ACC 340 Shields Chapter 1 – Financial Reporting Environment and Conceptual Framework

Flashcards covering key vocabulary from the ACC 340 Shields Chapter 1 lecture on the financial reporting environment and conceptual framework, including definitions of important terms, accounting bodies, principles, and concepts.

Financial Reports (Users)

Owners, Managers, Creditors, and Stockholders of business enterprises or other organizations who use financial reports for decision-making.

Creditors

Bankers and other lenders who use financial reports to determine whether to lend money and under what terms.

Stockholders

Current and potential investors who use financial reports to decide whether to buy, sell, or hold stock in a company.

Entity Perspective

A view that companies are separate and distinct from their owners for financial reporting purposes.

Decision-Usefulness

A primary objective of financial reporting, focusing on providing information that helps investors and creditors assess a company’s ability to generate cash inflows and management’s ability to protect investments.

Financial Accounting Standards Board (FASB)

The private organization responsible for establishing accounting standards (GAAP) in the U.S.

Securities Exchange Act of 1934

Legislation that established the need for uniform accounting standards and created the SEC to oversee public companies.

SEC (Securities and Exchange Commission)

A governmental agency with oversight responsibility and enforcement authority over accounting standards for public companies in the U.S.

Generally Accepted Accounting Principles (GAAP)

The common set of accounting and reporting rules that public companies in the U.S. are required to adhere to.

FASB Due Process

The systematic procedure FASB follows to research, debate, and issue new accounting standards or updates, involving preliminary views, public hearings, and exposure drafts.

Accounting Standards Updates

Authoritative pronouncements issued by the FASB that amend the FASB Accounting Standards Codification.

Financial Accounting Concepts

Non-authoritative pronouncements issued by the FASB that form the basis of the Conceptual Framework, providing guidance for developing standards.

FASB Codification

The official source of authoritative U.S. GAAP, which organizes all relevant literature by topic and simplifies user access.

Conceptual Framework

A coherent system of interrelated objectives and fundamentals that prescribes the nature, function, and limits of financial accounting and reporting, serving as a foundation for accounting insights.

American Institute of Certified Public Accountants (AICPA)

A national professional organization that provides guidance on both accounting and auditing rules and procedures.

International Accounting Standards Board (IASB)

A private organization, based in London, that issues International Financial Reporting Standards (IFRS) used in over 120 countries.

First Level of Conceptual Framework

The basic objective of financial reporting, which is to provide information useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers.

Second Level of Conceptual Framework

The bridge between the objective and the implementation, comprising qualitative characteristics of accounting information and the elements of financial statements.

Third Level of Conceptual Framework

Deals with the 'how' of financial reporting, including underlying assumptions, principles, and the cost constraint.

Relevance

A fundamental quality of accounting information, meaning it is capable of making a difference in a user's decision.

Predictive Value

An ingredient of relevance, meaning information helps users form their own expectations about future outcomes.

Confirmatory Value

An ingredient of relevance, meaning accounting information helps users confirm or correct prior expectations.

Materiality

A company-specific aspect of relevance; an item is material if its omission or misstatement could influence a decision-maker's judgment.

Faithful Representation

A fundamental quality requiring accounting information to be complete, neutral, and free from error.

Completeness

An ingredient of faithful representation, meaning all information necessary for faithful representation is provided.

Neutrality

An ingredient of faithful representation, meaning information cannot be selected or presented to favor one set of interested parties over another.

Free from Error

An ingredient of faithful representation, meaning information is accurate and represents financial items without omission or misstatement.

Comparability

An enhancing quality that allows users to compare accounting information with similar data reported by other entities and across different time periods for the same entity.

Verifiability

An enhancing quality where independent observers, using the same methods, would arrive at a similar measurement or direct verification.

Timeliness

An enhancing quality requiring information to be available to decision-makers before it loses its capacity to influence decisions.

Understandability

An enhancing quality meaning information is presented clearly and concisely, comprehensible to users with reasonable financial knowledge.

