ACC 313 Exam 1

Knight, Creighton University

types of accounting

• financial accounting

• managerial accounting

• tax accounting

• auditing (internal + external)

• SEC reporting

financial accounting is for…

external users (profit, nonprofit, + government entities)

managerial accounting is for…

internal users

tax accounting is for…

the preparation of tax returns, other required tax documents, and tax planning

external auditing

the examination of another firm’s financial statements by a CPA in order to express an opinion on those statements

internal auditing

two types:

• financial audit → examination of financial data to determine if it’s been recorded correctly

• operational audit → examination of an operation to determine if it’s being performed correctly

SEC reporting

reporting information to the SEC based on their rules and guidelines; only required for publicly traded companies

financial accounting characteristics

• external users

• regulated by GAAP

• focus on the past

managerial accounting characteristics

• internal users

• not regulated by GAAP

• focus on the future

financial accounting

identifies, measures, classifies, summarizes, interprets, and communicated financial information about economic entities to interested parties so that they may make resource or capital allocation decisions

contents of an audited annual report

• letter to shareholders

• management’s discussion and analysis (MD&A)

• auditor’s written opinion

• 4 or 5 required financial statements

• footnote disclosures

what parts of an annual report are audited?

financial statements and footnote disclosures

what are the five types of an auditor’s opinion?

• unmodified (clean) opinion

• unmodified opinion with emphasis-of-matter explanatory paragraph or non-standard wording

• qualified opinion

• adverse opinion

• disclaimer opinion

which type of auditor’s opinion do companies want most?

unmodified opinion

what is the objective of general purpose 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 abut providing resources to the entity

what does it mean that financial statements are general purpose?

they are not intended to satisfy the needs of all users

what else are users interested in in addition to a company’s financial statements?

• a company’s ability to generate future cash flows

• management’s ability to efficiently and effectively use economic resources of a company

financial statements are the responsibility of…

management

what are the different financial statements?

• income statement

• statement of comprehensive income

• statement of retained earnings (or statement of stockholders’ equity)

• balance sheet

• statement of cash flows

the income statement and statement of comprehensive income may be combined and issued as a single statement called…

statement of income and comprehensive income

with publicly held companies a statement of ________ is more commonly prepared than a statement of _______

stockholders’ equity; retained earnings

generally accepted accounting principles really means generally accepted accounting ______

methods

what are examples of concepts that are considered GAAP?

methods like LIFO, inventory valuation, straight line depreciation, and allowance method for accounting bad debts

what are examples of concepts that are not considered GAAP?

principles like “full disclosure”, “matching”, and “consistency”

in the past, an accounting method was considered GAAP if…

it had substantial authoritative support

in the past, an accounting method had substantial authoritative support if:

• it was a rule/regulation of FASB, APB, or CAP

• it had support of meaningful accounting organizations

what was the effect of using the past approach in determining what was considered GAAP? (pre-Codification)

GAAP was spread across many sources, which created confusion

Accounting Standards Codification

the sole source of authoritative GAAP for nongovernmental entities; launched by the FASB

all guidance within the Codification is considered ________

authoritative GAAP

any guidance/material not in the Codification is considered…

non-authoritative

if you are researching accounting guidance using the Codification system, what can you be confident in?

that you are accessing authoritative GAAP

what should accountants do if the Codification does not cover a transaction or event?

look to the conceptual framework and other relevant accounting literature to find a solution

GAAP uses ______-basis acounting

accrual

accrual-basis acounting

revenues are recorded when earned; expenses are recorded when incurred

who has to follow GAAP?

public companies and companies that require an audit

what companies need an audit?

any that deal with a 3rd party (investor, lender, creditor) who demands audited financial statements before doing business

American Institute of Certified Public Accountants (AICPA)

an organization composed of CPAs; offered leadership and advice on proper accounting methods in the early 1900s through its publication Journal of Accountancy

Securities and Exchanges Commission (SEC)

a governmental agency overseeing the selling of stocks and bonds to the public; regulates publicly held companies

the SEC was given the power by ______ to set accounting rules and standards

Congress

in 1938, the SEC delegated their rule-setting authority to…

the accounting profession

Committee on Accounting Procedures (CAP)

formed within the AICPA to develop accounting guidance; published recommendations through their Accounting Research Bulletin; authority rested only with general acceptance by the business and accounting community (no law gave it power)

Accounting Principles Board (ABP)

formed within the AICPA to develop more formal accounting principles; published ABP Opinion; authority rested only with general acceptance by business and accounting community

Financial Accounting Standards Board (FASB)

created in 1973 to replace the ABP; develops accounting standards today

the FASB operates under the supervision and support of the…

Financial Accounting Foundation (FAF) and the Financial Accounting Standards Advisory Council (FASAC)

Financial Accounting Foundation (FAF)

appoints members of FASB

Financial Accounting Standards Advisory Council (FASAC)

consults with FASB on major topics and policy issues and assists with selection and management of task forces

what are the types of FASB pronouncements?

