Chapter 1: Financial Accounting & Accounting Standards

Capital Allocation

The process of determining how and at what cost money is allocated among competing interests.

Financial Reporting Environment.

-Accounting & capital allocation. -Objective of financial reporting. -Need to develop standards.

Securities and Exchange Commission (SEC)

-Established by the federal government to help develop and standardize financial information presented to stockholders. -They are a federal agency. -It administers the Security Exchange Act of 1934 and several other acts. -The (SEC) currently exercises oversight over 12,000 companies that are listed on the major exchange. -The SEC requires registrants to adhere to GAAP. -The SEC relies on the FASB to develop accounting standards.

Generally accepted accounting principles

-FASB Codification.

Due Process

-In establishing financial accounting standards, the FASB relies on two basic premises: 1.The FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession. 2.It should operate in full view of the public through "due process" system that gives interested persons ample opportunity to make their views known.

User of these financial reports

-Investors -Creditors -Managers -Unions -Government Agencies

Major challenge in Financial reporting.

-Political environment. -Expectation gap. -Financial reporting issue. -International accounting standards. -Ethics.

Parties involved in standard-setting.

-Securities and exchange commission -American Institute of CPAs. -Financial Accounting Standards Board.

The purpose of the International Accounting Standards Board is to A. promote uniform accounting standards among countries of the world. B. arbitrate accounting disputes between auditors and international companies. C. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. D. develop a uniform currency in which the financial transactions of companies through-out the world would be measured.

A. promote uniform accounting standards among countries of the world.

CRs(Codification Research System)

An online, real time database that provides easy access to the codification.

Which of the following is not a user of financial reports? A. Unions. B. Customers. C. Creditors. D. Government agencies.

B. Customers

Which of the following is an ethical concern of accountants? A. Managerial Accounting. B. Earnings manipulation. C. Conservative accounting. D. Industry practices.

B. Earnings manipulation.

What group currently writes the Generally Accepted Accounting Principles? A. Financial Accounting Foundation. B. Financial Accounting Standards Board. C. Internal Revenue Service. D. Securities and Exchange Commission.

B. Financial Accounting Standards Board

A common set of accounting standards and procedures is called A. financial accounting standards. B. generally accepted accounting principles. C. objectives of financial reporting. D. statements of financial accounting concepts.

B. Generally accepted accounting principles.

Accrual accounting is used because A. it recognizes revenues when cash is received and expenses when cash is paid. B. it provides a better indication of a company's ability to generate cash flows than the cash basis. C. cash flows are considered less important. D. it provides past ability to generate negative cash flows.

B. it provides a better indication of a company's ability to generate cash flows than the cash basis.

Capital Allocation Process

Financial Reporting->Users(present and potential) -> Capital Allocation

Examples of how some financial information is better provided, or can be provided only, be means of financial reporting other than formal financial statements.

-President's letter or supplementary schedules in the corporate annual report. -Prospectuses. -Reports filed with government agencies. -News releases. -Management's forecasts. -Social or environmental impact statements.

:Generally Accepted=

-That an authoritative accounting rule-making body has established a principle of reporting in a given area. OR That over time a given practice has been accepted as appropriate because of its universal application.

Types of pronouncement

-The FASB issues two major types of pronouncements: 1. Accounting Standards updates. 2. Financial Accounting Concepts.

FASB Codification ("Codification")

-The FASB's primary goal in developing the codification is to provide in one place all the authoritative literature related to a particular topic. -The codification changes the way GAAP is documented, presented, and updated. -The codification integrates and synthesizes existing GAAP; it DOES NOT create new GAAP. -It creates one level of GAAP, which is considered authoritative. -To provide easy access to this codification, the FASB also developed the Financial Accounting Standards Board Codification Research System (CRs)

The Expectation Gap

-The Sarbanes-Oxley Act was passed in response to a string of accounting scandals at companies like Enron, Cendant, Sunbeam, Rite-Aid, Xerox, and Worldcom. The following are key provisions of the legislation: -Establishes an oversight board, the Public Company Accounting Oversight Board (PCAOB), for accounting practices. -Implements stronger independence rules for Auditors. -Requires CEOs and CFOs to personally certify that financial statements and disclosures are accurate and complete, and require CEOs and CFOs to forfeit bonuses profits when there is an accounting restatement. -Requires audit committees to be comprised of independent members and members with financial expertise. -Requires codes of ethics for senior financial officers.