Assets

Resources owned by or owed to the entity that are expected to provide probable future economic benefits.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations from past transactions.

Equity

The residual claims of owners on the assets of an entity after deducting liabilities; also known as net assets.

Investments by Owners

Increases in equity due to original investments or additional contributions made by owners.

Distributions to Owners

Decreases in equity due to transfers of assets, services, or incurrences of liabilities by the entity to its owners (e.g., dividends).

Comprehensive Income

All changes in equity during a period except those resulting from investments by owners and distributions to owners, including net income and other comprehensive income items.

Revenues

Inflows of assets or the settlement of liabilities as a result of performing services or delivering goods from ongoing operations.

Expenses

Outflows or other using up of assets or incurrences of liabilities from ongoing operations.

Gains/Losses

Increases/decreases in equity from incidental or non-operating transactions and events affecting the entity (e.g., sale of an asset not in the ordinary course of business).

Economic Entity Assumption

For accounting purposes, the owner and the business are separate and distinct entities, and all economic activities of an entity can be identified with one accountable unit.

Going Concern Assumption

Assumes that the business entity will continue to operate indefinitely into the foreseeable future and will not be liquidated.

Monetary Unit Assumption

Assumes that financial statements are reported in the U.S. Dollar (or other stable currency) and that the monetary unit is stable, ignoring price level changes due to inflation/deflation.

Periodicity (Time Period) Assumption

Economic activities of an entity can be divided into artificial time periods (e.g., quarterly, annually) for financial reporting so that information can be reported before it loses its value.

Measurement Principle

Financial statements use a 'mixed attribute' model where assets and liabilities are most commonly measured based on either Historical Cost or Fair Value.

Historical Cost

A measurement basis where assets/liabilities are reported based on their original acquisition cost, valued for its objectivity, reliability, and verifiability.

Fair Value

A measurement basis representing the current cash equivalent value; the price that would be received to sell an asset or paid to transfer a liability on the measurement date.

Revenue Recognition Principle

States that revenue should be recognized when a company satisfies a performance obligation by transferring promised goods or services to a customer.

Performance Obligation

A promise in a contract with a customer to transfer goods or services, which is satisfied when the company transfers control of those goods or services.

Expense Recognition Principle

Expenses are recognized when the 'using up' of a resource contributes toward generating revenue, often by matching them with the revenues they helped produce.

Direct Matching

Recognizing expenses in the same period as the revenues they directly helped generate, assuming a cause-and-effect relationship (e.g., Cost of Goods Sold).

Indirect Matching

Allocating costs to expense over the periods benefited in a systematic and rational manner when a direct relationship to revenue cannot be established (e.g., Depreciation Expense).

Immediate Recognition

Recognizing costs as expenses in the period incurred when it's impractical or impossible to determine which period, if any, related revenues will occur (e.g., Advertising Expense, Research and Development).

Full Disclosure Principle

A company must provide sufficient detail in financial statements and footnotes to make a difference to the user, while ensuring the information remains understandable and concise.

Cost Constraint

A limitation on financial reporting stating that the cost of providing useful information should not exceed the benefits derived from it.

Expectations Gap

The difference between what the public thinks accountants should do and what accountants think they can do, often highlighted during accounting scandals.

Sarbanes-Oxley Act (SOX) (2002)

Federal legislation passed in response to major accounting scandals, aiming to improve audit quality and strengthen management's responsibility for financial statements.

Public Company Accounting Oversight Board (PCAOB)

Established by SOX, this board oversees the audits of public companies to protect investors and ensure audit quality.

International Financial Reporting Standards (IFRS)

Accounting rules issued by the IASB and used in over 120 countries, generally characterized as being more principles-based and flexible than U.S. GAAP.

Principles-based standards

Accounting standards (like IFRS) that tend to be simpler and more flexible, focusing on broad principles rather than detailed rules, allowing for more judgment.

Stewardship (IASB focus)

A specific focus within the IASB's conceptual framework, emphasizing the need for information about how effectively and efficiently management has discharged their responsibilities to use an entity’s existing resources.