C248 Intermediate Accounting 1, Intermediate Accounting Test 1, Intermediate Accounting 1

What are the basic elements of financial statements as described in SFAC No. 6?

1. Assets 2. Liabilities 3. Equity 4. Investments by Owners 5. Distributions to Owners 6. Comprehensive Income 7. Revenues 8. Expenses 9. Gains 10. Losses

What are the most commonly used measurement principles in accounting?

1. Historical Cost 2. Fair value 3. Fair value Hierarchy

What are the 4 financial statements?

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

Describe two objectives of Financial Reporting.

1. To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources(capital) to the entity. 2. To identify, measure, and communicate financial information about economic entities to interested parties.

What are the six steps to the FASB Process?

1. Topics identified and placed on the board's agenda. 2. Research and analysis conducted and preliminary views of pros and cons issued. 3. Public hearing on proposed standard. 4. Board evaluates research and public response and issues exposure draft. 5. Board evaluates response and changes exposure draft, if necessary. 6. Final standard issued.

What is accrual basis accounting?

An entity records events that change its financial statements in the periods in which those events occur. Trends in revenues and expenses are generally more meaningful than trends in cash receipts and disbursements.

What is SFAC #8 and what is its purpose?

The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (Replaces 1 & 2) A product of a joint conceptual framework of the FASB and the IASB. Relates to levels 1 and 2 of the framework.

What is SFAC #7 and what is its purpose?

Using Cash Flow Information and Present Value in Accounting Measurements provides a framework for using expected future cash flows and present values as a basis for measurement relates to level 3 of framework

What is the purpose of the notes to financial statements?

provides disclosures required by GAAP

What is the purpose of other reporting means?

some financial info is better provided, or can only be provided by other means of financial reporting such as the president's letter, news releases, prospectuses, reports filed with government agencies, environmental impact statements, and management forecasts.

What is managerial accounting?

the process of identifying, measuring, analyzing and communicating financial information needed by management to plan, control, and evaluate a company's operations.

What is financial accounting?

the process of recording, summarizing and reporting the myriad of transactions resulting from business operations over a period of time.

What is understandability?

the quality of information that lets reasonably informed users see its significance is enhanced when information is classified, characterized, and presented clearly and concisely.

What is the purpose of the income statement?

Presents the revenues, expenses, profits, and/or losses generated during the reporting period. The results of an operating entity. Generally considered to be the most important statement. Reports on a period of time.

What is one advantage and one disadvantage of general purpose financial statements?

Advantage - least cost, most useful information possible. Disadvantage - may not be the most informative for a specific purpose.

Which elements of the finanical statements are recorded as a moment in time?

Assets Liabilities Equity

What is comprehensive income according to SFAC 6?

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner resources. Includes all changes in equity except those resulting from investments by owners or distributions to owners.

What is historical cost?

Companies account for and record many assets and liabilities on the basis of acquisition price. Required by GAAP because it is verifiable.

What is the entity perspective?

Companies are viewed as separate and distinct from their owners. Asses are the entity's not those of a specific shareholder or creditor.

What is neutrality as part of faithful representation?

Company can't select information to favor on set of interested parties over others

What are the enhancing qualitative characteristics?

Comparability Consistency Verifiability Timeliness Understandability

What are losses according to SFAC 6?

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and all transactions, events, or circumstances except expenses or distributions to owners.

What are distributions to owners according to SFAC 6?

Decreases in net assets of a business enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Such distributions decrease the ownership interest (equity) in an enterprise.

What is SFAC #3 and what is its purpose?

Elements of Financial Statements provides definitions of items in financial statements, such as assets, liabilities, revenue, and expenses. (superceded by SFAC #6) Relates to level 2 of framework

What is SFAC #6 and what is its purpose?

Elements of financial Statements replaces SFAC #3 and expands scope to include nonprofit organizations relates to level two of framework

What is the purpose of the FASB Codification Framework?

GAAP documentation varied in format, completeness, and structure. Created to provide all authoritative literature related to a certain topic.

What challenges are associated with GAAP?

GAAP is subject to political pressure and is much a product of political pressure as it is of careful logic or empirical findings.

How are financial statements used?

