accounting

sec

oversees US financial market REGULATOR - enforce the standards and most powerful

FASB

board creates and improves GAAP - sets accounting standards

PCAOB

sets standards just for auditing

IASB

international GAAP, less conservative

predictive value (what makes information relevant)

earnings should be able to predict future earnings

conformity value (what makes information relevant)

“confirms our expectations” components should confirm investors information about a company’s future cash generating ability

materiality

it makes a difference to the decision maker - substantial enough to be reported (2-5%)

faithful representation

the numbers and descriptions match what really existed or happened - truthful

completeness

all information (good and bad) needs to be included/ reported for faithful representation

neutrality

accounting standards should not favor anyone

free from material error

things have to be useful

comparability and consistency

information needs to be consistent (using one method for all years)

information needs to be comparable to other businesses - helps to see similarities and differences

timeliness

do everything timely - so people can make decisions

verifiability

consensus amoung different measures - auditors check

understandability

people should be able to understand what is being reported (plain English)

economic entity assumption

separates transactions made by the owner from the business

Going Concern assumption and implications

assume the business will keep operating for the foreseeable future (for depreciation reasons)

periodicity

company can divide things into time periods

monetary unit

everything measured with dollars, assumed to be stable over time

historical cost - principles for reporting

Assets and Liabilities should be measured based on the amount given or received in the exchange transaction. - record something at what you bought it for not what it is worth today

revenue/ expense recognition

revenue recognition - Revenue should be recognized when the performance obligation is satisfied.

expense recognition - Expenses should be recognized when they occur to support revenue-related activities, not when cash is paid.

matching principle

Expenses are recognized in the same reporting period as related revenues.

full disclosure

include any information that could affect the decisions of external users.

failing to record an adjusting entry to ACCRUE an EXPENSE

understatement of expense and overstatement of liabilities

failing to record an adjusting entry to ACCRUE a REVENUE

understatement of revenues and understatement of assets

revenue increases stockholders equity

true

an adjusting entry for prepaid rent results in an increase to an expense account and a decrease to an asset account

true

what accounts do you close

revenue, expenses, dividends