ACC 301 Test 1
completness
all the information that is necessary for faithful represntation is provided
AICPA
american institute of CPAs - national professional organization - established Committe on Accounting Procedures (CAP) and Accounting Principles Board (APB)
Qualitative characteristic being employed when companies in the same industry are using the same accounting principles
comparability
economic entity
company keeps its activity separate from its owners and other businesses
going concern
company to last long enough to fulfill objectives and commitments
having information available to users before it loses its capacity to influence decisions
timeliness
issuance of interim reports is an example of what enhancing quality of relevance
timeliness
Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena
comparability
Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. which qualitative characteristic of accounting information is not followed?
comparability (Consistency)
imperative for providing comparisons of a company from period to period
comparability (consistency)
Four qualitative characteristics that are related to both relevance and faithful representation
comparability, verifiability, timeliness, and understandability
enhancing qualities
comparability, verifiability, timeliness, understandability
Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent
completeness
equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners
comprehensive income
includes all changes in equity during the period, except those resulting form investments by owners and distributions to owners
comprehensive income
increases in net assets in a period from nonowner sources
comprehensive income
What is the quality of information that enables users to confirm or correct prior expectations
confirmatory value
information about an economic phenomena that corrects past or present expectations based on previous evaluations
confirmatory value
quality of information that confirms users' earlier expectations
confirmatory value
identify the pervasive constraint developed in the conceptual framework
cost
cost constraint
cost of providing information must be weighed against the benefits that can be derived from using it
equity accounts have
credit balances
income accounts have
credit balances
liability accounts have
credit balances
the objective of general-purpose financial reporting is to provide financial information about the reporting entity to a) investors b) creditors c) potential equity investors d) all of these answer choices are correct
d) all of these answer choices are correct
to convert cash receipts from customers to revenue on an accrual basis, which of the following adjustments is necessary? a) add ending accounts receivable b) subtract ending unearned service revenue c) subtract beginning accounts receivable d) all of these answer choices are correct
d) all of these answer choices are correct
which of the following is a reason the trial balance may not contain up-to-date and complete data a) some items may be unrecorded b) some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions c) some events are not recorded daily because its not efficient to do so d) all of these answer choices are correct
d) all of these answer choices are correct
an accrued expense is a) an expense for which cash is paid before the expense is incurred b) initially recorded as an asset c) an expense which is recorded with the passage of time d) an expense that has been incurred but for which payment has not yet been made
d) an expense that has been incurred but for which payment has not yet been made
What group currently writes the Generally Accepted Accounting Principles a) internal revenue service b) securities and exchange commission c) financial accounting foundation d) financial accounting standarads board
d) financial accounting standards board
the information provided by financial reporting pertains to a) individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers b) individual business enterprises and industries, rather than to an economy as a whole or to members of society as consumers c) individual business enterprises and an economy as a whole, rather than to industries or to members of society as consumers d) individual business enterprises, rather than to industries oran economy as a whole or to members of society as consumers
d) individual business enterprises, rather than to industries or an economy as a whole or to members of society as consuemrs
residual interest in the assets of the enterprise after deducting its liabilities
equity
target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets
expense recognition
rationale for accrual accounting
expense recognition and revenue recognition principles
a company charges its sales commission costs to expense
expense recognition principle
allocated expenses to revenues in the proper period
expense recognition principle
intangible assets are amortized over periods benefited
expense recognition principle
Quality of information that assures users that information represents the economic phenomena that it purports to represent
faithful representation
neutrality is an ingredient of this fundamental quality of accounting information
faithful representation
True or False a conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by referencing to the conceptual framework and a formal standard-setting body will not be necessary
false
accounting reports should be developed so that users without knowledge of economics and business can become informed about the financial results of a company true or false
false
accounting standards based on individual conceptual frameworks generally will result in consistent and comparable accounting reports true or false
false
capital providers are the only users who benefit from general-purpose financial reporting true or false
false
general - purpose financial reports are most useful to company insiders in making strategic business decisions true or false
false
information that is a faithful representation is characterized as having predictive or confirmatory value true or false
false
relevant information only has predictive value, confirmatory value, or both true or false
false
the fundamental qualitative characteristics that make accounting information useful are relevance and verifiability true or false
false
verifiability is solely an enhacing characteristic for faithful representation true or false
false
overview of the conceptual framework
first level = basic objectives (why) second level= qualitative characteristics and elements (bridge) third level= recognition, measurement, and disclosure concepts (how)
the extent to which information is accurate in representing the economic substance of a transaction
free from error
target was involved in litigation over the last year. this litigation is disclosed in the financial statements
full disclosure
all important aspects of bond indentures are presented in financial statements
full disclosure principle
all significant post-balance-sheet events are disclosed
full disclosure principle
ensures that all relevant financial information is reported
full disclosure principle
financial information is presented so that investors will not be misled
full disclosure principle
Qualitative characteristics of accounting information
fundamental qualities- relevance and faithful representation enhancing qualities
Fundamental quality- relevance
to be relevant, accounting information must be capable of making a difference in a decision predictive value, confirmatory value, and materiality
equity
residual interest in the assets of an entity that remains after deducting its liabilities.