Help current and potential investors assess the entity's ability to generate net cash inflows, and to understand management's ability to protect and enhance the assets of the company that will be used to generate future net cash inflows.

What are gains according to SFAC 6?

Increases in equity (net assets) from peripheral or incidental transactions of an entity and all transactions, events, or circumstances except revenues or owner investments.

What qualifies an event or transaction to be recognized?

It must meet the definition of "an element of financial statements" as definied in SFAC No. 6 and must be measurable.

What are the levels of conceptual framework

Level 1 - basic objective of reporting - the "why" Level 2 - Qualitative Characteristics & Elements of Financial Statements - bridge between levels 1 & 3 Level 3 - Recognition (assumptions), measurement (principles), and Disclosure (constraints) concepts. The "how". These are used to describe the reporting environment environment based on the accounting conceptual framework.

What documents does GAAP include?

* AICPA Accounting Interpretations * AICPA Industry Audit & Accounting Guides * AICPA Statements of Position * AICPA Accounting Research Bulletins * AICPA AcSEC Practice Bulletins * APB Opinions * FASB Technical Bulletin * FASB Standards, Interpretations, & Staff Positions * FASB Implementation Guides (Q&A) * FASB EITF consensuses * Widely recognized and prevalent industry practices.

What are the major types of FASB pronouncements?

* Accounting Standards Updates * Financial Accounting Concepts * Emerging Issues Task Force (EITF)

What does the codification do?

* Simplifies user access to all authoritative US GAAP * Changes how GAAP is documented, presented, and updated. * Explains what GAAP is and eliminated nonessential information

What is the periodicity assumption according to SFAC 5?

Time Period Assumption An entity can divide its economic activities into time periods. Shorter time periods are more difficult to determine proper net income for. A month is less verifiable than a quarter, a quarter less than a year. There is a definite trade-off between accuracy and timeliness in preparing financial data.

What is relevance in accounting?

To be relevant, information should be capable of influencing a decision and have either predictive value, confirmatory value, and/or materiality.

What are the objectives of financial reporting?

To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Information that is decision-useful to this group might also be useful to other financial statement users.

What are Accounting Standards Updates made by the FASB?

Updates that amend the Accounting Standards Codification, which represents the source of authoritative standards, other than standards issued by the SEC. Common amendments include: accounting standards that address a broad area of accounting practice and interpretations that modify or extend existing standards. Sometimes called Statement of Financial Accounting Standards.

What is fair value?

a market based measure. the prices 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. May be more relevant for certain types of assets and liabilities.

What is free from errors as part of faithful representation

accurate within what's possible using estimates made with management's judgement

What is the FASB Codification Research System (CRS)?

an online, real-time database providing access to the Codification. Organized topically - Topic, Subtopic, Section, Paragraph all using a numerical index system.

What is timeliness in financial statements?

decision makers receive information in time to influence decisions

What are the basic assumptions and principles of accounting?

1. Economic Entity Assumption 2. Going Concern Assumption 3. Monetary Unit Assumption 4. Periodicity Assumption

What is GAAP (Generally Accepted Accounting Principles)?

A mixture of 2,000 documents developed over the last 70 years to provide guidelines for how AICPA members prepare financial statements. A member cannot express an unqualified opinion on a financial statement that contains a material departure from GAAP.

What is the revenue recognition principle?

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied, not when the payment is received.

What is capital allocation?

the process of determining how and at what cost money is allocated among competing interests. Effective capital allocation promotes productivity, encourages innovation, and provides an efficient market for buying and selling securities.

What user groups influence GAAP?

* Businesses and entities * CPAs and accounting firms * AICPA (AcSEC) * Academics * Investing public * Financial community (analysts & brokers) * Preparers * Government (SEC, IRS, etc.) * Industry Associations

What is the SEC and how does it work?

* Established by fed, accounting & reporting for public companies * Has oversight and enforcement authority over publicly traded companies. * Securities Act 1933, Securities Act 1934 * Encouraged private standard-setting body. * Requires public companies to adhere to GAAP * SEC oversight & enforcement authority.

What is the FASB and how does it work?

