Intermediate Accounting 1 (Ch.1-5)

Committee on Accounting Procedure (CAP)

Committee established by the AICPA to deal with accounting problems. Issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board.

Historical cost principle

Companies account for and report most assets and liabilities on the basis of acquisition price; it is verifiable and neutral and therefore contributes to reliability.

Periodicity Assumption

Company can divide its economic activities into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly.

Going concern assumption

Company will continue in operation for the foreseeable future (long life). If liquidation appears imminent is the assumption inapplicable.

Period costs

Costs that attach to a specific accounting period. (Ex: salaries and other administrative expenses) Matched with revenue of a specific time period and expensed as incurred.

Product costs

Costs that attach to a specific product. (Ex: material, labor, and overhead) Carried into future periods if they recognize the revenue from the product in subsequent periods.

Fair value principle

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

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.

Expectations gap

Issue of financial reporting. The difference between what the public thinks accountants should do and what accountants think they can do. (reinforces ehtics and checks internal control of companies) Oxley Act helps fraud & poor reporting; PCAOB- audit & quality

Sarbanes-Oxley Act of 2002

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.

Principles of accounting

One of the parts in the third level of the conceptual framework, details recognition and measurement concepts. four basic principles 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; four basic assumptions: (1) economic entity, (2) going concern, (3) monetary unit, and (4) periodicity.

Public Company Accounting Oversight Board (PCAOB)

Organization established by the Sarbanes-Oxley Act of 2002 that has oversight and enforcement authority for accounting practices and that establishes auditing, quality control, and independence standards and rules.

Industry practices

Peculiarities of some industries and business concerns that cause variations from basic accounting theory or practice. For example, agricultural companies often report crops at fair value because it is costly to develop accurate cost figures on individual crops.

Emerging Issues Task Force (EITF)

Pronouncement of 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.

Staff Positions

Pronouncement of FASB, these provide interpretive guidance and also minor amendments to standards and interpretations. (Develop Concepts)

General-purpose financial statements

Provide financial reporting information to a wide variety of users at the least cost.

Objective of financial reporting

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.

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.

Equity

Residual interest

Earned (revenue)

Revenue is considered earned when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues.

Accrued revenues

Revenues earned but not yet received in cash or recorded at the statement date. Accrued revenues result from the passing of time (e.g., interest revenue and rent revenue) or from unbilled or uncollected services that a company performed (e.g., commissions and fees).

Accounting cycle

Standard set of accounting procedures to record transactions and prepare financial statements. (STEPS: Enter transactions> Post from journal to ledger> Take Unadjusted Trial Balance> Adjust J/E> Adjusted Trial Balance> Closing Entries> Post Closing Trial Balance> Reversing Entries)

Standards Statement

Statements (Rules) issued by the FASB that are considered GAAP and thereby binding in accounting practice. These statements go through a rigorous due process system (discussion memo, public hearing, exposure draft). The passage of a new Standards Statement requires the support of three of the five board members.

Interpretations

Statements issued by the FASB that modify or extend existing standards & have the same authority as standards for purposes of determining GAAP.

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.

Financial accounting

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

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.

General-purpose financial reporting

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

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. Formed Committee Accounting Procedure (CAP) who created ARB & formed Accounting Principles Board (APB) APB Opinions.

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, 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 U.S. GAAP, the FASB and the IASB are currently working on a convergence project to result in one set of high-quality standards.

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 Update

The process by which a new FASB standard, staff position, etc., is included in the FASB Codification. The update includes 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 Accounting Standards Board (FASB)

The standard-setting organization for financial accounting, establish and improve standards of financial accounting and reporting for the guidance and education of the public, & consists of five members, appointed for five-year terms by the Financial Accounting Foundation. Standards issued are generally accepted accounting principles (GAAP)

Entity perspective

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

Free from error

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

Realized (revenue)

When assets received or held are converted into cash or claims to cash—that is, when they are sold or traded in an active market at readily determinable prices without significant additional cost.

Conceptual framework

a coherent system of concepts that flow from an objective that identify boundaries, select transactions, and fundamentals which determine the nature, function, and limits of financial accounting and which lead to consistent accounting standards.

Accounting Research Bulletins

51 bulletins from the Committee on Accounting Procedure (CAP) deal with accounting problems as they arose. Subsequently, the AICPA created the Accounting Principles Board to provide a structured body of accounting principles.

Materiality

A company-specific aspect, its inclusion or omission would influence or change the judgment of a reasonable person; impact on a decision-maker. The point involved is one of relative size and importance.

Statement 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. Unlike a Standards Statement, 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.

Accounting information system

A system that collects and processes transaction data and then disseminates the financial information to interested parties.

