Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/52

Click to flip

52 Cards in this Set

  • Front
  • Back
What is the underlying theory of financial accounting known as?
The Conceptual Framework
What is the purpose of the conceptual framework?
It is a body of doctrine that provides the basis for GAAP.
How has the conceptual framework evolved?
It has developed and evolved over the years as the accounting profession has evolved
How has the framework of the conceptual framework changed?
It was codified by the Financial Accounting Standards Board beginning in the 1970s
What are the series of documents that outlined the concepts that form the basis for everything that will be covered in Accounting 221
FASB Statements of Financial Accounting
The conceptual framework can be broken down into these sections:
Objectives of Financial Reporting
Qualitative Characteristics of
Accounting Information
Elements of Financial Statements
Recognition and Measurement Criteria
Recognition and Measurement Criteria can further be broken down into
Assumptions
Principles
Constraints
What is the primary objective of financial reporting?
To provide information that is useful to external decision makers in the assessment of future cash flows-in other words, to provide information useful fo decision-making
The qualitative characteristics of information are broken down into two groups:
Primary
Secondary
What are the 2 primary characteristics?
1. Relevance-information that influences decisions

2. Reliability-Information must be free from error and bias
What categories fall under relevance?
Timely
Predictive Value
Feedback Value
What characteristics fall under reliability?
Validity
Verifiability
Neutrality
Describe timely
Relevant information must be available before it loses its relevance
Describe predictive value
Information must aid users ability to assess and predict the outcome(s) of events
Describe feedback value
Information must aid users in their assessment of previous outcomes
Describe validity
Information must measure the economic event that it says it measures
Describe verifiability
Information must be able to be confirmed as being accurate
Describe neutrality
Information must be unbiased
What are the secondary characteristics?
1. Comparability-Information can be compared to information from other businesses.

2. Consistency-Information can be compared across time periods
What do the elements of financial statements do?
They define what items are included in a full set of financial statements
What are the elements in a balance sheet?
Assets
Liabilities
Equities
Define assets
economic resources used by a business in the production of revenue
Define liabilities
Obligations of a business to provide assets or services sometime in the future
Define equities
Owner's residual interest in a business
What are the 2 types of equities?
Contributed capital (Common Stock)

Retained Earnings
Define Contributed Capital (Common Stock)
Portion of assets contributed to a business by its owners
Define retained earnings
Portion of assets resulting from the operations of a business that are retained in the business
Give an example of retained earnings
Distributions (Dividends)
Define distributions (dividends)
Transfers of wealth from a business to its owners
What are the elements on an income statement?
Revenues
Expenses
Gaines
Losses
Define revenues
Increases in assets or decreases in liabilities that result from the operating activities of a business
Define expenses
Decreases in assets or increases in liabilities that result from the operating activities of a business
Define gains
Increases in assets or decreases in liabilities that result from peripheral transactions
What are peripheral transactions?
Transactions used in the business but not in the act of buying and selling
Define losses
Decreases in assets or increases in liabilities that result from peripheral transactions
What do Recognition and Measurement Criteria do?
They outline how, what, when, why, and how much of each element is recorded in the accounting system.
What criteria provide the basis for accrual accounting?
Assumptions
Principles
Constraints
What are the 4 parts of assumptions?
Separate Entity
Continuity (Going Concern)
Unit-of-Measure
Time Period
Define separate entity
A specific unit for which accounting records are kept. The unit is distinct and separate from its owners, managers, creditors, and employees (i.e. transactions of the business are separate from transactions of the owners)
Define continuity (Going concern)
The assumption that companies will continue to operate indefinitely (i.e. they will not go out of business in the near future)
Define unit-of-measure
Accounting measurements are made in the national monetary unit (dollars in the US)
Define time period
The long life of a company can be broken into a series of shorter time periods. Accounting transactions can be organized according to these time periods
What categories fall under principles
Historical cost
Revenue
Matching
Full Disclosure
Define historical cost
Elements are recorded in the financial statements at their actual, historic, cash equivalent price
Define revenue
Revenues are recognized in the financial satements when they are earned and measureable.

a. The earnings process is complete
b. An exchange transaction takes place
c. Collection is reasonably assured
Define matching
Resources consumed to earn revenues in an accounting period should be recorded in that accounting period, regardless of when cash is paid (i.e. expenses are matched with the revenues they help to generate)
Define Full disclosure
Entities must disclose all relevant economic information (This is where footnotes come into play a lot)
What categories fall under constraints?
Cost-benefit
Materiality
Conservatism
Industry Preference
Define cost-benefit
Benefits of recording and reporting information should outweigh the costs of collecting and organizing the information
Define materiality
Items are considered material if their omission or misstatement will influence the decisions of a reasonable decision maker (user of a financial statement.) Small amounts that will not influence users' decisions may be recorded in the most cost-beneficial manner
Define conservatism
Accountants should be careful not to overstate assets and revenues or understate liabilities and expenses
Define industry preference
businesses may use alternative treatments if there is a clear precedent in their industry