revenue is recorded when the product is delivered
revenue recognition principle
income statement accounts effects from debits and credits
revenue, debit decreases, credit increases expense, debit increases, credit decreases
increases assets during a period through sale of product
revenues
arises from income statement activities that constitute the entity's ongoing major or central operations
revenues, expenses
understandability
the quality of information that lets reasonably informed users see its significance
What is the purpose of information presented in notes to the financial statements?
to provide disclosure required by generally accepted accounting principles
The process of establishing a typical FASB statement
1. Topics are identified and placed on the board's agenda 2. the board conducts research and analysis and a discussion memorandum is issued 3. a public hearing on the proposed standard is held 4. the board evaluates the research and public response and issues an exposure draft
the accounting cycle
1. transactions 2. journalization 3. posting 4. trial balance 5. adjustments 6. adjusted trial balance 7. statement preparation 8. closing 9. post closing trial balance 10. reversing entries
Although ethical dilemmas are frequently encountered in the business world, accountants are fortunate because adhering to GAAP solves all ethical questions True False
False
APB
Issued 31 Accounting Principle Board Opinions (APBOs) Wheat committee recommendations adopted in 1973- not part of AICPA
CAP
Issued 51 Accounting Research Bulletins (ARBs) on accounting procedures- not proactive, fix problem after the fact problem by problem approach failed was just volunteers from large accounting firms so they didn't pass standards to hurt their business
The ____ has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules a) Financial Accounting Standards Board FASB b) Public Company Accounting Oversight Board PCAOB c) Internal Revenue Service IRS d) Securities and exchange commission SEC
PCAOB
SEC
Securities and exchange commission - established by federal government - accounting and reporting for public companies - securities act of 1933 and 1934 - encouraged private standard setting body - SEC requires public companies to adhere to GAAP - SEC oversight - Enforcement Authority
neutrality
a company cannot select information to favor one set of interested parties over another
according to the FASB conceptual framework, an entity's revenue may result from
a decrease in a liability from primary operations
free from error
a more accurate (faithful) representation of a financial item
which of the following is the objective of financial reporting? to provide information a) about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors b) used to identify, measure, analyze and communicate financial information needed by management to plan, control and evaluate a company's operations c) about the management and shareholders of an enterprise d) that defines the process of how and at what cost money is allocated among competing interests
a) about the reporting entity that is useful to present and potenetial equity investors, lenders, and other creditors
Which of the following is an incorrect depiction of the accounting equation? a) assets + stockholders' equity = liabilities b) assets - liabilities = stockholders' equity c) assets = liabilities + stockholders' equity d) assets - stockholders' equity = liabilities
a) assets + stockholders' equity = liabilities
all of the following statements about contra asset accounts are true except a) contra asset accounts are not reported in the financial statements b) contra asset accounts are increased with credits c) contra asset accounts have normal credit balances d) contra asset accounts are deducted from the related asset account to determine book value
a) contra asset accounts are not reported in the financial statements
The residual interest in the assets of a company that remains after deducting its liabilities is called a) equity b) comprehensive income c) investments by owners d) distributions to owners
a) equity
The FASB is a(n) a) private sector body b) international organization c) governmental unit d) group of accounting firms
a) private sector body
a trial balance a) proves that debits and credits are equal in the ledger b) chronologically lists transactions and other events c) proves that a company recorded all transactions d) all of these answer choices are correct
a) proves that debits and credits are equal in the ledger
if the entry to close income summary to retained earnings includes a debit to income summary a) retained earnings will be increased by the current period's net income b) the company has incurred in a net loss c) dividends paid exceed the net income earned for the period d) expenses exceed revenues
a) retained earnings will be increased by the current period's net income
the financial statements most frequently provided include all of the following except the a) statement of retained earnings b) statement of cash flows c) balance sheet d) statement of stockholders' equity
a) statement of retained earnings
