FAR Chapter 1- M1- Standard and Conceptual Framework

Accounting Principles Board (APB)

*Part-time committee of the AICPA *Issued Accounting Principles Board Opinions (APBO) and APB Interpretations -Determined GAAP from 1959-1973

SFAC No. 5,

"Recognition and Measurement in the Financial Statements"

Equity

"Residual" interest in the assets of the company that remains after deducting its labilities.

SFAC No. 7

"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

Relevance

------ If it is capable of making difference in the decisions made by user. The financial information must have predictive value. and or confirming value, and must be material.

Timeless

Information is available to user in time to be capable of influencing decision.

Understandability

Information is understandable if it is classified, characterized and presented clearly and concisely.

Predictive value

Information is useful in predicting the future outcomes.

Expenses

COGS, SG&A, Depreciation, ETC. Are outflows or uses of assets or incurrences of liabilities from delivering goods or services as part of normal operation .

Periodicity Assumption

Economic activity can be divided into meaningful time periods

SFAC no. 6

Element of Financial Statements

SFAC No.3

Elements of Financial Statements. (superseded by SFAC No. 6)

Comparability

Enables users to identify similarities and differences among items.

REGL ALE ID Revenue Expense Gain Loss Asset Liabilities Equity Investments by owners Distribution to owners

What are components of Financial Statements?

complete, neutral, free from error

What are the characteristic of faithful representation?

predictive value, confirmatory Value, Materiality

What are the characteristic of relevance?

1. Estimate of future cash flow 2. Expectation about timing variations of future cash flow 3. Time value of money 4. the price of bearing uncertainty Other factors

5 Elements of PV ( present value or economic value) measurement that are use as the basis for determining measurement.

a. FASB accounting standard codification The FASB accounting standard codification is the single source of US GAAP . US public companies are required to follow US GAAP .

A US company needs guidance in accounting for and reporting a complex derivative transactions that it entered into with European subsidiary . This company is most likely to find the appropriate guidance in the: a. FASB accounting standard codification b. FASB statement of financial accounting concept c. International financial reporting standards d. FASB statement of financial accounting standard.

b. decrease in a liability from primary operations . Rule : Revenuies are inflows or other enhancement of assets and / or settlement (decrease) in liabilities resulting from the entity ongoing major operations, Not from "incidental" operations.

According to FASB conceptual framework , an entity revenue may result from: a. an increase in an asset from incidental transactions b. a decrease in a liability from primary operations c. a decrease in an asset from primary operations d. an increase in a liability from incidental transactions

d. replacement cost replacement cost is defined as the amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost.

According to FASB conceptual framework, certain assets are reported in financial statements at the amount of cash of its equivalent that would have to be paid if the same or equivalent asset were acquired currently. What is the name of the reporting concept? a. historical cost b. net realizable value c. current market value d. replacement cost

c. relevance - NO faithful representatuion- YES

According to FASB conceptual framework, completeness is an ingredient of a. relevance - NO faithful representation- NO b.relevance - YES faithful representation- NO c.relevance - NO faithful representation- YES d.relevance - YES faithful representation- YES

a. faithful presentation

According to FASB conceptual framework, neutrality is an ingredient of a. faithful presentation b. Relevance c. comparability d. timeless

b. Relevance - YES Faithful Representation -NO

According to FASB conceptual framework, predictive value is an ingredient of a. relevance - NO faithful representation- YES b.relevance - YES faithful representation- NO c.relevance - NO faithful representation- NO d.relevance - YES faithful representation- YES

C. Regulators

According to FASB conceptual framework, the primary user of financial reports include all of the following, except; a. Creditors b. Investors c. Regulators d. Lenders

c. recognition recognition is the process of recording an item in the financial statement of an entity SFAC 5.

According to FASB conceptual framework, the process of reporting an item in the financial statement of an entity is a. matching b. allocation c. recognition d. realization

b. predictive value

According to FASB conceptual framework, the quality of information that helps users forecast outcome is ; a. representational faithfulness b. predective value c. conforming value d. neutrality

c. predictive value To be relevant, information should have predictive value and or confirming value, must be material.

