Accounting Quiz 1 (Chapter 1 and 2)

Generally Accepted Accounting Principles.

GAAP: A common set of standards, principles, and procedures which have substantial authoritative support and have been accepted as appropriate because of universal application.

Committee on Accounting Procedures

CAP: A committee of practicing CPAs which issued 51 Accounting Research Bulletins between 1939 and 1959 and is a predecessor of the FASB

Certified Public Accountant

CPA: An accountant who has fulfilled certain education and experience requirements and passed a rigorous examination. Most CPAs offer auditing, tax, and management consulting services to the general public.

Generally Accepted Accounting Principles are those principles that have substantial authoritative support.

Define GAAP.

Information that is measured and reported in a similar manner for different companies is considered comparable. It enables users to identify the real similarities and differences in economic events between companies. Consistency is present when a company applies the same accounting treatment to similar events, from period to period.

Define the enhancing quality - comparability(including consistency).

Means having information available to decision-makers before it loses its capacity to influence decisions. E.g., Issuing interim reports.

Define the enhancing quality - timeliness.

The quality of information that lets reasonably informed users to see the connection between their decisions and the information contained in the financial statements. Understandability is enhanced when information is classified, characterized, and presented clearly and concisely.

Define the enhancing quality - understandability.

Financial Accounting Foundation

FAF: An organization whose purpose is to 1) select members of the FASB and its Advisory Councils, 2) fund their activities, and 3) exercise general oversight

Financial Accounting Standards Advisory Council

FASAC: An organization whose purpose is to consult with the FASB on issues, project priorities, and select task forces

Financial Accounting Standards Board

FASB: The primary body which currently establishes GAAP and improves financial accounting and reporting standards for the guidance of issuers, auditors, users, and others. Issues Accounting Standards Updates(primary document), Interpretations(represent extensions or modifications of existing standards), Statement of Financial Accounting Concepts(used to develop future standards), Staff Positions (provide additional guidance on implementing or applying FASB Standards or Interpretations), and EITF Statements(discussed previously). Also issues a preliminary document: Exposure Draft.

The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of 4 of the 7 board members.

How many FASB members must support the passage of an Accounting Standards Update?

International Accounting Standards Board

IASB: An international group, formed in 1973 that is actively developing and issuing accounting standards that will have international appeal and hopefully support. Working for the harmonization of accounting and reporting on a world-wide (global) basis.

Review Chapter 1 Wiley Homework

Review Chapter 1 Wiley Homework

Securities and Exchange Commission

SEC: An independent regulatory agency of the United States government which administers the Securities Acts of 1933 and 1934 and other acts. It has the authority to prescribe accounting treatment for companies that fall under its jurisdiction (all publicly held companies). Issues FRR's (Financial Reporting Releases)

1. Historical Cost 2. Fair Value

What are the 2 sub-principles under measurement principle?

1. Research 2. Discussion Paper 3. Exposure Draft 4. Standard

What is the order of the primary steps for due process?

Distributions to Owners

Which element is a decreases in net assets of a particular enterprise that result from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interests (or equity) in an enterprise?

Gains

Which element is a increase in equity (net assets) from peripheral or incremental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners?

Expenses

Which element is a outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations?

Occurs when independent measurers, using the same methods, obtain similar results. There is a consensus.

Define the enhancing quality - verifiability.

Emerging Issues Task Force

EITF: Provides implementation guidance to reduce diversity in practice in a timely basis. To become GAAP, EITF consensus must be approved by the FASB.

1. Predictive Value - Accounting information has value as an input to predictive processes used by investors to form their own expectations about the future. 2. Confirmatory Value - Helps users confirm or correct prior expectations. 3. Materiality - A company specific aspect of relevance. An item is material if its inclusion or omission would influence decisions that users make on the basis of the reported information. An individual company determines whether information is material because both the nature and/or magnitude of the items must be considered in the context of the individual company.

What are the three ingredients for relevance - a part of the fundamental concept?

1. Relevance: Accounting information is relevant if it is capable of making a difference in a decision. 2. Faithful Representation: Means that the numbers and descriptions contained in the financial statements match what really existed or happened.

What are the two Fundamental qualities that make accounting information useful for decision making?

1. Accounting Standards Updates 2. Financial Accounting Concepts These updates amend the Accounting Standards Codification which represents the source of authoritative accounting standards other than those issued by the SEC.

