Intermediate Accounting I

Losses

Decreases in equity (net assets) from an entity's peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners.

Distributions to owners

Decreases in equity of a particular business enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. This element decreases ownership interest (or equity) in an enterprise.

The four major elements of financial accounting are:

Economic entities: An economic entity is an organization or unit whose activities are separate from its owners and other entities. Economic entities can be corporations, partnerships, sole proprietorships, or governmental organizations, and may be privately held or publicly held. Financial information-includes items such as the footnotes to the financial statements, the letter to the owners, managements' discussion and analysis, the auditors' report, the management report, and press releases. Environment- the legal, economic, political, or social setting that shapes and influences the financial reporting process. User groups-demand financial information about an economic entity. Users include investors, creditors, competitors, financial analysts, employee and labor unions, suppliers, customers, and government agencies.

Are shareholders of the company.

Equity Investors

During the standard-setting process, an __ is issued by the FAB to solicit input from financial statement preparers, auditors, and other users of financial statements.

Exposure Draft (ED)

Are independent of the company and responsible for ensuring that management prepares and issues financial statements that comply with accounting standards and fairly present the financial statements that comply with accounting standards and fairly present the financial position and economic performance of the company.

External Auditors

Decribe the fundamental characteristics of financial information. Explain the enhancing characteristics of financial reporting information.

Fundamental characteristics are those basic characteristics that distinguish useful financial reporting information from information that is not useful. Enhancing characteristics distinguish more useful information from less useful information.

Are employees of the company serving in an advisory role to management. They provide information to management regarding the company's operations and proper functioning of its internal controls.

Internal Auditors

Identify whether the items below are characteristics of a principles-based (P) or rules-based ® accounting system:

P-Provides a clear discussion of the accounting objective related to the standard R-Contains detailed application guidance.R-Contains numerous exceptions to the types of firms and industries that are covered.P-Involves no bright-line tests R-Contains numerous bright-line test.P-Involves a significant amount of interpretation in application P-Involves few, if any, exceptions P-Provides insufficient guidance to implement the standard R-Would not rely on extensive use of professional judgement R-Results in inconsistencies between standards

An accountant will use a particular accounting standard only if it is more likely than not that a company's tax position will be sustained upon examination by the Internal Revenue Service

Principles-based standard

An accountant will use a particular accounting standard only if the length of a contract covers substantially all of the useful life of a plant asset.

Principles-based standard

Assets

Probably future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liability

Probably future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a reult of past transactions or events.

Support accounting professionals throughout their careers by providing training, professional skills development, and other resources.

Professional Organizations

Key characteristics of principles-based standards.

Provide a clear discussion of the accounting objective related to the standard Involve few, if any, exceptions Involve no "bright-line" tests Provide insufficient guidance to implement the standard Involve a significant amount of judgment in application

Explain the costs standard setters consider when comparing the cost of requiring information to the benefits to the users of having the information when setting a new standard.

Providing information has a cost to the reporting entity, which is ultimately passed along to the investors. New standards or significant revisions of existing standards require companies to increase training, update accounting systems, and renegotiate existing contracts based on updated accounting information. Standard setters consider costs for both financial statement reporters and users. The entity consumes a significant amount of resources in collecting, processing, verifying, and communicating their financial results. If the information required under a new standard is not provided to the users, they incur costs in obtaining or estimating that information on their own.

Which organization is responsible for setting auditing standards and oversseeing the audits of public companies in the United States?

Public Company Accounting Oversight Board

Which regulatory body sets auditing standards and oversees the audits of the public companies in the United States?

Public Company Accounting Oversight Board (PCAOB)

Indicate the assumption​ (going concern,​ business/economic entity, monetary​ unit, or​ periodicity) that best fits the following scenarios. Business or economic entity

Rainbow Paints, Inc. owns 15% of New Eljam Company. Rainbow does not consolidate this affiliate company because it cannot control New Eljam's operations.

Protect investors and oversee the accounting and auditing standard setting processes.

Regulatory Bodies

An accountant will use a particular accounting standard only if the sum of the undiscounted future cash flows from the use of a plant asset is less than its carrying value.

