Chapter 1 ACC 250

What is the primary objective of financial reporting?

To provide financial information useful to investors and creditors in making decisions.

What is the purpose of financial statements?

To communicate a company's financial position and results.

What are the five basic financial statements?

Balance sheet, income statement, statement of cash flows, statement of shareholders' equity, and statement of comprehensive income.

What is cash basis accounting?

An accounting method that recognizes cash receipts and cash payments.

What is accrual basis accounting?

An accounting method that recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid.

What does GAAP stand for?

Generally Accepted Accounting Principles.

What is the purpose of GAAP?

To provide standards and guidelines for measuring and reporting financial information and ensure comparability among companies.

What is the SEC?

Securities and Exchange Commission. It oversees publicly traded companies and has authority over financial reporting standards.

What is the FASB?

Financial Accounting Standards Board. It establishes U.S. accounting standards.

What is the FASB Accounting Standards Codification?

The organized, searchable source of authoritative U.S. GAAP.

What is the IASB?

International Accounting Standards Board. It develops international accounting standards known as IFRS.

What is the role of an auditor?

To offer credibility to financial statements.

What is the Sarbanes-Oxley Act of 2002 (SOX)?

Legislation enacted in response to corporate accounting scandals; Section 404 requires companies to document internal controls and report on them.

What is the conceptual framework?

The accounting constitution that provides the foundation for U.S. accounting standards.

What is the overall objective of the conceptual framework?

To provide useful financial information for decision-making by investors and creditors.

What are the two fundamental qualitative characteristics?

Relevance and faithful representation.

What makes financial information relevant?

Predictive value, confirmatory value, and materiality.

What is predictive value?

Information useful in predicting future outcomes, such as cash flows.

What is confirmatory value?

Information that confirms or changes previous expectations.

What is materiality?

Information is material if omitting or misstating it could influence users' decisions.

What are the three components of faithful representation?

Completeness, neutrality, and freedom from error.

What does completeness mean?

Including all information necessary to understand the economic event.

What does neutrality mean?

Information is unbiased.

What does freedom from error mean?

Information is free from errors in its description and the process used to produce it.

What are the four enhancing qualitative characteristics?

Comparability, verifiability, timeliness, and understandability.

What is comparability?

Information allows comparisons between companies.

What is consistency?

Using the same accounting practices over time.

What is verifiability?

Independent observers can reach agreement about financial information.

What is timeliness?

Information is available before a decision is made.

What is understandability?

Information is presented clearly so users can comprehend it.

What is the cost-effectiveness constraint?

The benefits of providing financial information should justify its costs.

What are the four accounting assumptions?

Economic entity, going concern, periodicity, and monetary unit.

What is the economic entity assumption?

A company's activities are accounted for separately from its owners and other businesses.

What is the going concern assumption?

A company is expected to continue operating indefinitely.

What is the periodicity assumption?

A company's activities can be divided into artificial reporting periods.

What is the monetary unit assumption?

Financial information is measured and reported using monetary units, such as U.S. dollars.

What is recognition?

The process of including an item in the financial statements.

What are the three recognition considerations in your notes?

Definition, measurability, and faithful representation.

When is revenue recognized?

When goods or services are transferred to customers for the amount the company expects to receive.

What is expense recognition?

Recognizing expenses in the appropriate accounting period.

What are the four expense recognition approaches?

Based on exact cause and effect, time period, allocation to time periods, and period incurred.

What is historical cost?

The original amount paid to acquire an asset.

What is net realizable value?

The amount expected to be collected or realized from an asset.

What is current cost?

The current amount needed to acquire or replace an asset.

What is present value of future cash flows?

The value today of expected future cash flows.

What is fair value?

A market-based measurement of an asset or liability.

What is the full disclosure principle?

Financial statements and accompanying notes must include information important to users' decisions.

Is freedom from error a component of relevance?

No. It is a component of faithful representation.

Is understandability a component of faithful representation?

No. It is an enhancing qualitative characteristic.

Is list price a measurement attribute identified in your notes?

No. Your notes identify historical cost, net realizable value, current cost, present value, and fair value.

Is the primary objective of financial reporting to describe a company's product lines?

No. Its objective is to provide useful information for investment and credit decisions.

What is the difference between relevance and faithful representation?

Relevance concerns whether information is useful to a decision; faithful representation concerns whether it accurately depicts the economic event.