3211 Chapter 1-4

Rate of Return (def)

(dividends + share price appreciation) / Initial Investment

To be useful, information...

-must make a difference in the decision process. -should possess the qualities of relevance and faithful representation.

Net Operating Cash Flow (def)

...

What is the hierarchy of accounting standard-setting authority?

...

Capital Markets

...provides a mechanism to help our economy allocate resources efficiently.

AIA

American Institute of Accountants

AICPA

American Institute of Certified Public Accountants

Distribution to owners

Decreases in equity of a particular enterprise resulting from transfers to owners

What does the Emerging Issues Task Force (EITF) do?

The Emerging Issues Task Force identifies financial reporting issues and attempts to resolve them without involving the FASB.

How do FASB, SEC, and GAP relate within the U.S. ?

The FASB Accounting Standards Codification is now the only source of authoritative U.S. GAAP. Exceptions are rules and interpretive releases of the SEC, which remain as sources of authoritative GAAP.

What else has FASB done besides issuing specific accounting standards?

The FASB has formulated a conceptual framework to provide an underlying theoretical and conceptual structure for accounting standards.

What mus the FASB consider if it introduces a new standard?

The FASB must consider potential economic conseuences of a change in an accounting standard or the introduction of a new standard.

What does FASB doe before issuing an accounting standards update?

The FASB undertakes a series of information-gathering steps before issuing an accounting standards update.

Conservatism is...

a justification for some accounting practices, not a desired qualitative characteristic of financial information.

Faithful representation means...

agreement between a measure and a real-world phenomenon that the measure is suppose to represent.

Professional judgment determintes what...

amount of information is material in each situation.

The costs of providing financial information include...

any possible adverse economic consequences of accounting standards.

The historical cost principle states that...

asset and liability measurements should be based on the amount given or received in the exchange transaction.

Accounting information should be...

comparable across different companies and over different time periods.

Auditors offer...

credibility to financial statements.

Ethics....

deals with the ability to distinguish right from wrong.

Managerial Accounting (def)

deals with the concepts and methods used to provide information to an organization's internal users (i.e., its managers)

The International Accounting Standards Board (IASB) is...

dedicated to developing a single set of global accounting standards.

Cash Basis Accounting (def)

difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers.

Revenue is recognized when...

earned, regardless of when cash is actually received.

Auditors...

express an opinion on the compliance of financial statements with GAAP.

International Financial Reporting Standards are...

gaining support around the globe.

Expenses are recognized...

in the same reporting period as the related revenues.

Net income is considered a better...

indicator of future cash flows than is current net operating cash flow.

The commitment to narrowing differences between U.S. GAAP and international standards has...

influenced many FASB standards.

FASB: A common goal of the Boards- a goal shared by their constituents-

is for their standards to be clearly based on consistent pinciples. To be consistent, principles must be rooted in fundamental concepts rather than a collection of conventions.

Rate of Return

is the percentage of increase or decrease in the value of your investments from earned interest.

Information is material if...

it has an effect on decisions.

Information is timely if...

it is available to users before a decision is made.

Certified Public Accountants (CPAs) are...

licensed by states to provide audit services.

Accrual Accounting (def)

measurement of the entity's accomplishmets and resource sacrifices during the period, regardless of when cash is received or paid.

Capital Markets (def)

mechanisms that foster the allocation of resources efficiently.

Both revenue recognition criteria usually are...

met at the point-of-sale.

Accrual Accounting

method of accounting where revenue and expenses recognized at the time they are incurred or earned (whether or not cash chages hands)

American Institute of Accountants (AIA) (def)

national organization of professional public accountants.

American Institute of Certified Public Accountants (AICPA) (def)

national organization of professional public accountants.

Many U.S. and foreign companies...

operate and raise capital in more than one country.

The economic entity assumption...

presumes that economic events can be identifieid specifically with an economic entity.

Financial Reporting (def)

process of providing financial statement information to external users.

A principles-based, or objectives-oriented, approach to standard setting stresses...

professional judgment, as opposed to following a list of rules.

Secondary Market Transactions (def)

provide for the transfer of stocks and bonds among individuals and institutions.

The conceptual framework does not prescribe GAAP. It ...

provides an underlying foundation for accounting standards.

Financial Accounting (def)

provides relevant financial information to various external users.

Historical Cost measurement provides...

relevant cash flow information and also is highly verifiable.

Securities and Exchange Commission (SEC) (def)

responsible for setting accounting and reporting standards for companies whose securities are publicly traded.

Generally Accepted Accounting Principles (def)

set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.

A departure from historical cost valuation...

sometimes is appropriate.