Rules-based standard

Why it is important for an accountant in the United States to learn international financial reporting standards (IFRS)?

U.S companies operate subsidiaries outside of the U.S. Many of the subsidiaries report under IFRS in their home countries. Accountants must convert the subsidiaries' financial statements to U.S. GAAP when preparing consolidated financial statements. So, if I am the accountant or auditor of a company with international subsidiaries, I will need to understand IFRS. Non-U.S. companies operate in the U.S. and prepare their financial statements using IFRS. If I am working at or auditing an international firm, I am likely to see IFRS. I'll be taking the CPA exam and IFRS is tested on it. The accounting profession has determined that a working knowledge of IFRS is important for today's accountant.I may want to work outside of the U.S. at some time in my career. As of 2016, IFRS is required or permitted in over 130 countries worldwide. The SEC permits the use of IFRS-based financial statements by international companies with shares trading on U.S. stock exchanges. As an accountant and auditor in the U.S., I may be asked to assist these non-U.S. companies in preparing U.S. regulatory reports.The SEC promotes high-quality, globally accepted accounting standards. U.S. accountants and auditors will need a working knowledge of IFRS to implement these standards in companies and perform audits.

What is the SEC's role in standard setting, both historically and currently?

U.S. financial reporting standard setting began with the 1934 Securities Exchange Act, which gave the SEC the power to promulgate accounting standards for all publicly traded firms. The SEC delegated its standard-setting power to the private sector, prompting the accounting profession to establish the first U.S. standard-setting board. Currently, the SEC issues standards and continues in an oversight function over the US standards setting bodies such as the FASB.

Accounting standards setters do which of the following? a. Develop concepts, rules, and guidelines for financial reporting b. Protect investors and creditors c. Assure transparent and truthful reporting and guarantee the efficient functioning of the capital markets. d. Prosecute violators of their rules and guidelines so as to maintain the public trust and to ensure the efficient functioning of capital markets.

a. Develop concepts, rules, and guidelines for financial reporting

Which of the following statements about the global standard-setting structure is false? a. The IASB oversees the IFRS Advisory Council which advises the Monitoring Board. b. The Monitoring Board was formed to enhance public accountability of the IFRS Foundation c. The IFRS Interpretations Committee is similar to the EITF in the U.S. d. The IFRS Foundation oversees the IASB and financies IASB operations.

a. The IASB oversees the IFRS Advisory Council which advises the Monitoring Board.

Which of the following is not a reason why an accountant in the United States should learn international accounting standards? a. An accountant may work for, or assist, a foreign company that operates in the U.S. and uses IFRS for financial reporting. b. The SEC permits the use of IFRS-based financial statements by international companies with shares trading on the U.S. stock exchanges. c. The united States has plans to adopt IFRS in the near future. d. U.S. companies operate subsidiaries outside of the United States which report under IFRS in their home countries

c. The United States has plans to adopt IFRS in the near future.

Which party involved in the financial reporting process provides assurance that the financial statements prepared by management fairly present the financial position and performance of the company? a. regulators b. accounting preparers c. external auditors d. standard setters

c. external auditors

Financial reporting information is a faithful representation when it is:

complete, neutral, and free from error.

Free from Error

information should not contain errors or omissions in the description of the economic event and there are no errors in the process used to produce the financial information

Indicate the assumption​ (going concern,​ business/economic entity, monetary​ unit, or​ periodicity) that best fits the following scenarios. Monetary unit

Factory buildings are reported on Jack Jones Warehousing, Inc.'s balance sheet as the sum of the total cost of two plants; one of the plants was acquired in 1951 and the other was purchased in 2011.

Which organization is responsible for the oversight, financing, and administration of all accounting standard setting organizations in the United States?

Financial Accounting Foundation (FAF)

Use financial information to review and analyze reported results of the companies they cover and make investment recommendations.

Financial Analysts

What is the term that describes the process of identifying, measuring, and communicating financial information about an economic entity to various user groups?

Financial accounting

What is the definition of financial accounting?

Financial accounting is the process of identifying, measuring, and communicating financial information about an economic entity to carious users groups within the legal. Economic, political, and social environment.

