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42 Cards in this Set

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Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.
Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.
Decreases in equity (net assets from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.
Moment in time
The FASB clasifies the elements into two distinct groups. The first group of three elements (assets, liabilities, and equity) describes amounts of resources and claims to resources at a moment in time.
Period of time
The other seven elements (comprehensive income and its components-revenues, expenses, gains, and losses-as well as investments by owners and distribution to owners) describe transactions, events, and circumstances that affect an enterprise during a period of time.
Four basic assumptions underlie the financial accounting structure:
1)economic entity
2) going concern
3)monetary unit
4) periodicity
What does economic entity assumption mean?
That economic activity can be identified with a particular unit of accountability
Explain why the entity concept does not necessarily refer to a legal entity
A parent and its subsidiaries are separate legal entities, but merging their activities for accounting and reporting purposes does not violate the economic entity assumption.
Going concern assumption
Most accounting methods are based on the going concern assumption; that the business enterprise will have a long life.
When are depreciation and amortization policies justifiable and appropriate?
Only if we assume some permanence to the enterprise. If a liquidation approach were adopted, the current-non current classification of assets and liabilities would lose much of its significance. Labeling anything a fixed or long term asset would be difficult to justify.
When is the going concern assumption not applicable?
Only where liquidation appears imminent is the assumption inapplicable. In these cases a total revaluation of assets and liabilities can provide information that closely approximates the entity's net realizable value
What is the monetary unit assumption
Means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
Why is the monetary unit important?
It is relevant, simple, universally available, understandable, and useful.
In what rare occurrence would the FASB consider "inflation accounting"?
Only if circumstances change dramatically such as if the US were to experience high inflation similar to South American countries.
Periodicity (or time period) assumption
Implies that the economic activities of an enterprise can be divided into artificial time periods. Usually monthly, quarterly, and yearly. The shorter the time period the more difficult it becomes to determine the proper net income for the period.
What are the four basic principles of accounting?
1. historical cost
2. revenue recognition
3. matching
4. full disclosure
What is the historical cost principle?
GAAP requires that most assets and liabilities be accounted for and reported on the basis of acquisition price
Are liabilities accounted for on a cost basis?
Yes. If we convert the term "cost" to "exchange price," we find that it applies to liabilities as well.
When is revenue recognized?
1. when realized or realizable
2. when earned
This is known as the revenue recognition principle.
When are revenues considered earned?
when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.
When is recognition of revenue allowed before the contract is completed?
In certain long-term construction contracts. In this method revenue is recognized periodically based on the parentage of the job completed.
When can revenue be recognized after the production cycle has ended but before the sale takes place?
In an active market at readily determinable prices without significant additional cost. For instance the mining of certain minerals.
What is the Matching Principle
"Let the expense follow the revenues."
Efforts (expenses) are matched with accomplishment (revenues) whenever it is reasonable and practicable to do so.
Costs are charged into what two groups?
1. product costs
2. period costs
What are product costs?
Material, labor, and overhead
What are examples of period costs?
Officers' salaries and other administrative expenses.
Product costs include material, labor and overhead and have a direct relationship between cost and revenue. When are the recognized?
Recognize in period of revenue (matching)
Period cost include salaries and administrative costs and have no direct relationship between cost and revenue. When is it recognized?
Expense as incurred.
Why is the matching principle a subject of debate?
A major concern is that matching permits certain costs to be deferred and treated as assets on the balance sheet when in fact these costs may not have future benefits.
What is the full disclosure principle?
The general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user.
Full disclosure principle has two tradeoffs, what are they?
It has sufficient detail to disclose matters that make a difference to users yet 2) sufficient condensation to make the information understandable, keeping in mind cost of preparing and using it.
Describe financial statements
Formalized, structured means of communicating financial information
To be recognized in the main body of financial statements, an item should meet the definition of...
basic element, be measurable with sufficient certainty, and be relevant and reliable.
What do the notes to financial statements do?
Amplify or explain the items presented in the main body of the statements.
What is supplementary information?
Information that may present a different perspective from that adopted in the financial statements. It may be quantifiable information that is high in relevance but low in reliability etc.
To provide information with the qualitative characteristics that make it useful, two overriding constraints must be considered, what are they?
1. the cost-benefit relationship
2. materiality

Also, industry practices and conservatism can be considered.
The AICPA Special Committee on Financial Reporting submitted 6 constraints to limit the costs of reporting, what are they?
1. should exclude info outside of management's expertise or for which management is not th best source such as info about competitors
2. don't report info that harms competitive position
3.Do not provide future forecast, only provide info that allows users to forecast themselves
4. only report info it knows, not required to provide information it does not have or need.
5. reporting should be presented only if users and management agree they should
6. Companies should not have to report forward looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.
What is the constraint of materiality?
An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
Both quantitative and qualitative factors must be considered in determining whether an item is ...
What does industry practices mean?
Basic theory of accounting.
What is conservatism?
When in doubt choose the solution that will be least likely to overstate assets and income. Does NOT mean to understate on purpose.