Test 1 (Ch 1 & 2)

Of what value is a common set of standards in financial accounting and reporting?

A common set of standards applied by all businesses and entities provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in noncomparability among enterprises.

materiality

A company-specific aspect of relevance, an item is said to be material if its inclusion or omission would influence or change the judgment of a reasonable person; it is immaterial, and therefore irrelevant, if it would have no impact on a decision-maker. The point involved is one of relative size and importance; that is, both quantitative and qualitative factors should be considered.

general-purpose financial statements

A means of providing financial reporting information to a wide variety of users at the least cost.

Statements of Financial Accounting Concepts

A series of statements by the FASB that set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. These statements of concepts do not establish GAAP. However, this cohesive set of interrelated concepts is intended to be a conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner.

notes to financial statements

A set of disclosures in a company's financial statements that further explain the items presented in the main body of the statements. The additional information provided in the notes does not have to be quantifiable, nor does it need to qualify as an accounting element. Notes to the financial statements are considered an integral part of the statements.

accrual-basis accounting

Accounting approach, in which a company records events that change its financial statements in the periods in which the events occur, rather than only in the periods in which it receives or pays cash. Thus, a company recognizes revenue when it satisfies a performance obligation rather than when it receives cash, and it recognizes expenses when it incurs them rather than when it pays them.

going concern assumption

Accounting assumption that a company will continue in operation for the foreseeable future. Only in situations in which liquidation appears imminent is the assumption inapplicable.

periodicity (time period) assumption

Accounting assumption that implies that a company can divide its economic activities into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly.

monetary unit assumption

Accounting assumption that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

full disclosure principle

Accounting principle that dictates that in deciding what information to report, companies follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user. It recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs between sufficient detail that makes a difference to users, sufficient condensation to make the information understandable, and the costs and benefits of providing the information.

expense recognition principle

Accounting principle that dictates that the recognition of expenses is related to net changes in assets and earning revenues, that is, "let the expense follow the revenues."

10-K's

All US publicly-held companies must report to the Securities & Exchange Commission with periodic financial statements (and other financial information required by the SEC), principally 10-Q's for financial statements at the end of each quarter, and ________ for audited financial statements at the end of each year.

10-Qs

All US publicly-held companies must report to the Securities & Exchange Commission with periodic financial statements (and other financial information required by the SEC), principally ___________ for financial statements at the end of each quarter, and 10-K's for audited financial statements at the end of each year.

Securities & Exchange Commission with periodic financial statements (and other financial information required by the SEC)

All US publicly-held companies must report to the ________________________with periodic financial statements (and other financial information required by the SEC)

New accounting standards or Accounting Standards Updates (ASU). To-date in 2016, 13 new ASUs have been issued (the most significant was ASU 2016-02, for "Accounting for Leases").

All authoritative US GAAP is now contained in the FASB's Accounting Standards Codification (ASC), which is updated several times each year when the FASB issues _______________________. To-date in 2016, 13 new _____________ have been issued.

Accounting Standards Codification (ASC)

All authoritative US GAAP is now contained in the FASB's _________________.

International Financial Reporting Standards (IFRS)

All the accounting rules accepted for international use, issued by the International Accounting Standards Board.

historical cost principle

An accepted accounting principle that companies account for and report most assets and liabilities on the basis of acquisition price. To the extent that historical cost is free from error and neutral, it contributes to faithful representation.

cost constraint (cost-benefit relationship)

An accounting constraint that requires that the costs of providing financial information be weighed against the benefits that can be derived from using it. The constraint applies to informational requirements established by standard-setting bodies and governmental agencies as well as to companies reporting financial information.

consistency

An aspect of comparable information, which indicates that a company applied the same accounting treatment to similar events from period to period. A company can change methods, but it must first demonstrate that the newly adopted method is preferable to the old and then must disclose in the financial statements the nature and effect of the accounting change.

economic entity assumption

An assumption that economic activity can be identified with a particular unit of accountability, by keeping an enterprise's economic activity separate and distinct from that of its owners and any other business unit. The entity assumption refers to economic, rather than legal, entities.

understandability

An enhancing qualitative characteristic of accounting information that lets reasonably informed users see its significance.

timeliness

An enhancing qualitative characteristic of accounting information, indicating that information should be available to decision-makers before it loses its capacity to influence their decisions.

verifiability

An enhancing qualitative characteristic of accounting information, indicating that similar results will occur when independent third parties (e.g., auditors) measure using the same methods.

comparability

An enhancing qualitative characteristic of accounting information, which describes information that is measured and reported in a similar manner for different companies. Comparability enables users to identify the real similarities and differences in economic activities between companies.