if the balances in both accounts receivable and accounts payable decrease during the year a) the decrease in the accounts receivable balance would result in an increase in cash for the period b) the decrease in both the accounts receivable and accounts payable balances will result in a decrease in cash for the period c) the decrease in both the accounts receivable and accounts payable balances will result in an increase in cash for the period d) the decrease in the accounts payable balance would result in an increase in cash for the period
a) the decrease in the accounts receivable balance would result in an increase in cash for the period
the proper sequence of financial statement preparation is a) the income statement, the retained earnings statement, the balance sheet, and then the statement of cash flows b) the retained earnings statement, the balance sheet, the income statement, and then the statement of cash flows c) the statement of cash flows, the income statement, the retained earnings statements, and then the balance sheet d) the balance sheet, the retained earnings statement, the income statement, and then the statement of cash flows
a) the income statement, the retained earnings statement, the balance sheet, and then the statement of cash flows
Companies may prepare a trial balance at any time a) true b) false
a) true
after journalizing and posting all adjusting entries, a company prepares an adjusted trial balance that is the primary basis for preparation of the financial statements a) true b) false
a) true
depreciation allocates the cost of long-lived assets to expense over their periods which benefit from their use (useful life) a) true b) false
a) true
accruals are
accrued revenues- revenues recorded for services performed but cash has yet to be received at the statement date accrued expenses- expenses incurred but not yet paid in cash or recorded
items characterized by service potential or future economic benefit
assets
normal balance debit
assets expenses
balance sheet accounts effects from debits and credits
assets, debits increase, credits decrease liabilities, debits decrease, credits increase equity, debits decrease, credits increase
Third level
assumptions, principles, and constraints
FASB Codification
attempts to put all authoritative literature on a topic in one place- a major reconstruction
International Financial Reporting Standards (IFRS) are issued by the a) FASB b) IASB c) EU d) SEC
b) IASB
the financial statements are prepared from the a) trial balance b) adjusted trial balance c) post-closing trial balance d) closing trial balance
b) adjusted trial balance
the adjusting entry to record an accrued expense includes a debit to a) an expense account and a credit to a revenue account b) an expense account and a credit to a liability account c) a liability account and a credit to an expense account d) a liability account and a credit to a revenue account
b) an expense account and a credit to a liability account
In analyzing a company's financial statements, which financial statement would a potential investor use primarily to assess the company's liquidity and financial flexibility a) income statement b) balance sheet c) statement of cash flows d) statement of retained earnings
b) balance sheet
which of the following is not transferred to retained earnings at the end of the period a) dividends b) common stock c) expenses d) revenues
b) common stock
the assumption that allows the merging of a parent company and its subsidiaries for financial reporting purposes is the a) going concern assumption b) economic entity assumption c) monetary unit assumption d) periodcity assumption
b) economic entity assumption
deferrals include a) revenues for services performed but not yet received in cash or recorded b) expenses paid in cash before they are used or consumed c) expenses incurred but not yet paid in cash or recorded d) all of these answer choices are correct
b) expenses paid in cash before they are used or consumed
In the closing process, all of the revenue and expense account balances are closed to the a) retained earnings account b) income summary account c) dividends account d) capital account
b) income summary account
Which of the following statements is correct concerning a conceptual framework in accounting a) Standard setting is based on personal conceptual frameworks which lead to different conclusions about similar issues b) it should allow practical problems to be solved more quickly by reference to it c) it should be based on fundamental truths that are derived from the laws of nature d) all of these answer choices are correct
b) it should allow practical problems to be solved more quickly by reference to it
unearned revenues are a) revenues b) liabilities c) accruals d) all of these answer choices are correct
b) liabilities
when a dividend is declared a) assets decrease b) liabilities increase c) stockholders' equity increases d) al of these answer choices are correct
b) liabilities increase
double-entry accounting system is the basis of accounting systems under a) GAAP only b) IFRS only c) both GAAP and IFRS d) neither GAAP nor IFRS
c) Both GAAP and IFRS
Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?
comparability
Which of the following documents is typically issued as part of the due-process activities of the financial accounting standards board (FASB) for amending the FASB accounting standards codification a) a proposed accounting research bulletin b) a proposed statement of position c) a proposed accounting standards update d) a proposed staff accounting bulletin
c) a proposed accounting standards update
Factors that shape an accounting information system include the a) informational demands of management b) volume of data to be handled c) all of these answr choices are correct d) transactions in which the business engages
c) all of these answer choices are correct
Adjusting entries a) are external events involving a transfer or exchange between two or more entities b) reduce the nominal accounts to zero and transfer net income or loss to an owners' equity account c) are made at the end of accounting period to bring all accounts up to date on an accrual basis d) all of these answer choices are correct
c) are made at the end of accounting period to bring all accounts up to date on an accrual basis
which of the following columns is generally found on a worksheet a) chart of accounts b) statement of cash flows c) income statement d) all of these answer choices are correct
c) income statement
which of the following statements about a trial balance is incorrect? a) it uncovers errors in journalizing and posting b) it is useful in the preparation of financial statements c) it proves that all transactions have been recorded d) its primary purpose is to prove the mathematical equality of debits and credits are posting
c) it proves that all transactions have been recorded
which one of the following accounts would have an amount listed in the debit column of a post-closing trial balance a) accounts payable b) allowance for doubtful accounts c) prepaid insurance d) accumulated depreciation -equipemnt
c) prepaid insurance
all of the following accounts are increased on the debit side except a) cash b) salaries expense c) retained earnings d) accounts receivable
c) retained earnings
when a corporation purchases a computer for cash a) assets increase b) liabilities increase c) the account cash will be credited d) stockholders' equity decreases
c) the account cash will be credited
Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB accounting standards codification a) an accountant can be sure that all SEC rules are included in the codification b) the codification includes only FASB statements c) the codification is the sole source of US GAAP for nongovernmental entities d) the codification significantly modified the content of GAAP when it became effective
c) the codification is the sole source of US GAAP for nongovernmental entities
calculate operating expenses on an accrual basis
cash paid for operating expenses +beginning prepaid expenses - ending prepaid expenses -beginning accrued liabilities + ending accrued liabilities = operating expenses on an accrual basis
to convert cash receipts from customers to revenue on an accrual basis
cash receipts from customers -beginning accounts receivable +ending accounts receivable +beginning unearned service revenue - ending unearned service revenue = revenue on an accrual basis
comprehensive income
change in equity (net assets)
periodicity
company can divide its economic activities into time periods
the purpose of financial accounting is to provide information primarily for which of the following groups a) internal revenue service b) government c) financial accounting standards board d) investors and creditors
d) investors and creditors
Choose the correct statement about GAAP a) firms may not restate financial statements previously issued b) GAAP are laws c) Only publicly traded companies must comply with GAAP d) it is a violation of SEC, regulations for publicly traded companies to depart from GAAP
d) its is a violation of SEC regulations for publicly traded companies to depart from GAAP
faithful representation includes all of the following ingredients except a) neutrality b) completeness c) free from error d) materiality
d) materiality
the worksheet a) replaces the financial statements b) is prepared at the beginning of the period to ready the permanent accounts for the activity that will occur during the period c) must be prepared on columnar paper d) none of these answer choices are correct
d) none of these answer choices are correct
The third level of the conceptual framework includes the a) elements of financial statements b) objective of financial reporting c) qualitative characteristics of accounting information d) recognition, measurement, and disclosure concepts
d) recognition, measurement, and disclosure concepts
Which of the following accounting pronouncements is the most authoritative a) FASB Statement of Financial Accounting Concepts b) AICPA Statement of Position c) FASB technical bulletin d) the FASB accounting standards codification
d) the FASB accounting standards codification
What is the primary protection for investors against fraudulent financial reporting by corporations a) criminal statutes b) the fact that all firms must report the same way c) the integrity of management d) the requirement that financial statements be audited
d) the requirement that financial statements be audited
adjusting entry in october pioneer advertising performed services worth 2,000 that were not billed clients before oct 31 prepare the entry to revenues for services performed
debit accounts receivable 2,000 credit service revenue 2,000
adjusting entry pioneer advertising reasonably estimates a bad debt expense for the month of $1,600 prepare the entry to record the bad debts for the month of october
debit bad debt expense 1,600 credit allowance for doubtful accounts 1,600
asset accounts have
debit balances
cost of goods sold accounts have
debit balances
expense accounts have
debit balances
stockholders invest $100,000 cash in an advertising venture to be known as pioneer advertising inc
debit cash 100,000 credit common stock 100,000