According to FASB conceptual framework, to be relevant information should have which of the following? a. verifiability b. completeness c. predictive value d. neutrality

c. faithful representation and relevance

According to FASB conceptual framework, useful information must exhibit the fundamental qualitative characteristic of : a. neutrality and verifiability b. comparability and materiality c. faithful representation and relevance d. understandability and timeless

a. neutrality

According to FASB conceptual framework, what does the concept of faithful representation include? a. neutrality b. materiality c. certainty d. effectiveness

c. relevance and materiality

According to FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of useful information with one its components? a. faithful representation and verifiability b. faithful representation and predictive value c. relevance and materiality d. relevance and timeless

b. an asset provides future benefits

According to FASB conceptual framework, which of the following is an essential characteristic of an assets? a. the claims to an assets benefits are legally enforceable b. an asset provides future benefits c. an asset is tangible d. an assets is obtained at a cost

True

Accounting and financial reporting practices not included in codification are not GAAP. True or False

c. Accrual's are concerned with the expected future cash receipts and payments, while deferrals are concerned with past cash receipts or payments. accrual occur when revenue or expense was incurred for given period but nothing has been booked in the financial statements; cash receipt or payments will occur in the future, but revenue or expense needs to be booked prior to the cash eve nt. Deferrals represent situation in which the cash receipt or payment already occurred, but the revenue or expense applies to a later period.

Accrual accounting involves accruals and deferrals . Which of the following best described accruals and deferrals ? a. accruals are concerned with past cash receipt and payments, while deferral are concerned with expected cash receipts and payments. b. Both accruals and deferrals are concerned with the expected future cash receipts and payments c. Accrual's are concerned with the expected future cash receipts and payments, while deferrals are concerned with past cash receipts or payments. d. Both accruals and deferrals are concerned with past cash receipt and payments.

Asset

Are probable future economic benefits to be received by company as result of past transaction

Monetary Unit Assumption

Assumed that money is an appropriate basis by which measured economic activity

Going Concern Assumption

Assumes that the entity will continue to operate in foreseeable future.

a. accounting standard updates when FASB announces to change to existing authoritative GAAP, it is done through an accounting standard update, which details the specific changes/ updates made to the accounting standard codification .

Changes to existing authoratitative GAAP for nonissuer entities are communicated by the financial accounting standards board through the issuance of a. accounting standard updates b. exposure drafts c. statement of financial accounting standards d. concept statements

a. timeless Interim financial statements emphasize timeless by providing financial information based on actual performance to date estimates prior the year end.

Conceptually, interim statements can be described as emphasizing which of the following enhancing qualitative characteristics? a. timeless b. verifiability c. relevance d. faithful representation

Verifiability

Different knowledgeable and independent measurers would reach consensus regarding whether information is a faithful representation of what it is intended to depict

b. it develops principles and attributes that allow organizations to understand the necessary elements to ensure robust system of internal control.

Each of the following is correct regarding the financial accounting standard board, EXCEPT; a. it provides a conceptual framework that helps to increase understanding of, and codification in, financial information on the part of users of financial reports. b. it develops principles and attributes that allow organizations to understand the necessary elements to ensure robust system of internal control. c. it is recognized as authoritative by the United States securities and exchange commission and the American institute of certified accountants . d. it establishes accounting concept and standards for financial accounting and reporting, and provides guidance on implementation of standards.

Free from error

Financial information and that are no error omission in the description of economic events.

neutral

Financial information is free from bias.

b. how effectively and efficiently the entity's shareholders have discharged their responsibility to use the entity resources. Shareholders do not have a responsibility ( o right) to use the entity's resources.

Financial information provide in general purpose financial reports does not include information about: a. the resources of the entity. a. managerial accounting need NOT follow generally accepted accounting principles (GAAP) while financial accounting must follow . c. how effectively and efficiently the entity's governing board has discharged its responsibility to use the entity's resources. d. the claims against the entity

Statement of financial position (balance sheet) Statement of earnings( Income statement) Statement of Comprehensive Income Statement of Cash Flow Statement of changes in owners equity

Full Set of Financial Statements

c. by releasing an accounting standard update Any changes to the codification must be made through the issuance of an accounting standard update. This is required when a new accounting standard is established or if there is a change to an existing accounting standard.

How are amendments incorporate into the FASB accounting standard condification? a. by issuing an exposure draft. b. by producing a discussion paper. c. by releasing an accounting standard updates d. by publishing a statement of financial accounting standard .

False

In accrual the expense recognition are necessarily not incurred to generate revenue . true or false

Financial Accounting Standards Board (FASB)

Independent group of full-time members responsible for setting accounting rules.

c. as reporting for an integral part of an annual period Interim financial reporting should be viewed as reporting for an integral part of annual period.

Interim financial reporting should be viewed primarily in which of the following ways? a. as if interim period were an annual accounting period b. as useful only if activity is spread evenly throughout the year c. as reporting for an integral part of annual period. d. as reporting under a comprehensive basis of accounting other than GAAP.

Confirmatory Value

It provides feedback about evaluations previously made by user.

