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