Intermediate Accounting Ch. 1

Accounting is ____________________________

the language of business

What is the purpose of accounting?

To provide useful information for the decision making process

What is the biggest constraint to accounting information?

cost

what is decision usefulness?

useful information for decision making

what two things does decision usefulness do in relation to financial reporting?

• helps investors asses the amounts, timing, and uncertainty of future cash inflows from dividends, interest, and proceeds from sales or maturity of investments

• compare the income and assets of different companies

what is capital allocation?

when users can asses the relative return and risks associated w/ investment opportunities, they channel resources more effectively

what is the process of capital allocation?

financial reporting, users (present & potential), then capital allocation

what is the financial reporting step of the capital allocation process?

the financial information a company provides to help users w/ capital allocation decisions about the company

what is the users (present & potential) step of the capital allocation process?

investors and creditors use financial reports to make their capital allocation decisions

what is the capital allocation step of the capital allocation process?

the process of determining how and at what cost money is allocated among competing interests

what are the four basic operational concepts of GAAP (or the 4 basic assumptions in accounting)?

economic entity, monetary unit, periodicity, and going concern

what is economic entity?

it reports the activities of the business separate from its owners

what is going concern?

the life of the company is indefinite

what is monetary unit?

All business transactions must be recorded in a stable currency

what is periodicity?

divides economic activities into artificial timer periods/standard time intervals

what does GAAP stand for?

generally accepted accounting principles

what does GAAP do?

sets a standard/basis for how companies present their finances and allows stakeholders to easily be able to compare companies’ finances

why is GAAP necessary?

there are a variety of stakeholders with different needs, which calls for a standard to allow for accurate comparison

what does SEC stand for?

securities exchange commission

what does the SEC do?

oversees all publicly traded companies and make sure they adhere to GAAP as developed by the FASB

what two organizations are primarily responsible for the development of GAAP in the United States?

the SEC and FASB

the SEC relies on the ______ to develop accounting standards

FASB

what does FASB stand for?

financial accounting standards board

what is the mission of FASB?

to establish and improve standards of financial accounting and reporting for the guidance and education of the public

what is FASB responsible for?

GAAP

all publicly traded companies must follow _____

GAAP

the major standard setting organization in the private sector is known as ______

FASB

what does AICPA stand for?

the American Institute of Certified Public Accountants

what does the AICPA do?

sets the rules and ethics for CPAs and handles standards for non‑public company audits

what does PCAOB stand for?

public company accounting oversight board

what does the PCAOB do?

the PCAOB regulates and monitors auditors of public companies to ensure accuracy and protect investors

what are stakeholders?

parties who use accounting information to make decisions and take action

what is an external stakeholder?

any individual or group outside the organization that is affected by the company’s decisions or can influence the company’s performance

what is examples of external stakeholders?

stockholders, customers, creditors/lendors, government, suppliers/vendors

who are sustainability reports for?

customers

what is an internal stakeholder?

any person or group within the company that has a direct interest in the organization’s success, decisions, and daily activities

what are examples of internal stakeholders?

employees(!), managers, owners, shareholders, workers union

how do internal and external stakeholders decide what they need from financial reports?

through capital allocation

what do creditors/lendors need from financial reports?

to see if they can get their money back; revenue and expenses

what does the government need from financial reports?

to see if you can pay your taxes

what is conceptual framework?

a system of interrelated objectives and fundamentals that provides the structure for developing consistent accounting standards and guiding accountants in applying them

what does the objective identify?

the purpose of financial reporting

what are the eight chapters of conceptual framework?

objective, reporting entity, qualitative characteristics, elements, recognition/derecognition, measurement, presentation, and notes

what is the objective of financial reporting?

to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

what is included in general purpose financial reporting?

a company’s full set of financial statements and the related notes and supplementary information

what is the objective of accounting?

decision usefulness

who are the primary stakeholders?

investors and creditors

what is stockholder premacy?

stockholders’ opinions are #1

what is the reporting entity concept?

entities that prepare general purpose financial reports

what are qualitative characteristics?

shows how to know if information is useful; helps distinguish better information from inferior information for meeting the objective of financial reporting

what is the difference between data and information?

data is raw numbers but information is when data is able to be used

what do accountants do with data?