adjusting entry pioner advertising received $12,000 on october 2nd from KC for advertising services expected to be completed by december 31. prepare the journal entry to record the recipt on october 2nd
debit cash 12,000 credit unearned service revenue 12,000
pioneer advertising receives a $12,000 cash advance from R. Knox, a client, for advertising services that are expected to be completed by December 31
debit cash 12,000 credit unearned service revenue 12,000
pioneer advertising receives 28,000 in cash and bills copa company 72,000 for advertising services of 100,000 performed in october
debit cash 28,000 and accounts receivable 72,000 credit service revenue 100,000
adjusting entry pioneer advertising estimates depreciation on its office equipment to be $400 per month. prepare the entry to record depreciation for the month of october
debit depreciation expense 400 credit accumulated depreciation 400
pioneer advertising's board of directors declares and pays a $5,000 cash dividend to stockholders
debit dividends 5,000 credits cash 5,000
pioneer advertising purchases office equipment costing $50,000 by signing a 3-month, 12% , $50,000 note payable
debit equipment 50,000 credit notes payable 50,000
to close net income (income summary)
debit income summary credit retained earnings
to close accounts with debit balances (expenses)
debit income summary credits cost of goods sold, sales returns and allowances, and expense accounts
adjusting entry an analysis of the policy reveals that $500 (6,000 / 12) of insurance expires each month. prepare the entry to record the insurance cost expired in october
debit insurance expense 500 credit prepaid insurance 500
adjusting entry pioneer signed a three month 12% note payable in the amount of $50,000 on october 1 prepare the adjusting entry on oct 31 to record the accrual of interest
debit interest expense 500 credit interest payable 500 50000 x 12% x 1/12=500
Pioneer advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30
debit prepaid insurance 6,000 credit cash 6,000
pioneer advertising pays $9,000 office rent, in cash, for october
debit rent expense 9,000 credit cash 9,000
to close net loss (income summary)
debit retained earning credit income summary
employees are paid every four weeks. the total payroll is 2,000 per day, the pay period ended on Friday October 26, with salaries and wages of 40,000 being paid
debit salaries and wages expense 40,000 credit cash 40,000
adjusting entry employees receive total salaries and wages of 10,000 for a five-day work week or 2,000 per day. prepare the adjusting entry on oct. 31 to record accrual for salaries
debit salaries and wages expense 6,000 credit salaries and wages payable 6,000 we owe them 6,000 for monday tuesday wednesday (2,000 x 3)
Watteau Inc. does not issue its first-quarter report until after the second quarter's results are reported. which qualitative characteristic of accounting is not followed
timeliness
adjusting entry on november 23, pioneer will again pay total salaries and wages of 40,000 prepare the entry to record the payment of salaries on novemer 23
debit salaries and wages payable 6,000 and salaries and wages expense 34,000 credit cash 40,000 40,000 (for the past 4 weeks) - 6,000 (the part of one week that was in october and we already accounted for) = 34,000
to close accounts with credit balances
debit sales revenue credit income summary
pioneer advertising purchases, for 25,000 on account, an estimated 3-month supply of advertising materials from aero supply
debit supplies 25,000 credit accounts payable 25,000
adjusting entry analysis reveals that pioneer advertising earned 4,000 of the advertising servcies in october. prepare the entry to record the revenue for services performed
debit- unearned service revenue 4,000 credit- service revenue 4,000
credits ______ asset accounts
decrease
credits ______ expense accounts
decrease
credits ________ cost of goods sold accounts
decrease
debits _______ equity accounts
decrease
debits _______ income accounts
decrease
debits ________ liability accounts
decrease
losses
decreases in equity (net assets)
distributions to owners
decreases in net assets of a patricular enterprise resulting form transferring assets, rendering services, or incurring liabilities by the enterprise to owners dividends
declares and pays cash dividends to owners
distributions to owners
decreases assets during the period by purchasing the company's own stock
distributions to owners
each enterprise is kept as a unit distinct from its owner or owners
economic entity assumption
indicates that personal and business record keeping should be separately maintained
economic entity assumption
the use of consolidated statements is justified
economic entity assumption
Third level- basic assumptions
economic entity, going concern, monetary unit, periodicity
arises from peripheral or incidental transactions
gains, losses
rationale why plant assets are not reported at liquidation value
going concern assumption
timeliness
having information available to decision-makers before it loses its capacity to influence decisions
confirmatory value
helps us prove or edit our predictions- double checking that what we previously predicted was correct
target records the purchase of a new dell pc at its cash equivalent price
historical cost
measurement principle
historical cost- acquisition price fair value- selling price
predicitive value
if it has value as an input to predictive processes used by investors to form their own expectations about the future
materiality
if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information
credits ______ liability accounts
increase
credits _______ income accounts
increase
credits ________ equity accounts
increase
debits _______ cost of goods sold accounts
increase
debits ________ asset accounts
increase
debits _________ expense accounts
increase
gains
increases in equity (net assets) gain on sale of equipment
investments by owners
increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interest or equity in it issuance of preferred stock
revenues
inflows or other enhancements of assets of an entity
comparability
information that is measured and reported in a similar manner for different companies is considered comparable
