ACCT 3110 Chapter 1

Increases in equity resulting from transfer to it from other entities of something of value to obtain or increase ownership interest

investment by owners

professions with their own code of ethics

medicine accounting law

The difference between revenues and expenses is

net income

if revenue recognition is not followed

net income statement would not report the accomplishments of the period net income may be over/under stated for the period

the amount of cash into which an asset is expected to be converted in the ordinary course of business Provides useful information to aid in the prediction of future cash flows

net realizable value

Faithful representation requires that info be

neutral free from error complete

qualitative characteristic requires that financial info should not influence decision making to achieve a predetermined result

neutrality

proponents of objective-bases standards assert that

profexxional judgement minimizes sidestepping of rules

objectives of financial accounting include

provide info to creditors and investors provide info to evaluate future cash flows

advantage of historical cost

objective and verifiable

using professional judgement when choosing how to account for a transaction

objectives-oriented

recent issue in implementing fair value 2007

pressure to reduce the extent to which fair value changes are reported in net income

What is net operating cash flow?

the difference between cash receipts and cash disbursements from providing goods and services.

Creecher purchased $200,000 worth of Troman stock , received four quarterly dividends of $1,000 each, and sold the Troman shares for $206,000 after one year. What is Creecher's rate of return? a. 1%. b. 2.5%. c. 5%. d. 10%.

((4 x $1,000) + ($206,000 - $200,000)) ÷ $200,000 = 5%

4 Basic Accounting Assumptions

(1) the economic entity assumption (2) the going concern assumption (3) the periodicity assumption, (4) the monetary unit assumption. These assumptions identify the entity that is being reported on, the assumption that the entity will continue to exist, and the frequency and denomination in which reports occur.

In general, revenue is recognized when A contract has been signed. The sales price has been collected. A good or service has been delivered to a customer. A purchase order has been received.

A good or service has been delivered to a customer.

National professional organization for CPA's

AICPA

integrates and topically organizes all relevant accounting pronouncements comprising GAAP in a searchable, online database

Accounting Standards Codification

Measurement of revenues and expenses, regardless of when cash is received or paid

Accrual-basis

examine 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.

Auditors

The primary objective of financial reporting is to provide information: Multiple Choice About a firm's financing and investing activities. About a firm's management team. About a firm's product lines. That is useful in decision making.

That is useful in decision making.

The fundamentals are the underlying concepts of accounting that guide the selection of events to be accounted for, the measurement of those events, and the means of summarizing and communicating them to interested parties. The conceptual framework provides structure and direction to financial accounting and reporting but does not directly prescribe GAAP.

The conceptual framework provides structure and direction to financial accounting and reporting but does not directly prescribe GAAP.

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

The periodicity assumption

IASB's primary objective

To develop a single set of high-quality, understandable, and enforceable global accounting standards

What are the primary forms of business organizations?

Sole Proprietorship Corporation Partnership

Why is accounting standard setting a political process?

Standards can have significant effects on companies, investors, and creditors Changes in standards can result in redistribution of wealth in our economy

Which of the following is a financial statement provided to investors: Statement of Shareholders Equity Statement of Investments Statement of Audit Report Staement of Managerial Discussion

Statement of Shareholders Equity

The documents that set forth fundamental concepts on which financial accounting and reporting standards will be based are: Multiple Choice Statements of Financial Accounting Standards. Statements of Financial Accounting Concepts. Accounting Principles Board Opinions. All of the above.

Statements of Financial Accounting Concepts.

what info regarding future cash flows are investors and lenders interested in?

amount uncertainty timing

FASB's Standard Setting Process

1- Adds a project to Agenda 2-Deliberates at public meetings 3-issues Exposure Draft or Discussion Paper 4-Analyzes comment letters 5-issues Accounting Standards Update

According to SFAC 5, an item should be recognized in the basic financial statements when it meets the following four criteria, subject to a cost effectiveness constraint and materiality threshold:

1. Definition. The item meets the definition 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 difference in user decisions. 4. Reliability. The information is representationally faithful, verifiable, and neutral.

