Chapter 1 ACC 310
Describe the four basic assumptions underlying GAAP
The four basic assumptions underlying GAAP are: 1. the economic entity assumption, 2. the going concern assumption, 3. the periodicity assumption, and 4. the monetary unit assumption.
What are the four different approaches to implementing expense recognition? Give an example of an expense that is recognized under each approach
1. Based on an exact cause and effect relationship - COGS 2. By associating in expense with the revenue is recognized in a specific time period - monthly salary paid to an office worker 3. By a systematic and rational and location to specific time periods - straight-line depreciation 4. In the period incurred, without regard to related revenues - advertising expenditures
What are the four basic assumptions underlying GAAP?
1. Economic entity assumption 2. Going concern assumption 3. Periodicity assumption 4. Monetary unit assumption
What measurement attributes are commonly used in financial reporting?
1. Net realizable value 2. Historical cost 3. Current cost 4. Present value of future cash flows 5. Fair value
List the three key provisions of the Sarbanes-Oxley act of 2002. Order you a list from most important to least important in terms of the likely long-term impact on the accounting profession and financial reporting.
1. Oversight board 2. Corporate executive accountability 3. Non-audit services 4. Retention of workpapers 5. Auditor rotation 6. Conflicts of interest 7. Hiring of auditor 8. Internal control
What are the four key accounting practices that often are referred to as principles in current GAAP?
1. Revenue recognition: revenue recognized when earned 2. Expense recognition: expenses recognized when incurred -causal relationship - allocation - period Incurred - specific time period 3. Mixed attribute measurement -historical cost: bases measurements on the amount given or received in the exchange transaction - net realizable value: bases measurements on the amount of cash into which the asset or liability and will be converted in the ordinary course of business -current cost: market value based on estimates -present value of future cash flows: bases measurement on future cash flow's discounted for the time value of money -fair value: bases measurements on the price that would be received to sell assets or transfer liabilities in an ordinary market transaction 4. Full disclosure: requires that any information useful to decision-makers be provided in the financial statements, subject to the cost-effectiveness constraint
Briefly to find the financial accounting elements: assets, liabilities, equity, investments by owners, distribution to owners, revenues, expenses, games, losses, and comprehensive income
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 entities in the future as a result of past transactions or events Equity (net assets): called shareholders equity or stockholders equity for corporation, it is the residual interest in the assets of an entity that remains after deducting its liabilities Investments by owners: increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests in it Distributions to owners: decreases and equity of a particular enterprise resulting from transfers to owners Comprehensive income: The change in equity of a business enterprise 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 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 entities ongoing major or central operations 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 entities ongoing major or central operations Gains: increases in equity from peripheral or incidental transactions of an entity Losses: represent decreases and equity arising from peripheral or incidental transactions of an entity
Explain the role of the auditor in the financial reporting process
Auditors offer credibility to financial statements. Auditors express an opinion on the compliance of financial statements with GAAP Types of opinions: 1. Unqualified 2. Qualified 3. 4.
Explain the difference between cash and accrual accounting
Cash basis accounting provides a measure of periodic performance called net operating cash flow, which is the difference between cash receipts and cash disbursements from transactions related to providing goods and services to customers. Accrual accounting provides a measure of performance called net income, which is the difference between revenues and expenses. Periodic net income is considered a better indicator of future operating cash flow's than is current net operating cash flow's
Explain factors that encourage high quality financial reporting
Factors encouraging high-quality financial reporting include conceptually based financial accounting standards, external auditors, financial reporting reforms (such as the Sarbanes-Oxley act), ethical management, and professional accounting organizations that prescribe ethical conduct and license practitioners
Describe the function of primary focus of financial accounting
Financial accounting is concerned with providing relevant financial information to various external users. However, the primary focus is on the financial information provided by profit oriented companies to their present and potential investors and creditors
What Is meant by the term materiality and financial reporting?
Financial information is material if omitting it or misstating it could affect users decisions
What is meant by GAAP? Why should all companies follow GAAP and reporting to external users?
