Unit exam 1 Flashcards
Provide financial information about the reporting entity that is useful (to help users with capital allocation decisions about company)present and potential equity investors,lenders, and creditors
Financial reporting
Provide at the least cost the most useful information possible; provide financial reporting information for a variety of users
Financial statements
Capital allocation process
Financial reporting ➡️ users(present/potential ➡️
capital allocation
Process of determining how and at what cost money is allocated among competing interests
Capital allocation
Financial statements provide:
Balance sheet
Income statement
Statement of cash flows
Statement of owners/stockholders equity
Examples of financial reporting
Presidents letter Supplementary schedules Prospectuses Reports filed with govt. agencies News releases Management forecasts Social/environmental impact statements
Define GAAP
who sets it?
Generally accepted accounting principles
AICPA requires that members prepare financial stats in accordance with GAAP
3 groups who were instrumental in developing GAAP
SEC
AICPA
FASB
Due process
Topics ID and placed on agenda
Research and analysis conducted and preliminary views of pros/cons issued
Public hearing on proposed standard
Board evaluates research and public response and issue exposure draft
Board evaluates responses and changes exposure draft, if necessary
Final standard issued
What is the codification of GAAP?
developed by FASB
Provide in one place all the authoritative literature related to a particular topic
(Simplified user access to all US GAAP)
FASB Standards
FASB updates/standards amend the accounting standard codification which represents the source of authoritative accounting standards, other than standards issued by SEC
Financial accounting concepts
Part of a long-range effort to move away from the problem by problem approach, the FASB issued statements of financial accounting concepts as part of its conceptual framework project
What public thinks accountants should do and what accountants think they can do
Expectations gap
What challenges in financial reporting are being faced now and in the future?
Non financial measurements Forward-looking info Soft assets Timeliness Understandability
Which measurement is the MOST subjective?
Unobservable inputs
— is verifiable and the least subjective measurement
Historical cost
What constraint is recognized by the conceptual framework?
Cost constraint
Under IFRS companies may apply fair value to natural resources and the monetary unit assumption is still used
The existing conceptual frameworks under IFRS and GAAP are very similar
Coherent system of concepts that flow from an objective
Show allow accounting profession to quickly solve new/emerging practical problems
Increases financial stat users understanding of and confidence in financial reporting
Conceptual framework
First level of conceptual framework
Recognition
Measurement
Disclosure concepts
An implicit assumption of financial reporting is that
Users need reasonable knowledge of business and financial accounting matters
Enhancing qualities include
Verifiability
Timeliness
Comparability
What describes amounts of resources or claims to resources at a moment in time?
Assets, liabilities, equity
Which assumption makes the current/noncurrent classification of assets/liabilities on the balance sheet lose much of its significance if a company adopts a liquidation approach?
Going concern assumption
What is made at the end of an accounting period to bring all accounts up to date on an accrual basis?
Adjusting entries
What account is increased on the credit side?
Retained earnings
A required step in the accounting cycle is the preparation of
Closing entries
Summarizes transactions possessing a common characteristic
Reduces bookkeeping time
Includes cash receipts and cash payments
Special journals
Deferrals include
Expenses paid in cash before they are used or consumed
The financial statements are prepared from the
Adjusted trial balance
When a merchandiser prepares closing entries, COGS is — and Income Summary is —
Credited
Devoted
What challenges in financial reporting are being faced now and in the future?
Nonfinancial measurements Forward-looking information Soft assets Timeliness Understandability
First primary level of conceptual framework
Basic objective - useful to present and potential equity investors, lenders, and other creditors in making decision about providing resources to the entity
Qualitative characteristics GAAP
Determining which alternative provides the most useful information for decision making purposes
Fundamental qualitative characteristics
Relevance - predictive value, confirmatory value, materiality
Fundamental qualities continued
Faithful representation - Completeness, neutrality, free from error
Enhancing qualitative characteristics
Comparability, verifiability, timeliness, understandability
Basic elements
Assets
Liabilities
Equity
- moment in time
Basic elements continued
Investments by owners Distribution to owners Comprehensive income Revenues Expenses Gains Losses - period of time
4 basic assumptions
Economic entity
Going concern
Monetary unit
Periodicity
Economic activity can be identified with a particular unity of accountability
Economic entity assumption
Company will have a long life
Going concern
Is relevant, simple, universally available, understandable, and useful
Monetary unity assumption
Implies that a company can divide its economic activities into artificial time periods
Periodicity assumption
Four basic principles of accounting to record and report transactions
Measurement
Revenue recognition
Expense recognition
Full disclosure
GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price
Historical cost principle
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Fair value
Requires that companies recognize revenue in the accounting period I which the performance obligation is satisfied
Performance obligation
Let the expense follow the revenues
Expense recognition principle
Recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs
Full disclosure principle
Companies must weight the costs of providing the information against the benefits that can be derived from using it
Cost constraint
Collects and processes transaction data and then disseminates the financial information to interested parties
Accounting information system
List of all open accounts in the ledger and their balances
Trial balance
In order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred, companies make —
Adjusting entries
Purpose of adjusting entries
Makes it possible to report on BS the appropriate assets, liabilities, and SE at the statement date
Prepaid expenses
Unearned revenues
Deferrals
Accrued revenues
Accrued expenses
Accruals
Permanent/real accounts
Assets
Liabilities
Stockholders equity