For each of the following situations, (1) indicate whether you agree or disagree with the financial reporting practice employed and (2) state the basic assumption, pervasive constraint, or accounting principle that is applied (if you agree), or violated (if you disagree). 1. Winderl Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress. 2. Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC. 3. Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense. 4. Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance.

1. Disagree- Full-Disclosure Principle 2.Agree- Periodicity 3. Disagree- Expense Recognition 4. Agree- Revenue Recognition

Listed below are several statements that relate to financial accounting and reporting. Identify the accounting concept that applies to each statement. 1. SiriusXM Radio Inc. files its annual and quarterly financial statements with the SEC. 2. The president of Applebee's International, Inc., travels on the corporate jet for business purposes only and does not use the jet for personal use. 3. Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications. 4. Lady Jane Cosmetics depreciates the cost of equipment over their useful lives.

1. The Periodocity Assumption 2..The Economic Entity Assumption 3.Revenue Recognition 4.Expense Recognition

Identify the basic assumption or broad accounting principle that was violated in each of the following situations. 1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured. 2. McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million. 3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

1.Expense Recognition 2.The historical cost principle 3.The Economic Entity Assumption

investor purchases shares of stock for $10,000 cash and receives $400 in dividends, then sells ownership for $10,600. what is his return on investment?

10% (400+600)=100/10000= 10%

SOX requires auditors to rotate every __________ years

5

investor purchases shares of stock for $100,000 cash and receives $3,000 in dividends, then sells ownership for $104,000. what is his return on investment?

7% (4000+3000)=7,000/100,000= 7%

The conceptual framework does not prescribe GAAP

TRUE The conceptual framework provides structure and direction to financial accounting and reporting but does not directly prescribe GAAP.

A probable future economc benefit obtained or controlled by a particular entity as a resultof a past transaction

asset

Which of the following is not an advantage of accrual accounting? a. Spreads out the influence of one-time events that affect multiple reporting periods. b. Highlights cash effects of operations. c. Captures long-run performance. d. Recognizes assets and liabilities associated with receivables and payables.

b. Highlights cash effects of operations. Cash-based accounting focuses on cash in and cash out, and so highlights the cash effects of ongoing operations.

accounting info is ______________________ if similar items are treated the same way among various companies

comparable

The change in equity of a business enterprise during a period from transactions 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.

comprehensive income

favorable items require more verifications than unfavorable items

conservatism

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 or central operations.

expenses

Labor Unions and emplyees are examples of ____________________ users of financial information

external

Advantages to one global accounting framework

facilitate access to capital improve comparability

cash basis accounting is required for most profit-oriented companies

false

net operating cash flow is a good indicator of long-run cash-generating ability

false

accrual is best able to achieve the goal of predicting ________ cash flows

future

Increases in equity from peripheral or incidental transactions of an entity

gains

arguments to one global accounting standards

implementation and enforcement of IFRS varies among nations accounting under IFRS will appear more uniform that it actually is maintaining competition improves quality

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

income approach

the transactions where corp obtain new cash by selling shares of stocks or bonds to investors

initial

when US corporations seek to raise cash, they sell stocks and bonds in

initial market transactions

Inflows of assets or settlements of liabilities resulting from providing a product or service to a customer

Revenue

1st private accounting standard setting body in the US

CAP Committee on Accounting Procedure

Measurement of cash receipts and cash payments from transactions related to providing goods and service

Cash-Basis

Expense Recognition Approaches (Examples

Cause & Effect- Cost of Goods Sold Specific Time Period- Monthly Salary Without Regard Related to Revenue- Advertising

has the authority to set accounting and reporting standards for companies whose securities are publicly traded

SEC

Qualitative characteristic refers to the same accounting practices being used over time to permit valid comparisons between reporting periods

Consistency

: requires that the financial reports should include any information that could affect the decisions made by external users Financial Statements and notes to those statements

Disclosure

refers to the process of including additional pertinent information in the financial statements and accompanying notes

Disclosure

What element of financial statements is described by "Residual interest in the assets of an entity that remains after deducting its liabilities?"