they take it and turn it into useful information

what are the two fundamental qualities that make accounting useful for decision making?

relevance and faithful representation

what are the the 3 things necessary to be relevant?

predictive value, confirmatory value, and materiality

what is relevance?

must be capable of making a difference in a decision

what is predictive value?

helps users form their own expectations about the future; can it be predicted

what is confirmatory value?

helps users confirm or correct prior expectations; would different parties say the same thing about the company

what is materiality?

capable of influencing the decision

what must companies consider when deciding whether an item is material?

both quantitative and qualitative factors

what is faithful representation?

the numbers and descriptions match what really existed or happened

what are 3 components of faithful representation?

completeness, neutrality, and free from error

what is completeness?

means that all the information that is necessary for faithful representation is provided

what is neutrality?

a company cannot select information to favor one set of interested parties over another

what is free from error?

has no mistakes; will be a more accurate representation of a financial item

what are the four enhancing qualities?

comparability, verifiability, timeliness, and understandability

what is comparability?

enables users to identify the real similarities and differences in economic events between companies

what is consistency(another type of comparability)?

when a company applies the same accounting method to similar events, from period to period

what is verifiability?

occurs when independent measures, using the same methods, obtain similar results

what is timeliness?

having information available to decision makers before it loses its capacity to influence decisions

what is understandability?

connection between users and the decisions they make

what are the 10 elements of financial statements?

assets, liabilities, equity/net assets, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses

what are assets?

something you own that can give you future benefit

what are liabilities?

what you owe to a third party

what is equity?

what you have left after paying liabilities

what are revenues?

inflows or other enhancements of assets of an entity from delivering or producing goods, rendering services, or carrying out other activities

what are expenses?

outflows or other using up of assets of an entity from delivering or producing goods, rendering services, or carrying out other activities

what are gains?

increases in equity from other transactions affecting an entity except those that result from revenues or investments by owners

what are losses?

decreases in equity from transactions and other events and circumstances except those that result from expenses or distribution to owners

what are the 3 elements of recognition?

meet the definition of an element, have a relevant measurement, and meet the requirement of faithful representation

when is an item derecognized?

when it no longer meets any one of the criteria for recognition

what is measurement?

the process of determining relevant numerical depictions of items recognized in the financial statements

what are the two key issues related to the reporting of financial information?

assets should not be overstated, and liabilities shouldn’t be understated

what is presentation?

relates to the display of line items, totals, and subtotals on the financial statements

what are notes to financial statements?

generally amplify or explain the items presented in the main body of the statements

what are investments by owners?

increases in equity of an entity resulting in transfers to the entity from others of something valuable to obtain or increase ownership interests

what are distributions to owners?

decreases in entity of an entity resulting from transferring assets, rendering services, or incurring liabilities by the entity to owners

what is comprehensive income?

the change in equity of a business entity during a period

what is an example of economic entity?

panera bread recording the company’s financial activities separately from the owners and managers

what is the difference between reporting entity and economic entity?

the reporting entity concept is limited to general purpose financial reporting, which economic entity is broader

what are the 3 significant implications of the going concern assumption?

• the historical cost principle is of limited usefulness if we assume eventual liquidation

• depreciation and amortization approaches would not be needed

• current and noncurrent classification of assets and liabilities would lose their significance

what are the 4 basic principles of accounting?

measurement, revenue recognition, expense recognition, and full disclosure

what is the revenue recognition principle?

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

what are the 5 steps of revenue recognition?

(1) identify the contract(s) with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations, and (5) recognize revenue when each performance obligation is satisfied

what is the expense recognition principle?

expenses must be recorded in the same period as the revenues they helped generate, not necessarily when the cash is paid.

what two groups are costs classified into for expense recognition purposes?

product costs and period costs

what are product costs?

material, labor, and overhead, which attach to the product

what are period costs?

officers’ salaries and other administrative expenses, which are attached to the period

what is the full disclosure principle?

Companies must report all information that could influence a user’s understanding of the financial statements

what two objectives does the full disclosure principle strive to balance?

sufficient details to disclose matters that make a difference to users, and sufficient condensations to make the information understandable

what is a performance obligation?

when a company agrees to perform a service or sell a product to a customer