Study Unit 1.2 - Objective of General Purpose Financial Reporting

Question 1

What is the objective of General Purpose Financial Reporting?

Answer 1

The objective is to report financial information that is useful in making decisions about providing resources to the reporting entity.

Question 2

What is the Statement Of Financial Accounting Concepts (SFAC)?

Answer 2

the Statement Of Financial Accounting Concepts (SFAC)

• establishes financial accounting and reporting objectives and concepts.
• SFACs are other accounting literature.
• They are only considered in the absence of applicable authoritative guidance (Accounting Standards Codification {ASC} or SEC Pronouncements)

Question 3

When are the Statement Of Financial Accounting Concepts (SFAC) considered?

Answer 3

• They are only considered in the absence of applicable authoritative guidance (Accounting Standards Codification {ASC} or SEC Pronouncements)

Question 4

What are the Statement of Financial Accounting Concepts (SFACs) intended to influence?

Answer 4

SFACs are intended to influence the development and application of GAAP.

Question 5

True or False? SFACs are authoritative and included in the Codification.

Answer 5

False:

SFACs are not authoritative and are not included in the Codification.

Question 6

Who are the PRIMARY USERS of financial information?

Answer 6

The Primary Users of financial information are:

1) Current Investors
2) Prospective Investors and
3) Creditors

Question 7

Why do PRIMARY USERS need financial information? And Why?

Answer 7

Primary Users, like Current Investors, Prospective Investors and Creditors,

Need financial information that helps them assess the entity’s future net cash inflows

because their decisions depend on expected returns?

Question 8

Can Primary Users obtain all necessary information about an entity solely from General-purpose financial reports? Why or Why Not?

Answer 8

No, Primary Users like Current Investors, Prospective Investors and Creditors obtain all the necessary information solely from general purpose financial reports.

The Reason is two-folds:
1) These reports are two insufficient to determine the value of the entity and

2) These reports are based significantly on estimates, judgments, and models.

Question 9

True or False? The information reported relates to the entity’s:(1) Economic Resources (2) Claims to them (financial position) and to (3) Changes in those resources and claims

Answer 9

True:
The information reported relates to the entity’s:

(1) Economic Resources
(2) Claims to them (financial position) and to
(3) Changes in those resources and claims

Question 10

What four things does information about economic resources and claims help to evaluate?

Answer 10

Information about economic resources and claims helps to evaluate:

1) Liquidity
2) Solvency,
3) Financing Needs
4) Probability of obtaining Financing

Question 11

What does Solvency mean?

Answer 11

Financial soundness of an entity that allows it to discharge its monetary obligations as they fall due. It is measured by solvency ratios.

Question 12

What does Liquidity mean?

Answer 12

1. A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this.
2. Accounting: The ability of current assets to meet current liabilities.

Question 13

True or False? Financial Users need to differentiate between resources and claims arising from:

1) The Entity’s performance and
2) other events and transactions (i.e. issuing debt or equity)

Answer 13

True:

Question 14

Information about financial performance is useful for? List 3 reasons.

Answer 14

Information about financial performance is useful for:

1) Understanding the return on economic resources, its variability, and its components;

2) Evaluating Management; and
3) Predicting future returns

Question 15

What is the accrual basis of accounting?

Answer 15

The accrual basis of accounting reports the effects of transactions and other events and circumstances on the entity’s resources and claims when they occur, not necessarily when the cash flows occur.

Question 16

True or False? The accrual-basis information is preferable to the cash basis for evaluating past performance and predicting future performance.

Answer 16

True

Question 17

True or False? An entity should be able to increase its economic resources other than by obtaining resources from investors and creditors.

Answer 17

True

Question 18

Information about financial performance is useful in determining how external factors (i.e. interest rate changes) affected economic resources and claims.

Answer 18

True

Question 19

Name 4 ways that information about cash flows in helpful?

Answer 19

Information about cash flows is helpful in:

1) Understanding Operations
2) Evaluating financing and investing activities, liquidity, and solvency
3) Interpreting other financial information; and
4) Assessing the potential for net cash inflows.

Question 20

What is the advantage of accrual accounting?

Answer 20

The advantage of accrual accounting is that information about an entity’s economic resources and claims and changes in them during a period provides a better basis for assessing past and future performance than information solely about cash flows (SFAC 8).

Question 21

Why is cash basis accounting inadequate to depict financial performance of businesses?

Answer 21

Cash basis accounting is inadequate to depict financial performance because their activities are largely based on credit and often involve long and complex financial arrangements or production or marketing processes. The accrual and deferral of costs and benefits better reflects the current-period effects on economic resources and claims.

Question 22

Why is a modified cash basis accounting inadequate to depict financial performance of businesses?

Answer 22

A Modified Cash Basis does adequately depict the long and complex financial arrangements or production or marketing processes and extensive use of credit employed by modern businesses.

Question 23

Why is a Tax basis of accounting inadequate to depict financial performance of businesses?

Answer 23

Tax basis of accounting is inadequate to depict financial performance of businesses because:

The basis of accounting specified in the federal income tax code has objectives other than those that users of financial statements seek to satisfy.

Such as Usefulness in investment and credit decisions, etc.

The tax code also has social and fiscal policy objectives, which are distinct from the goals of investors and grantors of credit.

Question 24

What is financial reporting ordinarily focused on?

Answer 24

Financial reporting is ordinarily focused on individual entities.

Question 25

True of False? Financial Reporting is ordinarily focused on Industries rather than Individual Entities?

Answer 25

False:

Financial Reporting is ordinarily focused on Individuals.

Question 26

True or FALSE. When considering Financial Reporting, it is important to note that an Entity’s performance is affected by many factors other than management.

Answer 26

True

Question 27

What are the Statements of Financial Accounting Concepts intended to establish?

Answer 27

The objectives and concepts for use in developing standards of financial accounting and reporting.

Question 28

True or False? SFACs are non-authoritative guidance for nongovernmental entities.

Answer 28

True.

SFACs are non-authoritative guidance for nongovernmental entities.

Question 29

What is the SFACs intended to do?

Answer 29

Statement of Financial Accounting Concepts (SFACs) are intended to guide the development of Accounting Standards by the FASB.

Question 30

Tell me how the Statement of Financial Accounting Concepts (SFACs) help the FASB?

Answer 30

SFACs describe the:

• Objectives,
• Qualitative Characteristics, and
• Other Fundamental concepts

that guide the FASB in developing sound accounting principles.

Question 31

What contains the only Authoritative Guidance issued by the FASB?

Answer 31

The Accounting Standards Codification (ACS) contains the only authoritative guidance issued by the FASB.