Role and standard setting process

Question 1

GAAP

Answer 1

The rule of financial reporting for business enterprises. GAAP are also called “accounting standards.”

Question 2

Financial Accounting Standards Board (FASB)

Answer 2

Currently the standard setting body in the United States.

Question 3

GAAP may be described as:

Answer 3

The standards used in preparing financial statements.

Question 4

SEC requires:

Answer 4

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.

Question 5

The FASB has maintained that:

Answer 5

New GAAP should be neutral and not favor any particular reporting objective. One of the objectives of the FASB in setting standards is to develop rules that are unbiased.

Question 6

What is the operating procedure for issuing a new FASB statement?

Answer 6

At least four of the seven members of the FASB must vote in favor of a proposed Statement of Financial Accounting Standards.

Question 7

When is revenue recognized under accrual accounting?

Answer 7

Revenues are recognized when earned and collection is reasonably assured, regardless of the period of cash collection.

Question 8

What topics does the FASB Accounting Standards Codification not include?

Answer 8

Other comprehensive basis of accounting, cash basis, income tax basis, and regulatory accounting principles.

Question 9

What does GAAP address?

Answer 9

Recognition, measurement and disclosure.

Question 10

When are expenses recognized under accrual accounting?

Answer 10

Expenses are recognized when incurred, regardless of the period of cash payment.

Question 11

Cash basis to accrual basis

Answer 11

Cash basis net income pretax + increase in A/R + decrease in A/P = accrual basis net income pre tax

Question 12

General Rule to convert from cash to accrual

Answer 12

Add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.

Question 13

Cash received before revenue earned

Answer 13

Deferred revenue - Liability (Prepaid rent, subscriptions, gift certificates)

Question 14

Revenue earned before cash received

Answer 14

Accrued revenue - asset (sales on account, interest receivable)

Question 15

Cash paid before expense incurred

Answer 15

Deferred expense - asset (prepaid insurance)

Question 16

Expense incurred before cash paid

Answer 16

Accrued expense - liability (Payable of: salaries, interest, taxes)

Question 17

Assets are presented in order of

Answer 17

decreasing liquidity. Liquid assets are shown first and less liquid assets are shown last.

Question 18

Liabilities are shown in order of

Answer 18

maturity. Current liabilities are presented first and then long term liabilities are presented.

Question 19

Owners’ equity items are shown

Answer 19

in order of permanence.

Question 20

What presentation formats are there for the balance sheet?

Answer 20

Account format and report format. In the account format, the assets are shown on the left side of the page and the liabilities and owners equity are shown on the right side of the page. The report form, the three categories of accounts are listed from top to bottom with assets always shown first.

Question 21

Changes and updates to the codification are accomplished through

Answer 21

Accounting Standards Updates

Question 22

Cash Flows - Operating

Answer 22

Cash flows related to transactions that flow through the income statement.

Question 23

Cash Flows - Investing

Answer 23

Cash flows related to the acquisition and disposal of long term assets an investments.

Question 24

Cash Flows - Financing

Answer 24

Cash Flows related to the liabilities and owners equity sections of the balance sheet.