Ch 1 ( Accounting) terms
Accounting standards have developed in the private sector either through
(1) AICPA (2) FASB
FASB issues two major pronouncements
(1) Accounting Standards Updates (2)Financial Accounting Concepts
Financial Reporting Environment
(1) Accounting and capital allocation (2)Objective of financial reporting (3)Need to develop standards
Financial statements
(1) Balance Sheet (2)The income statement (3)The statement of cash flows (4) The statement of owners or stockholders equity
True statements about the Sarbanes Oxley
(1) Established (PCAOB) (2) Implemented stronger independence rules for auditors (3)Requires CFO's and CEO's to personally certify that financial statements are complete (4)Requires audit committees to be comprised of independent members
Capital allocation Process
(1) Financial Reporting --> The financial information a company provides to help users with capital allocation decisions about the company. (2) Users (present or potential) --> Investors and creditors use financial reports to make their capital allocation decisions (3)Capital Allocation---> The process of determining how and at what cost money is allocated among competing interest.
There are two sets of rules accepted for international use
(1) GAAP (2)International Financial reporting standards (IFRS)--> issued by the london-based international accounting standards board (IASB)
The following hierarchy is used to determine what recognition, valuation, and disclosure requirements should be used (IFRS)
(1) International Financial reporting standards (2) International Accounting Standards;and (3) Interpretations originated by the international financial reporting committee (IFRIC) or the former standing interpretations Committee (SIC)
Which of the following is true related to accounting standard setting?
(1) Like CAP and the APB ( previous standard bodies) the FASB is criticized for being to slow and reactive (2) The SEC has the authority to set GAAP, but has appointed a private standard setting body set accounting standards (3) The SEC can influence standard setting by issuing an SEC letter to public companies
Three organizations are instrumental in the development of financial accounting standards
(1) Securities and Exchange Commission (SEC) (2)American Institute of Certified Public Accountants (AICPA) (3)Financial Accounting Standards Board (FASB)
Parties involved in standard-setting
(1) Securities and exchange commission (SEC) (2) American Institute of CPAS (AICPA) (3) Financial Accounting Standards Board (FASB)
DUE PROCESS SYSTEM OF THE FASB
(1) Topics identified and placed on Boards Agenda (2)PRELIMINARY VIEWS: Research and analysis conducted and preliminary views of pros and cons issued. (3)Public hearing on proposed standard (4) EXPOSURE DRAFT:Board evaluates research and public responses and issues exposure draft. (5)ACCOUNTING STANDARDS UPDATE: Board evaluates responses and changes exposures draft, If necessary. Final standard issued.
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.
Which of the following conceptual framework items best justifies deprecation each period and includes a correct explanation
(1)Going Concern (2)Expense Recognition
Major Challenges in Financial Reporting
(1)Political Environment (2)Expectations gap (3)Financial reporting class (4)International accounting standards (5)Ethics
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 (2)It should operate in full view of the public through a "due process" system that gives interested persons ample opportunity to make their views known.
What are elements?
Assets -Liabilities -Equity -Investment by owners -Distribution to owners -Comprehensive income -Revenues -Expenses -Gains -Losses
Which of the following is true related to fair market value and historical cost rules under US GAAP?
Assets, like building, should be valued at historical cost ( unless fair market value is lower)
Decision-Usefulness
Investors are interested in financial reporting because it provides information that is useful for making decisions
Accrual basis accounting
It ensures that a company records events that change in the periods in which they events occur, rather than only in periods in which it receives or pays cash. (Accrual Revenues/ Expenses)
Obligation to transfer resources arising from past transactions
Liabilities
An item is not recorded because its effect on income would not change a decision
Materiality
Indicates that fair value changes subsequent to purchase are not recorded in the accounts (do not use revenue recognition)
Measurement (Historical cost principle)
Argue Co. decided to adopt a new standard early even though it caused their company to have lower net income in the current period. Which concept from the conceptual framework best justifies this transaction?
Neutrality
Ignores the economic consequences of a standard or rule
Neutrality
What are the constraint?
cost
A companys owners purchases a fixed asset for the company and credits equity rather than cash
economic entity assumption
General-purpose financial statements are prepared primarily for:
external users
A company records a fixed assets historical cost and depreciates the asset over 10 years
going concern assumption
Managerial Accounting
is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company operations.
Financial accounting
is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties.
