Accounting Foundations: Understanding the GAAP (Generally Accepted Accounting Principles)

December 31, year 1, is the end of the current fiscal year. Company Z has two-week pay periods and the next pay period ends in the new year on Friday, January 5, year 2. The payroll for the 10 working days in the two-week pay period is $10,000. Using accrual accounting, how much salary expense should be recognized in year 1?

$5,000 for the last five working days in year 1

On August 7, 2021, Seller ABC sells a product on account to Buyer XYZ FOB destination. The product shipped on August 9 and was received by the buyer on August 14. Buyer XYZ paid the invoice on September 10. Using accrual accounting, when can Seller ABC recognize the revenue?

8/14/21

The primary financial reporting standard-setting body for for-profit and not-for-profit entities in the United States is the _____.

FASB

You are considering investing in stock, but you cannot decide which of the two long-established manufacturing companies to invest in. How does GAAP help you with your decision?

GAAP lets you compare the financial statements of the two different companies to arrive at an informed decision with greater confidence that the financial statements are comparable.

A governmental entity, like a municipality, must comply with financial reporting standards issued by the _____.

GASB

A salesperson sells you a 60-inch television that will be delivered to your house. With just these facts, what is missing from the store meeting the revenue recognition principle?

The transaction price has not been determined.

What is the purpose of a financial accounting standards board, as well as a set of accepted accounting standards?

They establish accounting standards that give investors reliable information on which to base their investment decisions.

You paid $24,000 in November as one year's rent for your store. If you report the $24,000 in this year, which two misleading results will you have on your financial statements?

Your balance sheet assets will be understated, and your income statement will show an understated net income.

Under the full-disclosure principle, what financial information must an entity present on its financial statements?

all material, relevant financial information

What is factory equipment an example of?

an asset

How would cash, paid on a long-term loan, appear on the statement of cash flows?

as a cash outflow reported in the financing section of the statement of cash flows

Your company sells cell phones and cell phone plans. There is $50,000 in obsolete flip phones gathering dust in your warehouse. How should they be reported?

at their revalued amount

US GAAP provides the "rulebook" to help ensure all for-profit and not-for-profit entities present their _____ accurately.

financial performance results

What assumption states that a business is able to financially continue operations and is not planning to liquidate?

going concern

A truck used in the course of business should be recorded and maintained at _____.

historical cost

Where would you report resources and claims to those resources?

in the balance sheet

A company buys inventory on account. Which financial statement element will show the amount owed to the vendor?

liability

The faithful representation of accounting information improves when _____ is maximized.

neutrality

If the US GAAP did not exist, what might entities be inclined to do?

overstate assets

Before revenue can be recognized, the revenue recognition principle requires the _____.

performance obligation be filled

If you purchase raw material and place it in the warehouse to produce your goods, you will initially record that purchase cost as _____ and then _____ when the product is sold.

raw materials inventory; cost of goods sold

The US GAAP provides rules and guidance for what two primary financial reporting purposes?

recognition and presentation

Publicly-traded companies, domiciled in the United States, must adhere to standards, rules, regulations and laws issued by _____.

the FASB, the IRS, and the SEC

GAAP standards allow financial statements to answer the questions that investors or others might have. Which financial statement answers the question, "How much money did the company make from operations in a given period?"

the initial measurement

This year's final paycheck will be issued on the last Friday of December. If you report the wages for the remaining four days of December as an expense in the next year, which principle are you violating?

the matching principal

When an asset or liability is initially recorded, what determines its amount?

the present value of future cash flows

Along with providing useful information, what are the key GAAP objectives regarding financial statements?

to provide a company's cash flow information, as well as information regarding resources and claims on the resources

What is a primary objective of financial reporting?

to provide useful information to investors, creditors, and financial statement users; to provide cash flow information (amounts, timing and uncertainty); to provide information about resources and claims to resources

What is the goal of the matching principle?

to record expenses incurred to generate revenue in the same period as the revenue is recognized

Financial reporting for an entity allows financial statement users to better understand the financial performance of an entity. If you have three years of financial information about an entity, instead of just one year of financial information, the _____ of that accounting information has improved.

usefulness

When a second independent, qualified individual provides the same information, the _____ improves.

verifiability

Using accrual accounting, when is revenue recognized?

when the performance obligation is fulfilled