Intermediate 1
Predictive and Confirmatory value
"earning quality" the ability of recording earnings (income) to predict a company's future earnings. -ex current period net income has predictive value if it helps users predict a company's future cash flows and it has confirmatory value if it helps investors confirm or change their propr assessments re
Financial statements normally provide
(1) the balance sheet, also called the statement of financial position, (2) the income statement, also called the statement of operations, (3) the statement of cash flows, and (4) the statement of shareholders' equity.
what is the recognition criteria
- Definition. The item meets the definition of an element of financial statements. - Measurability. The item has a relevant attribute measurable with sufficient reliability. -Relevance. The information about it is capable of making a difference in user decisions. -Reliability. The information is representationally faithful, verifiable, and neutral.
Why base measurement on historical costs?
- historical cost provides important cash flow information as it represents the cash or cash equivalent paid for an asset or received in exchange for the assumption of a liability. - is the result of an exchange transaction between two independent parties, the agreed-upon exchange value is objective and highly verifiable.
SFAC 5 lists five measurement attributes employed in GAAP what are they?
-Historical cost -Net realizable value -Current cost -Present (or discounted) value of future cash flows - Fair value
How can information be disclosed?
-Parenthetical comments or modifying comments placed on the face of the financial statements. -disclosure notes conveying additional insights about company operations, accounting principles, contractual agreements, and pending litigation. -Supplemental schedules and tables that report more detailed information than is shown in the primary financial statements.
net realizable value
-bases measurements on the amount of cash into which the asset or liability will be converted in the ordinary course of business. -if customers purchased goods or services on account for $10,000, and if $2,000 in bad debts were anticipated, net receivables should be valued at $8,000, the net realizable value -useful information to aid in the prediction of future cash flows.
what are the four different approaches for expense recognition
-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.
Accounting Standards Codification.
-created in 2009 - The Codification integrates and topically organizes all relevant accounting pronouncements comprising GAAP in a searchable, online database -It represents the single source of authoritative nongovernmental U.S. GAAP, and also includes portions of SEC accounting guidance that are relevant to financial reports filed with the SEC -organized into 9 topics
What are some of the problems that the APB faced
-ever able to establish a conceptual framework for financial accounting and reporting that was broadly accepted. -members were voluntary part time -lack of independence
going concern assumption
-in the absence of information to the contrary, we anticipate that a business entity will continue to operate indefinitely. -example, the assumption provides justification for measuring many assets based on their historical costs. If it were known that an enterprise would cease operations in the near future, assets and liabilities would be measured at their current liquidation values. -used in depreciation
International Accounting Standards Board (IASB).
-is dedicated to developing a single set of global accounting standards. The IASB's 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.
American Institute of Accountants (AIA). The AIA, which was renamed the American Institute of Certified Public Accountants (AICPA)
-renamed in 1957 -is the national professional organization for certified professional public accountants. From 1938 to 1959, the CAP issued 51 Accounting Research Bulletins (ARBs) which dealt with specific accounting and reporting problems.
Emerging Issues Task Force (EITF)
-responsible for providing more timely responses to emerging financial reporting issues. -was formed to improve financial reporting by resolving narrowly defined financial accounting issues within the framework of existing GAAP. The EITF primarily addresses implementation issues, thereby speeding up the standard setting process and allowing the FASB to focus on pervasive long-term problems. EITF rulings are ratified by the FASB and are considered part of GAAP.
fiscal year
-the annual time period used to report to external users. -doesn't correspond with calendar year. -walmart uses jan 31st as the end because it is after all the Christmas shopping is done and things start to slow.
Accounting Principles Board (APB)
-the second private sector body delegated the task of setting accounting standards. -replaced the CAP -operated from 1959 through 1973 and issued 31 Accounting Principles Board Opinions (APBOs), various Interpretations, and four Statements. The Opinions also dealt with specific accounting and reporting problems. Many ARBs and APBOs have not been superseded and still represent authoritative GAAP.
Securities and Exchange Commission
-was created by Congress with the 1934 Securities Exchange Act. -authority to set accounting and reporting standards for companies whose securities are publicly traded. -government appointed body -has delegated the task of setting accounting standards to the private sector.
heirachry of standard setting authority
1. Congress 2. SEC 3. Private Sector CAP-APB-FASB
Fair value hierarchy has how many levels?