American Institute of Certified Public Accountants (AICPA)

-The national professional organization of practicing Certified Public Accountants (CPAs) -The AICPA appointed the Committee on Accounting Procedure in 1939. - The Committee on Accounting Procedure (CPA) composed of practicing CPAs, issued 51 Accounting Research Bulletins during the years 1939 to 1959. - This problem-by-problem approach failed to provide the needed structure body of accounting principles. - In 1959, the AICPA created the Accounting Principles Board.

Financial Accounting Standards Board (FASB)

-The wheat committee's recommendations resulted in the creation of a new standard setting structure composed of three organizations: 1. Financial Accounting Foundation(FAF) 2.Financial Accounting Standard Board(FASB) 3.Financial Accounting Standards Advisory Council(FASAC) -The Financial Accounting Foundation selects the members of the FASB and the Advisory Council, funds their activities, and generally oversees the FASB's activities. -The major operating organization in the three part structure is the Financial Accounting Standards Board (FASB). -Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public which includes issuers, auditors, and users of financial information.

Current Environment

-There are two sets of rules accepted for international use: - GAAP -International Financial Reporting Standards. The two boards agreed to use their best efforts to: -Make their existing financial reporting standards fully compatible as soon as practicable. -Coordinate their future work programs to ensure that once achieve, compatibility is maintained.

Essential characteristics of accounting

1) the identification, measurement, and communication of financial information. 2) economic entities. 3) interested parties.

Major Purposes of the Accounting Principles Board (APB)

1. Advance the written expression of accounting principles. 2. Determine appropriate practices. 3. Narrow the areas of difference and inconsistency in practice.

Financial Statements most frequently provided

1. Balance Sheet 2. Income Statement 3. Statement of cash flow 4. Statement of owners OR Stockholders Equity.

Financial Accounting & Accounting Standards

1. Financial Reporting Environment. 2. Parties involved in standard-setting. 3. Generally accepted accounting principles. 4. Major challenges in financial reporting.

Three organizations are instrumental in the development of Financial Accounting Standards (GAAP) in the United States

1. Securities and Exchange Commission (SEC) 2. American Institute of Certified Public Accountants(AICPA) 3. Financial Accounting Standards Board.

The expectations of success and support for the new FASB relied on several significant differences between it and its predecessor, the APB:

1. Smaller Membership. 2. Full-time,remunerated membership. 3. Greater autonomy. 4. Increased independence. 5. Broader representation.

When making decisions, Investors are interested in assessing:

1.The company's ability to generate net cash inflows. 2.Manager's ability to protect and enhance the capital providers investments.

Proprietary Perspective

A perspective that financial reporting should be focused only on the needs of shareholders.

Internal Control

A system of checks and balances designed to prevent and detect fraud and errors.

Which of the following is a requirement for an accounting principle to be called "generally accepted"? A. An authoritative accounting rule-making body has established it or it has been accepted because of its universal application. B. An authoritative accounting rule-making body has established it in an official pronouncement. C. The principle has been accepted as appropriate because of its universal application. D. Each company develops its own standards.

A. An authoritative accounting rule-making body has established it or it has been accepted because of its universal application.

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. Balance Sheet B. Income Statement C. Statement of Cash Flow D. Statement of Retained Earnings.

A. Balance Sheet

Primary users for general-purpose financial statements include each of the following except A. employees. B. investors. C. creditors. D. suppliers.

A. Employees

General-purpose financial statements are the product of A. financial accounting. B. managerial accounting. C. both financial and managerial accounting. D. neither financial nor managerial accounting.

A. Financial Accounting

Financial statements in the early 2000s provide information related to A. hard assets (inventory and plant assets). B. nonfinancial measurements. C. soft assets. D. forward-looking data.

A. Hard assets (inventory and plant assets)

The information provided by financial reporting pertains to A. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. B. Individual business enterprises and an economy as a whole, rather than to industries or to members of society as consumers. C. Individual business enterprises and industries, rather than to an economy as a whole or to members of society as consumers. D. Individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.

A. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

.Which of the following does not help in determining whether a business thrives? A. Lack of innovation. B. Markets. C. Free enterprise. D. Competition.

A. Lack of innovation

What is not due process in the context of standard setting at the FASB? A. No public hearings are held on proposed accounting standards. B. The FASB operates in full view of the public. C. Public hearings are held on proposed accounting standards. D. Interested parties can make their views known.

A. No public hearings are held on proposed accounting standards.

The FASB is a(n): A. Private sector body. B. Governmental unit. C. International organization. D. Group of accounting firms.