* Part of Financial Accounting Foundation * Wheat Committee recommended creation * Mission is to establish and improve standards of financial accounting and reporting * Consults with Financial Accounting Standards Advisory Council (FASAC) on major policy issues. * FASB has 7 members, greater autonomy, increased independence, and broader representation than APB.

What is the need for a conceptual framework?

-to develop a coherent set of standards and rules -to solve new and emerging practical problems -the underlying theme of the conceptual framework is decision usefulness

When did FASB begin developing their conceptual network and what was the reason?

1976 to help resolve financial reporting controversies.

What is GAAP?

A common set of standards, principles, and procedures which have substantial authoritative support and have been accepted as appropriate because of universal application.

How does accounting assist in efficient use of scarce resources?

Accountants must measure performance accurately, fairly, and on a timely basis so that managers and companies are able to attract investment capital. Relevant and reliable financial information allows investors and creditors to compare the income and assets employed by companies to assess the relative risks and returns associated with investment.

What is the EITF and what is its purpose?

Emerging Issues Task Force Also issues consensus updates. Reaches consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices. Examples include: accounting for pension plan terminations, revenue from barter transactions for internet companies, excessive amounts paid to takeover specialists. FASB reviews and approves all EITF consensuses. SEC views consensus solutions as preferred accounting and requires pervasive justification for departing from them.

What is the third level of the conceptual framework?

Explains how companies should recognize, measure, and report financial elements and events. Most are contained in Statement of Financial Accounting Concepts No. 5 (Recognition and Measurement in Financial Statements of Business Enterprises)

What is the full disclosure principle?

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.

What are investments by owners according to SFAC 6?

Increases in net assets of a business enterprise resulting from transfers to it from other entities of something of value in exchange for ownership interests. Can be assets, services, or conversion of liabilities.

What is verifiability?

Independent measurers, using the same methods, get the similar results.

What are revenues according to SFAC 6?

Inflows or enhancements of assets of an entity, or a settlement of its liabilities (or both) during a period due to delivering goods, rendering services, or other activities that constitute ongoing major or central operations. (gains from primary operations)

What is materiality?

Information which, if omitted or misstated, would influence decisions made based on the reported financial information.

Which elements of the financial statements are recorded as a period of time?

Investments by Owners Distributions to Owners Comprehensive Income Revenue/Expenses Gains/Losses

Who is the primary user group of financial statements?

Investors

What is decision-usefulness?

Investors want information that gives them the ability to assess the company's ability to generate cash and to protect and enhance investments made.

What is the expense recognition principle?

Match expenses with revenues in the period when the company makes efforts to generate those revenues. Some costs are charged to the current period because they cannot be matched with revenue. (examples include salaries and administrative expenses)

What is a product cost?

Materials, labor, and overheads that can be attached to a product.

Do the Statements of Financial Accounting Concepts issued by the FASB establish GAAP?

No.

What is SFAC #2 and what is its purpose?

Qualitative Characteristics of Accounting Information examines the characteristics that make accounting information useful (superceded by SFAC No.8, Chapter 3) Relates to level 2 of framework.

What is SFAC #5 and what is its purpose?

Recognition and Measurement of Financial Statements Recognition and measurement criteria & guidance on what information should be formally incorporated into financial statements and when. Relates to level 3 of framework.

What are the qualitative characteristics of accounting information?

Relevance Faithful representation Enhancing Qualities

What is the purpose of the statement of retained earnings?

Reports on changes in equity during the reporting period. Can included sale or repurchase of stock, dividend payments, and changes in reported profits or losses. Least used of the statements.

What is equity according to SFAC 6?

Residual interest in the assets of an entity that remains after deducting its liabilities from its assets. Ownership interest in a business enterprise.

Why have a conceptual framework?

Rule making should build on and related to an established body of concepts Conceptual framework allows FASB to issue more useful and consistent pronouncements, which should result in coherent standards helps to enhance comparability among financial statements. helps to increase financial statement users' understanding of and confidence in reporting provides a basis for which to solve new and emerging practical problems

What is a period cost?

Salaries and administrative expenses that are attached to a period.

What are the objectives of financial reporting based on?

The needs of the users of the information and the assumption that users have some knowledge of accounting.