3
SFAC 6 defines 10 elements of financial statements. What are the elements
Assets, Liability, Equity, Investment by owners, distribution by owners, comprehensive income, revenues, expenses, gains, losses
accrual accounting produces a measure called net operating cash flow. True or False
False cash basis accounting
In the United States, we have a highly developed free-enterprise economy with the majority of productive resources government owned rather than privately owned. True or False
False government and private switched
investors and creditors would like to invest in stocks or bonds that provide the lowest expected rate of return. True or False
False highest
The better financial information is the less efficient will be investor and creditor resource allocation decisions. True or false
False more
GAAP have been evolving over time from an emphasis on assets and liabilities to an emphasis on revenues and expenses. True or False
False revenues and expenses and then assets and liabilities
There are six full-time members of the FASB. True or False
False seven
GAAP
GAAP is a dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.
Cost Effectiveness constraint
Information is cost effective only if the benefit of increased decision usefulness exceeds the costs of providing that information.
SOXs
It provides for the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.
what are the three different approaches for fair value
Market approach, income approach and cost approach
April 2008
The FASB and IASB agreed to accelerate the convergence process and focus on a subset of key convergence projects.
November 2008
The SEC issues a Roadmap that listed necessary conditions (called "milestones") that must be achieved before the U.S. will shift to requiring use of IFRS by public companies.
May 2011
The SEC issues a discussion paper describing a possible approach for incorporating IFRS into U.S. GAAP.
December 2011
The SEC postpones making a final determination concerning whether and how to incorporate IFRS into U.S. GAAP until sometime in 2012.
key variables in the investment decision.
The expected rate of return and the uncertainty, or risk, of that return
Committee on Accounting Procedure (CAP)
The first private sector body to assume the task of setting accounting standards
critical event
The primary earnings activity that triggers the recognition of revenue
According to the matching principle, expenses should be recognized in the period in which they produce revenues. True or False
True
According to the realization principle, revenue should be recognized when the earnings process is virtually complete and collection is reasonably assured. True or False
True
Accounting standards should be developed using A principles-based, or objectives-oriented, approach to standard-setting stresses professional judgment, as opposed to following a list of rules. True or False
True
Companies must provide detailed disclosures about their use of fair value measurements. True or False
True
Corporations acquire capital from investors in exchange for ownership interest and from creditors by borrowing. True or False
True
Corporations receive no new cash from secondary market transactions. True or False
True
FASB members represent various constituencies concerned with accounting standards, and have included representatives from the auditing profession, profit-oriented companies, accounting educators, financial analysts, and government. True or False
True
If the SEC does not agree with a particular standard issued by the private sector, it can force a change in the standard. True or False
True
If the potential return is high enough, investors will prefer to invest in the profit-oriented company, even if that return has more risk associated with it. True or False
True
In the United States, sole proprietorships and partnerships outnumber corporations. True or False
True
The Codification does not change GAAP; instead it reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics, and displays all topics using a consistent structure. True or False
True
The FASB Accounting Standards Codification is now the only source of authoritative U.S. GAAP, other than rules and interpretive releases of the SEC. True or False
True
The FASB undertakes a series of information-gathering steps before issuing an Accounting Standards Update. True or False
True
The accrual accounting model provides a measure of periodic performance called net income, the difference between revenues and expenses. True or False
True
The conceptual framework does not prescribe GAAP. It provides an underlying foundation for accounting standards. True or False
True
The fact that companies use the same model is important to investors and creditors, allowing them to compare financial information among companies. True or False
True
The primary means of conveying financial information to investors, creditors, and other external users is through financial statements and related disclosure notes. True or False
True
focusing on accrual accounting as well as cash flows provides a more complete view of a company and its operations. True or False
True
net operating cash flow is important over long periods of time but not so important during short periods. True or False
True
present value is the focus of an FASB concept statement, SFAC 7, which provides a framework for using future cash flows as the basis for accounting measurement. True or False
True
Accounting Standards Update
When the FASB issues a new standard
rules-based
a list of rules for choosing the appropriate accounting treatment for a transaction.
accounting can be described as
a special "language" used to communicate financial information about a business to those who wish to use the information to make decisions.
conservatism
accountants require greater verification before recognizing good news than bad news -inconsistent with neutrality
periodicity assumption
allows the life of a company to be divided into artificial time periods to provide timely information.
Complete
an economic phenomenon is complete if it includes all the information necessary for faithful representation of the economic phenomena that it purports to represent
the 1934 Securities Exchange act
applies to secondary market transactions and mandates reporting requirements for companies whose securities are publicly traded on either organized stock exchanges or in over-the-counter markets. -created sec
objectives-oriented/ principles-based
approach to standard setting stresses professional judgment, as opposed to following a list of rules.