What are the two major types of pronouncements issued by the FASB?

General-Purpose financial statements are prepared primarily for external users. They provide financial reporting information to a wide variety of users -- shareholders, creditors, suppliers, employees, and regulators. General purpose financial statements provide at the least cost the most useful information possible.

What are "general-purpose financial statements?" Prepared primarily for?

The objective of financial reporting identifies investors and creditors as the PRIMARY users for general-purpose financial statements. It places the most emphasis on reporting to these capital provides. As part of the objective of general-purpose financial reporting an entity perspective is adopted.

What are "general-purpose financial statements?" Primary users are?

The benefits its development will generate can be characterized as follows: 1. Should allow the FASB to develop more useful and consistent standards over time. Coherence in rules and standards should lead to increased financial statement user understanding of and confidence in financial reporting and enhanced comparability among companies' financial statements. 2. New and emerging practical problems should be more quickly solved by reference to an existing framework of basic theory.

What are the benefits of conceptual framework?

1. Measurement Principle 2. Revenue Recognition Principle 3. Expense Recognition Principle 4. Full Disclosure Principle

What are the four fundamental recognition criteria an information item should meet in order to be recognized in the main body of the financial statements?

An item and information about it should meet four fundamental recognition criteria to be recognized and should be recognized when the criteria are met, subject to a cost-benefit constraint and a materiality threshold. Those criteria are: 1. *Definitions* - The items meets the definition of an element of financial statements. 2. *Measurability* - It has a relevant attribute measurable with sufficient. 3. *Relevance* - The information about it is capable of making a difference is user decisions. 4. *Reliability* - The information is representationally faithful, verifiable, and neutral.

What are the four fundamental recognition criteria an information item should meet in order to be recognized in the main body of the financial statements?

1. Completeness: The financial statements include all the information that is necessary for faithful representation is provided. 2. Neutrality: Information is neutral if it is unbiased, i.e., it is not presented in a manner that favors one set of interested parties over another. 3. Free from Error: Does not mean total freedom from error. It means that the information presented is as accurate as possible, given any estimates are based on the best information available at the time.

What are the three ingredients for Faithful Representation - a part of the fundamental concept?

Periodicity Assumption

What assumption means the life of a company can be divided into artificial time periods for the purpose of providing periodic reports on the economic activity of the company?

Accrual Basis of Accounting

What assumption says transactions that change a company's financial statements are recorded in the periods in which the events occur? Use of the cash basis of accounting is prohibited under IFRS because it violates both the revenue recognition principle and the expense recognition principles.

GAAP is composed of a mixture of over 2,000 documents that have developed over the last 70 years that includes the FASB standards, APB opinions, and Accounting Research Bulletins. It also issued interpretations and FASB Staff Positions that modified or extended existing standards.

What documents comprise GAAP?

The SEC(Securities and Exchange Commission) is a federal agency and administers the Securities Exchange Act of 1934. IT has broad powers to prescribe the accounting practices and standards to be employed by companies that fall within its jurisdiction(publicly held companies/listed on a stock exchange - over 12,000 currently).

What does the SEC have the power to do with respect to companies falling within its jurisdiction?

Conservatism is a GAAP (generally accepted accounting principles) principle. The conservatism principle requires that losses be recognized as soon as they can be quantified and that gains are recorded only when they are realized. This principle is intended to protect the users of financial information from inflated revenue, profit, or asset numbers and make all potential costs, losses, or declines in value apparent as soon as possible.

What is conservatism?

Due Process System gives interested persons ample opportunity to make their views known.

What is meant by the "due process" system?

The expectations gap is the difference between what the PUBLIC thinks accountants should do and what ACCOUNTANTS think they do is difficult to lose. Example: Accounting Scandals of Enron, WorldCom, Xerox.

What is meant by the term "expectations gap?"

A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements.

What is the Conceptual Framework?

The objective of general-purpose 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 decisions about providing resources to the entity.

What is the objective of general-purpose financial reporting?

