Acct3313 Chapter 1

Identify the objective of financial reporting.

Some info can only be provided via financial reporting. Examples include the company president's letter or supplementary schedules in the corporate annual reports, prospectuses, reports filed with government agencies, news releases, management's forecasts, and descriptions of an enterprise's social or environmental impact.

Explain from where the Securities and Exchange Commission receives its authority.

The Securities and Exchange Commission (SEC) is an independent federal agency that receives its authority from federal legislation enacted by Congress. The Securities and Exchange Act of 1934 created the SEC.

One part of financial accounting involves the preparation of financial statements. What are the financial statements most frequently provided?

The financial statements most frequently provided are the balance sheet, the income statement, the statement of cash flows, and the statement of changes in owners' or stockholders' equity.

Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

There is no direct relationship as the SEC was created by Congress and the Financial Accounting Standards Board (FASB) was created by the private sector. However, the SEC historically has followed a policy of relying on the private sector to establish financial accounting and reporting stan¬dards known as generally accepted accounting principles (GAAP). The SEC does not necessarily agree with all of the pronouncements of the FASB. In cases of unresolved differences, the SEC rules take precedence over FASB rules for companies within SEC jurisdiction.

GAAP is the term used to indicate the whole body of FASB authoritative literature.

True

The primary governmental body that has influence over the FASB is the SEC.

True

The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

True.

Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.

Users are expected to possess a reasonable understanding of accounting concepts, financial statements, and business and economic activities and are expected to be willing to study and interpret the information with reasonable diligence.

The authoritative status of the conceptual framework is as follows. (a) It is used when there is no standard or interpretation related to the reporting issues under consideration. (b) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue. (c) It takes precedence over all other authoritative literature. (d) It has no authoritative status.

A

The objective of financial reporting places most emphasis on: (a) reporting to capital providers. (b) reporting on stewardship. (c) providing specific guidance related to specific needs. (d) providing information to individuals who are experts in the field.

A

Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.

As a result of the Securities and Exchange Act of 1934, the SEC has legal authority relative to accounting practices. The U.S. Congress has given the SEC broad regulatory power to control accounting principles and procedures in order to fulfill its goal of full and fair disclosure.

General-purpose financial statements are prepared primarily for: (a) internal users. (b) external users. (c) auditors. (d) government regulators.

B

The expectations gap is: (a) what financial information management provides and what users want. (b) what the public thinks accountants should do and what accountants think they can do. (c) what the governmental agencies want from standard-setting and what the standard-setters provide. (d) what the users of financial statements want from the government and what is provided.

B

Accounting standard-setters use the following process in establishing accounting standards: (a) Research, exposure draft, discussion paper, standard. (b) Discussion paper, research, exposure draft, standard. (c) Research, preliminary views, discussion paper, standard. (d) Research, discussion paper, exposure draft, standard.

D

Economic consequences of accounting standard-setting means: (a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard. (b) standard-setters must ensure that no new costs are incurred when a new standard is issued. (c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public. (d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.

D

GAAP is comprised of: (a) FASB standards, interpretations, and concepts statements. (b) FASB financial standards. (c) FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations. (d) any accounting guidance included in the FASB Codification.

D

GAAP stands for: (a) governmental auditing and accounting practices. (b) generally accepted attest principles. (c) government audit and attest policies. (d) generally accepted accounting principles.

D

Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.

False. Any company claiming compliance with GAAP must comply with all standards and interpretations, including disclosure requirements.

The objective of financial statements emphasizes a stewardship approach for reporting financial information.

False. In addition to providing decision-useful information about future cash flows, management also is accountable to investors for the custody and safekeeping of the company's economic resources and for their efficient and profitable use; however, this is not considered an objective.

The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.

False. In establishing financial accounting standards, the FASB relies on two basic premises: (1) the FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession, and (2) it should operate in full view of the public through a "due process" system that gives interested people ample opportunities to make their view known.

Because they are generally shorter, FASB interpretations are subject to less due process, compared to FASB standards.

False. The FASB follows the same due process procedures for interpretations and standards.

The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners' or stockholders' equity.

False. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.

Differentiate between financial accounting and managerial accounting.

Financial accounting is the process that culminates in the preparation of financial reports relative to the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast, managerial accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by the management to plan, evaluate, and control within an organization and to assure appropriate use of, and accountability for, its resources.

What is the difference between financial statements and financial reporting?

Financial statements are the principal means through which financial information is communicated to those outside an enterprise. However, some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements.