Ch 1
Economic Entity:
A business or organization whose major purpose is to produce a profit for its owners. ex. Corporation
Match the Organization: Developed GAAP from 1939-1973
AICPA
Professional organization of CPAs.
AICPA
Monetary Unit Assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
What financial statement can you find asset on?
Balance Sheet
What financial statement can you find Equity on?
Balance sheet
What financial statement can you find liability on?
Balance sheet
Comprehensive Income
Changes in equity during a period from non-owner sources
UNDERSTANDABILITY meaning
Classifying, characterizing, and presenting information clearly and concisely makes it understandable.
unrealized gain or loss - other comprehensive income
Comprehensive Income
What financial statement can you find Comprehensive Income on?
Comprehensive income statement
Distribution to owners
Decrease in net assets by transfer of assets to the owners of the company
cash dividend declared
Distribution to Owners
Raises funds to support the FASB
FAF
Loss on impairment of Intangible asset
Loss
Expense Recognition Principle
Match expenses with revenues in the period when the company makes efforts to generate those revenues
Sales Revenue
Revenue
A company elects to reference accompanying notes to financial statement items. For example, next to long-term debt in the liabilities section of the balance sheet is the reference, "see note 7."
Understandability
Two independent auditors determine that a company's recorded bond payable value is supported by reviewing bond contracts with creditors.
Verifiability
Income Tax Payable
liability
The Going Concern Assumption means:
the entity is viewed as continuing in business for the foreseeable future with no need for liquidation.
Loss
Decrease in Equity from peripheral or incidental activities and other transactions except those that result from expenses or distributions to owners
CONFIRMATORY VALUE meaning
Financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations
PREDICTIVE VALUE meaning
Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes
A company elects to present a supplementary schedule on the detail of general and administration expenses, the total of which is shown in the income statement.
Full Disclosure Principal
Match the Accounting Assumption: The segregation of assets and liabilities into the categories of current and noncurrent is supported by the assumption that the company will be in existence beyond one year
Going Concern
b. Develops international financial reporting standards .
IASB
What Fundamental Qualitative Characteristic? information is ______ if amending it or stating it could influence decisions that users make on the basis of that information
Material
A company discloses its accounting policy for estimated uncollectible accounts because the policy and the amount recorded could make a difference to users of the financial information
Materiality
Match the Qualitative Characteristic: Management concludes that a depreciation error discovered will not make a difference to external financial statement users because it represents less than 1% of net income.
Materiality
An investment in common stock of another company is adjusted to its quoted price based on the closing stock price on a public exchange. The fair value is considered to be a Level 1 classification in the fair value hierarchy because the market price is observable.
Measurement
Match the Accounting Principle: A purchase of land 15 years ago is recorded in the financial statements at its original acquisition cost, which is verified with the supporting documents from the date of purchase.
Measurment
Match the Accounting Assumption: A company that began operations in 2001 reinvests income in retained earnings each year through 2020 without any adjustments for inflation
Monetary Unit
The benefit of a widely recognized, favorable reputation of a company is not converted into a dollar amount on its financial statements.
Monetary Unit Assumption
A company does not deliberately increase its allowance for doubtful accounts in a period of profitability in order to build a cushion for future unprofitable years
Neutrality
Match the Qualitative Characteristic: A company discloses a description and a dollar amount of sales to a company in which it has a 25% ownership interest
Neutrality
Emerged from actions of Congress
SEC
Requires registered companies to file annual financial statements
SEC
What financial statement can you find Investment by Owner on?
Stockholder Equity Statement
What financial statement can you find Distribution to Owners on?
Stockholders Equity Statement
Equity
The owners' residual interest in the assets of a company
A company with a loan outstanding to a bank provides the bank with monthly, unaudited financial statements.
Timeliness
For certain filers with the Securities and Exchange Commission, annual financial statements are due 60 days following the end of the fiscal year.
Timeliness
(True/False) Management reports are prepared primarily for internal users.
True
(True/False) Providing both cash-basis and accrual-basis information through financial reporting is beneficial to external users
True
(True/False) Information can be Free From Error even if the information is not accurate?