Expense Recognition Principle

What principle says Accountants attempt to match expenses incurred while earning revenues with the related revenues. Use of accrual accounting procedures assists the accountant in allocating revenues and expenses properly among the fiscal (time) periods that compose the life of a business enterprise. Practical rules for expense matching: Analyze costs to determine whether a direct relationship exists with revenue. When a direct association exists, expense costs against revenues in the period when the revenue is recognized (e.g., COGS vs. Sales). When association is difficult to identify, allocate costs rationally and systematically to expense in the periods benefited (Depreciation, Bad Debts, Amortization) If there is little or no connection with revenue (such as with officers' salaries, administrative expenses or other Period Costs), these costs are normally expensed immediately.

Historical Cost

What principle says Both U. S. GAAP and IFRS require many assets and liabilities be reported at their acquisition price, or cost, sometimes referred to as historical cost. It is thought to be a faithful representation of the amount paid for a given item. Many users favor the cost principle because it is generally thought to be verifiable?

Full Disclosure Principle

What principle says In the preparation of financial statements, information that is of sufficient importance to influence the judgment and decisions of an informed user should be presented? Users can find information (1) within the main body of the financial statements, (2) in the notes to those statements, or (3) as supplementary information.

Fair Value Principle

What principle says It is defined as "the price that would be received to sell an asset of paid to transfer a liability in an orderly transaction between market participants at the measurement date." It is a market-based measure. Recently GAAP has increasingly called for use of fair value measurements in the financial statements. At acquisition, historical cost and fair value are identical. It is felt that where fair value information is available, it provides more relevant information about the expected future cash flows related to an asset or liability.

Cost Constraint or Cost-Benefit Relationship

What principle says the costs of providing the information must be weighed against the benefits that can be derived from using the information? That is, the benefits perceived to be derived from providing certain accounting information should exceed the perceived costs of providing that information. The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.

Revenue Recognition Principle

What principles says when a company agrees to perform a service or sell a product to a customer, it has a performance obligation. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is _________________?

PAGE 7 The FASB's primary goal in developing the Financial Accounting Standards Codification was to *provide in one place all the authoritative literature related to a particular topic.* It creates ONE level of GAAP which is considered authoritative. Read the paragraph in page 7!

What was the FASB's primary goal in developing the Codification? Review other details about the Codification found in that same paragraph in the Chapter 1 Notes. How many levels are there?

Going Concern Assumption

Which assumption means in the absence of information to the contrary, a company is assumed to have a long life? This is also the rationale why plant assets are not reported at liquidation value.

Monetary Unit

Which assumption means money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis? It is considered to be relevant, simple, universally applicable, understandable, and useful. The monetary unit is assumed to remain relatively stable over the years in terms of purchasing power. The unit of measure varies by country.

Economic Entity Assumption

Which assumption means that economic activity can be identified with a particular unit of accountability. In other words, a company keeps its activity separate and distinct from its owners and any other business unit?

Equity A.K.A.: Stock holder's equity, owner's equity, net assets

Which element is a Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest?

Comprehensive Income

Which element is a change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners?

Assets

Which element is a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events?

Liabilities

Which element is a probable future sacrifices of economic benefits that arise from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events?

Investments by Owners

Which element is an increase in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may include services or satisfaction or conversion of liabilities of the enterprise?

Losses

Which element is decreases in equity (net assets) from peripheral or incidental transactions of an entity from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners?

Revenues

Which element is inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing or major central operations?

1. Committee on Accounting Procedure(CAP) issued 51 Accounting Research Bulletins(ARBs) that narrowed the wide range of alternative accounting practices then in existence. However it was a problem by problem approach and not a structured body of principles. 2. Accounting Principles Board(APB) mission was to develop a framework and to research individual issues before the AICPA issued pronouncements. They appointed the Wheat Committee to deflect any government interference. In 1973, it was replaced by the FASB.

Who were the AICPA(American Institute of Certified Public Accountants) organizations that preceded the current FASB organization and what were the names of the documents issued by each?

American Institute of Certified Public Accountants

AICPA: The national organization of practicing certified public accountants. Comparable to the American Bar Association for the legal profession

Accounting Principles Board

APB: 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, remain a primary source of GAAP.

1. Smaller membership(7 versus 18-21 on the APB) 2. Full Time remunerated membership(APB members were unpaid and part-time/now paid big bucks) 3. Greater Autonomy (APB was a senior committee of the AICPA) 4. Increased Independence(FASB members must sever all ties with firms, companies, and institutions) 5. Broader representation(It is not necessary to be a CPA to be a member of the FASB)

In what ways does the FASB differ from its immediate predecessor (the APB)?