Indicate the assumption​ (going concern,​ business/economic entity, monetary​ unit, or​ periodicity) that best fits the following scenarios. Going concern

Financial analysts at Nelson Corporation use an infinite-growth assumption in building a model to value the company.

Use of Accounting Information: Potential creditors review a company's long-term liabilities footnote to determine that entity's ability to assume additional debt.

Fundamental Characteristic: Faithful Representation Attribute: Complete

Use of Accounting Information: A corporation discloses both favorable and unfavorable tax settlements.

Fundamental Characteristic: Faithful Representation Attribute: Neutral

Use of Accounting Information: This year's reported earnings per share is $.50 below analysts' forecasts

Fundamental Characteristic: Relevance Attribute: Confirmatory Value

Review the financial statements of publicly traded companies for a variety of reason that are in the public interest.

Government Agencies

Complete

Includes all information that is necessary for the user to understand the underlying economic event being depicted

Gains

Increases in equity (net assets) from an entity's peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.

Investments by owners

Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something valuable to obtain or increase ownership interests (or equity) in it.

Revenues

Inflows or other enhancements of an entity's assets or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Timely

Information is available to financial statement users soon enough to be useful

Understandable

Information is classified, characterized, and presented clearly

Neutral

Information is free from bias in both selection and presentation of financial data

Parties in the financial reporting process: Auditors

It is their job to ensure that the management of the company has prepared financial statements that follow the accounting rules and fairly present the position and performance of the company

Discuss the three main approaches to recognizing expenses.

Some expenses are allocated systematically over the periods during which the related asset provides benefit. For example, a building is depreciated (i.e. expenses) over the periods that it will provide a benefit to the entity. Expenses are recognized when they are matched with their related revenues. Some expenses are recorded in the period in which they are incurred. For example, the salary of a salesperson is recorded in the period worked

Comprehensive income

The change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Identify whether the following items are fundamental characteristics​ (FC) or enhancing characteristics​ (EC): Comparable Relevant Timely Understandable Faithful representation Verifiable

(EC) Comparable (FC) Relevant (EC) Timely (EC) Understandable (FC) Faithful representation (EC) Verifiable

Identify whether the following items are characteristics of information that are relevant​ (REL) or a faithful representation​ (FR): Information that is neutral Information has​ decision-making implications because of its predictive value Information that is complete Information that is free from error Information has​ decision-making implications because of its confirmatory value

(FR)Information that is neutral (REL)Information has​ decision-making implications because of its predictive value (FR)Information that is complete (FR)Information that is free from error (REL)Information has​ decision-making implications because of its confirmatory value

Use of Accounting Information: The Later Than Sooner Company reports income only every two years.

Enhancing Characteristic: Timeliness Satisfied or Violated: Violated

Use of Accounting Information: Auditors from two offices of a large public accounting firm agree on the measurement used for a client's plant assets.

Enhancing Characteristic: Verifiability Satisfied or Violated: Satisfied

In addition to the comments obtained from responses to the exposure drafts and public round​ tables, the U.S. standard setting process relies on the information gathered and opinions from all of the following except​ a. the Monitoring Board b. managers c. auditors d. users

a. the Monitoring Board

Which of the following statements correctly identifies accounting standard setters? a. The FASB promulgates accounting standards in the U.S. and the IFRS issues international accounting standards b. The FASB promulgates accounting standards in the U.S. and the IASB issues international accounting standards. c. The AICPA promulgates accounting standards in the U.S. and IASB issues international accounting standards d. The AICPA promulgates accounting standards in the U.S. and the IFRS issues international accounting standards.

b. The FASB promulgates accounting standards in the U.S. and the IASB issues international accounting standards.

Which of the following statements is false? a. Non-U.S. companies operate in the United States but prepare their financial statements using IFRS. b. The accounting profession has determined that a working knowledge of IFRS is not important for accountants working the the United States. c. Accountants must convert to U.S. GAAP the IFRS financial statements of foreign subsidiaries that belong to U.S. companies d. The SEC permits the use of IFRS-based financial statements by international companies with shares trading on U.S. stock exchanges.

b. The accounting profession has determined that a working knowledge of IFRS is not important for accountants working in the United States.

