Chapter 1 - Intermediate Accounting

What are the 7 steps in analyzing ethical issues?

1. Determine the facts of the situation. 2. Identify the ethical issue and the stakeholders. 3. Identify the values related to the situation. 4. Specify the alternative courses of action. 5. Evaluate the courses of action. 6. Identify the consequences of each possible course of action. 7. Make your decision and take any indicated action.

What are the seven steps in FASBs Standard-Setting Process?

1. Identify issue 2. Decide whether to add issue to technical agenda 3. Board deliberates the issue at a public meeting 4. Board issues an exposure draft. 5. Board holds a public roundtable meeting on the exposure draft. 6. Staff analyze comment letters, discussions, and any other information. 7. Board issues ASU

What are four things that SOX provides for?

1. Regulation of Auditors and the types of services they furnish to clients 2. Increases accountability of corporate executives 3. Addresses conflicts of interest for securities analysts. 4. Provides stiff criminal penalties for violators

Which Act and the year that set forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds).

1933 Securities Act

Which Act and the year that applies to secondary market transactions and mandates reporting requirements whose securities are publicly traded on either organized stock exchanges or in over the counter markets.

1934 Securities Exchange Act

What did the APB issued?

31 Accounting Principles Board Opinions (APBOs), various Interpretations, and four Statements.

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

Rules-based accounting standards

A list of rules for choosing the appropriate accounting treatment for a transaction

What group was never able to establish a conceptual framework for financial accounting and reporting that was broadly accepted, and inappropriately influenced decisions?

APB

What organization replaced CAP?

APB

Comparability

Ability to compare the accounting information of different companies because they use the same accounting principles.

APB

Accounting Principles Board

What is it called when the FASB issues a new standard that eventually becomes authoritative when entered in the Codification?

Accounting Standards Update (ASU)

What accounting basis is used by the majority of profit-oriented companies and by many NFP organizations?

Accrual Accounting

Faithful Representation

Agreement between a measure and the phenomenon it purports to represent

AIA/AICPA

American Institute of Accountants/American Institute of Certified Public Accountants - national professional organization for certified public accountants.

Financial accounting should help investors and creditors evaluate the ______, ______, and ______ of the enterprise's future cash receipts and disbursements.

Amounts, Timing, and Uncertainty

Full Disclosure Principle

An accounting principle that requires that a business's financial statements provide information on all the significant facts that have a bearing on their interpretation

Monetary Unit Assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Economic Entity Assumption

An assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Periodicity Assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Objectives-oriented/principles-based accounting standards

Approach to standard setting stresses professional judgement as opposed to following a list of rules.

What are the ten elements of financial statements?

Assets Liabilities Equity Investments by Owners Comprehensive Income Revenues Expenses Gains Losses

Securities Exchange Commission role is what?

Authority to set accounting and reporting standards for companies whose securities are publicly traded.

What are the five most frequently used financial statements?

Balance Sheet aka Statement of Financial Position Income Statement aka Statement of Operations Statement of Cash Flows Statement of Shareholders' Equity Statement of Other Comprehensive Income

What accounting basis produces a measure called net operating cash flow?

Cash Basis

Expense recognition is implemented by one of four different approaches. What are the approaches?

Cause and effect Associating an expense with the revenues recognized in a specific time period. Systematic and Rational allocation to specific time periods In the period incurred, without regard to related revenues

CAP

Committee on Accounting Procedure - A part-time committee of the AICPA that promulgated Accounting Research Bulletins ARB which determed GAAP from 1939-1959

What does Section 404 of SOX require?

Company management document internal controls and report on their adequacy. Auditors also must express an opinion on whether the company has maintain effective control over financial reporting.

What costs companies are concerned with when competitors gain access to certain financial information?

Competitive Disadvantage Costs

What is considered as the "Accounting Constitution because it provides the underlying foundation for US accounting standards?"