• statements of financial accounting concepts (SFAC)

• accounting standards updates (ASUs)

statements of financial accounting concepts (SFAC)

a FASB pronouncement; does not establish GAAP but relates to the conceptual framework and establishes concepts the FASB should use when writing new standards

accounting standards updates (ASUs)

a FASB pronouncement; amends the Codification and outlines the appropriate method for accounting for a particular situation; considered a primary source of GAAP

due process system for developing ASUs:

• identification of most important topics

• discussion paper → outlines possible models and invites feedback from public

• exposure draft → a formal proposed standard with a waiting period on public comment

• final ASU issued → after any revision of exposure draft, the Board votes on acceptance and issuance of final ASU

Private Company Council

writes accounting standards specifically for private companies because some rules for public companies may be too onerous or time-intensive to be reasonable for smaller, private companies

lobbying groups that influence FASB:

• governmental → SEC and IRS

• accounting → AICPA, AAA, IMA, GASB, state society of CPAs, CPA firms, EITF

how does the SEC influence FASB?

they publish SABs (Staff Accounting Bulletins) that express the SEC’s views on accounting practices

how does the AICPA influence FASB?

they publish Auditing Standards, Audit and Accounting Guides, and Journal of Accountancy

American Accounting Association (AAA)

composed of accounting academians; interested most in accounting theory

how does the American Accounting Association (AAA) influence FASB?

it published several academic journals

Institute of Management Accounting (IMA)

composed of management accountants working for private companies; publishes Strategic Finance (journal on internal accounting and finance)

Governmental Accounting Standards Board (GASB)

created by the Financial Accounting Foundation (FAF); establishes standards of financial reporting for state and local governments

Emerging Issues Task Force (EITF)

created by FASB to identify issues that need to be addressed in the accounting profession

Sarbanes-Oxley Act (SOX)

passed because of scandals like Enron, created the PCAOB → sets auditing standards for publicly held companies

what requirements did SOX establish?

• audit committees that work with the company auditor and are independent from the Board of Directors

• companies must create a code of ethics for the members of top management

• CEOs and CFOs must sign off on financial statements that they present fair and true numbers of the company

expectations gap

the difference between what the public thinks accountants can/should do, versus what accountants think they can/should do

what can we expect financial reporting to look like in the future?

• more nonfinancial data

• more forwardlooking information

• more info about a company’s soft assets

• more timely and frequent financial statement info

• improved understandability of reports

accounting is considered a profession. what are the characteristics of a profession?

• an examination to enter

• self-regulation

• a code of ethics

all accountants have a _______ that goes along with their certification

code of ethics

unmodified (clean) opinion

the financial statements are presented fairly, are free from error, and were prepared in accordance with GAAP

unmodified opinion with emphasis-of-matter explanatory paragraph or nonstandard wording

the financial statements are fairly presented but the auditor believes that it’s important to provide additional information

qualified opinion

the financial statements overall presented fairly but the scope of the audit was restricted, there were material misstatements, or accounting standards were not always followed

adverse opinion

the financial statements aren’t presented fairly, are not free from error, or weren’t prepared in accordance with GAAP

disclaimer opinion

because of scope limitations, the auditor was not able to gather enough evidence to give an opinion regarding the financial statements

who sets the rules for financial reporting guidance (GAAP) for publicly held companies?

FASB

who sets the rules for financial reporting guidance (GAAP) for privately companies?

FASB or Private Company Council

who sets the rules for audit standards for publicly held companies?

PCAOB

who sets the rules for audit standards for private companies?

Auditing Standards Board

who sets the rules for tax laws for publicly held companies?

U.S. Congress

who sets the rules for tax laws for private companies?

U.S. Congress

interpretation of financial statements is mostly left to…

users

investors in a company want ______ information, but are only given ______ information

future; past

what is fraud?

an intentional mistake or error

what percent of people are ethical?

20%

what percent of people are situationally ethical?

60%

what percent of people are unethical?

20%

profitability

a measurement of the monetary success or failure of an entity during a given period of time; measures both effectiveness and efficiency

liquidity

a measurement of an entity’s ability to pay its short-term, maturing obligations

leverage

a measurement of how much an entity is attempting to use other people’s money to make money

financial flexibility

a measure of an entity’s ability to raise additional capital, if needed, from a wide variety of sources

long-term risk

a measurement of an entity’s ability to stay in business over a long period of time

operating efficiency

a measurement of how expeditiously an enterprise is using the assets that it is employing

present value equation

PV = amount x interest factor [time, %, table type]

ordinary annuity

payment due at the end of a period

annuity due

payment due at the beginning of a period

the primary users of general purpose financial reports are:

• people who have a reasonable knowledge of business and economic activities

• people who will diligently review and analyze the financial information provided to them

to assess a company’s future cash flows, primary users need information about:

• the resources of a company (assets)

• claims against a company (liabilities)

• how effectively management uses a company’s resources

information about a company’s economic resources and claims can help users assess:

• liquidity and solvency

• need for additional financing

• how successfully a company can obtain additional financing

• how future cash flows will be distributed among those with claims

reporting any changes in a company’s economic resources can help users assess:

• a company’s future cash flows

• a company’s financial performance

from using accrual accounting, changes in a company’s economic resources and claims can better reflect future cash flows than…

information solely about cash receipts and payments (cash basis)

financial reports are based on…

estimates, judgements, and models

are general purpose financial reports designed to show the value of an entity?

no, only to help estimate

reporting entity

an area of economic activities that can be represented by general purpose financial reports that are useful to existing and potential users

pervasive criterion

decision-usefulness