What is completeness as part of faithful representation?

all information necessary is provided

What is consistency in financial statements?

applying the same accounting treatment to similar events from period to period. using accounting standards consistently unless it can be shown that switching to a new method is preferable to continuing to use an old one.

What are notes to the financial statements?

clarify the financial statements and provide additional detail

Account - Treasury Stock

classification on balance sheet - Contra-Equity Account - Stockholders' Equity

What is confirmatory value?

confirms or corrects prior expectations.

What is the conceptual framework?

establishes the concepts that underlie financial reporting and guides the development of standards. A coherent system of concepts that flow from an objective. The concepts help to identify boundaries of financial reporting, select the transactions or events to be represented, how they should be recognized and measured, and how they should be summarized and developed.

What is the AICPA and how does it work?

* National professional organization * Established the Committee on Accounting Procedures (1939-1959) which issued Accounting Research bulletins * Established the Accounting Principles Board (1959-1973, aka Wheat Committee) which issued Accounting Principle Board Opinions.

What are Financial Accounting Concepts?

An attempt to move away from the problem-by-problem approach. Began in 1978 as part of a conceptual framework project that sets forth fundamental objectives and concepts that the FASB uses in developing future standards of financial acocunting and reporting. DOES NOT ESTABLISH GAAP!

What is the monetary unit assumption according to SFAC 5?

Money is the common denominator of economic activity and provides an appropriate basis for measurement and analysis. Monetary units are relevant, simple, universally available, understandable and useful.

What is faithful representation?

Numbers and descriptions match what actually happened. Three aspects are completeness, neutrality, and free from error.

What is SFAC #1 and what is its purpose?

Objectives of Financial Reporting presents the goals and purposes of accounting (superceded by SFAC No. 8, Chapter 1) Relates to level 1 of framework

What is SFAC #4 and what is its purpose?

Objectives of Financial Reporting for Nonbusiness Organizations (not for businesses, use SFAC #6)

What happens if the Codification doesn't cover a transaction or event?

Other accounting literature should be considered such as FASB Concept Statements, international reporting standards, and other professional literature. This is a rare occurrence.

What are expenses according to SFAC 6?

Outflows or other using up of assets, or incurred liabilities (or both) during a period due to delivering or producing goods, rendering services, or carrying out other activities that constitute ongoing major or central operations. (Loss from primary operations)

What is predictive value?

Predictive value is valuable input in forseeing the future performance of a business entity.

Why are financial statements prepared using GAAP?

Preparing financial statements according to GAAP contributes to the comparability of financial information. Without them, it would be nearly impossible to compare statements, each company would have their own standards, and readers would have to know each company's standards for accounting and reporting.

What is the purpose of the statement of cash flows?

Presents the cash inflows and outflows that occurred during the reporting period. Useful for comparing to P & L on income statement.

Since 1976 the FASB has issued how many Statements of Financial Accounting Concepts that related to financial reporting for business enterprises?

Seven

Who uses general purpose financial statements and how do they use them?

Shareholders Creditors Suppliers Unions Government agencies Employees Regulators to better understand the entity's financial position and performance.

What are liabilities according to SFAC 6?

Something of value an entity owes. Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities in the future, as a result of past transactions or events.

What are assets according to SFAC 6?

Something of value an entity owns. Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

What is the going concern assumption according to SFAC 5?

The assumption that a company will have a long life and fulfill its objectives and commitments. This assumption makes depreciation and amortization policies justifiable and appropriate. If liquidation is imminent, this assumption is inapplicable.

What is the purpose of the balance sheet?

The balance sheet, also called a statement of financial position, provides information about an entity's assets, liabilities, and owners' equity at a point in time (usually the end of a reporting period). The statement shows the entity's resource structure—the major classes and amounts of assets—and its financing structure—the major classes and amounts of liabilities and equity.

What is the Economic Entity Assumption according to SFAC 5?

a company keeps its activity separate and distinct from owners and any other business unit. An entity and its subsidiaries can merge activities for accounting and reporting purposes.

What is the fair value hierarchy?

indicates the level of subjectiveness in applying fair value basis. Least subjective - quoted prices for identical assets, most subjective - company's unverifiable assumptions or data.

What is comparability in financial statements?

information is measured and reported in a similar manner for different companies allows users to identify real similarities and differences in economic events.