Historical cost - PPEE (what you paid for) Current Cost - Inventory (replacement cost) Net realizable Value - AR (Gross amount- Allowance Uncollectible) Current market value -(Market Security) Present value of future -cash flow (Bonds and Note)

Items reported to the financial statement are currently measured using different attributes . Measurement attributes for assets and liabilities

b. what influences or makes a difference to a decision maker The accountants determination of materiality and relevance is based on professional judgement and is affected by the needs of those who will be using the financial statement to make decisions.

Materiality and relevance are both defined by a. quantitative criteria set by the financial accounting standard board b. what influences or makes a difference to a decision maker c. the consistency in the application of methods over time d. the perceived benefits to be denied that exceed the perceived cost associated with it.

Measurement principle

Mixed attribute system that allows assets & liabilities to be measure in various variety measurement.

Selling Price - Cost to Sell = NRV

Net realizable Value Formula

Distribution to owners (dividends)

Not Expense - Not in IS and comprehensive income decrease in the equity from transfer of cash , property or services or the incurrence of a liability to owner.

Investment by owners

Not Revenue not in IS and excluded from comprehensive income. Increase in the equity of an entity resulting from transfer of cash, property or services from owners.

SFAC No. 4

Objectives of Financial Reporting by Nonbusiness Organizations

d. Net Realizable value Net Realizable value is the appropriate measurement basis for equipment included in Brooks Dec. 31 balance sheet , because of the decisions to end operations quickly (3 months) dispose of its assets.

On Dec. 31 Brooks Co. decided to end operations and dispose of its assets within 3 months . At Dec. 31 , the net realizable value of the equipment was below historical coast . What is the appropriate measurement basis for equipment included in Brooks December 31 balance sheet? a. current reproduction cost b. current replacement cost c. historical cost d. Net Realizable value

Committee on Accounting Procedure (CAP)

Part time committee of the AICPA Determined GAAP from 1939-1959

Accrual Accounting.

Revenue are recognized when it earned the performance obligation is satisficed.

Losses

Selling price or NRV < BV Decrease in equity from peripheral transactions and other events, except expenses & distribution to owners.

Gains

Selling price or NRV > BV Increase in equity from pheripheral transactions & other events except revenues & investment from owners

Revenue

Selling your inventory or services. (In Operating) Are inflows of enhancement of assets or settlement of liabilities from delivering goods or services as part of normal operations.

FASB Accounting Standard Codification

Single source of authoritative nongovernmental UA GAAP.

Comprehensive Income

Sum of Net income per IS + OCI "PUFF" Includes any changes in equity other than investments by owners and distribution by owners .

d. accounting standard updates The FASB updates the accounting standard codification (ASC) for new US GAAP issued by the FASB , and for any changes to existing GAAP, with accounting standard updates.

The FASB amends the accounting standard codification through the issuance of: a. technical bulletins b. staff accounting bulletins c. statement of financial accounting standards d. accounting standard updates

True

The FASB updates the Accounting Standard Codification for new US GAAP issued by the FASB and for amendments to the SEC content with Accounting Standard updates. True or False

SFAC No.8

The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces SFAC No. 1 and No. 2)

Reliability

The information is representationally faithful, verifiable and neutral.

a. The needs of the external user of the information . Per SFAC No.8 The primary users are external user such as creditors, lenders and investors.

The objectives of financial reporting stem from which of the following sources? a. The needs of the external users of the information. b. Reporting on management stewardship c. Reporting on management consistency d. the need for conservatism

a. resource provider regardless of whether entity is a for- profit or for non-for-profit , the objective of financial reporting (and the associated financial statement) is to provide information about that useful to primary user is making decision about resources to provide to the entity .

The primary purpose of a not- for - profit organization's statement is to provide relevant information to its: a. resource providers b. managers c. state regulatory body d. beneficiaries

Investors, lenders, and other creditors

The primary user of general purpose of financial reports are existing______.

Relevance

The quality of information that indicates the information makes a difference in a decision or to financial statement user.

Accural Basis Accounting

To record without an exchange of cash. record revenue and expense without exchange of cash

Relevance and faithful representation

Two fundamental qualities that make accounting information useful for decision-making purposes.

c. in the period inccured Royalties paid should be reported as expense in the period incurred

Under the royalty agreement with another company, Wand Co, will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as expense:l a. in the period paid. b. at the date the royalty agreement expired c. in the period incurred d. at the date the royalty agreement began

c. relevance The fundamental qualitative characteristic of useful accounting information described by the term " relevance" contemplates predictive value, conforming value, and materiality .