Conceptual Framework

Predictive Value/Confirmatory Value

Confirmation of investor expectations about future cash-generating ability

SFAC 8 explicitly rejects ______ as a desirable characteristic of accounting information, stating that _______ undermines representational faithfulness by being inconsistent with neutrality.

Conservativism

The dominant form of business organization, in terms of the ownership of productive resources is what?

Corporation

Why do corporations care about secondary market transactions?

Corporations care because it provides feedback, sell shares (primary) in the future, and evaluates performance

_____ _____ determine value by estimating the amount that would be required to buy or construct an asset of similar quality or condition.

Cost approaches

Conceptual Framework

Deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting standards.

What four criteria must an item meet in order to be recognized in a financial statement?

Definition Measurability Relevance Reliability

What does the FASB do before issuing ASUs?

Elaborate information-gathering steps

There are 10 ______ which are called the building blocks of financial statements.

Elements

EITF

Emerging Issues Task Force, formed by FASB to improve financial reporting by resolving narrowly defined issues within the existing framework of GAAP.

Revenue/Expense Approach

Emphasizes principles for recognizing revenues and expenses, with some assets and liabilities recognized as necessary to make the balance sheet reconcile with the income statement.

Which group is an independent, private-sector body whose members represent a broad constituency of interest groups?

FASB

________ __________ requires that information be complete, neutral, and free from error.

Faithful Representation

True or False: GAAP must be followed even if the amount is considered immaterial.

False

True or False: Financial accounting does not play a vital role by providing information that helps direct society's resources to the companies that utilize those resources most effectively.

False.

FAF

Financial Accounting Foundation is responsible for selecting the members of the FASB and its Financial Accounting Standards Advisory Council (FASAC), ensuring adequate funding of FASB activities and exercise general oversight of the FASB's activities.

What is the primary means of conveying financial information to external users?

Financial statements and related notes.

Net Realizable Value

For a receivable, the amount of cash expected to be realized in the future. For inventory, the estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions

What does GAAP stand for?

Generally Accepted Accounting Principles

What are the five measurement attributes?

Historical Cost Net realizable value Current cost Present (or discounted) value of future cash flows Fair Value

Material

If a more costly way of providing information is not expected to have a material effect on decisions made by those suing the information, the less costly method may be acceptable.

____ ______ estimate fair value by first estimating future amounts and then mathematically converting those amounts to a single present value.

Income approaches

Auditors

Independent intermediaries that help to ensure that management appropriately applies financial reporting rules in preparing the company's financial statements.

Understandability

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

IMA

Institute of Management Accountants; the primary national organization of accountants working in industry and government

What does the Codification do?

Integrates and topically organizes all relevant accounting pronouncements comprising GAAP in a searchable, online database.

IASB

International Accounting Standards Board whose main objective is to develop a single set of high quality, understandable, and enforceable global accounting standards to help participants in the world's capital markets and other users make economic decisions.

IASC

International Accounting Standards Committee formed to produce international accounting standards as financial markets were becoming more globalized

IFRS

International Financial Reporting Standards issued by IASB

Secondary Market Transaction

Investors trade securities among themselves.

Measurement

Is the process of associating numerical amounts with the elements

Describe the Fair Value Hierarchy

Level 1 is most desirable is based on observed quote market prices, Level 2 is based on observed information other than quoted market prices, Level 3 is least desirable and is based on the entity's own assumptions.

Fair value can be measured using what three approaches?

Market Income Cost

_____ _____ base valuation on market information.

Market approaches

Revenue

Measure of resources provided by business operations

Expenses

Measure of resources sacrificed to produce revenues

Institute of Internal Auditors

National organization of accountants providing internal auditing services for their own organizations

Conservativism is inconsistent with _________.

Neutrality

Is the conceptual framework authoritative GAAP?

No.

In September 2002, FASB and IASB signed what which pledge to remove existing differences between their standards and to coordinate their future standard-setting agendas so that major issues are worked on together.

