GAAP and Financial Reporting — Key Terms (Chapter 1)

Vocabulary flashcards covering core GAAP concepts, conceptual framework, qualitative characteristics, assumptions, measurement bases, and revenue recognition from the lecture notes.

Decision-usefulness approach

The idea that financial reporting should provide information that helps investors make decisions by assessing a company’s ability to generate net cash inflows and protect capital, including timing and uncertainty of cash flows.

Substantial authoritative support

GAAP elements widely recognized; statements issued by the FASB are considered substantial authoritative support for accounting principles.

General-purpose financial reporting

Financial reporting intended to meet the needs of a broad group of users rather than a single user.

Conceptual framework

A coherent system of interrelated objectives and fundamentals that guides the development of consistent standards and the presentation of financial statements.

Qualitative characteristics

Characteristics that make financial information useful, including fundamental (relevance and faithful representation) and enhancing qualities (comparability, verifiability, timeliness, understandability).

Relevance

A fundamental quality of useful information; capable of making a difference in a decision by helping predict outcomes or confirm/correct previous expectations.

Faithful representation

Information that faithfully represents what happened or exists; numbers and descriptions match the underlying events.

Materiality

The significance of an item to informed decisions; both qualitative and quantitative factors determine whether something should be disclosed.

Enhancing characteristics

Qualities that enhance usefulness: comparability, verifiability, timeliness, and understandability.

Comparability

Enables users to compare information across different enterprises at a single point in time.

Consistency

A form of comparability; enables comparisons of financial information for the same entity over different periods.

Going concern

The assumption that an entity will continue to operate for the foreseeable future.

Economic entity assumption

Economic activities are identified with a specific unit of accountability.

Monetary unit assumption

The unit of measure (usually the dollar) is stable enough to allow meaningful aggregation over time.

Periodicity assumption

The life of an entity is divided into artificial time periods for reporting.

Historical cost principle

Assets and liabilities are measured at their cost rather than current market value.

Fair value

The price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date; a market-based measure.

Fair value hierarchy Level 1

Observable inputs from quoted prices in active markets for identical assets or liabilities.

Fair value hierarchy Level 2

Observable inputs other than Level 1, corroborated by observable data.

Fair value hierarchy Level 3

Unobservable inputs requiring significant judgment based on the best information available.

Revenue recognition principle

Revenue is recognized in the accounting period when the performance obligation is satisfied, with a five-step process to determine timing.

Performance obligation

A promise to deliver a product or provide a service to a customer.

Contract (revenue context)

An agreement creating enforceable rights or obligations between a company and a customer.

Transaction price

The amount of consideration a company expects to receive in exchange for transferring goods or services.

Allocate the transaction price

Distribute the transaction price to each performance obligation, typically based on relative stand-alone selling prices.

Five-step revenue process

Identify contract; identify performance obligations; determine transaction price; allocate price; recognize revenue as obligations are satisfied.

Recognize revenue

Record revenue when the performance obligation is satisfied (services when performed; products when delivered).

Cause-and-effect cost recognition

Some costs are recognized with revenue (e.g., commissions); others are allocated systematically over periods.

Systematic and rational allocation

Allocating costs over periods with expected future benefits when a direct link to revenue is unavailable.

Full disclosure principle

Disclose all information of sufficient importance to influence an informed reader’s judgment; judgment often needed.

Cost constraint (cost-benefit)

Benefits of providing information must exceed the costs of providing it.

Economic consequences

The impact of accounting reports on wealth and decision-making, which can influence policy and credibility.

Fraudulent financial reporting

Deliberate misstatement or omission that harms credibility and may invite government scrutiny.

Expectations gap

Difference between what people think accountants should do and what they can do; professionals work to narrow it.

Nonfinancial measurement

Reporting significant nonfinancial metrics (e.g., customer satisfaction, backlog, reject rates).

Forward-looking information

Future-oriented information that presents anticipated conditions or results.

Soft assets (intangible assets)

Intangible assets such as market know-how or skilled employees; difficult to measure and report.

Timeliness

Providing information in a timely manner to aid decision-making.

Ethical decision-making

Choosing among alternatives when GAAP does not specify a feature to report, considering stakeholders' potential harm or benefit.

Codification

A web-based, regularly updated compilation of GAAP to simplify understanding and compliance.

SEC (Securities and Exchange Commission)

Regulator that oversees public company disclosures and relies on GAAP; increasingly active in standard setting and disclosure requirements.

FASB (Financial Accounting Standards Board)

The board that establishes financial accounting standards in the United States.

ASR No. 150

SEC statement recognizing FASB statements as having substantial authoritative support.

AICPA

American Institute of Certified Public Accountants; professional organization for accountants.