How are investors and creditors similar
are willing to provide capital to a corporation (buy stocks or bonds) only if they expect to receive more cash in return at some time in the future.
Market approaches
base valuation on market information. For example, the value of a share of a company's stock that's not traded actively could be estimated by multiplying the earnings of that company by the P/E (price of shares/earnings) multiples of similar companies.
present value
bases measurement on future cash flows discounted for the time value of money.
Historical cost principle
bases measurements on the amount given or received in the exchange transaction.
Fair Value
bases measurements on the price that would be received to sell assets or transfer liabilities in an orderly market transaction.
creditors lend cash to corporations
by making individual loans or by purchasing publicly traded debt such as bonds.
CPA
can represent that the financial statements have been audited in accordance with generally accepted auditing standards. -are licensed by states to provide audit services.
cost approaches
determine value by estimating the amount that would be required to buy or construct an asset of similar quality and condition.
International Financial Reporting Standards (IFRSs)
developed by the IASB and used by more than 100 countries. -are gaining support around the globe.
cash basis accounting
difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers.
net income
difference between revenues and expenses
verifiability
different knowledgeable and independent measures would reach consensus regarding whether information is a faithful representation of what is intended to depict.
corporation
dominant form of business organization that acquires capital from investors in exchange for ownership interest and from creditors by borrowing.
Income approaches
estimate fair value by first estimating future amounts (for example, earnings or cash flows) and then mathematically converting those amounts to a single present value.
SFAC 8
explicitly rejects conservatism as a desirable characteristic of accounting information stating that conservatism undermines representational faithfulness by being inconsistent with neutrality
The FASB also has issued over 100 specific accounting standards, called Statements of Financial Accounting Standards (SFASs), as well as numerous FASB Interpretations, Staff Positions, Technical Bulletins and EITF Issue Consensuses. True or False
false 160
GAAP gives a company the option to report some or all of its financial assets and equity at fair value true or false
false liabilities
net operating cash flows is considered a better indicator of future operating cash flows than is current net income true or false
false net operating cash flows and net income switched
fair value option involves
financial assets and liabilities
What is mainly measured using fair value?
financial assets and liabilities (side note) Also, we use fair values when determining whether the value of nonfinancial assets like property, plant, equipment and intangible assets has been impaired.
neutral
free from bias
What are the assumptions
going concern, monetary unity, economic entity, periodicity
comparability
helps users see similarities and differences between events and conditions
Financial Accounting
in particular, is chiefly concerned with providing relevant financial information to various external users.
With the accrual method revenue should be recognized
in the period it is earned, not necessarily in the period in which cash is received.
FASB standard setting process
include open hearings, deliberations, and requests for written comments from interested parties.
financial intermediaries
includes financial analysts, stockbrokers, mutual fund managers, and credit rating organizations. These users provide advice to investors and creditors and/or make investment-credit decisions on their behalf.
timeliness
information is available to users before a decision is made.
relevance
information must posses predictive value and/or confirmatory value.
Ethics
is a term that refers to a code or moral system that provides criteria for evaluating right and wrong.
material
is an aspect of relevance that depends on a company's particular situation and is based on the nature or magnitude of the item that is being reported. -financial information is material if it has an effect on decisions
measurement
is the process of associating numerical amounts with the elements.
A company will be able to provide a return to investors and creditors only if
it can generate a profit from selling its products or services.
current cost
measured by the cost that would be incurred to purchase or reproduce the goods.
accrual accounting
measurement of the entity's accomplishments and resource sacrifices during the period, regardless of when cash is received or paid. - recognizing revenue and expenses during the period it occurs
capital markets
mechanisms that foster the allocation of resources effectively -all investors and creditors
What other ways do external users find out information on a company besides financial statements?
news releases and management forecasts, prospectuses, and reports filed with regulatory agencies.
free from error
no errors or omissions in the description of the amount or the process used to report the amount
point-of-scale
occurs when the goods or services sold to the buyer are delivered -critical event for most businesses
consistency
of accounting practives over time permits valid comparisons among different reporting periods (falls under comparability)
The primary focus of financial accounting is on
on the financial information provided by profit-oriented companies to their present and potential investors and creditors.
