ACCT Theory EXAM II

What is one of the reasons why accounting standards can vary so significantly from one country to the next?

Financial accounting is influenced by the environment in which it operates. Nations have different histories, values, cultures, and political and economic systems, and they are also in various stages of economic development. These national influences interact with one another and, in turn, influence the development and application of financial accounting practices and reporting procedures. Because of national differences, teh financial accounting standards applied to the accounting data reported by these multinational companies often vary significantly from country to country.

The newest version of the AICPA Code of Professional Conduct is organized in three major sections. If you are a CPA employed in a position that gives you primary responsibility for preparing your employer's financial statements, which of these sections is most directly applicable to your conduct?

Implicit in the Code of Professional Conduct is the expectation that CPAs will abide by the rules at the minimum and strive to achieve the principles at the maximum. The rules/code consists of 4 sections: principles, rules of conduct, interpretations, ethical rulings. The principles include responsibilities, public interest, integrity, objectivity and independence, due care, and scope and nature of services.

Contract

-contracts could be written, oral, implied, tradition -value you expect to receive to satisfy PO -expectation of performance -terms must be clear -no confusion of exchange -collectibility: expectation that customer is credit-worthy

Transaction price

-cost+sales tax -what I reasonably expect to receive in value from my customer -not necessarily the contract price

Contract Asset

-if the entity performs by transferring goods or services to the customer, before the customer pays consideration, then the entity may recognize a contract asset -unconditional right to contract asset occurs when an entity has earned the right to payment=accounts receivable -conditional right to contract: occurs when a company completes one PO in the contract, but must complete another PO before it is entitled to consideration from the customer=contract asset -conditional right to bill; expect money but cant bill yet -Lower consideration given than revenue recognized

Contract Asset vs Accounts Receivable

-if unconditional right to bill=A/R -if not unconditional right to bill=Contract Asset=unbilled receivable

LIFO Conformity Rule

-if want use LIFO in tax return, you must use it in financial statements

In Retained Earnings Statement

-instead of CECAP, it would be correction of an error -instead of adjusted, it would be corrective -corrections to redo JE can be complex -key fact is whether or not closed the books

Changes in Accounting principles

-mandatory or voluntary -RETROSPECTIVE application method: in new year report current method along with other prior years using current method -mechanically, every year were closing out income statement numbers, so report all cumulative effects that are in Retained Earnings.

Contract Liability

-receive value ahead of performing obligations -if the customer pays consideration before goods or services have been transferred to the customer, then the entity will record a contract liability to represent its obligation to satisfy the PO for which the customer has paid -as recognize revenue, eat away at contract liability -Higher consideration given than revenue recognized -unearned revenue; more consideration than PO satisfaction

5 Step process for recognizing revenue

1. identify the contract with customers 2. identify the separate PO in the contract; Are the POs distinct-a. distinct on own terms and b. distinct within contract 3. determine transaction price 4. allocate the transaction price to the separate POs: do we need a JE to recognize each obligation? 5. Recognize revenue when each PO is satisfied: purpose of recognizing revenue-how many PO are there? are they distinct values/products, distinct within contract? if NOT, collapse in to one

What is one of the reasons why a business may find it necessary to develop an understanding of international accounting?

Dealing with foreign companies presents some unique problems. Includes possibility of foreign exchange gains and losses, changes in the values of currencies, obtaining international credit information, and evaluating the company's liquidity and solvency from its financial statements may be complicated by the use of a different language/acct principle. As a company's foreign trade increases, it may be necessary to create an international division and becomes necessary to develop international accounting expertise.

CECAP

Cumulative effect of cumulative accounting principles -add/subtract adjustments/changes net of related income taxes of $ -Beg 1/1/18, as reported +-CECAP net of income taxes Beg 1-1-18, as adjusted

The most recent significant milepost on the path toward global accounting was probably a report the SEC issued in 2012. Though generally supportive of convergence, it was not so with respect to formally recognizing IFRSs as authoritative in the U.S. What might be a reason why both convergence and efforts to promote U.S. recognition of IFRSs seem to have lost momentum?

