Chapter 1 Terms

General-purpose financial statements

A means of providing financial reporting information to a wide variety of users at the least cost.

Statements of Financial Accounting Concepts

A series of statements by the FASB that set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. These statements of concepts do not establish GAAP. However, this cohesive set of interrelated concepts is intended to be a conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner.

Decision-usefulness

Approach that requires that financial reporting be useful to investors by helping them assess (1) the company's ability to generate net cash inflows and (2) management's ability to protect and enhance the capital providers' investments.

FASB Staff Postions

Issued by the FASB, these provide interpretive guidance and also minor amendments to standards and interpretations.

Sarbanes-Oxley Act

Legislation, enacted by the U.S. Congress, intended to combat accounting fraud, curb poor reporting practices, and make sweeping changes to the institutional structure of the accounting profession.

Accrual-basis accounting

Accounting approach, in which a company records events that change its financial statements in the periods in which it receives or pays cash. Thus, a company recognizes revenue when it satisfies a performance obligation rather than when it receives cash, and it recognizes expenses when it incurs them rather than when it pays them.

International Financial Reporting Standards (IFRS)

All the accounting rules accepted for international use, issued by the International Accounting Standards Board.

Financial Accounting Standards Board Codification Research System (CRS)

An online, real-time database that provides easy access to the Codification, through a topically organized structure, subdivided into topics, subtopics, sections, and paragraphs, using a numerical index system.

Committee on Accounting Procedure (CAP)

Committee established by the AICPA in 1939 at the urging of the SEC to deal with accounting Problems. The CAP issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board.

Financial Accounting Standards Board Accounting Standards Codification (Codification)

Developed by the FASB, it provides in one place all the authoritative literature related to a particular topic.

Securities and Exchange Commission (SEC)

Federal agency established to help develop and standardize financial information presented to stockholders, It administers the Securities Exchange Act of 1934 and several other acts. Most companies that issue securities to the public are required to file audited financial statements with the SEC. The SEC also has broad powers to prescribe the auditing practices and standards to be employed by companies that fall within its jurisdiction.

Accounting Research Bulletins

Fifty-one bulletins from the Committee on Accounting Procedure (CAP) during the years 1939 to 1959, issued to deal with accounting Problems as they arose. Subsequently, the AICPA created the Accounting Principles Board to provide a structured body of accounting principles.

Objective of financial reporting

Goal for financial accounting and reporting, established by the accounting profession, which is to provide information about the reporting entity that is useful to present and potential to equity investors, lenders, and other creditors in decisions about providing resources to the entity.

Emerging Issues Task Force (EITF)

Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. The FASB reviews and approves all EITF consensuses, and the SEC views consensus solutions as preferred accounting.

Public Company Accounting Oversight Board (PCAOB)

Organization established by the Sarbanes-Oxley Act that has oversight and enforcement authority for accounting practices and that establishes auditing, qualty control, and independence standards and rules.

Accounting Principles Board (APB)

Private standard-setting organization from 1959 to 1973, whose mission was to develop overall conceptual framework. Its official pronouncements, called APB opinions, were to be based mainly on research studies and be supported by reasons and analysis. The APB issued 31 opinions in its lifetime.

Financial reporting

Reporting of financial information other than in formal financial statements. Examples include the president's letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management's forecasts, and social or environmental impact statements.

Interpretations

Statements issued by the FASB that modify or extend existing standards. Interpretations have the same authority as standards for purposes of determining GAAP.

Wheat Committee

The Study Group on Establishment of Accounting Principles, chaired by Francis Wheat, that examined the organization and operation of the Accounting Principles Board and determined the changes needed to attain better productivity and more timely correction of accounting abuses. The Study Group submitted its recommendations to the AICPA Council in the spring of 1972, which adopted the recommendations in total and implemented them by early 1973.

Financial accounting

The accounting process that culminates in the preparation of financial reports for use by both internal and external parties.

Auditing Standards Board

The arm of the AICPA that had been responsible for developing auditing standards. The Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act, now oversees the development of auditing standards.

Generally accepted accounting principles (GAAP)

The common set of accounting standards and procedures, for which either an authoritative accounting rule-making body has established a principle of reporting in a given area, or over time, a given practice has been accepted as appropriate because of its universal application.

Expectations gap

The difference between what the public thinks accountants should do and what accountants think they can do.

Financial Accounting Standards Board (FASB)

The major organization of the standard-setting structure for financial accounting. Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. The FASB consists of seven members, appointed for five-year terms by the Financial Accounting Foundation. Accounting guidance issued by the FASB is considered generally accepted accounting principles (GAAP).

American Institute of Certified Public Accountants (AICPA)

The national professional organization of practicing Certified Public Accountants (CPAs), whose various committees and boards have been an important contributor to the development of GAAP.

APB Opinions

The official pronouncements of the Accounting Principles Board, intended to be based mainly on research studies and be supported by reasons and analysis. Between its inception in 1959 and its dissolution in 1973, the APB issued 31 opinions.

International Accounting Standards Board (IASB)

The organization, based in London, that sets accounting standards accepted for international use. Although many of the international standards are similar to U.S. GAAP, the FASB and the IASB are currently working on a convergence project to result in one set of high-quality standards.

Financial statements

The principal means through which a company communicates its financial information. These statements reflect the collection, tabulation, and final summarization of the accounting data. The statements most frequently provided are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners' or stockholders' equity. Note disclosures are an integral part of a company's financial statements.

Accounting Standards Updates

The products of standard-setting (e.g., FASB standards, staff positions, EITF consensuses) included in the FASB Codification. The Updates include the background and basis for conclusions for the new pronouncement in a common format, regardless of the form in which such guidance may have been issued. Updates are also issued for amendments to the SEC content in the Codification.

Entity perspective

The view that companies are distinct and separate from their owners (present shareholders).