The SEC Roadmap proposes...

that IFRS be required by U.S. companies by 2014.

The monetary unit assumption states...

that financial statement elements should be measured in terms of the United States dollar.

Financial statements of a company presume...

the business is a going cocern.

Net Operating Cash Flow

the difference between cash receipts and cash disbursements from providing goods and services. It may not be indicative of the company's long-run cash-generating ability.

Net Income

the difference between revenues and expenses

Corporation (def)

the dominant form of business organiation that acquries captial from investors in exchange for ownership interest and from creditors by borrowing.

Committee on Accounting Procedure (CAP) (def)

the first private sector body that was delegated the task of setting accounting standards.

The periodicity assumption allows...

the life of a company to be divided into aritificial time periods to provide timely information.

Information is cost effective if...

the perceived benefit of increased decision usefulness exceeds the anticipated costs of providing that infomation.

Accounting Principles Board (APB) (def)

the second private sector body delegated the task of setting accounting standards.

The primary objective of financial reporting is....

to provide useful information to capital providers.

Revenue should be recognized...

when the earnings process is virtually coplete and colleciton is reasonable assured.

Gains

Increases in equity from peripheral or incidental transactions of an entity

Investments by owners

Increses in equity of a particular business enterprise resulting frm transfers to it from other entities of something of value to obtain or increase ownership interests in it

Revenues

Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations

Why do people invest or loan?

Investors and creditors both are interested in earning a fair return on the resources provided.

What do investors and creditors use to assess risk and return?

Investors and creditors use information to assess risk and return.

Coporation

It is a form of business that aquires capital from investors in exchange for owership interest and from creditors by borrowing..

Financial Reporting

It refers to the process of providing financial statements to external users.

10 Elements of Financial Statements

1. Assets 2. Liabilities 3. Equity (or net assets) 4. Investments by owners 5. Distributions to owners 6. Comprehensive Income 7. Revenues 8. Expenses 9. Gains 10. Losses

Most frequently provided financial statements:

1. Balance Sheet or Statement of Financial Position 2. Income Statement or Statement of Operations 3. Statement of Cash Flows 4. Statement of Shareholders' Equity

4 Requirements for recognition

1. Definition- The item meets the definitio of an element of financial statements. 2. Measurability- The item has a relevant attribute measurable with sufficient reliability. 3. Relevance- The information about it is capable of making a differene in user decisions. 4. Reliability- The information is represntationally faithful, verifiable, and neutral.

When will a company be able to provide a return to investors and creditors?

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.

Managerial Accounting

A type of accounting that deals with the concepts and methods used to provide information to an organization's internal users, that is, its managers.

Financial Accounting

A type of accounting that is primarily concerned with producing information for external users.

8 Phases of the Joint Conceptual Framework

A. Objective and Qualitative Characteristics B. Elements and Recognition C. Measurement D. Reporting Entity E. Presentation and Disclosure F. Framework for a GAAP Hierarchy G. Applicability to the Not-For-Profit Sector H. Remaining Issues

APB

Accounting Principles Board

Cash Basis Accounting

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Equity (or net assets)

Called shareholders' equity or stockholders' equity for a corporation, it is the residual interest in the assets of an entity that remains after deducting its liabilities

CAP

Committee on Accounting Procedure

Who currently sets accounting standards?

FASB

FASB

Financial Accounting Standards Board

What do financial statmements convey?

Financial statements convey financial information to external users.

What may not be an accurate predictor of future operating cash flows (over short periods of time)?

Operating Cash Flow

Expenses

Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major central operations

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entitites in the future as a result of ast transactions or events

Primary Market Transaction

Provides for the transfer of capital from investors to the corporation. Money is new and opportunites for stocks and bonds come directly from the company.

Secondary Market Transaction

Provides for the transfer of stocks and bonds among individuals and institutions.

What else can prevail in standard setting?

Public pressure sometimes prevails over conceptual merit in the standard-setting arena.

Losses

Represent decreases in equity arising from peripheral or incidental transactions of an entity

SEC

Securities and Exchange Commission

Who sets accounting standards?

The SEC has the authority to set accounting standards for companies, but has delegated the task to the private sector.

When was the SEC created?

The SEC was created by Congress in 1934 with the Securities and Exchange Act.

Comprehensive Income

The change in equity of a business enterprise during a period from transactoins and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

What are key variables in the investment decision?

The expected rate of return and uncertainty, or risk, of that return are key variables in the investment decision.

What is the objective of financial accounting?

The objective of financial accounting is to provide investors and creditors with useful information for decision making.

*What is the primary focus of financial accounting?*

The primary focus of financial accounting is on the information needs of investors and creditors.