Difficulty with transparency and clarity of the financial statements and the diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries The diversity arising from the standards themselves was mitigated by guidance from local standard setters or regulatory bodies that narrowed the range of acceptable alternatives that were already permitted by IFRS or that provided additional guidance or interpretations. This diversity also was mitigated by a tendency by some companies to carry over their previous home country practices in their IFRS financial statements. Although country guidance and carryover tendencies might promote comparability within a country, they can diminish comparability on a global level.

Assume that a company has an account receivable from a customer experiencing financial difficulty and that at year-end the company increases its allowance for doubtful accounts to include a portion of the customer's outstanding balance. Further assume that before the company releases its financial statements, it learns that the customer has filed for bankruptcy. Based on GAAP for subsequent events, what modifications, if any, should the company make to its financial statements before it releases them and why?

During the period between the end of a company's fiscal year and the issuance of its financial statements, events might occur that aren't reflected in its accounting records. These events are referred to as subsequent events and may be either events that provide further evidence of conditions that existed on the BS date ro events that provide evidence of conditions that did not exist at the balance sheet date. GAAP requires events in the first category to be reported in financial statements. In other words, when a company experiences an event-after the BS date but before it issues its financial statements-that provides further evidence of some condition existing at the BS date, it is required to adjust its records to reflect the financial impact of the condition. The adjusted disclosure is required because the event that gave rise to the adjustment occurred before the BS date. Fin statements must reflect true financial condition at BS date. On the other hand, GAAP does not require adjustments to the financial statements for category 2 events; however, companies often disclose these events in the footnotes to their financial statements. These footnote disclosures allow the company to discuss the impact of the new info. Occurred AFTER BS date...footnote disclosures.

Error Corrections

mechanically same as accounting change restate all prior years that you present

Revenue recognition principle

recognize revenue in the accounting period when the performance obligation is satisfied

Key objective of Revenue Recognition

recognize revenue to depict the transfer of goods/services to customers in an mount that reflects the consideration that the company receives, or expects to receive, in exchange for these goods or services.

When researching U.S. GAAP or IRFS, accountants often fail to find explicitly applicable guidance. In such instances, how, if at all, are accountants to use the respective conceptual frameworks of the FASB and IASB (which they jointly revised in 2010)? If accountants are performing practice-based research for a company that follows IFRSs, how, if at all, are they to use the IASB's conceptual framework?

In 2010, the IASB and FASB issued a revision to their conceptual frameworks now titled by the IASB The conceptual Framework for Financial Reporting. In The Conceptual Framework for Financial Reporting, the IASB described the basic concepts that underlie the preparation and presentation of financial statements for external users. The revised conceptual framework will serve as a guide to the Board in developing future IFRSs and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard/interpretation. In the absence of a Standard or an Interpretation that specifically applies to a transaction, the revised conceptual framework suggests that management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, IASB standards require management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the framework.

GAAP emphasizes the importance of interim financial information and states that the usefulness of such information rests on the relationship it has to the annual results. Therefore, how does GAAP view an interim period in relation to the annual period?

Information on financial performance and operating results for periods of less than a year are termed interim financial reports. The major value of interim financial reports and news releases is their timeliness; investors need to be aware of any cages in the financial position of the company as soon as possible. GAAP(APB) stated that interim financial information is essential to provide timely data on the progress of the enterprise and that the usefulness of the data rests on its relationship to annual reports. The Board determined that interim periods should be viewed as integral parts of the annual periods and that the principles and practices followed in the annual period should be followed in the interim period. Interim financial information is essential to provide timely data on the progress of the enterprise. Moreover, the usefulness of the data rests on its relationship to annual reports. In short, interim periods should be viewed as integral parts of the annual period and the principles and practices followed in the annual period should be followed in the interim period.

SATTA provides guidance of continuing relevance in evaluating the development of accounting theory and assessing the contributions of accounting research. However, SATTA's impact was diminished considerably through widespread criticism of its conclusion that accounting could benefit from a more scientific approach. As an example, the textbook cites commentary arguing instead that accounting is not a science. Do you agree with this argument? Why or why not? Which view is closer to your own?

