Intermediate Account I Exam 1

Financial reporting

the process of providing financial information to users via financial statements and other sources

information needs of investors and creditors

The primary focus of financial accounting is on the…

the amounts, timing, and uncertainty of future cash flows

Investors and creditors use information to assess…

general purpose financial statements

provide the most information at the lowest cost, and helps meet the objective of financial reporting

accrual basis accounting, financial statements prepared in accordance with GAAP, and the calculation of net income

Decisions usefulness is the reason that we have…

accrual basis accounting

We use ____________________ because it is better for predicting future cash flows than cash basis

generally accepted

means either that an authoritative accounting rule-making body has established a principle of reporting in a given area of that over time a given practice has been accepted as appropriate because of its universal application

net income

________________ is considered a better indicator of future operating cash flows than is current net operating cash flows

Congress

bad accounting is considered part of the cause of the Great depression, so ___________ took action via the 1934 Securities Exchange Act to create the SEC

SEC

Given the authority to set accounting and reporting standards, but they delegated it to the private sector

CAP

Appointed by the AICPA as the first body to set standards, and addressed specific issues and made nonbinding recommendations with no official framework

Committee on Accounting Procedure

What does CAP stand for?

APB

Created to replace CAP, issued by the APBO’s, made up of 18-21 part-time volunteers who were supposed to create a conceptual framework and advance written accounting rules to create more consistency in practice however they were not productive enough and created a lot of controversy

Accounting Principles Board Opinions

What does APBO stand for?

Accounting Research Bulletin

What does ARB stand for?

FASB

Sets the standards, replaces APB, and is made up of 7 full-time members appointed by the FAF

Financial Accounting Standards Board

What does FASB stand for?

Financial Accounting Foundation

What does FAF stand for?

FAF

Selects members of the FASB and its Advisory Councils and exercises general oversight

FASAC

Consults on major policy issues, technical issues, project priorities, and selection and organization of task forces

Financial Accounting Standards Advisory Council

What does FASAC stand for?

Codification project

launched in 2007 and became effective in 2009 to organize the pronouncements into a searchable online database

Accounting Standards Updates

FASB makes new accounting pronouncements via…

American Institute of Certified Public Accounts

What does AICPA stand for?

Generally Accepted Accounting Principles

What does GAAP stand for?

Certified Public Accountants

What does CPA stand for?

Securities and Exchanges Committee

What does SEC stand for?

International Accounting Standards Board

What does IASB stand for?

SEC

Public companies must file with the _______ otherwise they can “stop order” and stop companies from issuing or trading

IASB

set the IFRS used in over 120 countries

International Financial Reporting Standards

What does IFRS stand for?

FASB and IASB

Agreement that _____________ need to work together towards the goal of high-quality global accounting standards, which would result in comparability over time

GAAP

Politics + logic + empirical findings = …

The conceptual framework

provides fundamentals which leads to consistent standards, prescribes the nature, function, and limits of financial accounting and reporting, and provides structure and direct to financial accounting and reporting

Decision usefulness

Provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity

investors

With decision usefulness, ________ decide where to buy, sell, or hold stock in a company

lenders

With decision usefulness __________ decide whether to lend money to a company and at what interest rate and for how long

general purpose financial statements

help investors and creditors assess a company’s future net cash flows

Constraint

providing useful financial information is limited by a constraint on financial reporting

cost should not exceed the benefits of a reporting practice

Constraints indicate…

fundamental, ingredients of fundamental qualities, and enhancing

There are three characteristics of decision useful information, depending on how they affect the decision-usefulness information, which include:

relevance and faithful representation

There are two types of fundamental characteristics which include…

predictive value, confirmatory value, and materiality

there are three ingredients that go into relevance, which include:

relevance

relevant accounting information must be capable of making a difference in a decision

predictive value

earnings should be able to predict future earnings

confirmatory value

net income and components should confirm investor expectations about a company’s future cash-generating ability

