Chapter 1: Accounting Environment and the Conceptual Framework

Vocabulary flashcards covering key concepts from Chapter 1 notes.

Financial accounting

The information system designed to provide external users with investment and credit decision‑making information about a reporting entity.

General purpose financial statements

Financial statements prepared to be useful to external users for decision making, including related notes.

GAAP

Broad set of standards and procedures that companies must follow when reporting information in their financial statements.

FASB

Financial Accounting Standards Board; the private-sector body that develops and issues accounting standards in the U.S.

SEC

Securities and Exchange Commission; has authority to prescribe accounting principles, enforce compliance, and regulate publicly traded companies.

PCAOB

Public Company Accounting Oversight Board; established by Sarbanes‑Oxley to oversee audits of public companies.

ASC

Accounting Standards Codification; online tool organizing all GAAP literature by topic for easier access.

ASU

Accounting Standards Update; updates issued by FASB to communicate changes to GAAP.

Due process

FASB’s formal, participatory process for standard setting (topic identification, research, exposure draft, feedback, final standard).

Conceptual Framework

A body of interrelated objectives and fundamentals that guides financial reporting and standard setting.

Objective of financial reporting

To provide information that is useful for investment and credit decisions by users with a reasonable understanding of business.

Relevance

Qualitative characteristic including predictive value, confirmatory value, and materiality.

Predictive value

Part of relevance; information helps users predict future outcomes.

Confirmatory value

Part of relevance; information helps users confirm prior expectations.

Materiality

The relative size or importance of an item; material if its omission or misstatement could influence decisions.

Faithful representation

Information faithfully represents what happened, consisting of completeness, neutrality, and freedom from error.

Completeness

All necessary information is provided in the financial statements.

Neutrality

Information is free from bias toward any party.

Free from error

Information is accurate and free from material mistakes.

Comparability

Enhancing quality that allows users to identify similarities and differences across entities.

Consistency

Enhancing quality where a company applies the same accounting methods from period to period.

Verifiability

Independent observers could reach similar conclusions using the same methods.

Timeliness

Information is available before it loses relevance for decision making.

Understandability

Information is clear and comprehensible to reasonably informed users.

Assets

Present rights to economic benefits controlled by the entity.

Liabilities

Present obligations to transfer economic benefits.

Equity

Residual interest in the assets after deducting liabilities.

Investments by owners

Increases in equity from transfers from owners (e.g., stock issuances) or contributions.

Distributions to owners

Decreases in equity from transfers to owners (e.g., dividends).

Comprehensive income

Net income plus other comprehensive income; changes in equity not from owner transactions.

Revenues

Inflows or other enhancements of assets from delivering goods or services.

Expenses

Outflows or using up of assets to generate revenues.

Gains

Increases in equity from incidental or peripheral events, not from core operations.

Losses

Decreases in equity from incidental or peripheral events, not from core operations.

Going concern

Assumes the entity will continue operating for the foreseeable future.

Monetary unit

Money as the common denominator of economic activity; reporting in the currency of the reporting entity.

Periodicity

Dividing economic activity into artificial time periods for reporting.

Recognition

Process of including an item in the financial statements when it meets defined criteria.

Derecognition

Removing an item from the financial statements when it no longer meets criteria.

Measurement

Determining amounts for assets and liabilities using historical cost, fair value, or a mix (mixed attribute system).

Entry price

Historical cost; the price at which an asset was acquired or a liability incurred.

Exit price

Fair value; the price to sell an asset or transfer a liability at the measurement date.

Historical cost

Original cost of an asset or liability; an entry price basis of measurement.

Fair value

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

Level 1 fair value

Quoted prices in active markets for identical assets or liabilities.

Level 2 fair value

Inputs other than Level 1, observable for similar assets or liabilities.

Level 3 fair value

Unobservable inputs based on management’s own assumptions; least observable.

Mixed attribute system

Using a combination of historical cost and fair value measurements across different assets and liabilities.

Double-entry accounting

System in which every transaction affects at least two accounts with debits and credits.

Form 10-K

Annual audited report filed with the SEC by publicly traded companies.

Form 10-Q

Unaudited quarterly report filed with the SEC.

Form 8-K

Report filed when a major event occurs (e.g., auditor change) that shareholders should know.

SOX

Sarbanes‑Oxley Act; established the PCAOB, required CEO/CFO certification, restricted nonaudit services, and strengthened internal controls.