Which of the following is a characteristic of rules-based standards? a. involve few, if any, exceptions b. contain no bright-line tests c. provide insufficient guidance d. result in inconsistencies between standards

d. result in inconsistencies between standards

Financial accounting is the process of __ an economic entity to various user groups within the __.

identifying, measuring, and communicating financial information about; political, social, legal and economic environment.

The primary users of financial statements are__ who are not in a position to demand information from the entity. They rely on the financial statements to __ the reporting entity, so that they can form an opinion about future returns that will accrue to the them by holding a stake in the entity. This view applies to __.

investors, lenders, and other creditors; help them assess the amount, timing, and uncertainty of future cash flows of; both U.S. GAAP and IFRS

Most Financial information in general purpose financial statements is provided to ___. General purpose financial statements provide information to ___.

satisfy users with limited ability or authority to obtain additional information; investors, creditors, financial analysts, insurance companies, unions, and government agencies.

An economic entity is an organization or unit with activities that are __ those of its owners and other entities. Financial information __ relates to a particular economic entity. Economic entities __ corporations, partnerships, sole proprietorships, or governmental organizations. Also, economic entities __.

separate from; always; can be; may be privately help or publicly held.

Which of the following organizations is responsible for setting accounting standards for state and local governments? a. Government Issues Task Force (GITF) b. Government Accounting Standards Advisory Council (GASAC) c. Securities and Exchange Commission (SEC) d. Government Accounting Standards Board (GASB)

d. Government Accounting Standards Board (GASB)

Currently, what is the single source of generally accepted accounting principles in the United States?

Accounting Standards Codification

Net realizable value

Amount of cash (or equivalent) that is expected to be received in exchange for an asset less the direct costs of the disposal. In the case of a liability, it is the amount of cash (or equivalent) expected to be paid to liquidate the obligation, including any direct costs of liquidation

Historical cost

Amount of cash (or equivalent) that is paid to acquire the asset. In the case of a liability, this measurement base is the amount of cash (or equivalent) that is received when the obligation was incurred. This measurement base may change over the life of the asset/liability if it is adjusted for depreciation or amortization.

Current market value

Amount of cash (or equivalent) that would be received by selling the asset in an orderly liquidation. Liabilities may also be measured at current market value.

Current cost

Amount of cash (or equivalent) that would be required if the asset were acquired currently.

Use financial information to determine their market position relative to the reporting entity and to attempt to identify future strategies of the reporting entity.

Competitors

Key characteristics of rules-based standards.

Contain numerous exceptions to the types of firms and industries that are covered by the standard Contain numerous bright-line test Result in inconsistencies between standards Contain detailed application guidance Do not rely on extensive use of professional judgement

Are banks and other financial institutions that led money to the company.

Creditors

Verifiability

Different knowledgeable parties could reach a consensus that a particular depiction is a faithful representation

Present value of future cash flows

Discounted net cash flows expected to be received on exchange of an asset, or paid out in the case of a liability.

Use financial information during negotiation of new labor agreements and compensation contracts.

Employees and Labor Unions

Indicate the assumption​ (going concern,​ business/economic entity, monetary​ unit, or​ periodicity) that best fits the following scenarios. Periodicity

Monro Manufacturing requires that its division managers report to corporate headquarters on a monthly basis

List the components of the current conceptual framework.

Objective of financial reporting Characteristics associated with high-quality financial information Elements of the financial reporting system Recognition and measurement criteria

Expenses

Outflows or other consumption of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations

An accountant will use a particular accounting standard only if a corporation has the ability to control the operating and financial activities of an affiliate company.

Principles-based standard

Explain the difference between revenues and gains.

Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.

An accountant will use a particular accounting standard only if a corporation owns over 50% of the voting shares of an affiliate company.

Rules-based standard

An accountant will use a particular accounting standard only if the number of new common shares of a firm issues is equal to 20% of the previously outstanding shares.

Rules-based standard

The FASB follows a seven-step process to issue a final standard. Place the steps listed in the proper order.

