CH 1 Intermediate Accounting 1

In the US

Sole proprietorships and partnerships outnumber corporations

Creditors lend cash to the corporation

either by making individual loans or by purchasing publicly traded debt such as bonds

Which of the following models is best in helping predict future cash flows ? A) Cost Accounting B) Cash accounting C) Accrual accounting

Accrual accounting

Net operating cash flow

Cash-basis accounting produces a measure called

Proponents of objectives-based standards assert that Multiple choice question. professional judgment minimizes sidestepping of rules less professional judgment will be needed in the preparation and audit of the financial statements financial statements will become more transparent

professional judgment minimizes sidestepping of rules

The Sarbanes-Oxley Act increases accountability of who? Multiple choice question. FASB members securities analysts

corporate executives

The dominant form of business organization, in terms of productive resources

corporation

Three primary forms of business organization

1. Proprietorship 2. Partnership 3. Corporation

Before issuing an Accounting Standards update, the FASB undertakes a series of information-gathering steps including...

Deliberations, open hearings, written comments

Cash vs. Accrual Accounting

Even though predicting future cash flows is the primary goal of many users of financial reporting, the accrual accounting model is best able to achieve that goal.Cash Basis Accounting: produces a measure called net operating cash flow, which is the difference between cash receipts and cash payments from transactions related to providing G and S to customers during a reporting period. Over life of company, net operating cash flow definitely is the variable of concern, but over short periods of time, operating cash flows may not be indicative of the company's long-run cash-generating ability. Sometimes a company pays or receives cash in one period that relates to performance in multiple periods...so net operating cash flow may not be a good predictor of long-run cash generating ability...also not a good indicator of year to year performance.Accrual Accounting: Gives a more accurate prediction of future operating cash flows and more reasonable portrayal of the periodic operating performance of the company. Doesn't focus on cash flows, instead reflected other resources provided and consumed by operations during a period...Accrual accounting model's measure of resources provided by business operations is called revenues, and the measure of resources sacrificed to produce revenues is called expenses. Difference between revenues and expense is Net Income, or net loss. More indicative of performance yearly, across years, and better predictor of future operating cash flows...but doesn't mean information about cash flows from operating activities is not useful...statement of cash flows does this. Key point is that focusing on accrual accounting as well as cash flows provides a more complete view of a company and its operations.

The primary role of financial accounting is to provide useful financial information to users who are _________ to the business enterprise.

External

True or False Cash basis Accounting is the method used by most profit-oriented companies

False Accrual basis accounting is the accounting method used by most profit-oriented and not-for-profit entities.

Financial Accounting and Reporting Standards

Most companies use GAAP, so comparability is better. To facilitate these comparisons, financial accounting employs standards known as GAAP.Historical Perspective:Securities and Exchange Commission (SEC): Congress gave the SEC the authority to set accounting and reporting standards for companies whose securities are publicly traded. The SEC Delegated the task of setting accounting standards to the private sector...but the power still lies with the SEC. If SEC does not agree with particular standard issued by the private sector, it can force a change, and has done so.First Private Sector Entity: Committee on Accounting Procedure (CAP)...a committee of the American Institute of Accountants (AIA), which was later renamed the American Institute of Certified Public Accountants (AICPA). CAP issued 51 Accounting Research Bulletins dealing with specific accounting and reporting problems...piecemeal approach without a framework led to criticismAccounting Principles Board (APB) replaced CAP and issued 31 Accounting Principles Board Opinions, various Interpretations, and four Statements...these also dealt with specific accounting/reporting problems, many of them have not been superseded and represent authoritative GAAP today...but a variety of problems...didn't establish conceptual framework...members served on a voluntary-party time basis, couldn't act quickly...most importantly perceived lack of independence because composed almost entirely of CPAs and supported by the AICPA...argued clients of represented CPA firms exerted self-interested pressure...also other interest groups lacked an ability to provide inputThe Financial Accounting Standards Board (FASB) came after criticism of the APB in 1973...Seven full-time members representing various constituencies concerned with accounting standards...auditing, profit-oriented companies, accounting educators, financial analysts, and government...supported by its parent organization, the Financial Accounting Foundation (FAF), which selects members of FASB and its Financial Accounting Standards Advisory Council (FASAC) ensuring adequate funding of FASB activities and exercising general oversight of the FASB's activities. So FASB is an independent private sector body whose members represent a broad constituency of interest groups...FASB also has an Emerging Issues Task Force (EITF) to improve financial reporting...it resolves narrowly defined financial accounting issues within framework of existing GAAP...primarily addresses implementation issues, thereby speeding up standard-setting and allowing FASB to focus on long-term issues. EITF rulings are ratified by the FASB and considered part of GAAP.

Investors provide resources, usually cash to a corporation in exchange for

Ownership interest, that is, shares of stock.

Financial Reporting

Process of communicating information relevant to investors, creditors, and others in making investment, credit, and business decisions.

The involvement of accounting professionals and management in accounting scandals resulted in Congress passing the Sarbanes-Oxley Act. What is the purpose of the Sarbanes-Oxley Act? (Select all that apply.) Require accountability of corporate executives. Provide penalties for violators. Addresses conflicts of interests. Regulate auditors. Issue capital requirements for companies.

Require accountability of corporate executives. Provide penalties for violators. Addresses conflicts of interests. Regulate auditors.

Ethics deals with the ability to distinguish _________ from _________ . (Only one word per blank)

Right Wrong

The Primary function of Financial accounting

To provide useful financial information to users who are external to the business enterprise, particularly investors and creditors.

What financial reporting model is used by most profit-oriented businesses and not-for-profit entities? Multiple choice question. tax accounting accrual accounting cost accounting cash basis accounting

accrual accounting

Criticisms of the objectives-oriented approach for accounting standards are (Select all that apply.) Multiple select question. the rules can be easily applied uniformly. professional judgment may result in different treatments of similar transactions. an absence of rules may lead to intentional misuse of a standard. a lack of disclosure notes explaining accounting policies.

professional judgment may result in different treatments of similar transactions. an absence of rules may lead to intentional misuse of a standard.

Risk refers to the _________ of an investment

uncertainty

Financial Accounting

which is chiefly concerned with providing financial information to various external users.