Materiality

It must make a difference to the decision-making, where omitting it or misstating it would influence decisions that users make on the basis of the reported financial information

completeness, neutrality, and free from material error

there are three ingredients that go into faithful representation which includes:

Faithful representation

the numbers and descriptions match what really existed or happened

Completeness

all information is included to be a faithful presentation, where an omission can cause information to be false or misleading

Neutrality

Accounting standards should not favor one set of interested parties over another nor influence behavior in any specific way

Free from material error

in order to be useful

comparability/consistency, verifiability, timeliness, and understandability

Enhancing characteristics include:

Comparability/consistency

Ability to help users see similarities and differences between events and conditions, and permits valid comparisons between periods

Verifiability

Independent measures yield similar results

example of verifiability

two different auditors would get the same inventory account

timeliness

available before a decision has to be made

Understandability

users with a reasonable understanding of the activities must understand the information in the context of the decision being made

accounting terms

____________ constitute the language of business or the jargon of accounting

assets, liabilities, equity/net assets, investment by owners, distribution to owners, comprehensive income, revenue, expenses, gains and losses

FASB provided 10 elements of financial statements which include…

Assets

resources of the firm that will benefit the firm in the future

liabilities

probable future sacrifices arising from present obligations

equity/net assets

residual interest in the assets of an entity that remain after deducting liabilities

Investment by owners

Increases equity

distribution to owners

decreases equity

Comprehensive income

change in equity from non-owner source aka sources other than investments and distributions

Revenue

inflows or increase of assets from producing goods, rendering service from ongoing operations

expenses

outflows or increases in liability from producing goods or services from ongoing operations

gains

increases/revenues from peripheral transactions

losses

decreases/expenses from peripheral transactions

assets, liabilities, and equity/net assets

which elements of financial statements are used in a moment in time

investment by owners, distribution to owners, comprehensive income, revenue, expenses, gains, and losses

what elements of financial statements are using in a period of time

recognize the item

_______________________ when it is an element of the financial statements and it is measurable

economic entity, going concern, periodicity, and monetary unit

Assumptions underlying GAAP include…

economic entity

presumes that economic events can be identified specifically with an economic entity 

going concern

presumes business is a going concern and the company will have a long life

periodicity

allows the life of a company to be divided into artificial time periods

monetary unit

financial statement measured with US dollars and the unit is assumed to be stable overtime

measurement principle, revenue recognition principle, expense recognition principle, and full disclosure principle

The principles underlying GAAP include:

historical cost and fair value

There are two kinds of measurement principles which include…

Historical cost

asset and liabilities should be measured based upon the amount given or received in the exchange transaction

Fair value

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

historical cost; fair value

The _______________ is verifiable, however, the ____________ is sometimes more reliable

revenue recognition principle

revenue should be recognized when the performance obligation is satisfied

Expense recognition principle

expenses are recognized in the same reporting period as related revenues

full disclosure principle

financial statement should include any information that could affect the decisions of external users

impairment loss

If long lived assets such as building or equipment decline in value, a fair value measure determines any …

loss

if inventories decline in value, a fair value measure is used to determine the amount of the…

gain or loss

if equity investments and certain types of debt investments either increase or decrease in value, a fair value measure is used to determine the…

receivables and debt securities

if a company chooses, it can use a fair value option to measure its financial assets and financial liabilities, including items such as…

mixed attribute system

With the measurement principle, we currently use a…

accounting information system

the system for processing transactions and creating financial statements

accounting information system

the _____________________ is important because it produces financial statements, which are used by investors and creditors to make decisions

Accounting

tells you how to ACCOUNT for transactions that occur in a business

auditors

________ review that accounting records that employees of a company enter into the accounting system

internal corporate employees

_________________ enter transactions into the accounting system

are poorly maintained

If accounting records _____________________ it can delay reporting to investors and providing goods and services  to customers if items cannot be verified

unrealistically maintained

If accounting records are _______________ it can create inaccurate financial information

language

accounting is the ___________ of a business

assets = liabilities + owners equity

What is the accounting equation?