Financial Accounting Standards Board Codification Research System (CRS)

An online, real-time database that provides easy access to the Codification, through a topically organized structure, subdivided into topics, subtopics, sections, and paragraphs, using a numerical index system.

decision-usefulness

Approach that requires that financial reporting be useful to investors by helping them assess (1) the company's ability to generate net cash inflows and (2) management's ability to protect and enhance the capital providers' investments.

Committee on Accounting Procedure (CAP)

Committee established by the AICPA in 1939 at the urging of the SEC to deal with accounting problems. The CAP issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board in 1959.

period costs

Costs that attach to a specific accounting period. Examples are officers' salaries and other administrative expenses. Companies charge off such period costs in the immediate period, even though benefits associated with these costs may occur in the future. Period costs are not included as part of inventory cost; instead, they are expensed as incurred.

product costs

Costs that attach to a specific product. Examples are material, labor, and overhead. Companies carry product costs into future periods if they recognize the revenue from the product in subsequent periods.

External users

Creditors using financial reports to determine if they should lend a company money is an example of______________

elements, basic

Definitions of the items that make up any theoretical structure. For accounting, there are ten basic accounting elements: assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses. These terms constitute the language of business and accounting.

Financial Accounting Standards Board Accounting Standards Codification (Codification)

Developed by the FASB, it provides in one place all the authoritative literature related to a particular topic.

Securities and Exchange Commission (SEC)

Federal agency established to help develop and standardize financial information presented to stockholders. It administers the Securities Exchange Act of 1934 and several other acts. Most companies that issue securities to the public are required to file audited financial statements with the SEC. The SEC also has broad powers to prescribe the auditing practices and standards to be employed by companies that fall within its jurisdiction.

Accounting Research Bulletins

Fifty-one bulletins from the Committee on Accounting Procedure (CAP) during the years 1939 to 1959, issued to deal with accounting problems as they arose. Subsequently, the AICPA created the Accounting Principles Board to provide a structured body of accounting principles.

conceptual framework

For the accounting profession, a coherent system of objectives and fundamentals established by the FASB, which determine the nature, function, and limits of financial accounting and which lead to consistent accounting standards.

fair value principle

GAAP-based principle that calls for the use of fair value measurements in the financial statements.

Objective of financial reporting

Goal for financial accounting and reporting, established by the accounting profession, which is to provide information about the reporting entity that is useful to present and potential to equity investors, lenders, and other creditors in decisions about providing resources to the entity.

objective of financial reporting

Goal for financial accounting and reporting, established by the accounting profession, which is to provide information about the reporting entity that is useful to present and potential to equity investors, lenders, and other creditors in decisions about providing resources to the entity.

Emerging Issues Task Force (EITF)

Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. The FASB reviews and approves all EITF consensuses, and the SEC views consensus solutions as preferred accounting.

supplementary information

Information included in the notes to financial statements, which includes details or amounts that present a different perspective from that adopted in the financial statements. It may be quantifiable information that is high in relevance but low in reliability and may include management's explanation of the financial information and its discussion of the significance of that information.

FASB Staff Positions

Issued by the FASB, these provide interpretive guidance and also minor amendments to standards and interpretations.

Sarbanes-Oxley Act

Legislation, enacted by the U.S. Congress, intended to combat accounting fraud, curb poor reporting practices, and make sweeping changes to the institutional structure of the accounting profession.

historical cost

Long-term assets, such as property, plant and equipment are recorded at their _____________ and depreciated over their useful life in some systematic and rational manner (Dr. Depreciation Expense and Cr. Accumulated Depreciation, which is a "contra asset" account).

predictive value

One characteristic of relevant information, indicating that information must help users predict the ultimate outcome of past, present, and future events.

revenue recognition principle

One of the basic principles of accounting, which dictates that companies recognize revenue in the accounting period in which the performance obligation is satisfied. Generally, recognition at the time of sale provides a uniform and reasonable test.

neutrality

One of the ingredients of the fundamental quality of faithful representation, neutrality indicates that a company cannot select information to favor one set of interested parties over another. Unbiased information must be the overriding consideration.

