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69 Cards in this Set
- Front
- Back
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Essential characteristics of accounting
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1. identification, measurement, and communication of financial info about
2. economic entities to 3. interested parties |
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Financial accounting
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the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. Users include investors, creditors, managers, unions, and government agencies.
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Managerial accounting
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the process of identifyingm measuring, analyzing, and communicating financial info needed by management to plan, control, and evaluate a company's operations.
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Financial statement most frequently provided
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1. balance sheet
2. income statement 3. statement of cash flows 4. statement of owners' or stockholders' equity |
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Securities and Exchange Commission (SEC)
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-federal agency
-administers the Securities Exchange Act of 1934 and several other acts. -has broad powers to prescribe the accounting practices and standards to be employed by companies hat fall within its jurisdiction. -relies on FASB to develop accounting standards. |
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American Institute of Certified Public Accountants (AICPA)
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-national professional organization of practicing Certified Public Accountants.
-important contributor to the development of GAAP. |
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Committee on Accounting Procedure (CAP)
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-appointed by the AICPA (urged by SEC)
-composed of practicing CPAs. issued 51 Accounting Research Bulletins |
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Accounting Research Bulletins
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-issued by CAP
-dealt with a variety of accounting problems -failed to provide the needed structured body of accounting principles. |
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Accounting Principles Board (APB)
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-created in response to failure of Accounting Research Bulletins
-major purposes were 1. advance the written expression of accounting principles, 2. determine appropriate practices, and 3. narrow the areas of difference and inconsistency in practice. -its official pronouncement, called APB Opinions, were intended to be based mainly on research studies and be supported by reason and analysis |
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Wheat Committee
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-Study Group on Establishment of Accounting Principles.
-examined the organization and operation of the APB and determined the necessary changes to attain better results. -submitted its recommendations to the AICPA council, which were adopted and implemented. --recommendations led to the demise of the APB and the creation of a new standard-setting structure composed of three organizaions |
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Financial Accounting Standards Board (FASB)
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-members selected by the FAF
-activities funded by the FASAC -mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. -several significant differences between it and the APB 1. smaller membership 2. full-time, remunerated membership 3. greater anatomy 4. increased independence 5. broader representation -relies on the expertise of various task force groups formed for various projects and on the FASAC |
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Financial Accounting Standards Advisory Council (FASAC)
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-consults with the FASB on major policy and technical issues and also helps select task force members
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Standards Statement
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-passage requires support of 3 of 5 board members.
-considered GAAP and thereby binding in practice |
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Standards, Interpretations, and Staff Positions
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-type of pronouncement
-interpretations modify or extend existing standards and have same authority, and require same votes for passage, as standards. -FASB issues staff positions, which provide interpretive guidance and also minor amendments to standards and interpretations and have same authority as standards and interpretations. |
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Financial Accounting Concepts
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-set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting.
-DOES NOT establish GAAP -pass through same due process system as do standards statements. |
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Due process system
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1. Topics identified and placed on Board's agenda
2. Research and analysis conducted and preliminary views of pros and cons issued. 3 Public hearing on proposed standard. 4. Board evaluates research and public response and issues exposure draft. 5. Board evaluates responses and changes exposure draft, if necessary. Final standard issued |
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Emerging Issues Task Force Statements
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-type of pronouncement
-comprised of representatives from CPA firms and financial statement preparers. -purpose is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices. -identifies controversial accounting problems as they arise |
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Accounting Standards Executive Committee (AcSEC)
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-created by the AICPA when the FASB replaced the APB
-authorized to speak for the AICPA in the area of financial accounting and reporting |
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Audit and Accounting Guides
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-written communication by AcSEC
- summarize the accounting practices of specific industries and provide specific guidance on matters not addressed by the FASB. |
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Statement of Position (SOP)
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-written communication by AcSEC
-provide guidance on financial reporting topics until the FASB sets standards on the issue in question |
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Practice Bulletins
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-written communication by AcSEC
-indicate AcSEC's views on narrow financial reporting issues not considered by the FASB. |
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Financial Accounting Standards Board Accounting Standards Codification
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-response to concerns in determining what is authoritative and what is not.
-provide in one place all the authoritative literature related to a particular topic -major restructuring of accounting and reporting standards. |
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Financial Accounting Standards Board Codification Research System (CRS)
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-an online real-time database that provides easy access to the Codification
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The Sarbanes-Oxley Act
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-increases the resources for the SEC to combat fraud and curb poor reporting practices
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Fair value
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how much an asset is currently worth
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Historical cost
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how much asset cost to acquire
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Primary qualities
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-relevance
-reliability |
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Relevant information
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-predictive value
-feedback value -timeliness |
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Predictive value
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-helps users predict the ultimate outcome of past, present, and future events.