GAAP is generally accepted accounting principles All companies should follow GAAP so that it is easier to compare financial information among companies
Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between US and international standards
Generally accepted accounting principles comprise a dynamic set of both broad and specific guidelines that companies follow when measuring and reporting the information in their financial statements and related notes. The securities and exchange commission (SEC) has the authority to set accounting standards in the United States. However, the SEC has always delegated the task to a private sector body, at this time the financial accounting standards Board (FASB). The international accounting standards Board (IASB) sets global accounting standards and works with national accounting standards setters to achieve convergence in accounting standards around the world.
What is the standard setting body responsible for determining IFRS? How does it obtain its funding?
IASB Receives funding through voluntary donations by accounting firms and corporations
What is meant by the benefits of accounting information must exceed the costs
It is a constraint on qualitative information. If it's going to cost more than it's worth then we won't require it
What is the purpose of the FASB's conceptual framework?
It provides an underlying foundation for accounting standards
What are two advantages to basing the valuation of assets and liabilities on their historical cost?
It's verifiable, and objective. We can look it up
Define net operating cash flows. Briefly explain why periodic net operating cash flows may not be a good indicator of future operating cash flow's.
Net operating cash flow is the difference between cash receipts and cash disbursements from providing goods and services. Over short periods of time, operating cash flow may not be an accurate predictor of future operating cash flows. This is because money may be spent in periods and consumed in later periods.
Describe the recognition, measurement and disclosure concepts that guide accounting practice
Recognition determines whether an item is reflected in the financial statements, and measurement determines the amount of the item. Measurement involves choice of a monetary unit and choice of a measurement attribute. In the United States the monetary unit is the dollar. Various measurement attributes are used in GAAP, including historical cost, not realizable value, present value, and fair value.
Describe how revenue recognition relates to transferring goods and services
Revenue is earned when the customer has legal title of the product (title transition) When providing services, revenue is recognized when the service is provided
Explain the purpose of the conceptual framework
The FASB's conceptual framework is a set of cohesive objectives and fundamental concepts on which financial accounting and reporting standards can be based
Explain the roles of the SEC in the FASB in the setting of accounting standards
The SEC has ultimate authority but gives the FASB responsibility to set accounting standards 1. The board identifies financial reporting issues based on requests/recommendations from stakeholders or through other means 2. The board decides whether to add a project to the technical agenda based on a staff prepared analysis of the issues 3. The board deliberates at one or more public meetings the various issues identified and analyzed by the staff 4. The board issues in exposure draft. In some projects, a discussion paper maybe issued to obtain input at early-stage that is used to develop an exposure draft 5. The board holds a public round table meeting on the exposure draft, if necessary 6. The staff analyzes comment letters, public roundtable discussion, and any other information. The board redeliberates the proposed provisions at public meetings. 7. The board issues an accounting standards update describing amendments to the accounting standards codification
Identify the objective in qualitative characteristics of financial reporting information, and the elements of financial statements
The objective of financial reporting is to provide useful financial information to capital providers. The primary decision specific qualities that make financial information useful are relevance and faithful representation. To be relevant, information must possess predictive value and/or confirmatory value, and all material information should be included. Completeness, neutrality, and freedom from error enhance faithful representation. The 10 elements of financial statements are assets, liabilities, equity, investments by owners, distribution to owners, revenues, expenses, gains, losses, and comprehensive income.
Explain the periodicity assumption
The periodicity assumption allows the life of a company to be divided into artificial time periods To provide timely information
Discuss the terms relevance and faithful representation as they relate to financial accounting information
They are fundamental qualitative characteristics Relevance- information must possess predictive value and/or confirmatory value. Materiality is an aspect of relevance that depends on the company's particular situation and is based on the nature or magnitude of the item that is being reported Faithful representation- means agreement between a measure and a real world phenomenon that the measure is supposed to represent. Completeness, neutrality, and free from error
What is the function and primary focus of financial accounting?
To provide information to investors and creditors and give the information needed to make decisions
What is the going concern assumption?
We anticipate that a business entity will continue to operate indefinitely