Equity

Often matches revenues and expenses that arise from the same transactions or other events

Expense Recognition

the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value

In the US, we have a free enterprise economy with the majority of productive resources being government owned

False

The separate entity assumption states that, in the absence of contrary evidence, all entities will survive indefinitely. False True

False

________________ Accounting is chiefly concerned with providing info to external users

Financial

organization responsible for standard setting process in cities and states in the US

Government Accounting Standards Board (GASB

original transaction value adjusted for depreciation and amortization. asset and laibility measurement should be based on amount given or received in the original transaction

Historical cost

Statements of Financial Accounting Concepts issued by the FASB Have been superseded by SFASs. Identify the conceptual framework within which accounting standards are developed. Are subject to approval of the SEC. Represent GAAP.

Identify the conceptual framework within which accounting standards are developed

Fair Value Hierarchy

Level 1- Quoted market prices for identical assets/liabilities Level 2- inputs other than quoted prices that are observable Level 3- Unobservable inputs that reflect entity's own assumptions.

is the process of associating numerical amounts with the elements

Measurement

the process of associating numerical amounts with the elements

Measurement

Item 2 Item 2 The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by: Multiple Choice Monitoring the development of GAAP within the accounting profession and using its stature to influence that development. Exercising its statutory authority to prescribe external financial reporting requirements. Allying with the AICPA to lobby the efforts of the FASB. Providing auxiliary funding to the FASB.

Monitoring the development of GAAP within the accounting profession and using its stature to influence that development.

Which of the following characteristics does not describe a liability? Multiple Choice Result of a past transaction. Probable future sacrifices. Present obligation. Must be legally enforceable.

Must be legally enforceable.

The underlying assumption that assumes that the life of a company can be divided into artificial time periods is: Multiple Choice Periodicity. Going concern. Economic entity. Monetary unit.

Periodicity.

refers to the process of admitting information into the financial statements

Recognition

In depreciating the cost of an asset, accountants are most concerned with Full disclosure. Conservatism. Recognizing expense in the appropriate period. Recognizing revenue in the appropriate period.

Recognizing expense in the appropriate period.

The primary objective of the matching principle is to Promote comparability between financial statements of different periods. Record expenses in the period that related revenues are recognized. Provide full disclosure. Provide timely information to decision makers.

Record expenses in the period that related revenues are recognized.

The uncertainty of the return on an investment is also referred to as as risk

True

in 2011 the SEC recognized that

US GAAP provides more guidance than IFRS different application methods of IFRS could lead to unconformity in financial statements across coutries

The primary objective of financial reporting is to provide information. Concerning the changes in financial position resulting from the income-producing efforts of the entity. Useful to capital providers. About a firm's financing and investing activities. About a firm's management team.

Useful to capital providers.

the concept of understandability assumes that users of financial statements should have

a reasonable understanding of business and economic activities

Which of the following is not a component of relevance as defined in the FASB's conceptual framework? a. Free from error. b. Materiality. c. Predictive value. d. Confirmatory value.

a. Free from error. Free from error is a component of faithful representation.

Accounting standards in the United States are currently set by: a. The FASB. b. The AICPA. c. The EITF. d. The NCAA.

a. The FASB. Since 1973, the FASB has been the primary standard-setting body in the United States.

costs of providing information

all but interpreting

External users of financial information include

banks, credit-rating agencies

Which of the following is not a measurement attribute defined in the FASB's conceptual framework? a. Net realizable value. b. Historical cost. c. List price. d. Fair value.

c. List price. List price is not a measurement attribute. Rather, it is whatever sales price a seller indicates (which might be negotiable or subject to discounts).

