Accounting 330 Exam 1

Qualitative characteristics

Capital providers and their characteristics, cost constraint, decision usefulness, relevance: predictability, confirmatory value, materiality, Faithful representation: free from error, completeness, neutrality, and comparability, verifiability, timeliness, undertandability

FASB

Est. to set GAAP in 1973, non gov, develop and promulgate accounting standards used to create financial statements

Financial Reporting

Financial reporting is other than formal financial statements. The objectives of financial reporting are to provide information that is useful in investment and credit decisions, useful in assessing future cash flows, and useful in assessing resources, claims to resources and changes in them.

Challenges facing financial reporting

Forward looking/timeliness: all info in financial statements relates to the past. Nonfinancial measurements: customer satisfaction, brand loyalty, environmental/sustainability efforts Soft assets: easier to measure hard assets such as buildings, equipment or cash but what about intangible assets like patents. Understandability.

measurement principle

Historical cost: report assets and liabilities on the basis of acquisition price. Fair value: report assets and liabilities on the current market value of the asset or liability.

accounting cycle

Journalization, posting to general ledger, trial balance, adjustments, adjusted trial balance, statement prep, closing entries, post closing trial balance

Primary/Secondary Users of Financial Reporting

Primary: investors and creditors Secondary: management, regulators and some other non-investor group.

AICPA

Private organization that set GAAP from 1939-1973 (non gov), now develops and grades CPA exams and CPEs

SEC

Regulates the securities industry and enforces federal laws, requires companies to file audited financial statements that adhere to GAAP, maintain fair, orderly and efficient markets, protect investors, and facilitate capital formation. Government org

Different organizations involved in standards setting

SEC, AICPA, FASB

Financial Reporting's role in Capital Allocation

The role it plays in the capital allocation process is that financial reports determine the decisions of investors and creditors for capital allocation and based on that the company has to decide how to allocate the capital they receive from said investors and creditors. Capital allocation is necessary for a healthy economy.

noncontrolling interest

When a company owns usually more than 50% interest of another company GAAP usually makes them consolidate their financials, gain or loss goes under consolidated net income

Need for Coherent Accounting Standards

a coherent set of accounting standards are necessary to present information fairly, clearly and completely and make info comparable to other companies. GAAP

periodicity assumption

activities of an enterprise can be divided into artificial time periods.

completeness

all info necessary for faithful representation is provided.

accrual

are accrued revenues and accrued expenses. For example if interest is due on a loan yearly on july 31 then there has to be an adjusting entry at the end of the year for interest expense accrued even though it hasn't been paid yet and wont be until next july 31.

deferral

are prepaid expenses and unearned revenues. For example we collected one years rent on October 1 and then on December 31 we would need to make an adjusting entry bc it's the end of the accounting cycle.

relevance

capable of making a difference in a decision

going concern

companies will have a long life

neutrality

company cannot select information to favor one interested party over another

economic activity assumption

economic activity can be identified with a particular unit of accountability 1) company keeps its activity separate and distinct from its owners and any other business units. 2) We can distinguish activities between different companies and or between different divisions or segments

expense recognition principle (matching)

efforts (expenses) should be matched with accomplishments (revenues). Record cost of generating revenues (expenses) in the same period as those revenues were earned.

timeliness

having info to decision makers before it loses capacity to influence decisions.

confirmatory value

helps users confirm or correct their prior expectations.

verifiability

independent measurers, using the same methods get similar results.

predictive value

info has value as an input to predictive processes used by investors and creditors to form their own future expectations.

materiality

info is material if omitting or misstating it could influence a users decision. Determined on a company to company basis.

comparability

info is measured and reported similarly for different companies and different years

adjusting entries

made at the end of the period to bring all accounts up to date on an accrual basis. Have to satisfy the revenue recognition and matching principle and these are internal transactions.

faithful representation

numbers and descriptions match what really existed or happened

understandability

quality of info that lets reasonably informed users see its significance.

full disclosure principle

revealing in financial statements any facts of sufficient importance to influence the judgment and decisions of an informed reader.

revenue recognition principle

revenue is recognized at the time in which the performance obligation is satisfied, regardless of when cash is received.

IASB

sets accounting and financial reporting standards internationally

limitations of income statement

some items cannot be measured reliably and are omitted (gains and losses bypass the income statement, brand recognition customer satisfaction, product quality, innovation), income can be affected but accounting methods employed (dep method, inventory), involves judgment (bad debt, warranty, useful life).

monetary unit assumption

the monetary unit (e.g. the dollar) is the common denominator of economic activity and provides the most effective means of expressing to interested parties changes in capital and exchanges of goods and services

Usefulness of income statement

to evaluate out past performance, look for improvement, compare it to competitors, provide basis for predicting future performance, help assess the risk or uncertainty of achieving future cash flows (focus on main operations)