Step 1. The FASB identifies a financial reporting issue. Step 2. The FASB chairperson decides whether to add the issue to the technical agenda. Step 3. The FASB holds public meetings to deliberate various issues identified. Step 4. The Board issues and Exposure Draft Step 5. The Board may hold public round tables to discuss the Exposure Draft Step 6. The Board analyzes comments and re deliberates the issue. Step 7. The Board issues an Accounting Standards Update.

Use financial statements to determine whether to conduct business or purchase products from a company.

Suppliers and Customers

Which financial statement is implicitly considered dominant as standard setting shifts towards the asset/liability approach? a. statement of financial position b. statement of cash flows c. statement of shareholder's equity d. statement of comprehensive income

a. statement of financial position

Which of the following defines fair value?

The amount at which an asset could be bought or sold in a current transaction between willing parties.

Equity

The net assets are the residual interest in the assets of an entity that remains after deducting its liabilities

Financial statement user: Equity investors

They buy stock in the company, that is, they purchase a percentage of the company itself. The financial statements help them make investment decisions.

Financial statement user: Suppliers and customers

They can use the financial statements to determine a company's financial position and whether they want to do business with the company.

Parties in the financial reporting process: Accounting standard setters

They create accounting concepts, rules, and guidelines that will result in financial statements that provide financial information that is relevant and that faithfully represent the financial performance and position of the reporting entity

Financial statement user: creditors

They loan money to the company. The financial statements help them assess the credit-worthiness of the company

Parties in the financial reporting process: Regulatory bodies

They oversee the accounting standard setting process, including giving the FASB the authority to determine U.S. GAAP.

Financial statement user: Employees and labor unions

They use the financial statements to assess the company's performance, which is important information in wage negotiations.

Comparability

Users of the financial statements can identify and understand similarities and differences between different entities

Which of the following is not true of FASB? a. Board members must be CPAs b. The FASB is not a subcommittee of the AICPA c. The FASB is a full-time board of seven members d. Board members must sever all relationships with outside entities

a. Board members must be CPAS

Equity investors include all but which of the following? a. Bondholders b. Partners c. Shareholders d. Sole proprietor

a. Bondholders

Which of the following is not a current trend in accounting−standards ​setting? a. move toward principles-based system b. increase in political involvement c. focus on asset/liability approach d. emphasis on measuring fair value

a. increase in political involvement

Order the steps in f the Financial Accounting Standards Board's standard-setting process from 1 to 7.

1. A financial reporting issue is identified either by requests of financial statement users or by some other means. 2. After consultation with FASB members and others as appropriate, the FASB Chairperson decides whether to add the issue to the technical agenda. 3. The Board holds public meetings where it deliberates the various issues identified by the FASB staff. 4. The Board issues an Exposure Draft (ED), which is intended to solicit input. 5. The Board may hold public roundtables to discuss the ED, if needed. 6. The FASB staff analyzes the comment letters received, public roundtable discussions, and any other information. The Board then redeliberates the issue. 7. The Board issues an Accounting Standards Update (ASU), which is the final standard. It then incorporates the ASU in to the Accounting Standards Codification that makes up U.S. GAAP.

Discuss how well the historical cost concept satisfies the fundamental characteristics of relevance and faithful representation.

A consensus decision can always be reached regarding historical information and this information can be verified or confirmed by tracing it back to source documents. Historical cost based measures may not always be relevant. This is true for several reasons. First, historical cost data are not timely because they are not updated to provide information needed for decision making, thereby reducing its ability to predict future outcomes and provide feedback of past forecasts (as it does not change from year to year). The historical cost concept is justified by the conceptual framework because it is considered representationally faithful. The use of historical cost is said to increase the reliability of asset measurement because it is neutral, free from error, and complete, which are key ingredients of the accounting quality of representational faithfulness.

Explain the objective of financial reporting

According to the Conceptual Framework, "The objective of general purpose financial reporting is to 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. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit."

Use of Accounting Information: A company discloses the write-off of an accounts receivable. The receivable due from a major customer accounts for 35% of the company's current assets.

Fundamental Characteristic: Relevance Attribute: Materiality

Use of Accounting Information: A financial analyst computes a company's five-year average cost of goods sold in order to forecast next year's profit margin.

Fundamental Characteristic: Relevance Attribute: Predicitive Value