Busi 353 Ch. 1 & 2 - Intermediate Financial Accounting

Front 1

Objective of accounting and financial reporting

Back 1

To communicate useful (relevant/ reliable) info to allow users of financial statements to make decisions

Front 2

Who are the users of financial statements?

Back 2

Shareholders/investors and creditors

Front 3

What decisions do the users make?

Back 3

Buy/hold/sell or Lend/continue lending/call loan

Front 4

Why allow choices in accounting standards?

Back 4

"One size does not fit all" Principles based accounting allows for choices and judgement

Front 5

Positive Accounting Theory

Back 5

Theory for understanding managers' motivations/ accounting choices/ reactions to accounting standards.

Front 6

Motivation for upwards earnings management (supply side)

Back 6

-bonus based on net income
-meeting debt covenants
-increase perceived value of firm

Front 7

Motivations for Downward earnings management

Back 7

-reduce taxes
-increase chances of obtaining gov't assistance
-taking a "big bath" for higher future compensation/stock price

Front 8

What causes supply and demand of accounting information?

Back 8

Information assymetry. Mgmt has info. Users making decisions under uncertainty demand information to alleviate uncertainty

Front 9

Four types of decisions of users

Back 9

-prediction of cash flows/dividends/earnings
-assessment of risk
-contracting and compliance
-assess stewardship and competence of mgmt

Front 10

Fundamental qualitative characteristics (IFRS)

Back 10

-Relevance: Predictive value/confirmatory value/materiality
-Faithful representation

Front 11

Enhancing qualitative characteristics

Back 11

-comparability
-verifiability
-timeliness
-understandability
(enhance usefulness of relevant and faithfully represented info)

Front 12

Asset

Back 12

resource controlled by an entity as a result of past events and from which future econ benefits are expected to flow to entity

Front 13

Liability

Back 13

present obligation arising from past events. settlement is expected to result in an outflow from entity of econ resources embodying econ benefits

Front 14

Equity

Back 14

residual interest in assets after deducting liabilities

Front 15

Income

Back 15

Increases in econ benefits during accounting period in form of inflow or enhancements of assets or decreases of liabilities that result in increases in equity. Encompasses both revenue and gains. But not contributions from equity participants

Front 16

Revenue

Back 16

arises in course of ordinary activities

Front 17

Gains

Back 17

income from peripheral activities

Front 18

Expenses

Back 18

decreases in econ benefits in form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity. But not those relating to distribution to equity participants. Encompasses ordinary expenses and losses

Front 19

Losses

Back 19

expenses from peripheral activities

Front 20

General Recognition Criteria

Back 20

1) it is probable that any future econ benefit associated with item will flow to or from entity
2) item has cost or value that can be reliably measured

Front 21

Common measurement bases

Back 21

-historical cost
-current (replacement) cost
-realizable value
-present value

Front 22

Constraints

Back 22

-benefits vs. costs
-timeliness vs. reliability
-trade-off among qualitative characteristics e.g. relevance vs. reliability

Front 23

Assumptions

Back 23

-accrual basis
-going concern
-financial capital maintenance (physical: focus on production requirements/financial: focus on monetary requirements)

Front 24

General notes about IFRS conceptual framework

Back 24

-does not override any specific standard
-lower authority
-may depart from standards if objectives in framework are not met (but rare)

Front 25

Are global standards best?

Back 25

benefits:
-increase comparability globally
-reduce reporting costs
-provide common language
costs:
-uniqueness of individual countries
-lack of competition and development among standard-setters