Introduction to Financial Accounting Concepts and GAAP

Flashcards covering basic accounting definitions, regulatory bodies (FASB, SEC, AICPA), SOX act requirements, the Conceptual Framework, and accounting principles/assumptions.

What is the definition of a liability according to the transcript?

A present obligation to transfer cash.

What is the formula for calculating Net income?

$$\text{revenues} + \text{gains} - \text{expenses} - \text{losses}$$

What are the five financial statements listed in the notes?

1. balance sheet (statement of financial position), 2. Income Statement (P&L statement / Statement of operations), 3. Statement of cash flows, 4. stmt of Owners' Equity or stmt of stockholder's equity/shareholders' equity, and 5) statement of comprehensive income.

Which organization enforces the Securities and Exchange Act of 1934?

The SEC (Securities and Exchange Commission).

What are the characteristics and member count of the Financial Accounting Standards Board (FASB)?

The FASB consists of $7$ members, uses a publicly viewed DUE PROCESS, deals with long-term, regular problems, and CREATES GAAP.

What is the specific role of the Emerging Issues Task Force (EITF)?

It was created by the FASB to help out on unexpected, case-by-case, short-term issues.

Under the SOX act, how often must auditors rotate and what are they prohibited from doing?

Auditors must rotate every $5$ years and are prohibited from offering certain types of consulting services to corporate clients.

What is the voting requirement for the FASB board to turn an exposure draft into an Accounting Standards Update (ASU)?

$4/7$ FASB board members must vote in favor.

What is the purpose of the FASB Codification Research System (CRS)?

An online, real-time database that provides easy access to the Codification through a topically organized structure using a numerical index system.

Why did the Norwalk Agreement between the FASB and IASB fail?

The US was reluctant to fully adopt IFRS, there was no support for an SEC mandate of IFRS for public companies, and both boards took different approaches to reporting and conceptual frameworks.

What is considered 'The Constitution' of accounting and what are its three levels?

The Conceptual Framework; Level 1: Objective, Level 2: Qualitative Characteristics & Elements, Level 3: Recognition, Measurement, & Disclosure Concepts.

What are the three components of Relevance under the Fundamental Qualities?

1) Predictive Value, 2) Confirmatory Value, and 3) Materiality.

What is the numerical threshold for an item to be considered immaterial?

ANYTHING $<5\%$ OF NET INCOME is considered immaterial.

What does the principle of Conservatism dictate regarding gains and losses?

Always report the bad news but not always the good news; losses are reflected in Net Income more quickly than gains, often resulting in understated net assets.

Define 'Comprehensive income' as described in the elements.

The change in equity during a period from non-owner sources, excluding investments by owners and distributions to owners (operations only).

What are the four primary Assumptions (Level 3) of the Conceptual Framework?

a) economic entity, b) going concern, c) monetary unit, and d) periodicity.

What are the five measurable attributes under the Measurement Principle?

1) historical cost, 2) fair value, 3) Net realizable value, 4) current cost, and 5) present (or discounted) value of future cash flows.

How does the Historical Cost Principle treat the value of an asset over its life in accounting records?

The value stays at the original acquisition price in the accounting books, even if the market price rises.

What are the five steps of the Revenue Recognition Principle?

1) identify the contract, 2) identify separate performance obligations, 3) determine transaction price, 4) allocate price to obligations, 5) recognize revenue when each obligation is satisfied.

What is the difference between Product and Period expense recognition?

Product costs stay in inventory (asset) until sold (then become COGS); Period costs (like rent or advertising) are expensed immediately in the period incurred.