One argument: Accounting is not a science, but a service activity. Accounting therefore, should be equated not with the sciences, but with fields like medicine, technology and law, of which the principal is an external social need. Second argument: SATTA suggests scientific progress proceeds in the following order: 1. Acceptance of a paradigm(a kind of world view and focus for research) 2. Working with that paradigm by doing normal science 3. Becoming dissatisfied with that paradigm(SATTA suggested that we were in this step when a number of theorists became dissatisfied) 4. Searching for a new paradigm 5. Accepting a new paradigm

During its forty-plus years of existence, the FASB appears to have been shifting from a rules-based approach to standard-setting to one that is more principles-based. To the extent that the latter allows greater exercise of professional judgment, what is a potential downside(s) to this approach?

Principles-based can present enforcement difficulties because they provide little guidance or structure for preparers and auditors to exercise professional judgement. However, study recommended that standard setters use principles based method to develop standards. Principles-based is better able to cope with speed of change of business envr, less voluminous, encourages use of professional judgment, and discourages financial engineering. Board agreed that objectives of its standards need to be more clearly defined, implementation guidance needs to be improved, scope exceptions need to be reduced, and the asset liability approach to standard setting should be retained.

Prior to 2012, the IASB followed a standard-setting process similar to the FASB's. But in a key change to that process, the IASB now accepts a project for inclusion on its agenda only after its staff has performed a cost-benefit analysis and only if the IASB is confident that what is true?

Projects will only become standards-level projects when the IASB is confident that the problem is defined properly and that the staff has identified solutions that are of high quality and are implementable.

Which of the "qualitative characteristics" described in the FASB's conceptual framework best explain(s) GAAP's rationale for requiring radically different financial statements and measurement bases when a company believes liquidation is imminent?

RELEVANCE characteristic in FASBs conceptual framework. Liquidation is the process by which an entity converts its assets to cash or other assets and partially or fully settles its obligations with creditors in anticipation of the entity ceasing its operations. The ASU also requires financial statements prepared using the liquidation basis to reflect relevant information about an entity's resources and obligations in liquidation by measuring and presenting assets and liabilities in the entity's financial statements as the amount of cash or income and it expects to earn during the expected duration of the liquidation, including any costs associated with settlement of those assets and liabilities.

Prior to the creation of the FASB, there had been numerous attempts to articulate accounting theory. Each was generally perceived as a well-intentioned failure that did little more than describe the accounting practices prevalent at the time. In 1973, the American Accounting Association (AAA) began an examination of these past attempts, eventually issuing Statement on Accounting Theory and Theory Acceptance (SATTA). The Statement identified a number of reasons why all these efforts met with rejection. In your view, which of these reasons best explains the challenge in articulating accounting theory? Why?

SATTA turned out to be an update of ASOBAT(defined accounting as the process of identifying, measuring, and communicating economic information to permit informed judgements and decision by users of the information). The committees rationale for this approach was stated as follows: Fundamental changes have occured since the publication of ASOBAT. THe basic disciplines traditionally utilized by accounting theory have been altered considerably, and accounting researchers have enthusiastically employed their new tools, perspectives and analytical techniques to explore a wide range of accounting issues from new directions. The committees conclusion was that a single, universally accepted basic accounting theory did not exist. SATTA embarked on a discussion of why none of the approaches to theory had gained general acceptance. SATTA raised 6 issues: 1)The problem with relating theory to practice...real world more complex; 2) allocation problem: allocation is arbitrary/depreciation; 3) the difficulty with normative standards(cant satisfy all users); 4) The difficulties in interpreting security price behavior research; 5) The problem of cost-benefit considerations accounting theories: how to measure benefits/costs?; 6) Limitations of data expansion.

In SFAC 8, the FASB states what it believes to be the objective of financial reporting. That objective has been criticized for its apparent exclusion of certain types of users and decisions. What is an example of one of these user groups and the type of decisions these users make that would seem to fall outside this objective?