Which of the following is not a component of faithful representation as defined in the FASB's conceptual framework? a. Free from error. b. Neutrality. c. Understandability. d. Completeness.

c. Understandability. Understandability is an enhancing characteristic of decision usefulness.

Which oranizations provide financial information to external users

charitable organizations profit-oriented businesses

providers of financial information

companies households

Provides shares of common stock as an ownership interest

corporation

determine fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition

cost approach

All capital markets are a composite of

creditors and investors

IN US, companies aquire capital from

creditors and investors

Which of the following is not true? a. The fair value hierarchy reflects the subjectivity of inputs used to compute fair values. b. Level 1 of the fair value hierarchy refers to quoted market prices that can be directly observed. c. Level 3 of the fair value hierarchy refers to inputs that are not directly observable, and so must be based on the entity's own assumptions. d. Level 3 inputs are preferred to Level 2, which are preferred to Level 1.

d. Level 3 inputs are preferred to Level 2, which are preferred to Level 1. Level 1 inputs are most preferable because they are the least subjective. Level 3 inputs are the least preferable because they are based on the entity's own assumptions.

Which of the following is not one of the ways in which high-quality accounting is encouraged by the U.S. financial reporting system? a. Accounting standards encourage comparability. b. Auditors assess whether financial statements are materially misstated. c. Sarbanes-Oxley instituted reforms designed to improve the quality of financial reporting. d. Managers are required to use frameworks for ethical decision making when deciding how to account for transactions.

d. Managers are required to use frameworks for ethical decision making when deciding how to account for transactions. Ethical frameworks can be very useful, but managers are not required to use them.

PCC Private Company Council

determines whether changes to existing GAAP are necessary to meet the needs or users of private company financial statements

Decreases in equity resulting from transfers to owners

distributions to owners

FASB and IASB converged accounting

earnings per share non-monetary exchanges share-based compensation

the requirement that economic activities of an owner should be separated from the business

economic entity

The purpose of the FASB's conceptual framework is to

establish objectives and fundamental concepts on which to base standards

Probable future sacrices of economic benefits arising from present obligations

liability

a decrease in equity from peripheral or incidental transactions of an entity

loss

The application of conservatism leads to:

losses being recognized quicker than gains assets tending to be biased downwards

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.

market approach

criticism of fair value accounting

may not be represented faithfully or verifiable

a corp. shareholders will receive cash from their investments through

periodic dividends

for accounting information to be relevant, it must have

predictive value confirmatory value

calculated by removing the time value of money from future cash flows

present value

Financial reporting is the process of

providing informaiton to outside users

SEC requires info to be submitted

quarterly and annually

refers to the process of admitting information into the financial statements

recognition

Purpose of SOX

regulate auditors provide penalties for violators require CEO accountability prevent conflicts of interest

proponents of fair value accounting point out that it will enhance the ________ of the information provided

relevance

to be useful in decision making, info must have

relevance and faithful representation

FASB Accounting Standards Codification

reorganize all relevant accounting prounouncements in U.S. GAAP

key provisions to SOX

requiring documentation and assessing effectiveness of internal controls restricting activities of auditors to prevent conflicts of interest requiring that corporate executives certify financial statements

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.

revenues

The accrual accounting model's measure of resources provided by business operations is called

revenues

a company generates profits when it provides goods and services and _________________

revenues are greater than expenses

the market where stocks and bonds are traded among individual and institiutional investors

secondary

Capital markets foster he efficirnt allocation of resources

true

Investors expect than if an investments has greater risk, it should pay a higher return

true

both profit-oriented companoes and not-for-profit companies are providers of financial information

true

implies that different knowledgeable and independent measurers would reach consensus regarding whether information is a faithful representation of what it is intended to depict.

verifiability

Before issuing updates, the FASB has information gathering steps

written comments deliberations open hearings