A. Private sector body.

Companies that are listed on a stock exchange are required to submit their financial statements to the A. SEC. B. AICPA. C. APB D. FASB.

A. SEC.

The financial statements most frequently provided include all of the following except the A. statement of retained earnings. B. statement of cash flows. C. income statement. D. balance sheet.

A. Statement of retained earnings.

Which of the following accounting pronouncements is the most authoritative? A. The FASB Accounting Standards Codification. B. AICPA Statement of Position. C. FASB Statement of Financial Accounting Concepts. D. FASB Technical Bulletin.

A. The FASB Accounting Standards Codification.

Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight? A. The FASB follows due process. B. The FASB board members were CPAs. C. The FASB board had a smaller membership. D. The FASB board members were well-paid.

A. The FASB follows due process.

A characteristic of generally accepted accounting principles includes: A. a common set of standards and principles. B. standards and principles are based a federal statutes. C. acceptance requires an affirmative vote of Certified Public Accountants. D. practices that become accepted for at least a year by all industry members.

A. a common set of standards and principles.

The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is A. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions. B. a majority of the members of the FASB are CPAs who are drawn from public practice. C. all members of the FASB possess extensive experience in financial reporting. D. the FASB issues exposure drafts of proposed standards.

A. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.

The information provided by financial reporting pertains to A. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. B. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers. C. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries. D. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.

A. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

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 statement of position. B. A proposed accounting standards update. C. A proposed accounting research bulletin. D. A proposed staff accounting bulletin.

B. A proposed accounting standards update.

Which perspective is adopted as a part of the objective of general-purpose financial reporting? A. A proprietary perspective. B. An entity perspective. C. A financial reporting perspective. D. A decision-usefulness perspective.

B. An entity perspective.

What would be an advantage of having all countries adopt and follow the same accounting standards? A. Comparability. B. Comparability and lower preparation costs. C. Agreement. D. Lower preparation costs.

B. Comparability and lower preparation costs.

The purpose of financial accounting is to provide information primarily for which of the following groups? A. Government. B. Investors and creditors. C. Internal Revenue Service. D. Financial Accounting Standards Board.

B. Investors and creditors.

The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization's operations is called A. financial accounting. B. managerial accounting. C. tax accounting. D. auditing.

B. Managerial Accounting

The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the A. FASB. B. SEC. C. AICPA. D. APB.

B. SEC.

Why did the AICPA create the Accounting Principles Board? A. The reason was to revert to the written expression of accounting principles. B. The previous standard setting organization did not provide a structured set of accounting principles. C. No such organization existed in the past. D. The SEC disbanded the previous standard setting organization.

B. The previous standard setting organization did not provide a structured set of accounting principles.

What is the primary protection for investors against fraudulent financial reporting by corporations? A. Criminal statutes. B. The requirement that financial statements be audited. C. The integrity of management. D. The fact that all firms must report the same way.

B. The requirement that financial statements be audited.

The passage of a new FASB Accounting Standards Update requires the support of A. five Board members. B. four Board members. C. seven Board members. D. three Board members.

B. four Board members.

All the following are ways in which accounting information is used by financial accounting except to A. buy, sell, hold equity and debt instruments. B. plan and control company's operations. C. evaluate borrowing capacity to determine the extent of a loan to grant. D. decide whether to invest in the company.

B. plans and control company operations.

Which of the following is related to an effective capital allocation? A. Encouraging innovation. B. Providing an efficient market for buying and selling securities. C. All of these answer choices are correct. D. Promoting productivity.

C. All of these answer choices are correct.

Which of the following will be of interest to investors in decision-making? A. Assessing the company's ability to generate net cash inflows. B. Assessing the company's ability to collect debts. C. Both assessing the company's ability to generate net cash inflows and assessing management's ability to protect and enhance the capital provider's investments. D. Assessing management's ability to protect and enhance the capital providers' investments.

C. Both assessing the company's ability to generate net cash inflows and assessing management's ability to protect and enhance the capital provider's investments.

How does accounting help the capital allocation process attract investment capital? A. By promoting productivity. B. By providing timely, relevant information and by encouraging innovation. C. By providing timely, relevant information. D. By encouraging innovation.

C. By providing timely, relevant information.

Which of the following is a general limitation of "general purpose financial statements"? A. General purpose financial statements are not comparable. B. General purpose financial statements do not fairly present a company's financial operations. C. General purpose financial statements may not be the most informative for a specific enterprise. D. General purpose financial statements provide financial reporting information to a wide variety of users.

