Accounting Prelim 1

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Financial Accounting

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providing relevant financial information to various external users

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capital markets

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mechanism that help our economy allocate resources efficiently

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Three forms of biz organization

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sole prop, partnerships, corporations

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corporation

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acquire capital from investors in exchange for ownership interest and from creditors by borrowing

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initial market transactions

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involve issuance of stocks and bonds by coporation

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secondary market transactions

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transfers of stocks and bonds between individuals and institutions

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rate of return

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asdfasdf

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net operating cash flow

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difference between cash receipts and cash disbursements from providing goods and services

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Net income

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revenues - expenses

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GAAP

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dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the info in their financial statements and related notes

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Securities and Exchange Commission

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created by Congress in 1934 to set accounting and reporting standards for public companies

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Timeline of Accounting Standards

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Committee on Accounting Procedure (CAP)
Acounting Prnciples Board (APB)
Financial Accounting Standards Board (FASB)
Financial Accounting Foundation (FAF)

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Conceptual Framework

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provides underlying structure for the development of accounting standards

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International Accounting Standards Board (IASB)

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Formed in 1973 and renamed in 2001 to develop a single set of global accounting standards

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International Financial Reporting Standards (IFRSs)

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gaining support, formed by IASB. global accounting standards

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auditors

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express an opinion on the compliance of financial statements with GAAP

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Certified Public Accountants

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licensed by states to provide audit services

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objectives based approach

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emphasized using professional judgement as opposed to following a list of rules, when choosing how to account for a transaction

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Institute of Management accounants and institute of internal auditors

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national organization of accountants and auditors working in industry and govt

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conceptual framework

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does not prescribe GAAP. provides an underlying fondation for accounting standards

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decision usefulness

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information must possess relevance and faithful representation

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Relevance

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information must possess predictive value and/or confirmatory value. Predictive value helps users predict a companys future cash flows. Confirmatory value helps investors confirm or change their prior assessments regarding companys cash flow generating ability

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Material

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info that has an effect on decisions

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faithful representation

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agreement between a measure and a real world phenomenon that the measure is supposed to represent

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complete

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depiction is complete if it includes all info necessary for faithful representation

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neutrality

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implies freedom from bias

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Free from error

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representational faithfulness is enhanced if information is free from error

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conservatism

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inconsistent with neutrality

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comparability

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how similar accounting information is across different companies and over different time periods

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Consistency

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if it measured and reported the same way in each time period

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verifiable

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different measurers would reach consensus about whether it is representationally faithful

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timeliness

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if it is available to users before a decision is made

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understandable

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users can comprehend it

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cost effective

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benefit of increased decisions usefulness excess costs of providing that information (includes any possible adverse economic consequences of accounting standards)

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economic entity

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economic events can be identified specifically with an econonmic entity

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going concern assumption

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assumption that business will continue to operate indefinitely

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periodicity assumption

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allows life of a company to be divided into artifical time periods to provide info

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fiscal year

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corresponds with natural biz year

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monetary unity assumption

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financial statement elements should be measured in particular monetary units

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recognition

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admitting information into the financial statement

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recognition criteria

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definition
measurablility
relevance
reliability

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realization principle

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earnings process is virtually complete and collection is reasonably assured

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point of sale

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where the primary earnings activity that triggers the recognition of reveneu happens

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matching principole

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expenses should be recogniezed in the period in whcih they produced revenues

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historical cost

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bases measurement on amount given or recieved in exchange transaction

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net realizable value

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bases measurement on amount of cash into which the asset or liability will be converted in the ordinary course of business

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present values

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bases measureement on future discounted cash flows

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fair value

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bases measurement on price that wouldb e recieved to sell assets or transfer liabilities to orderly market

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full disclosure principle

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any informuation useful to decision makers be provided in financial statements, subject to cost effectiveness constraint

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revenue/expense approach

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recognition and measurement of revenues and expenses are emphasized

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asset/liability approach

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recognition and measurement of assets and liabilities drive revenue and expense recognition