Users of financial statement frequently rely upon the data displayed in the financial statement to predict future financial outcomes. Financial accounting concept refer to the characteristic of accounting information that provides predictive value to users as the quality of: a. faithful representation b. understandability c. relevance d. comparability

Comparability, Verifiability, timeless , understandability

What are the enhancing qualitative characteristic. Can be used to determine how an economic event or transaction should be depicted if two ways are equally relevant and faithfully represented?

d. to provide information that is useful for economic decision making

What is the primary objective of financial reporting? a. to provide forecast for future cash flow and financial performance b. to provide economic information that is comprehensible to all users c. to provide management with an accurate evaluation of their financial performance d. to provide information that is useful for economic decision making.

a. applying the enhancing qualitative characteristic is iterative process that does not follow a prescribed order . As described in SFAC no.8 " conceptual framework for financial reporting", the enhancing qualitative are comparability, verifiability, timeless and understandability. The application of these characteristic is a process that does not follow specific or prescribed order.

When CPA is applying the enhancing qualitative characteristic of useful financial information , it is important for the CPA to remember that; a. applying the enhancing qualitative characteristic is iterative process that does not follow a prescribed order b. the enhancing qualitative characteristic could compensate for unfaithful representation . c. Each of the four enhancing qualitative characteristic should be given equally priority. d. Cost is a secondary consideration when applying the enhancing qualitative characteristics.

a. monetary unit The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Which of the following assumption means that money is the common denominator of economic activity and provides an appropriate basis for the accounting measurement and analysis? a. monetary unit b. going concern c. periodicity d. economic entity

a. timeless Timeless is a characteristic that enhances the usefulness of information that is relevant and faithful represented.

Which of the following characteristic enhances relevance and faithful representation? a. timeless b. materiality c. predictive value d. neutrality

c. Faithful Representation

Which of the following characteristic means that information is reasonably free from error and bias ? a. Predictive value b. relevance c. faithful representation d. consistency

a. Total assest less total liabilities Stock holders equity= Asset- liabilities . by the definition, equity is the residual interest in the asset of a company that remains after deducting its liabilities.

Which of the following defines equity as it relates to business entity? a. Total assets less total liabilities b. Total assets and liabilities c. Total revenues less total expenses d. Net revenues

d. Risk tolerance of management the risk tolerance of management is not defined by SFAC no.7 as an element of present value measurement used to establish the value of assets or liabilities using cash flow. SFAC defines the folowing elements ; - The price for bearing uncertainty - Expectations about timing variations of future cash flows - other factor (e.g liquidity issues and market imperfection) - time value of money 9the risk- free rate of interest) - estimate of future cash flow

Which of the following is NOT defined in FASB statement of financial accounting concept no. 7 as one of the five elements of present value (or economic value) measurement used to established the value of assets or liabilities using cash flow information? a. timing variations of future cash flow b. estimates of future cash flow c. time value of money d. risk tolerance of management

a. FASB accounting standard codification

Which of the following is the most authoratitative source of US GAAP? a. FASB accounting standard codification b. FASB statement of financial accounting concept c. International financial reporting standards d. FASb statement of financial accounting standard

a. managerial accounting need NOT follow generally accepted accounting principles (GAAP) while financial accounting must follow

Which of the following is true regarding the comparison of managerial financial accounting? a. managerial accounting need NOT follow generally accepted accounting principles (GAAP) while financial accounting must follow b. managerial accounting has a past focus and financial accounting has a future focus c. managerial accounting is generally more precise d. the emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeless.

a. an accounting standard updates is issued only after a majority vote by the members of FASB .

Which of the following statements best describes an operating procedure for issuing FASB Accounting Standard updates? a. an accounting standard updates is issued only after a majority vote by the members of FASB . b. the expense draft is modified per public opinion before issuing the discussion memorandum c. a new accounting standards update can be rescinded by the a majority vote of the AICPA membership d. the emerging issues task force must prove a discussion memorandum before it is disseminated to the public

Securities and Exchange Commission (SEC)

___________ has the legal authority to establish US generally accepted accounting principle (GAAP). And most instances ____ has allowed to accounting profession to Establish GAAP and Self- Regulate.

Entity Assumption

economic activity can be accounted for when considering an identifiable set of activities

Materiality

if omission or misstatement of the information could affect the decision made by user based on financial information. An entity- specific aspect of relevance.

True

in accrual accounting general rule revenue are recognized when entity satisfies a performance obligation (earned) by transferring either goods or services to customer. True or false

Faithful representation

information that is complete, neutral, and free from error

Liabilities

probable future sacrifices of economic benefits arising from the present obligation of the company to transfer assets.

Cost Constraint

the benefits of reporting financial information must be greater than the costs of obtaining and presenting the information. (cannot report financial biweekly or monthly)

Measurability

the item has a relevant attribute measurable with sufficient reliability

Private Company Council (PCC)

to establish alternatives to U. S. GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost-beneficial. Created by the Financial Accounting Foundation (FAF)