xxx Flashcards
What are the eight principles of GAAP?
- Entity principle
- Cost principle: money as a measure
- The going concern principle
- The conservatism and cost principle
- The matching principle
- The consistency principle
- The materiality principle
- The accrual principle
What is GAAP?
GAAP is the generally accepted accounting principle.
GAAP is a set of principles that guide the government and the non-profit sector in Canada on how financial information will be created, reported, audited, and generally understood.
What is the entity principle?
This principle defines the unit or entity being reported. You have to be able to determine what is in and what is out of the unit for which you are preparing reports. The users have to know what these reports refer to and exclude anything that is not related to that entity.
What is the cost principle: money as measure?
All information in the financial statement must be monetized. Accounting recognizes only those activities that can be expressed in monetary terms. This principle pulls together hetergenous information in terms of costs.
The monetization or cost principle permits an organization to develop an understanding of the value of its assets (in terms of costs). The tool most commonly used in placing monetized value on asset is the historic cost (recording what was paid for the asset orginally)
This principle reflects the conservatism principle
What is the going concern principle?
This principle states that the organization will continue to operate for the foreseeable future in the absence of evidence to the contrary.
Assets are treated according to what is expected to happen over the normal course of operations and over their anticipated useful lifetime. They will be expected to depreciate in value or to be amortized.
The heart of this principle remains that only what is known can be used in financial statements and unless some information is available that indicates otherwise, the organization will carry on
What is the conservatism and cost principle
This principle requires that accountants value assets at the lower of their historical cost or market value
This has been described as a principle by which accountants recognize no gains until they happen, but record all possible losses even before they take place
When in doubt, it is better to overstate expense and understate revenue
What is the matching principle?
The matching principle states that all expenses must be recorded in the same accounting period as the revenue that they helped to generate
The matching principle normally refers to the matching of revenue and expenses
for government entities: revenues should be recognized when the goods and/or services have been rendered and expenses should be matched to program delivery outputs of services to the public
What is the consistency principle?
This principle holds that, once an organization has adopted a set of standards for accounting and financial reporting it will continue to use them, so as to allow for consistent comparisons between time periods
When they change them, they have to provide what is a called a “cross walk” to explain where changes have been made in the financial information in order to permit comparisons
What is the materiality principle?
Whether the information being reported is significant to users of financial statements in making decisions or arriving at an understanding of the organization’s financial position
What is the accrual principle?
The elements of the accrual basis that are significant to this principle are that:
- revenue is recognized when goods and services are provided, even if payment has not occurred
- expenses are recorded on consumption of the assets
- a full set of financial statements are used to support the accrual basis
Accrual is seen as providing a much more complete picture of the financial condition of an organization
Key differences between cash and accrual accounting
Cash Accounting
- Does not record the impacts of assets and liabilities
- money borrowed with a long-term liability is considered as a cash inflow and it not stated in the financial statements until it is due and payable
- Recognition and transparency are diminished
Accrual accounting
- Recognizes events and transactions when they occur by recording accounts payable and receivable and the changes in the values of the assets and liabilities
- It keeps a tally of what the organization own and owes, it also depletes the values of those assets as it uses them up
- Liabilities and expenses are recorded when the event occurred. The cash is paid, the liability is removed
- Upon receipt of goods this system provides two information: creation of liability or obligation to pay and information about the level of inventory (asset)
Name and describe two advantages of accrual accounting
- little to no cash manipulation of cash
2. records assets including depreciation and replacement
Name and describe two disadvanatages of accrual accounting
- Standards are open to manipulation
distortions of the accrual system through manipulation in 2 ways:
-revenue is recognized on the basis of flimsy evidence (record sale as income even though it was only an agreement)
-the write-off of bad debts or deferral of the timing of certain cost flows is manipulated to make the organization’s performance look better in a specified period - Poor linkage to budget information when the budgets are on cash basis making financial reports difficult to understand and create the need for “cross-over” reports
Name two objectives that a budget accomplishes
A budget translates policy intention into specific activities through the allocation of resources to that goal or to one or more objectives
A budget sets limits on expenditures to guide managers within the organization
What is budgeting in the public sector?
For government, a budget is necessary to allocate resources and get the authority to spend
The public sector working within an approved budget is a distinct measure of sound management. This works in two ways:
-managers faces criticism for overspending and underspending