Norwalk Agreement

Verifiability

Occurs when independent measurers, using the same methods, obtain similar results

Relevance

One of the primary decision-specific qualities that make accounting information useful; made up of predictive value and/or feedback value, and timeliness.

FASB's information gathering steps include what three things?

Open Hearings Deliberations Requests for written Comments from interested parties.

What are three means in which information can be disclosed?

Parenthetical comments or modifying comments Disclosure Notes Supplemental Schedules and Tables

Conservativism

Practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.

Financial Reporting

Process of providing statements of financial position (balance sheets), results of operations (income statements, statements of shareholders' equity, and statements of comprehensive income), changes in cash flows (statement of cash flows), and accompanying disclosure (footnotes) to outside decision makers who do not have access to management's internal sources of information. A company's accountants, under the direction of its management, perform this function.

Initial Market Transaction

Provide for new cash by the issuance of stocks and bonds by the corporation.

What is the primary function of financial accounting?

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

Asset/Liability Approach

Recognize and measure the assets and liabilities that exist at a balance sheet date and secondly, recognize and measure the revenues, expenses, gains and losses needed to account for the changes in these assets and liabilities from the previous measurement date.

Recognition

Refers to the process of admitting information into financial statements

Disclosure

Refers to the process of including additional pertinent information in the financial statements and accompanying notes.

Accrual Accounting

Requires that revenue be recorded when earned and that expenses be recorded when incurred, irrespective of when the related cash movements occur

Rate of Return

Return on an investment expressed as a percentage of the amount of money invested

Which Act applies to public securities-issuing entities?

Sarbanes-Oxley Act (SOX)

The 1934 Securities Exchange Act created what organization?

Securities Exchange Commission (SEC)

GAAP

Set of RULES and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.

In the US, ________ and ________ outnumber ___________.

Sole Proprietorship Partnership

What are three primary forms of business organizations?

Sole Proprietorship Partnership Corporation

FASB has issued numerous Interpretations, Staff Positions, Technical Bulletins, EITF Issue Consensuses and over 160 specific accounting standards called what?

Statement of Financial Accounting Standards (SFASs)

FASB disseminates the conceptual framework through what?

Statements of Financial Accounting Concepts (SFACs)

FASB

The Financial Accounting Standards Board (FASB) is the governing body that issues accounting rules and standards in the United States. These rules and standards are often referred to as generally accepted accounting principles, or GAAP.

Decision Usefulness

The ability of the information to be useful in decision making

Current Cost

The amount of cash, or its equivalent, that would be paid if the same asset were to be acquired currently (inflationary economies)

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future.

Financial Accounting

The field of accounting that focuses on providing information for external decision makers

Fair Value

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.

Present Value

The value today of an amount to be received at some date in the future after taking into account current interest rates.

Net Operating Cash Flow

This measure is the difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period.

True or False: GAAP gives a company the option to report some financial assets and liabilities at fair value.

True.

True or False: The SEC delegated the task of setting accounting standards to the private sector.

True.

Consistency

Use of the same accounting principles and methods from year to year within a company.

Ethics

a set of practices based on moral beliefs clarifying what is right and wrong.

Cash Basis Accounting

an accounting practice in which revenue is not recognized in the accounting records until received and in which expenses are not recognized until paid

Financial Intermediaries

another name for banks, loan associations and pension funds operate as brokers who bring savers and borrowers together. They have developed a level of expertise that eliminates the borrowers and savers inconvenience of being involved in direct transactions.

Cost effectiveness

financial accounting information is provided only when the benefits of doing so exceed the costs.

Timeliness

information being available to users early enough to allow them to use it in the decision process

Capital Markets

provide a mechanism to help the economy allocate resources efficiently

To be useful for decision making, information should possess the qualities of ______ and ______.

relevance and faithful representation

Historical Cost

when the actual amount paid for merchandise or other items bought is recorded