completeness

One of the ingredients of the fundamental quality of faithful representation. Completeness means that all the information necessary for faithful representation is provided.

confirmatory value

One of the ingredients of the fundamental quality of relevance, it helps to confirm or correct prior expectations based on previous evaluations of financial reporting information.

principles of accounting

One of the parts in the third level of the conceptual framework, which details recognition and measurement concepts. The accounting profession generally uses four basic principles of accounting to record transactions: (1) measurement, (2) revenue recognition, (3) expense recognition, and (4) full disclosure.

assumption

One of the parts in the third level of the conceptual framework; a concept that the accounting profession assumes as foundational for the financial accounting structure. There are four basic assumptions: (1) economic entity, (2) going concern, (3) monetary unit, and (4) periodicity.

relevance

One of the qualitative characteristics of accounting information, which describes information capable of making a difference in a decision. Information with no bearing on a decision is irrelevant. To be relevant, information needs have predictive or feedback value and is material.

faithful representation

One of the qualitative characteristics of accounting information. To be a faithful representation, information must be complete, free from error, and neutral.

Public Company Accounting Oversight Board (PCAOB)

Organization established by the Sarbanes-Oxley Act that has oversight and enforcement authority for accounting practices and that establishes auditing, quality control, and independence standards and rules.

qualitative characteristics

Part of the second level of the conceptual framework of accounting; the characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes. The primary qualitative characteristics are relevance and faithful representation.

Accounting Principles Board (APB).

Private standard-setting organization from 1959 to 1973, whose mission was to develop an overall conceptual framework. Its official pronouncements, called APB Opinions, were to be based mainly on research studies and be supported by reasons and analysis. The APB issued 31 opinions in its lifetime.

aren't

Privately-held companies ____________required to submit their financial statements to anyone unless required by lenders, vendors, shareholders, or other stakeholders.

Financial Reporting

Reporting of financial information other than in formal financial statements. Examples include the president's letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management's forecasts, and social or environmental impact statements.

fair value

Some financial instruments, such as investments, however, are reported at their _________, rather than historical cost. When reported at __________, the company must disclose, in the Notes to the Financial Statements, the reliability of the fair value estimates.

interpretations

Statements issued by the FASB that modify or extend existing standards.

Public Companies Accounting Oversight Board (PCAOB)

The Sarbanes-Oxley Act (SOX) created an additional level of oversight over public company financial reporting, including it formed the ____________________________________ which is responsible for the oversight of the independent auditing firms who audit the financial statements of public companies.

Wheat Committee

The Study Group on Establishment of Accounting Principles, chaired by Francis Wheat, that examined the organization and operation of the Accounting Principles Board and determined the changes needed to attain better productivity and more timely correction of accounting abuses. The Study Group submitted its recommendations to the AICPA Council in the spring of 1972, which adopted the recommendations in total and implemented them by early 1973.

Auditing Standards Board

The arm of the AICPA that had been responsible for developing auditing standards. The Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act, now oversees the development of auditing standards.

fair value option

The choice allowed by the FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. Under the fair value option, the item is recorded at fair value at each reporting date, and unrealized holding gains or losses are reported as part of net income.

generally accepted accounting principles (GAAP)

The common set of accounting standards and procedures, for which either an authoritative accounting rule-making body has established a principle of reporting in a given area, or over time, a given practice has been accepted as appropriate because of its universal application.

expectations gap

The difference between what the public thinks accountants should do and what accountants think they can do.

general-purpose financial reporting

The format for providing information to decision-makers at the least cost.

• Deloitte & Touche • Ernst & Young • KPMG • PricewaterhouseCoopers

The largest international CPA firms which audit over 80% of publicly-held companies, and who have offices in every major city in the free world, are termed the "Big Four" CPA firms and include:

Big Four

The largest international CPA firms which audit over 80% of publicly-held companies, and who have offices in every major city in the free world, are termed the "___________" CPA firms

Financial Accounting Standards Board (FASB)

The major organization of the standard-setting structure for financial accounting. Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. The FASB consists of seven members, appointed for five-year terms by the Financial Accounting Foundation. Accounting guidance issued by the FASB is considered generally accepted accounting principles (GAAP).

American Institute of Certified Public Accountants (AICPA)

The national professional organization of practicing Certified Public Accountants (CPAs), whose various committees and boards have been an important contributor to the development of GAAP.

