how to account for new financial transactions and events.
How does a new statement come about by FASB?
At least 4 of the 7 members of FASB must vote in favor of a proposed Statement.
FASB has maintained that
One of the objectives of FASB in setting standards is develop rules that are unbiased.
Reference to proposed accounting standards, the term “negative economic consequences” includes
The Inability to Raise Capital. Proposed standard may cause firm earnings to fall. Which effect a firms ability to sell stock or secure loans. It is a main focal point for arguments against the proposed standard.
What groups currently writes Generally Accepted Accounting Principles
Financial Accounting Standards Board
What is FASB’s official connection
FASB is a Private Sector Body. It has no official connection with the US Government although the SEC, can modify or resind an accounting standard adopted by FASB.
Financial Statement used by potential investors to assess company’s liquidity and financial flexibility?
Balance Sheet, discloses the assets and liabilities. It shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change.
The reconciliation of operating expenses and the treatment of prepaid expenses and accrued liabilities
Operating Expenses
+ Increase in prepaid expenses
- increases in accrued expenses
= Reconciliation of Operating expenses
Converting from Cash Basis to Accrual Basis
Sales must be adjusted for change in accounts receivable.
Under an accrual agreement when should expenses be recognized
As they incurred.
Cash basis accounting overstates income by net increase during the accounting period of
Accrued Expenses Payable.
Increase in liability reflects recognized but unpaid expenses. The accrual method recognizes these expenses in earnings, causing income to decrease relative to cash basis income.
What is classified as a current asset
Current asset uses the period of “operating cycle or one year, whichever is longer.
Which financial statement would a potential investor use primarily to assess the company’s liquidity and financial flexibility?
The Balance Sheet