Norwalk Agreement
pledging to remove existing differences between their standards and to coordinate their future standard-setting agendas so that major issues are worked on together. -signed by FASB and IFRS in 2002
economic entity assumption
presumes that economic events can be identified specifically with an economic entity. ex- when considering buying stock not only would you look into the united states corporation but you would also look into other countries that the company operates in. - distinction between the economic activities of owners and those of the company.
Accrual accounting is the financial reporting model used by the majority of
profit-oriented companies and by many not-for-profit companies.
What apparently starting in 2012 must also be included in financial statements
provide a statement of other comprehensive income immediately following the income statement, or present a combined statement of comprehensive income that includes the information normally contained in both the income statement and the statement of other comprehensive income.
initial market transactions
provide for new cash by the issuance of stocks and bonds by the corporation.
secondary market transactions
provide for the transfer of stocks and bonds among individuals and institutions. -help establish market prices for additional shares and for bonds that corporations may wish to issue in the future to acquire additional capita -many shareholders and bondholders might be unwilling to initially provide resources to corporations if there were no available mechanism for the future sale of their stocks and bonds to others.
Financial Reporting
providing financial statement information to external users
asset/liability approach
recognition and measurement of assets and liabilities drives revenue and expense recognition.
revenue/expense approach
recognition and measurement of revenues and expenses are emphasized.
SFAC 5 focuses on what three things?
recognition, measurement, disclosure.
recognition
refers to the process of admitting information into the financial statements.
disclosure
refers to the process of including additional pertinent information in the financial statements and accompanying notes.
What potential investors look for when investing
require information about the company that will help them estimate the potential for future profits, as well as the return they can expect on their investment and the risk that is associated with it.
full-disclosure principle
requires that any information useful to decision makers be provided in the financial statements, subject to the cost effectiveness constraint.
The accrual accounting model's measure of resources provided by business operations is called ........., and the measure of resources sacrificed to earn revenues is called ............
revenues expenses
what type of market transactions are important in the allocation of resources in our economy
secondary
auditors
serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion about whether the statements fairly present the company's financial position, its results of operations, and its cash flows in compliance with GAAP.
The 1933 Securities Act
sets forth accounting and disclosure requirements for initial offerings of securities
In order for the economy to function efficiently resources.....
should be allocated to private enterprises that will use them best to provide the goods and services desired by society and not to enterprises that will waste them.
the three primary forms of business organizations are....
sole proprietorship, the partnership, and the corporation
monetary unit assumption
states that financial statement elements should be measured in a particular monetary unit (in the United States, the U.S. dollar). - problem, value of money changes
example of systematic and rational allocation to specific time periods.
straight-line depreciation is a "systematical and rational" way to allocate the cost of equipment to the periods in which that equipment is used to produce revenue.
conceptual framework
that is not authoritative GAAP but provides an underlying structure for the development of accounting standards. -cliff notes for GAAP -accounting constituation
Stocks and bonds usually are traded on organized security markets such as
the New York Stock Exchange and the NASDAQ.
November 2011
the SEC issued two studies comparing U.S. GAAP and IFRS and analyzing how IFRS are applied globally.
Financial accounting information should help investors and creditors evaluate the....
the amounts, timing, and uncertainty of the enterprise's future cash receipts and disbursements.
what event lead to the desire for accounting standards
the crash of the stock market in 1929
Financial Accounting Standards Board (FASB)
the current private sector body that has been delegated the task of setting accounting standards.
net operating cash flow
the difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period.
example of associating an expense with the revenues recognized in a specific time period.
the monthly salary paid to an office worker is not directly related to any specific revenue event. Instead, the employee provides benefits to the company for that one month that indirectly relate to the revenue recognized in that same period.
Institute of Internal Auditors
the national organization of accountants providing internal auditing services for their own organizations.
Institute of Management Accountants (IMA)
the primary national organization of accountants working in industry and government—has its own code of ethics
Faithful representation
there is an agreement between a measure or description and the phenomenon it purports to represent -requires that information be complete, neutral, and free from error.
net operating cash flow may not be a good predictor of long-run cash-generating ability. True or False
true
understandable
users can comprehend it.
government accounting standard board
was created to develop accounting standards for governmental units such as states and cities. The FAF oversees and funds the GASB, and the Governmental Accounting Standards Advisory Council (GASAC) provides input to it.
International Accounting Standards Committee (IASC)
was formed in 1973 to develop global accounting standards.
Financial accounting foundation (FAF)
which is responsible for selecting the members of the FASB and its Financial Accounting Standards Advisory Council (FASAC), ensuring adequate funding of FASB activities and exercising general oversight of the FASB's activities.