APB Opinions

The official pronouncements of the Accounting Principles Board, intended to be based mainly on research studies and be supported by reasons and analysis. Between its inception in 1959 and its dissolution in 1973, the APB issued 31 opinions.

International Accounting Standards Board (IASB)

The organization, based in London, that sets accounting standards accepted for international use. Although many of these international standards are similar to GAAP, the FASB and the IASB are currently working on a convergence project to reduce differences between IFRS and GAAP.

fair value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Financial Statements

The principal means through which a company communicates its financial information. These statements reflect the collection, tabulation, and final summarization of the accounting data. The statements most frequently provided are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners' or stockholders' equity. Note disclosures are an integral part of a company's financial statements.

Accounting Standards Updates

The products of standard-setting (e.g., FASB standards and EITF consensuses) included in the FASB Codification. The Updates include the background and basis for conclusions for the new pronouncement in a common format, regardless of the form in which such guidance may have been issued. Updates are also issued for amendments to the SEC content in the Codification.

financial statements

The structured means of communicating financial information, through the balance sheet, income statement, statement of cash flows, and statement of owners' equity.

Entity Perspective

The view that companies are distinct and separate from their owners (present shareholders).

(a) Vendor invoice (i.e., the "bill" from the supplier or service provider), (b) Purchase order (i.e., document which includes description of goods ordered, quantity ordered, payment terms, and agreed upon cost for the items), and

The voucher package should include:

historical cost principal

US GAAP financial statements are largely based on the ___________________, meaning that transactions are recorded at their cost at the time of the transaction (i.e., purchase of an asset, incurrence of an expense, etc.).

going concern principle.

US GAAP financial statements, unless liquidation of the company is imminent are prepared using the ____________________________.

• Level 1 - the most reliable fair value estimate (traded market price for identical items, such as a share of Apple stock) • Level 2 - may include 3rd party estimates of fair value • Level 3 - least reliable fair value estimate and often based on internal company estimates

US GAAP puts the fair value reliability disclosures into 3 groups:

accrual basis of accounting

US GAAP transactions are recorded using the _______________________, meaning that revenues are recorded when the performance obligation to the customer is satisfied (which may be different than when cash is received), and expenses are recorded when they are incurred (which may be different than when cash is paid).

revenues

US GAAP transactions are recorded using the accrual basis of accounting, meaning that ____________ are recorded when the performance obligation to the customer is satisfied (which may be different than when cash is received), and expenses are recorded when they are incurred (which may be different than when cash is paid).

expenses

US GAAP transactions are recorded using the accrual basis of accounting, meaning that revenues are recorded when the performance obligation to the customer is satisfied (which may be different than when cash is received), and ___________________ are recorded when they are incurred (which may be different than when cash is paid).

free from error

View that information that is accurate will be more representationally faithful.

Proprietary Perspective

________ believes financial reports should be made only for shareholders

Entity Perspective

________ considers the company to be separate from current shareholders.

The Sarbanes-Oxley Act (SOX)

______________________ created an additional level of oversight over public company financial reporting, including it formed the Public Companies Accounting Oversight Board (PCAOB) which is responsible for the oversight of the independent auditing firms who audit the financial statements of public companies.

Warehouse receiving report

______________________________ (i.e., receiving report completed by warehouse personnel that shows items received in the warehouse from vendor, including their count of the number of items and whether any of the items are damaged).

President's letter

__________is a form of communication provided by financial reporting but not financial statements.

Managerial accounting

also measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity. it is management decision oriented and directed more toward product line, division, and profit center reporting.

Voucher packet

hen a commercial business pays its bills, there are 3 documents that should always be matched in the standard "___________________" to ensure that the terms (i.e., cost, discounts, payment terms, etc.) of the transactions and the quantities received are in agreement with what the vendor has billed to the company.

International Accounting Standards Board (IASB)

is responsible for setting International Financial Reporting Standards (IFRS).

The Financial Accounting Standards Board (FASB)

is responsible for setting US Generally Accepted Accounting Principles (US GAAP)

Managerial Accounting

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

Financial accounting

measures, classifies, and summarizes in report form those activities and that information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise.

Financial Accounting

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

FOB Receiving Point

title transfers to the customer upon receipt of the products by the customer, and revenue is recognized by the vendor upon receipt of the products by the customer.

FOB Shipping Point

title transfers to the customer upon the vendor's shipment of the products and revenue is recognized by the vendor upon shipment to the customer