True As long as the information has been done in good-faith
The accounting standards require a tabular reconciliation of warranties, outlining changes in the warranty accrual from the beginning of the period to the end of period. The format of a tabular reconciliation provides a clear picture of how the accrual increased and decreased over the year.
Understandability
COMPARABILITY meaning
Users' decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
An independent auditor uses indirect evidence (customer aging, historical collection history, etc.) to evaluate the adequacy of the allowance for doubtful account balance recorded by the client.
Verifiability
VERIFIABILITY meaning
Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related probabilities also can be verified
COMPLETENESS meaning
A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations.
What is the meaning of perodicity?
A companies economic life is divided up between artificial periods for reporting purposes
NEUTRALITY meaning
A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasized, deemphasized, or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users
Match the Organization: Enforces a code of professional ethics and develops the Uniform CPA Examination
AICPA
Match the Organization: Established the CAP and APB which contributed to GAAP
AICPA
Match the Organization: Organized as a private-sector board
AICPA, FASB, IASB
Full Disclosure Principle
Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.
Financial reporting is necessary because investors and creditors make decisions that require allocation of limited resources
Aligned
financial reporting includes both cash-based reporting and accrual-based reporting
Aligned
intended users of financial reporting include individuals who are considering whether to purchase stock in the company
Aligned
A company consistently uses the same method of depreciation (straight-line) year after year, for the same class of assets.
Comparability
A company reporting inventory under the LIFO inventory method (last-in, first-out), discloses inventory values under the FIFO inventory method (first-in, first-out). This disclosure allows financial statement users to compare inventory amounts using similar accounting methods across entities.
Comparability
Match the Qualitative Characteristic: A company supplies extensive information in a note accompanying its financial statements related to its pension plan, including the assumptions used to calculate the pension liability.
Completenes
A company reports the cost of equipment ($500,000) and accumulated depreciation ($100,000) in its financial statements, which provides information on the extent to which assets have been depreciated or used
Completeness
Information reported in a 2020 income statement in a Form 10-K of a public company is used to assess the accuracy of forecasted 2020 sales.
Confirmatory Value
Match the Qualitative Characteristic: The drop in sales reported in 2020 was inconsistent with an investor's projected level of sales based upon a 5-year trend of previously reported sales.
Confirmatory Value
When information provides feedback from previous evaluations, it has _________
Confirmatory Value
Revenue Recognition Principle
The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.
Focused on technical issues, short-term in nature.
EITF
Match the Accounting Assumption: Even though a shareholder holds an ownership interest in a corporation, the corporation owns its assets (equipment, buildings, and so forth). Those assets are not owned directly by its shareholders
Economic Entity (Ex. Corporation)
What are the accounting assumptions?
Economic Entity Going Concern Monetary Unit Periodicity
Two legally separate companies (a parent company and a subsidiary company) are consolidated and reported as one company for financial reporting purposes.
Economic Entity Assumption
shareholders equity
Equity
Amortization expense
Expense
Match the Accounting Principle: When a seller delivers a product in fulfillment of a promise in a revenue contract, the seller recognizes expense (cost of goods sold) for sacrifice of the product sold to the customer. The expense is directly related to the revenue
Expense Recognition
The cost of utilities for the month of June for a company is expensed in that month because the benefits from incurring utilities cost are derived in that same month
Expense Recognition
An upfront full payment for a 12-month casualty insurance policy is allocated evenly as expense over the 12-month period that the company receives the benefit from having insurance coverage
Expense Recognition Principal
FREE FROM ERROR meaning
Faithful representation does not mean accurate in all respects. Free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate. However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate.
Acts as an advisory council to the FASB
FAFAC
Match the Organization: Approves the standards developed by the EITF that become part of the GAAP
FASB
Match the Organization: Develops GAAP through a transport process that involves public meetings, hearings, and deliberations based upon public comments and research
FASB
Match the Organization: Develops and updated GAAP currently
FASB
Match the Organization: Issues Accounting Standards Update that ament the codification
FASB
Requires a full-time commitment as a board member
FASB
(True/False) A company can choose the types of financial statements to report according to the needs of external users.