Adjusted trial balance

A trial balance prepared from a company's ledger accounts after journalizing and posting all adjusting entries. It shows the effects of all financial events that occurred during the accounting period.

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 revenues when it earns them rather than when it receives cash, and it recognizes expenses when it incurs them rather than when it pays them.

Adjusting entry

Adjustments made at the end of the accounting period to ensure that a company has recorded revenues in the period in which it earns them and recognized expenses in the period in which it incurs them—in other words, that it has followed the revenue recognition and expense recognition principles.

Due Process

Agenda > Views > Think > Draft > Standard is created

International Financial Reporting Standards (IFRS)

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

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.

Completeness

all the information necessary is provided.

Account

arrangement that shows the effect of transactions and other events on a specific element

Financial statements

balance sheet, income statement, statement of cash flows, and statement of owners' equity

Elements, basic

basic elements are 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.

Comprehensive Income

changes in equity from non owner sources

Faithful representation

characteristic of accounting information which indicates a company's accounting numbers and descriptions match what really existed or happened. (complete, neutral, free from error)

Consistency

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.

Full disclosure principle

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, 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.

Distribution to Owner

decrease in net assets resulting from transferring assets (dividends)

Losses

decreases in (equity) from peripheral or incidental transactions except those that result from expenses or distribution to owner

Moment in Time

describes amounts and claims of resources : assets, liabilities, equity

Revenue recognition principle

dictates that companies recognize revenue when it is realized or realizable and when it is earned-that is, when assets are salable or interchangeable in an active market at readily determinable prices without significant additional cost and when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. Generally, recognition at the time of sale, during production, end of production or receipt of cash provides a uniform and reasonable test.

Matching principle

dictates that efforts (expenses) be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so.

Prudence

dictates that when in doubt, choose the solution that will be least likely to overstate assets and income (conservative)

Economic entity assumption

enterprise separate and distinct from that of its owners and any other business unit

Assets

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

Liabilities

future sacrifies arising from present obligations of a particular entity

Confirmatory value

helps to confirm or correct prior expectations based on previous evaluations of financial reporting information.

Gains

increases in (equity) from peripheral or incidental transactions except those that result from revenues or investment by owner

Investment by Owner

increases in net assets from transfers from other entities of something of value to obtain or increase ownership

Neutrality

indicates that a company cannot select information to favor one set of interested parties over another; Unbiased information.

Verifiability

indicating that similar results will occur when independent third parties (e.g., auditors) measure using the same methods.

Revenues

inflows or other enhancements of an entity resulting from primary business operations

Relevance

information capable of making a difference in a decision. To be relevant, information needs predictive or confirmative value and material.

Predictive value

information must help users predict the ultimate outcome of past, present, and future events.

Timeliness

information should be available to decision-makers before it loses its capacity to influence their decisions.

Comparability

information that is measured and reported in a similar manner for different companies, enables users to identify the real similarities and differences.

Understandability

information that lets reasonably informed users see its significance.

Measurement Principle

mixed attribute system that allows different ways of measuring

Monetary unit assumption

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

Expenses

outflows or usine up of assets from primary business operations

Concepts

pronouncement of FASB, framework for solving existing problems in consistent manner

Objective of financial reporting

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. (decision useful)

Financial Accounting Standards Board Codification (ASC)

provides in one place all the authoritative literature that changes the way GAAP documented, presented and updated.

Cost constraint (cost-benefit relationship)

requires that the costs of providing financial information be weighed against the benefits that can be derived from using it

Realizable (revenue)

revenues are realizable when assets received or held are readily convertible into cash or claims to cash

Qualitative characteristics

second level of the conceptual framework; the primary characteristics are relevance and faithful representation. Secondary are enhancing qualities.

Accounting Principles Board (APB)

standard-setting organization mission was to develop an overall conceptual framework called APB Opinions

Expense recognition principle

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

Period of Time

transactions events and circumstances of other 7 elements

Need for Conceptual Framework

useful & consistent standards overtime & solve practical problems more quickly

Conservatism

when in doubt, choose the solution that will be least likely to overstate assets and income.

Accrued expenses

Expenses incurred but not yet paid or recorded at the statement date. Ex. interest, rent, taxes, and salaries.

Securities and Exchange Commission (SEC)

Federal agency works with FASB established to help develop and standardize financial information presented to stockholders also has broad powers to enforce the accounting practices and standards to be employed by companies that fall within its jurisdiction. Relies on FASB to develop accounting standards.

Accounting & Capital Allocation

Financial reporting: provides direction to users on capital allocation decisions > Users: investors/creditors > Capital Allocation: how money gets spent

Balance sheet

Financial statement that shows the financial condition of a company at the end of a period by reporting its assets, liabilities, and owners' equity.