Ch 1 smart book

GAAP

(Generally accepted accounting principles) set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.

rate of return on stock investment

(dividends+ share price appreciation)/(initial investment)

What information regarding an entity's future cash flows are investors and lenders interested in? (Select all that apply.) Multiple select question. -amount -inflation adjusted -timing -uncertainty

-amount -timing -uncertainty

Most frequently provided financial statements to external users are:

1. balance sheet 2. income statement (statement of operations) 3. the statement of cash flows 4. statement of shareholders' equity *also must include a statement of other comprehensive income immediately following the income statement or present a combined statement of comprehensive income that includes

Financial Accounting Standards Board (FASB)

Critiques of APB led to the creation of FASB in 1973. The current private sector body that has been delegated the task of setting accounting standards

certified public accountants

Licensed professional accountants who serve the general public.

The process of admitting information into the financial statements is referred to as ______

Recognition

What was the purpose of the FASB Accounting Standards Codification project? -Reorganize all relevant accounting pronouncements in U.S. GAAP. -Integrate international standards with U.S. accounting standards. -Issue new accounting pronouncements.

Reorganize all relevant accounting pronouncements in U.S. GAAP

accounting standards updates (ASU)

These Updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC.

FASB Accounting Standards Codification

a compilation of all standards and other elements of US GAAP into a single searchable database that is organized by topic to make it easy to research financial reporting issues

Who has the responsibility for preparing financial statements in accordance with generally accepted accounting principles? Multiple choice question SEC staff auditors Audit committee Corporate management CPA firms who audit the company

corporate management

The purpose of the FASB's conceptual framework in accounting is to Multiple choice question. -establish objectives and fundamental concepts on which to base standards. -create accounting rules to be applied uniformly. -enforce accounting standards on a uniform basis. -define accounting procedures and set limitations for companies.

establish objectives and fundamental concepts on which to base standards.

A code or moral system that provides criteria for evaluating right and wrong is referred to as a values model. ethics. standards. a dilemma system.

ethics

Material

has qualitative or quantitative characteristics that make it matter for decision making. Including or correcting the information would affect a users judgment decisions.

Measuring assets and liabilities based on their original transaction value is an example of Multiple choice question. net realizable value. fair value. historical cost. current cost. present value.

historical cost

What accounting principle states that an asset or liability should be recorded at the amount given or received in the exchange transaction? Multiple choice question. historical cost monetary unit net realizable value going concern

historical cost

The revenue/expense approach focuses on the income statement because it relies on which accounting principles? (Select all that apply.) Multiple select question. going concern historical cost matching revenue recognition

matching revenue recognition

Accrual accounting

measures income according to the entity's accomplishments and resource sacrifices during the period from transactions related to providing goods and services to customers, regardless of when cash is received or paid.

Cash-basis accounting

measures income as the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers. produces a measure called net operating cash flow. better used in long term not short term.

capital markets

mechanisms that foster the allocation of resources efficiently. a composite of all investors and creditors.

International Accounting Standards Board (IASB)

objectives are to develop a single set of high-quality, understandable global accounting standards, to promote the use of those standards, and to bring about the convergence of national accounting standards and International Accounting Standards.

Select all that apply Before issuing an Accounting Standards Update, the FASB undertakes a series of information-gathering steps including open hearings written comments company visits deliberations

open hearings written comments deliberations

Assets

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

diclosure

refers to including pertinent information in the financial statements and accompanying notes

Recognition

refers to the process of admitting information into the financial statements

conservatism

requires greater verification for good news than for bad news.

Net operating cash flow

the difference between cash receipts and cash disbursements from providing goods and services

Measurement

the process of associating numerical amounts with the elements

Net income is considered a better indicator of future operating cash flows than is current net operating cash flow. True or false

true

True or false: In the United States, sole proprietorships and partnerships outnumber corporations.

true

The primary role of financial accounting is to provide useful financial information to users who are ______ to the business enterprise. connected related external internal

external

Accounting principles board (APB)

In 1959 APB replaced CAP. CAP was critized for having no theoretical framework. from 1959-1973, APB issued 31 accounting principles board opinions (APBOS, various interpretations, and four statements.

1934 securities exchange act

applies to secondary market transactions and mandates reporting requirements for companies whose securities are publicly traded. Also created the securities and exchange commission (SEC)

True or false: Cash basis accounting is the required accounting method for most profit-oriented companies.

false

Financial intermediaries inclue:

financial analysts, stockbrokers, mututal fund managers, and credit rating organizations.

