Financial Accounting Theory

What is accounting

• recognition, measurement, and disclosure

• economic entities

• Interested parties

What is the objective of financial statements

to provide useful information for decision making

Why are ethics a crucial part?

information can influence decisions, need to provide fair and unbiased information

Why is there a need for conceptual framework

• coherence in rules

• Quicker problem solving

• Increased understanding

• Enhanced comparability

What is the purpose of accounting

to provide useful information for decision making

When is accounting information relevant

It is relevant if it is capable of making a difference in a decision

What are 3 ways to verify

Statements, receipts, transactions

What should accounting information always be

Neutral

What are the 10 foundational principles

Economic entity, going concern, monetary unit, periodicity, historical cost, fair value, revenue recognition, matching, full disclosure, control

Economic Entity

Personal and business are separate

Going Concern

Assume business is continuing business for the future

Monetary Unit

do not adjust money for inflation

Periodicity

Divided into different time periods

i.e. monthly, quarterly, annually, etc.

Historical Cost

Original cost

Fair Value

a way to give valuations based off current info (investments)

Revenue Recognition

receive revenue at point of sale (the 4 principles)

Matching

Matching expenses to revenue

Full Disclosure

all the important information is included in the statement, more info is in the notes than the actual statement

Control

One entity is joining (consolidating) with another entity