pt 2

Assets: A present right of an entity to an economic benefit
Liabilities: A present obligation of an entity to transfer an economic benefit
Equity (net assets): Residual interest in the assets after deducting liabilities
Investments by owners: Increases in equity from transfers to obtain or increase ownership interests
Distributions to owners: Decreases in equity from transferring assets, rendering services, or incurring liabilities to owners
Revenues: Inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods, rendering services, or carrying out activities
Expenses: Outflows or using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out activities
Gains: Increases in equity from transactions or events affecting the entity from nonowner sources
Losses: Decreases in equity from transactions or events affecting the entity from nonowner sources
Comprehensive income: The change in equity during a period from nonowner sources, including all changes in equity except investments by owners and distributions to owners

Four basic assumptions: Economic Entity, Going Concern, Periodicity, Monetary Unit
Purpose: Identify the reporting entity, continuation of the entity, and frequency/denomination of reports

All economic events are identifiable with a particular economic entity
Investors want information tied to their ownership interest
Consolidation: parent and subsidiaries are combined into one accounting entity
Distinguish owner activities from entity activities (e.g., owner’s personal assets are not business assets)

Assume the entity will continue to operate indefinitely in absence of contrary information
Justifies carrying assets at historical cost and depreciation over an estimate life
If cessation were likely, assets/liabilities would be measured at liquidation values

Life of a company is divided into artificial time periods to provide timely information
External users (e.g., SEC) require periodic reporting (quarterly, annual)
Some firms use natural business years (e.g., retailers ending after slow January)

Financial statement elements measured in nominal money units (e.g.,
$USD$ , $EUR$ )
Assumes stable purchasing power; ignores inflation in measurement (recognizes limitations when prices change)

Recognition: admitting information into financial statements
Measurement: assigning numerical amounts to elements
Disclosure: including pertinent information in statements and notes
Recognition criteria (SFAC 5, later SFAC 8):
- Definition: item meets the definition of an element
- Measurability: item is measurable with a relevant attribute
- Faithful Representation: item can be depicted and measured faithfully
- Cost effectiveness and materiality: constraints to recognition

Technical definition: revenues are inflows/enhancements of assets or settlements of liabilities from delivering/producing goods or services
Practical: revenues are sales of goods or services
Timing: revenue recognized when goods/services are transferred to customer for the amount expected to be received
Timing options: point in time or over a period, depending on transfer of control
Probable collectibility: revenue recognized only if collection is probable
Journal entry implication: revenue credited; corresponding debit increases asset (cash/receivable)
Evolution: moved from the realization principle to a standard-based approach (ASC 606/ASU 2014-09) focusing on performance obligations and transfer of control
Prior criteria (historical note): earning process complete and collectibility reasonably certain (now superseded but concept of collectibility remains)

Technical definition: expenses are outflows or usage of assets or incurrence of liabilities incurred to produce revenues
Ideal relation: expenses tied to the revenues they help generate (cause-and-effect)
Four general approaches, depending on expense nature:
1) Exact cause-and-effect: relate directly to revenue (e.g., COGS, sales commissions tied to revenue)
2) Associated with period of revenue: expenses relate to the period during which revenue is earned (e.g., monthly salaries)
3) Systematic and rational allocation: allocate costs over multiple periods benefiting from the asset (e.g., straight-line depreciation)
4) In period incurred: recognize as expense in the period incurred even if related revenues aren’t determinable yet (e.g., advertising)
Timing impact: expense recognition timing affects asset/liability recognition and de-recognition (e.g., paying cash reduces assets; accruals increase liabilities)