Test 1 Flashcards
FASB
Financial Accounting Standards Board
The main organization that establishes and improves financial accounting and reporting standards
CPA
Certified Public Accountant
Someone who has met rigorous educational and experience requirements and has passed an extremely difficult exam. They generally offer tax, management, and auditing consultation services.
GAAP
Generally Accepted Accounting Principles
The principles, standards, and procedures that are given substantial authoritative support. They are widely accepted because of their universal application.
SOP
Statements of Position
Statements issued by the AICPA that are generally in line with emerging problems that have yet to be addressed by the SEC & FASB.
FASAC
Financial Accounting Standards Advisory Board
An organization that works with the FASB to select task forces, project priorities, and consult about issues.
FAF
Financial Accounting Foundation
The organization that chooses the members of the FASB and its advisory councils. They also fund their activities and exercise general oversight.
APB
Accounting Principles Board
The committee of public accountants that replaced the CAP, but was later replaced by the FASB. It’s opinions are still a primary source of GAAP.
ARB
Accounting Research Bulletins
CAPs official protocol that unless superseded represents the current GAAP.
CAP
Committee on Accounting Principles
A committee of practicing CPAs that came before the establishment of the FASB.
AICPA
Accounting Institute of Certified Public Accountants
A national organization of certified public accountants. Replaced by CAP.
Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements.
Standards and Interpretations: the standards recognized as GAAP. The interpretations are modifications/extensions to the standards that are considered official.
Financial Accounting Concepts: used so there are cohesive concepts in place to help with the introduction of new accounting standards. They ensure problems are solved in line with general concepts that were previously deemed appropriate.
Technical Bulletins: documents used to widely disclose statewide policies and procedures that have been passed based on other types of pronouncements.
Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.
Financial Accounting Standards Advisory Council
Due Process is used and means everyone has the opportunity to respond to new standards before they become official standards.
What is the present role of AICPA in the rule making environment?
The AICPA no longer gives accounting guidance. Instead, it develops and grades the CPA exams.
Why did the CAP & APB fail? How has the FASB taken steps to avoid failure?
CAP- failed because it had no clearly defined, structured form of accounting principles
APB- did not carry out the consequences of accounting abuses. Lots of opposition from CPA firms while handling accounting issues.
FASB- offers full-time membership, greater autonomy, greater independence, and a broader scope of representation. It also uses Due Process.
What are the two committees of the AICPA that established accounting principles before the establishment of the FASB?
Committee on Accounting Procedures (CAP)
Accounting Principles Board (APB)
What are the steps of the Due Process System of the FASB?
- Topics identified and placed on the Board’s agenda
- Research and analysis conducted and preliminary views of pros and cons issued
- Public hearing on proposed standard
- Board evaluates research and public response and issues exposure draft
- Board evaluates responses and changes exposure draft if necessary. The final standard is issued.
What is expected of the users of financial reports?
Users are expected to possess a reasonable understanding of accounting information, financial statements, business, and economic concepts. They also must be willing to study and interpret the information with reasonable diligence.
What is the purpose of financial accounting?
To provide information for external users (investors and creditors)
Increases Ownership Interest
Investment by the owner; comprehensive income
Obligation to transfer resources arising from a past transaction
Liabilities
Arises from peripheral or incidental transactions
Gains and Losses
Issuance of interim reports is an example of what primary ingredient of relevance.
Timeliness
Two primary qualities that make accounting information useful for decision-making purposes.
Relevance and Faithful Representation
Neutrality is an ingredient of this primary quality of accounting information.
Faithful Respresentation
An item is not recorded because its effect on income would not change a decision.
Materiality
Four qualitative characteristics that are related to both relevance and faithful representation.
Comparability, Timeliness, Verifiability, and Understandability
Predictive value is an ingredient of this primary quality of information.
Relevance
Requires a high degree of consensus among individuals on a given measurement.
Verifiability
Ignores the economic consequences of a standard rule.
Neutrality
Imperative for providing comparisons of a company from period to period.
Comparability and Consistency
Quality of information that confirms users’ earlier expectations
Confirmatory Value
Qualitative characteristics being employed when companies in the same industry are using the same accounting principles.
Comparability
Each enterprise is kept as a unit distinct from its owner or owners.
Economic Entity Assumption
Agricultural companies use fair value for purposes of valuing cost
Industry Practices or Fair Value Principle
Repair tools are expensed when purchased.
Fair Value
Intangible assets are capitalized and amortized over periods benefitted.
Expense Recognition Principle
Patent, Copyright, etc.
Financial information is presented so that investors will not be misled.
Full Disclosure Principle
Fair value changes are not recognized in the accounting records.
Measurement Principal/Historical Cost
Includes all changes in equity during a period, except those resulting from investments by and distributions to owners.
Comprehensive Income
Increases assets during a period through sale of product
Revenues
Residual interest in the assets of the enterprise after deducting its liabilities
Equity
Arises from Income Statement activities that constitute the entity’s ongoing major or central operations.
Revenues and Expenses
Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.
Comprehensive Income
Items characterized by service potential or future economic benefit.
Assets
Increases in net assets in a period from non-owner sources
Comprehensive Income, Increased Revenues, and Gains
A company charges its sales commission costs to expense
Expense Recognition Principle
Goodwill is recorded only at time of purchase
Measurement/Fair Value Principle
An allowance for doubtful accounts is established
Fair Values
Reporting must be done at defined time values
Periodicity Assmption
The use of consolidated statements is justified
Economic Entity Assumption
Rationale for accrual accounting
Revenue Recognition
and
Expense Recognition Principles
All important aspects and bond indentures are presented in financial statements.
Full Disclosure Principle
Revenue is recorded at the point of sale.
Revenue Recognition Principle
All significant post balance sheet events are reported
Full Disclosure Principle
Declares and pays cash dividends to owners.
Distribution to Owners