C. General purpose financial statements may not be the most information for a specific enterprise.

Authoritative standards for IFRS include: A. International Financial Reporting Standards, International Accounting Standards and any GAAP standard recognized by an organized stock exchange. B. International Financial Reporting Standards only. C. International Financial Reporting Standards and International Accounting Standards only. D. International Financial Reporting Standards, International Accounting Standards and GAAP only.

C. International Financial Reporting Standards and International Accounting Standards only.

Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB Accounting Standards Codification? A. The Codification includes only FASB Statements. B. An accountant can be sure that all SEC rules are included in the Codification. C. The Codification is the sole source of U.S. 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 U.S. GAAP, for nongovernmental entities.

Which organization was responsible for issuing Accounting Research Bulletins? A. The Accounting Principles Board. B. The SEC. C. The Committee on Accounting Procedure. D. The FASB.

C. The Committee on Accounting Procedure.

Which of the following organizations is responsible for setting U.S. accounting standards nowadays? A. The Accounting Principles Board. B. The Committee on Accounting Procedure. C. The Financial Accounting Standards Board. D. All of the answer choices are correct.

C. The Financial Accounting Standards Board.

Generally Accepted Accounting Principles (GAAP)

Common set of standards and procedures.

Which of the following is not a major challenge facing the accounting profession? A. Timeliness. B. Forward-looking information. C. Nonfinancial measurements. D. Accounting for hard assets.

D. Accounting for hard assets.

Which of the following publications does not qualify as a statement of generally accepted accounting principles? A. Statements of financial standards issued by the FASB. B. APB Opinions. C. Accounting interpretations issued by the FASB. D. Accounting research studies issued by the AICPA.

D. Accounting research studies issued by the AICPA.

Which of the following is a source of pressure that may influence the accounting standard setting process? A. Congress B. Lobbyists C. CPA firms D. All of these answers are correct.

D. All of these answers are correct.

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. It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

What is the purpose of Emerging Issues Task Force? A. Provide interpretive guidance. B. Provide timely guidance on select issues. C. Provide interpretation of existing standards. D. Provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis.

D. Provide implementation guidance within the Codification framework to reduce diversity in practice on a timely basis.

What is the objective of financial reporting? A. Provide information that excludes claims to the resources. B. Provide information that is useful to management in making decisions. C. Provide information that clearly portrays nonfinancial transactions. D. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

D. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors

The IASB's standard-setting structure includes all of the following except A. Standards Advisory Council B. Board C. Trustees D. Standards Comparison Committee

D. Standards Comparison Committee

What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States? A. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC. B. The SEC reviews financial statements for compliance. C. The SEC coordinates with the AICPA in establishing accounting standards. D. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.

D. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.

Characteristics of generally accepted accounting principles include all of the following except A. standards are considered useful by the profession. B. practice has become universally accepted over time. C. authoritative accounting that the rule-making body has established as a principle of reporting. D. each principle is approved by the SEC.

D. each principle is approved by the SEC.

The Financial Accounting Standards Board employs a "due process" system which A. requires that all accountants must receive a copy of financial standards. B. is an efficient system for collecting dues from members. C. identifies the accounting issues that are the most important. D. enables interested parties to express their views on issues under consideration.

D. enables interested parties to express their views on issues under consideration.

Objective of Accrual-Basis Accounting

Ensures that a company records events that change its financial statement in the periods in which the events occur, rather than only in the periods in which it receives or pays cash.

Some financial information is better provided, or can be provided only, by the means of what other than formal financial statements?

Financial Reporting.

The objective of financial reporting identifies what?

Investors and Creditors as the primary users of General-Purpose financial statements.

Users (present and potential)

Investors and creditors use financial reports to make their capital allocation decisions.

Decision-Usefulness approach

Investors are interested in financial reporting because it provides information that is useful for making decisions.

General-purpose financial statements provide, at the least cost, the what?

Most useful information possible.

What perspective is not considered appropriate?

Proprietary perspective.

General-Purpose financial statements

Provides financial reporting information to a wide variety of users.

Financial Reporting

The financial information a company provides to help users with capital allocation decisions about the company.

Managerial Accounting

The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company's operations.

Financial Accounting

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

Objective of Financial Reporting

To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

Which of the following represents a form of communication through financial reporting but not through financial statements? A. Notes to financial statements. B. Income statement. C. President's letter. D. Balance sheet.

c. President's letter.