SFAC 8 states that the objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to current and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Criticized the FASB's viewpoint that financial statement users are rational decision makers who are only interested in economic events and transactions and with predicting their effects upon an entity's future cash flows, future profitability and future financial position. As a result, the current CFP maintains that "decision-useful" information is defined with respect to its effectiveness in forming such predictions and expectations. Therefore, other types of information that might be construed as meaningful, significant, or useful either to other users including customers, suppliers, employers, labor unions, and even investors who have different perspectives under an alternative interpretation of the financial statement user, is dismissed as falling outside the appropriate purview of financial statements. Other purposes of accounting being defined in the reporting of entities is the status of relationships among economic entities, employees, communities, and the environment are emphasized as much as or more than the measurements of cash flows, profits, and financial position.

Can the SFACs (and SFAC8 specifically) be regarded as accounting theory? Why or why not?

SFAC is the objective of FASBS conceptual framework for financial accounting and reporting(top of triangle). SFAC 8 states that the objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to current and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit. The objective of financial reporting is the foundation of the conceptual framework. Other aspects of the framework-qualitative characteristics, elements of financial statements, recognition, measurement, and disclosure - flow logically from the objective Those aspects of the framework help to ensure that financial reporting achieves its objective.

The textbook states that the SFACs affect practice "only" through their influence on the development of new accounting standards. This statement is not entirely true. Why not?

SFACs provide the board with a foundation for setting standards and tools to use in resolving accounting and reporting questions. THey also provide a framework that can be used to consider the merits of alternatives and promote greater efficiency in internal and external communications.

Given the fate of its predecessors, the FASB chose not to pursue an articulation of accounting theory but instead embarked on the creation of a "conceptual framework." It continues the development of this framework through the issuance of Statements of Financial Accounting Concepts (SFACs). What is the approach that the FASB has taken in its Conceptual Framework Project (CFP)? In particular, what is the FASB hoping to achieve in creating it?

The CFP initially attempted to develop principles or broad qualitative standards to permit the making of systematic rational choices among alternative methods of financial reporting. As a result, the CFP is a body of interrelated objectives and fundamentals. The objectives identify the goals and purposes of financial accounting, whereas the fundamentals are the underlying concepts that help achieve those objectives. The FASB intends the CFP to be viewed not as a package of solutions to problems, but rather as a common basis for identifying and discussing issues, for asking relevant questions, and for suggesting avenues for research.

What is the purpose in requiring public companies to prepare "Management's Discussion and Analysis" (the MD&A) and include it in their annual 10-K filings?

The SEC requires all publicly held companies to include a MD&A section in their annual reports because management knows more about the enterprise and its affairs that investors, creditors, or other outsiders and can often increase the usefulness of financial information by identifying certain transactions, other events, and circumstances that affect the enterprise and explaining their financial impact on it. Basically, the MD&A section evaluates the causes and explains the reasons for a company's performance during the annual period, includes info about liquidity, capital resources, and results of operations; also requires mgmt to highlight favorable or unfavorable trends and identify significant events that impact those three factors.

Refer to the preceding question. Given this view, what does GAAP require in terms of the accounting principles and methods applied in interim financial statements?

The SEC requires companies to issue quarterly summary financial statements on Form 10-Q. The interim financial statements are timely, must be reliable for investors, and usefulness based on relationship to annual reports. The Board notes that 2 views exist as to the principal objective of interim financial reporting: 1. Each interim period is a separate acct period-rev/exp report as occur and 2. Interim periods were integral part of annual period, thus revenues and expenses might be allocated to various interim periods.

In terms of their respective regulatory focus, how do the Securities Act of 1933 and the Securities Exchange Act of 1934 differ?

The Securities Act of 1933 regulates the initial public sale and distribution of a corporation's securities(going public). The goal of this legislation is to protect the public from fraud when a company is initially issuing securities to the general public. Designed to provide adequate disclosures of material facts to allow investors to assess the degree of potential risk. The Securities Exchange Act of 1934 regulates the trading of securities of publicly held companies(being public). This legislation addresses the personal duties of corporate officers and owners(insiders) and corporate reporting requirements, and it specifies info that is to be contained in the corporate annual reports and interim reports issued to shareholders. The adt established extensive reporting requirements to provide continuous full and fair disclosure. The major goal of the 1934 act is to ensure that any corporate insider does not achieve an advantage in the purchase or sale of securities because of a relationship with a corporation. The act also established civil and criminal liabilities for insiders making false or misleading statements when trading corporate securities.