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Feedback value
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-helps users confirm or correct prior expectations.
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Timeliness
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-relevant information is available to decision makers before it loses its capacity to influence their decisions.
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Reliability
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-verifiability
-representational faithfulness -neutrality |
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Verifiability
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-occurs when independent measurers, using the same methods, obtain similar results
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Representational faithfulness
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-the numbers and descriptions match what really existed or happened
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Neutrality
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-means that a company cannot select information to favor one set of interested parties over another.
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Secondary qualities
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-comparability
-consistency |
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Comparability
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-information that is measured and reported in a similar manner for different companies is considered comparable.
-enables users to identify the real similarities and differences in economic events between companies. |
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Consistency
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-when a company applies the same accounting treatment to similar events from period to period, the company shows consistent use of accounting standards.
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Basic elements
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-assets
-liabilities -equity -investments by owners -distributions to owners -comprehensive income -revenues -expenses -gains -losses |
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Basic assumptions
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-economic entity
-going concern -monetary unit -periodicity |
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Economic Entity Assumption
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-economic activity can be identified with a particular unit of accountability
-a company keeps its activity separate and distinct from its owners and any other business unit |
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Going Concern Assumption
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-the company will have a long life
-only where liquidation appears imminent is the assumption inapplicable |
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Monetary Unit Assumption
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-money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
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Periodicity Assumption
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-implies that a company can divide its economic activities into artificial time periods
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Basic Principles of Accounting
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-measurement
-revenue recognition -expense recognition -full disclosure |
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Measurement
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-historical cost
-fair value |
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Historical Cost
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-acquisition price of an asset and liability
-generally thought to be reliable |
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Fair Value
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-the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
-often provide more relevant information about the expected future cash flows related to the asset or liability. -FASB believes that fair value information is more relevant to users than historical cost -increasing use |
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Revenue Recognition Principle
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-revenue generally recognized when
1. realized or realizable and 2. when earned -a company realizes revenues when it exchanges products, merchandise, or other assets for cash or claims to cash -companies delay recognition of revenue until earned |
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Expense Recognition Principle
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-companies recognize revenue when the work or the product actually contributes to revenue.
-product costs or period costs |
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Full Disclosure Principle
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-recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs
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Financial Statements
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-balance sheet
-income statement -statement of cash flows -statement of owners' equity |
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Notes to financial statements
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amplify or explain the items presented in the main body of the statements
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Supplementary information
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-may include details or amounts that present a different perspective from that adopted in the financial statements
-may be quantifiable information that is high in relevance but low in reliability -may also include management's explanation of the financial information and its discussion of the significance of that information. |
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Constraints
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-cost-benefit relationship
-materiality -industry practices -conservatism |
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Cost-Benefit Relationship
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-companies must weigh the costs of providing the information against the benefits that can be derived from using it.
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Materiality Constraint
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-concerns am item's impact on a company's overall financial operations.
-an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. |
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Industry practices
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-the peculiar nature of some industries and business concerns sometimes requires departure from basic theory.
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Conservatism
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-when in doubt, choose the solution that will be least likely to overstate assets and income
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Debit balance
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-when the total of the debit amounts exceeds the credits
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Trial balance
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-lists accounts and their balances at a given time.
-a company usually prepares a trial balance at the end of an accounting period -lists the accounts in the order in which they appear in the ledger. -proves the mathematical equality of debits and credits after posting. -uncovers errors in journalizing and posting. -doesn't prove that a company recorded all transactions or that the ledger is correct |
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Deferrals
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-prepaid expenses
-unearned revenues |
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Accruals
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-accrued revenues
-accrued expenses |
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Book value
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-difference between its cost and its related accumulated depreciation
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Closing process
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-reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions.
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post-closing trial balance
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-the trial balance after closing consists only of asset, liability, and owners' equity accounts--the real accounts.
-provides evidence that the company has properly journalized and posted the closing entries. -shows that the accounting equation is in balance at the end of the accounting period. -does not prove that all transactions have been recorded or that the ledger is correct |
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current cash debt coverage
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net cash provided by operating activities / Average current liabilities
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cash debt coverage ratio
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net cash provided by operating activities / average total liabilities
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free cash flow
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net cash provided by operating activities - (capital expenditures + dividends)
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