The authoriatative status of the authoritative status of the conceptual framework is as follows
it is used when there is no standard or interpretation related to the reporting issues under consideration
The expectations gap is:
what the public thinks accountants should do and what accountants think they can do
Financial Accounting Standards Board Accounting Standards codification "The Codification"
- The FASB primary goal in developing the codification is to provide in one place all the authoritative literature related to a particular topic. -It explains what GAAP is and eliminates nonessential information such as redundant document summaries, basis for conclusion sections, and historical content . -In short, the codification integrates and synthesizes existing GAAP; it does not create new GAAP. It creates one level of GAAP, which is considered authoritative. ALL other accounting literature is considered non-authoritative.
Financial Accounting Standards Board Codification Research System (CRS)
- is an online, real-time database that provides easy access to codification. -The codification and the related CRS provide a topically organized structure, subdivided into topic, subtopics, sections, and paragraphs, ,using numerical index systems.
Emerging Issues Task Force (EITF)
-A second type of update is a consensus of the Emerging Issues Task Force created in 1984 -EITF provides implementation guidance within the framework of the codification reduce diversity in practice on a timely basis. -The EITF was designed to minimize the need for the FASB to spend time and effort addressing narrow implementation, application, or other emerging issues that can be analyzed within existing GAAP. -EITF deals with short term emerging issues
Accounting Principles Board (APB)
-AICPA Created the APB -There main purpose (1)advance the written expression of accounting principles, (2) determine appropriate practices, & (3) narrow the areas of difference and inconsistency in practice.
Committee on Accounting Procedures (CAP)
-AICPA appointed the committee on accounting procedure in 1939 -CAP composed of practicing CPAs, issued 51 accounting research bulletins during the years 1939-1959
FinREC
-AICPA financial reporting executive committee -Is authorized to make public statements on behalf of the AICPA on financial reporting matters. The mission of the FINrec is to determine the AICPA's technical policies regarding financial reporting standards, with the ultimate purpose of serving the public interest by improving financial reporting.
What is faithful representation information?
-Completeness -Neutrality -Free from error
What is relevant information?
-Confirm -Materiality -Predictive value
What are the enhancing qualities?
-Consistent -Compare -Understand -Time -Verify
What are the principles?
-Full Discloser -Expense Recognition -Revenue Recognition -Measurement/Matching
American Institute of Certified Public Accountants (AICPA)
-National professional organization of practicing certified public accountants (CPAs)
What are the assumptions?
-Periodicity -Economic Entity -Going Concern -Monetary Unit
What are the fundamental qualitative characteristics?
-Relevance -Faithful representation
Statements of Financial Accounting Concepts
-The series sets forth fundamental objectives and concepts that the board uses in developing future standards of financial accounting and reporting. -Does NOT establish GAAP
Sarbanes-Oxley Act
-was passed in response to a string of accounting scandals at companies like Enron, Cendant, Sunbeam, Rite-Aid, Xerox, and world com. -this law increased resources for the sec to combat fraud and curb poor reporting practices. (1) Established an oversight board, the public company accounting oversight board (PCAOB), for accounting practices. The PCAOB has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules. (2)Implements stronger independence rules for auditors. Audit partners, for example are required to rotate very five years, and auditors are prohibited from offering certain types of consulting services to corporate clients. (3)Requires CFOs and CEOs to personally certify that financial statements and disclosures are accurate and complete,and requires CEOs and CFOs to forfeit bonuses and profits when there is an accounting restatement. (4)Requires audit committees to be comprised of independent members and members with financial expertise. (5) requires codes of ethics for senior financial officers.
SEC
-will help develop and standardize financial information presented to stockholders. -Federal Agency -It administers the Securities Exchange act of 1934 and several other acts
Auditing Standards Board
AICPA has been the leader in developing auditing standards
GAAP includes
APB opinions, FASB standrads, and AICPA research Bulletins.
Which of the following is true when accounting standards include more industry- specific information? ( like US GAAP compared to IFRS)?
Accountants working in one industry and moving jobs to another industry would he more challenging
APB is what
Accounting Principles Board. A committee of public accountants industry accountants and academicians which issued 31 opinions between 1959 and 1973. The APB replaced the CAP and was itself replaced by the FASB its opinions unless superseded remains a primary source of GAAP
ARB is what
Accounting Research Bulletins. Official pronouncements of the committee on accounting procedures which, unless superseded remain a primary source of GAAP
Economic consequences of accounting standard-setting means:
Accounting standards can have detrimental impacts on the wealth levels of the providers of financial information
Which of the following identifies the key differences between cash and accrual accounting?
Adjusting entries are never booked under the cash accounting.