SFAC5 presented a model of all information potentially useful to decision makers. Based on this model, what is the relationship between "financial statements" and "financial reporting"?

The building blocks to disclosure are the scope of recognition and measurement, basic financial statements, areas directly affected by existing FASB standards, financial reporting, and all info useful for investment, credit, etc. Financial Statements: in addition to the 4 basic statements, a full set of financial statements also includes footnotes, supplementary schedules, and parenthetical disclosures. In addition to the financial statements, basic financial statements incorporate notes to financial statements, which include accounting policies, schedules and exhibits, explanations, and general info. Financial reporting include all of the above "financial statements" in addition to supplementary information which include segment info, changing price disclosures, oil/gas info, auditors report, interim financial statements, liquidation basis of acct AND other means of financial reporting, which includes management discussion and analysis and letters to stockholders.

What is the rationale for SOX's section 302 and the CEO and CFO certifications it requires?

The essence of Section 302 of the Sarbanes-Oxley Act states that the CEO and CFO are directly responsible for the accuracy, documentation and submission of all financial reports as well as the internal control structure to the SEC.CEOs and CFOs must certify in each annual and quarterly report that the officer has reviewed the report, that based on the officers knowledge the report contains no untrue statement of a material fact or omits a material fact, and that based on the officers knowledge, the financial statements and other financial info included in the report fairly present the financial condition and results of operations of the issuer. They must also attest that they are responsible for establishing and maintaining internal controls, that they have designed such controls to ensure that material info is made known to the officers, that they have presented their conclusions about het effectiveness of those controls in the report, and that they have disclosed both to the outside auditors nad to the audit committee all deficiencies and fraud.

What is one of the factors that influences the development of a country's accounting standards and determines the level to which its standards have advanced?

The level of a country's economic development influences both the development and application of its financial reporting practices. Countries with low levels of economic development will have relatively less need for a sophisticated accounting system than countries with high levels of economic development. Other factors that influence the development of a country's accounting standards are level of education, political system,legal system(authority)

Refer to the preceding question. The MD&A must provide information about three major aspects of a company's financial profile. What are they?

The three major aspects of a company's financial profile that the MD&A must provide info about are 1. Liquidity 2. Capital Resources 3. Results of Operations

What is one of the reasons often given for why standard-setting bodies should "harmonize" accounting standards, i.e., for why they should develop a single set of global accounting standards?

There is a move to harmonize accounting standards among countries because transnational financial reporting requires users to understand the accounting practices employed by the company, the language of the country in which the company resides and the currency used by the corporation to prepare its financial statements. If investors and creditors cannot obtain understandable financial information about companies that operate in foreign countries, they are not likely to invest in or lend money to these companies.

42. When researching U.S. GAAP or IRFS, accountants often fail to find explicitly applicable guidance. In such instances, how, if at all, are accountants to use the respective conceptual frameworks of the FASB and IASB (which they jointly revised in 2010)? More specifically: a. If accountants are performing practice-based research for a company that follows U.S. GAAP, how, if at all, are they to use the FASB's conceptual framework?

This single conceptual framework will serve as the foundation for the development of financial accounting and reporting. In 2010, the FASB and IASB issued 2 chapters as part of this joint project to develop an improved converged conceptual framework for financial accounting and reporting. A common conceptual framework useful to facilitate the convergence of US and International accounting standards. The objective of financial reporting is the foundation of the conceptual framework. Other aspects of the framework-qualitative characteristics, elements of financial statements, recognition, measurement, and disclosure - flow logically from the objective Those aspects of the framework help to ensure that financial reporting achieves its objective.

It's reasonable to argue that the FASB created the conceptual framework primarily for its own benefit. Even so, the framework can and does benefit financial statement users. How so?

Without the guidance provided by the conceptual framework, standard setting would be based on the individual personal frameworks of the members of the board. The conceptual framework contains three levels-the first level identifies the objective of financial reporting/purpose, the second level outlines the fundamentals, which are the qualitative characteristics that make accounting info useful, and the third level identifies the implementation guidelines of recognition, measurement, and disclosure used in establishing and applying accounting standards