Week 2 Chapter 1 Flashcards
Financial Accounting
Prep of financial reports for use by internal & external parties.
4 Most Common Financial Reports
- Balance Sheet
- Income Statement/P&L
- Statement of Cash Flows
- Statement of Owners’/Stockholders’ Equity
Managerial Accounting
Prep of financial information used by managers in planning & evaluating business operations
What two groups are the primary users of general-purpose financial statements?
Investors & Creditors
Stewardship
Safekeeping of company’s economic resources for ongoing profitable use
Entity Perspective
In financial reporting, companies are viewed as separate from their owners
Proprietary Perspective
Financial reporting should be focused on needs of owners (not considered an appropriate view)
What are investors trying to assess? (2)
- Ability to generate net cash inflows
2. Management’s ability to protect/enhance investments
Objective of Accrual-Basis Accounting
Recording events in the period they occur, rather than periods in which is receives or pays cash. Trends are more meaningful in the long run than cash-basis.
“Generally Accepted”
An authoritative rule-making body has established a principle of reporting, or over time a given practice has been accepted as appropriate because of its universal application
SEC
Securities and Exchange Commission
Federal agency established after 1929 stock market crash. Has broad powers to prescribe accounting practices and standards. Public companies required to file audited financial statements with SEC.
AICPA
American Institute of Certified Public Accountants
National profession organization of practicing CPAs. Its committees have contributed to development of GAAP.
FASB
Financial Accounting Standards Board. Organization funded and overseen by the Financial Accounting Foundation.
Establishes and improves standards of financial accounting and reporting for the guidance and education of the public.
Which organization develops standards:
- SEC
- FASB
- AICPA
FASB: Financial Accounting Standards Board
with advice and recs from the SEC, AICPA
FASB Codification creates new GAAP (T/F)
False
It simplifies user access to US GAAP and eliminates nonessential information, but does not create new GAAP. Its guidance is considered to be GAAP.
Politics play no role in developing GAAP (T/F)
False.
Lobbying and the political process factor heavily into GAAP.
IFRS
International Financial Reporting Standards
More principles-based than rules-based in its approach to standards, than US GAAP.
Publicly traded companies in the EU and required to use IFRS
IASB
International Accounting Standards Board
Issues IFRS/International Financial Accounting Standards
Foreign companies listed on US exchanges are required to issue GAAP-compliant statements. (T/F)
False
They are allowed to use IFRS if they are foreign.
4-step process in establishing accounting standards
- Research
- Discussion Paper
- Exposure Draft
- Standard
The Conceptual Framework is used when
there is no standard or interpretation related to the reporting issues under consideration
Economic Consequences of Accounting Standard-Setting
Recognizes that accounting standards can have detrimental impacts of wealth levels of the providers of financial information
Expectations Gap
What the public thinks accountants should do vs. what accountants think they can do
Two types of pronouncements by the FASB
- Accounting Standards Updates: amends Codification
- Financial Accounting Concepts: identifies fundamental objectives and concepts (Conceptual Framework) the FASB uses as tools for solving problems.
EITF
Emerging Issues Task Force. Created by the FASB to identify controversial accounting problems as they arise, and dealing with them in the short-term while the FASB works on long-term problems.
What is the AICPA’s role in the CPA Exam?
AICPA develops and grades the CPA Exam.
Where is the authoritative level of GAAP found?
The FASB Codification
Internal Controls
System of checks and balances designed to prevent and detect fraud and errors
What is the SEC’s role in accounting standards?
Varied role - relies on the FASB to develop standards, but gives advice and recommendations
US GAAP: more principles-based, or rules-based?
Rules-Based
IFRS: more principles-based, or rules-based?
Principles-Based
What is GAAP comprised of?
Any accounting guidance listed in the FASB Codification