AICPA is what
American Institute of Certified Public Accountants. The national organization of practicing certified public accountants
CAP is what
Committee on Accounting Procedure. A committee of practicing the CPAs which issued 51 accounting research bulletins between 1939 and 1859 and is a predecessor of the FASB
Entity perspective
Companies are viewed as separate and distinct from their owners
Qualitative characteristic being employed when companies in the same industry are using the same accounting principles
Comparability
The existence of two sets of accounting standards in todays globally competitive markets a negative implication on which conceptual framework quality?
Comparability
Four qualitative characteristics that are related to both relevance and faithful representation
Comparability, verifiability, timeliness, understandability
Quality of information that confirms users earlier expectations
Confirmatory value
Which of the following conceptual framework items was used by a company to complain about the amount of additional work Sarbanes-Oxley required of them?
Cost constraint
The SEC has to determine whether or not the US will adopt IFRS even though it will be expensive change for companies in the short term
Cost-Constraint
Allocates expenses to revenues in the proper period
Expense recognition
Which of the following entities is apart of the private sector but not a publicly-traded company?
FASB
Generally Accepted Accounting Principles (GAAP)
FASB Codification
Two fundamental qualities that make accounting information useful for decision-making purposes
Faithful representation and relevance
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 (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
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
FAF is what
Financial Accounting Foundation. An organization whose purpose is to select members of the FASB and its advisory councils fund their activities and exercise general oversight
The PCAOB has oversight over which of the following groups
Financial Auditors
Ensures that all relevant financial information is reported
Full disclosure
Arises from peripheral or incidental transactions
Gains, Losses
The common set of standards and procedures are called
Generally accepted accounting principles (GAAP)
What accounting concept best justifies the usage of depreciation
Going Concern
Norwalk agreement
IFRS & GAAP ( Both boards have agreed to use their best efforts to: (1) Make their existing financial reporting standards fully compatible as soon as possible (2)Coordinate their future work programs to ensure that once achieved, compatibility is maintained.
What is the objective of financial reporting?
Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers
Predictive value is an ingredient of this fundamental quality of information
Relevance
Which of the following might cause a company to compromise representational faithfulness in favor of providing investors more relevance
Reporting financial statements more frequently
When the stock market crashed in 1929 and the nations economy plunged into the great depression, there were calls for increased government regulations of business, especially financial institutions and the stock market.
The federal government established the Securities and exchange commission (SEC)
Financial reporting
Some financial information is better provided or can be provided only by means of financial reporting. EX) President letter or supplementary schedule in the corporate annual report, prospectuses, reports filed with government agencies, new releases, managements forecast, and social or environmental impact statements.
Accounting Standards Updates
The FASB issues accounting pronouncements through accounting standards updates. These updates amend accounting standards codification, which represents the source of authoritative accounting standards issued by the sec. Each update explains how the codification's been amended and also includes information help the reader understand the changes and when those changed will be affective. -ESTABLISH GAAP
Financial Accounting Standards board (1973)
The Wheat Committee's recommendations resulted in the creation of a new standard setting (1)Financial Accounting Foundation (FAF) --> selects the members of the FASB and the advisory council, funds their activities, and generally oversees the FASB activities. (2)Financial Accounting Standards Board(FASB)--> Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. (3)Financial Accounting Standards Advisory Council (FASAC)--> consults with the FASB on major policy and technical issues and also helps select task force members.
GAAP is comprised of:
any accounting guidance included in the FASB codification
True Statements about the matching principle
The matching principle is one of the basic underlying guidelines in accounting. The matching principle directs a company to report an expense on its income statement in the same period as the related revenues. The matching principle is associated with the accrual method of accounting and adjusting entries.
What is the objective of financial reporting? (focused on investors and creditors)
The purpose 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 decision and providing resources to the entity.
Which of the following is the most significant difference between the cash and accrual basis of accounting over the life of one account transaction?
The timing of when income is recorded and closed to retained earnings
Issuance of interim reports is an example of what enhancing quality of relevance
Timeliness
Which of the following would not differ under the cash basis as compared to the accrual basis?
Total income at the end of the life of the company
GAAP is the term used to indicate the whole body of FASB authoritative literature
True
In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities
True
The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report
True
The primary governmental body that has influence over the FASB is the SEC
True
Requires a high degree of consensus among individuals on a given measurement
Verifiability
Expectation Gap
What the public thinks accountants should do and what accountant think they can do.
General purpose Financial statements?
provide financial reporting information to a wide variety of users.
The objective of financial reporting places most emphasis on:
reporting to capital providers
Accounting standard-setters use the following process in establishing accounting standards:
research, discussion paper, exposure draft, standard