Primary means of conveying financial information to investors, creditors, and other external users is through

financial statements and related disclosure notes.

The main focus of accounting information is to Multiple choice question. -regulate the stock markets. -provide useful information for decision making. -provide information to taxing authorities. -control the firm from a management perspective.

provide useful information for decision making.

1933 securities act

set forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds)

Which of the following models is best in helping predict future cash flows? Multiple choice question. Accrual accounting Cost accounting Cash accounting

Accrual accounting

International Financial Reporting Standards (IFRS)

developed by the IASB and used by more than 100 countries

Faithful Representation

exists when there is agreement between a measure or description and the phenomenon it purports to represent. requires information to be complete, neutral, and free from error. complete: depiction is complete if it includes all information necessary for faithful representation neutral: implies freedom from bias free from error: if it contains no errors or omissions.

Auditors

independent professionals who render an opinion about whether the financial statements fairly present the company's financial position, performance, and cash flows in compliance with GAAP

True or false: The conceptual framework does not prescribe GAAP.

true

In developing standards, the FASB considers the: Multiple select question. -concerns and opinions of constituents -economic transactions that standards will address -effect on the financial position of constituents

-concerns and opinions of constituents -economic transactions that standards will address

The primary focus of the qualitative characteristics of accounting information is: Multiple choice question. -accountability -outcome certainty -decision usefulness -accuracy

decision usefulness

Select all that apply Select the four criteria used to determine if an item is recognized in the financial statements according to SFAC 5. Multiple select question. Persistence Definition Quality Measurability Relevance Reliability

definition measurability relevance reliability

Financial accounting is chiefly concerned with providing information to various ______users. (Enter only one word.)

external

relevance

requires that information have predictive value and/ or confirmatory value. Predictive value: confirmation of investor expectations about future cash-generating abilility Confirmatory value: confirmation of investor expectations about future cash-generating ability

decision usefulness

requires that information possess the qualities of relevance and faithful representation

Governmental Accounting Standards Board (GASB)

responsible for developing accounting standards for governmental units such as states and cities. FAF oversees and funds GASB and council.

Financial accounting foundation (FAF)

responsible for selecting the members of the FASB and its Advisory Council, ensuring adequate funding of FASB activities, and exercising general oversight of the FASB's activities.

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.

Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley Act)

Key provisions: -corporate executives must personally certify the financial statements and ocmpany disclosures with severe financial penalities and possibility of imprisonment for fraud. -Nonaudit services. The law makes it unlawful for the auditors of public companies to perform a variety of nonaudit services for audit clients. prohibited services include bookkeeping, internal audit outsourcing, appraisal or valuation services, other consulting services. Tax services require preapproval by the audit committee of the company being audited. -retention of work papers. auditors of public companies must retain all audit or review work papers for seven years or face the threat of a prison term for willful violations. -conflicts of interest. audit firms are not allowed to audit public companies whose cheif executives worked for the audit firm and participated in that company's audit during the preceding year. -hiring of auditor. audit firms are hired by the audit committee of the board of directors of the company, not by the company management. -internal control. section 404 of the act requires that company management document and assess the effectiveness of all internal control processes that could affect financial reporting.

the securities and exchange commission SEC

a government appointed body who has the authority to set accounting standards for companies, but it relies on the private sector to do so. if the sec does not agree with a particular standard issued by the private sector, it can force a change in the standard.

Committee on accounting procedure

first private sector body to assume the task of setting accounting standards. CAP was a committee of the american institute of accountants (AIA) but AIA was renamed american institute of certified public accountants (AICPA) in 1957. From 1938- 1959, CAP issued 51 accounting research bulletins (ARBs)

Select all that apply Which of the following are among the basic assumptions underlying U.S. GAAP? (Select all that apply.) Multiple select question. conservatism monetary unit economic entity cost-effectiveness fair value going concern periodicity

monetary unit economic entity going concern periodicity

An emphasis is placed on proper income statement item recognition under what approach under US GAAP? Multiple choice question. -balance sheet adjustment approach -asset/liability approach -revenue/expense approach -income statement reconciliation approach

revenue/expense approach

Recording depreciation on fixed assets is an example of which approach to expense recognition? Multiple choice question. -Systematic and rational allocation. -Association in a specific period of time. -When incurred, without regard to revenues. -Cause-and-effect relationship.

systematic and rational allocation

International Accounting Standards Committee

umbrella organization formed to develop global accounting standards.