False
(True/False) Financial reporting focuses primarily on internal users of financial statements.
False
(True/False) Financial reporting is indirectly concerned with stockholders and creditors.
False
(True/False) The addition of notes following financial statements is an optional way for companies to communicate information with investors.
False They are required and falls under Full Disclosure Principal
Match the Qualitative Characteristic: The computation for depreciation expense on equipment for 2020 was accurately computed using the original cost of equipment, plus an estimated salvage value and useful life based upon the company's past experiences with similar equipment.
Free From Erro
Actual warranty repairs in 2021 pertaining to 2020 sales of products exceed the warranty reserve on December 31, 2020 by $10,000. Although warranty estimates proved inaccurate, the amounts were reasonable based on information available at the end of 2020.
Free From Error
Match the Accounting Principle: A balance sheet includes a consolidated amount for property, plant, and equipment while a note to the financial statements includes the categories and amounts of property, plant, and equipment, the balance of accumulated depreciation, the depreciation method employed, and average useful lives.
Full Disclosure
gain on litigation settlement
Gain
A company purchases a patent with a useful life of 10 years. The company amortizes the patent over 10 years rather than reporting the patent at its liquidation value.
Going Concern Assumption
Match the Organization: Develops IFRS, a single set of global standards
IASB
financial reporting consists of general purpose financial statements, such as an income statement, cash flow statement that serves the needs of investors and creditors
In Alignment
What financial statement can you find Gain on?
Income Statement
What financial statement can you find Loss on?
Income Statement
What financial statement can you find Revenue on?
Income Statement
What financial statement can you find Expense on?
Income statement
Gain
Increase in equity from peripheral or incidental transaction, except those that result from revenues or investment by owners
Investments by owners
Increase in new assets for an ownership interest
Revenue
Inflow of an asset from providing a good or service
common stock issued for cash
Investment by owners
Match the Organization: Organized as a governmental board
SEC
Financial reporting consists of a number of specialized financial reports that meet the needs of a variety of user groups
Not Aligned
Primary users of financial reporting are a companies managers who make decisions for daily operations
Not Aligned
a shareholder or owner of a company is able to obtain financial information (like monthly sales) by inquiring directly to the companies management. This means financial reporting is beneficial, but not critical to an investor
Not Aligned
Liability
Obligation to transfer cash or other resources as a result of a past transaction.
Expense
Outflow of an asset related to the production of revenue
A company records an accrual for salaries expense as of the date of its fiscal year-end, December 31, 2020, in order to properly recognize incurred expenses for the fiscal year
Periodicity Assumption
Match the Accounting Assumption: A company with publicly traded securities registered with the Securities and Exchange Commission is required to report financial statement information on a quarterly and annual basis that coincides with its fiscal year
Periodicity Assumption
Information reported in the 2020 income statement in a Form 10-K of a public company is used as the basis to prepare a forecast of 2021 sales.
Predictive Value
Match the Qualitative Characteristic: Income derived from discontinued operations is reported separately from income derived from continuing operations in the income statement. This presentation helps financial statements users estimate the amount of income that will continue into future years
Predictive Value
Match the Accounting Principle: A company receives a cash deposit from a customer for a service to be performed in three months. Even though cash is received now, revenue is not recognized until the performance obligation is satisfied in three months.
Revenue Recognition
A company performs a service in the current month but will not receive payment for 90 days. Because the company satisfied the performance obligation in the current period, the company records revenue in the current period even though payment will be received in the future.
Revenue Recognition Principal
What are the 4 accounting principles?
Revenue Recognition, Expense Recognition, Measurement, Full Disclosure
Match the Organization: Has regulatory oversight over the FASB
SEC
Match the Organization: Has the authority to create GAAP but allows the private sector to be responsible for updates to GAAP
SEC
Interest Receivable
asset
MATERIALITY meaning
nformation is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.
Asset
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
What is the objective of General-purpose financial reporting?
provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity
Measurement Principle
the most commonly used measurements are based on historical cost and fair value