increases ownership interest
investments by owners, comprehensive income
expense recognition
let the expenses follow the revenues
obligation to transfer resources arising from a past transaction
liabilities
normal balance credit
liabilities stockholders' equity revenue
look at closing entries
look at reversing entries
an item is not recorded because its effect on income would not change a decision
materiality
agricultural companies use fair value for purposes of valuing crops
measurement principle (fair value)
fair value changes are not recognized in the acounting records
measurement principle (historical cost)
goodwill is recorded only at time of purchase
measurement principle (historical cost)
indicates that fair value changes subsequent to purchase are not recorded in the accounts
measurement principle (historical cost)
an allowance for doubtful accounts is established
measurement principle and expense recognition principle
Third level principles
measurement principle, revenue recognition, expense recognition, full disclosure,
Financial Accounting Standards Board
mission is to make better reporting standards smaller membership full-time, paid membership greater autonomy increased independence broader representation more than just public accountants these are reasons by FASB is different than CAP and APB
assumes that the dollar is the "measuring stick" used to report on financial performance
monetary unit assumption
monetary unit
money is the common denominator
Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences o the industry. Which qualitative characteristic of accounting information is not followed?
neutrality
absence of bias intended to attain a predetermined result or to induce a particular behavior
neutrality
ignores the economic consequences of a standard or rule
neutrality
the chairman of the SEC at one time noted, "if it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." which qualitative characteristic of accounting information should ensure that such a situation will not occur?
neutrality
Major challenges in financial reporting
nonfinancial measurements forward looking information soft assets timeliness two sets of standards accepted for internation use ethics
expenses
outflows or other enhancements of assets of an entity amortization, cost of goods sold
reporting must be done at defined time intervals
periodicity assumption
separates financial information into time periods for reporting purposes
periodicity assumption
information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future
predictive value
deferrals are
prepaid expenses- assets paid for and recorded before a company uses them unearned revenues- receipt of cash before the services are performed is recorded as a liability called unearned revenues
GAAP
principles that have substantial authoritative support major sources of GAAP: - FASB standards, interpretations, and staff positions - APB Opinions - AICPA Accounting Research Bulletins (CAP)
assets
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events interest receivable, prepaid insurance, cash, equipment
liabilities
probable future sacrifices of economic benefits arising from present obligations of a aparticlar entity to transfer assets or provide services to other entities in the future as a result of past transactions or events accounts payable
An effective process of capital allocation is critical to a healthy economy, which
promotes productivity, encourages innovation, and provides an efficient and liquid market for buying and selling securities
ownership structure
proprietorship or partnership: owner's capital/drawing corporation: common stock, dividends, retained earnings, paid-in capital in excess of par
full disclosure
providing information that is of sufficient importance to influence the judgement and decisions of an informed user
Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?
relevance
information that is capable of making a difference in the decisions of users in their capacity as capital providers
relevance
predictive value is an ingredient of this fundamental quality of information
relevance
What are the two fundamental qualities that make accounting information useful for decision-making
relevance and faithful representation
two fundamental qualities that make accounting information useful for decision-making purposes
relevance and faithful representation
revenue recognition
requires that companies recognizer revenue in the accounting period in which the performance obligation is satisfied
adjusting entry an inventory count at the close of business on october 31 reveal that 10,000 of the advertising supplies are still on hand
started with 25,000 ended with 10,000 25,000-10,000= 15,000 debit supplies expense 15,000 credit supplies 15,000
fundamental quality- faithful representaion
that the numbers and descriptions match what really existed or happened completness, neutrality, free from error
according to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on
the needs of the users of the information
What are the statements of financial accounting concepts intended to establish
the objectives and concepts for use in developing standards of financial accounting and reporting
objective of financial reporting
to provide financial information about the reporting entity that is useful to present and potential equity investors, lender, and other creditors in making decisions about providing resources to the entity
True or False a conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements
true
accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements true or false
true
in preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities
true
the objective of financial reporting is the foundation from which the other aspects of the framework logically result true or false
true
quality of information that allows users to comprehend its meaning
understandability
Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data?
verifiability
requires a high degree of consensus among individuals on a given measurement
verifiability
verifiability
when independent measurers, using the same methods, obtain similar results