Chapter One Accounting

Front 1

Financial Accounting

Back 1

process that culminates the preparation of financial reports on the enterprise for use by both internal and external parties
users: investors, creditors, managers, unions, governments agencies

Front 2

managerial accounting

Back 2

process of identifying, measuring, analyzing and communicating financial info needed by management to plan, control, and evaluate a company's operations

Front 3

financial reporting

Back 3

other than formal financial statement
ex: president's letter, supplementary schedule, prospectuses, reports filed with govt. agencies, news releases, management forecasts, and social or environmental impact statements.

Front 4

Capital Allocation

Back 4

The process of determining how and at what cost money is allocated among competing interests.

Front 5

Captital Allocation Process

Back 5

Financial Reporting, Users, Capital Allocation
Encourages innovation, provides an efficient and liquid market for buying and selling securities and obtaining and granting credit. .

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Challenge: Nonfinancial Measurements

Back 6

financial reports fail to provide some key performance measures widely used by management (customer satisfaction indexes, backlog information, and rejects rates on goods purchased)

Front 7

Challenge: Forward-looking measurement

Back 7

Financial reports fail to provide forward looking info needed by present and potential investors and creditors.

Front 8

Challenge: Soft Assets

Back 8

Financial reports focused on hard assets (inventory, plant assets) but failed to provide much info about a co's soft assets (intangibles)

Front 9

Challenge: Timeliness

Back 9

Companies only prepare financial statements quarterly and provide audited financials annually.

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Objectives of financial reporting

Back 10

Provide info that:
-useful to present and potential investor and creditors in making rational investment, credit and similar decisions.
-Helps asses the amounts, timing and uncertainty of prospective cash receipts.
-Clearly portrays the economic resources of an enterprise, the claims to those resources.

Front 11

Advantage of accrual accounting

Back 11

better indicates a company's present and continuing ability to generate favorable cash flows

Front 12

Accrual accounting

Back 12

company records events that change its financial statements in periods in which the events occur, rather than the period in which it receives or pays cash.
Recognizes revenues when it earns them and expenses when it incurs them.

Front 13

Parties involved in standard setting

Back 13

SEC
AICPA
FASB
GASB

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SEC

Back 14

Securities Exchange Commission
established by fed government

helps develop and standardize financial info presented to stockholders

requires registrants to adhere to GAAP

Front 15

AICPA

Back 15

American Institute of Certified Public Accountants, national professional organization of practicing Certified Public Accountants.

Front 16

Committee of Accounting Procedure

Back 16

composed of practicing CPAs
issued 51 Accounting Research Bulletins in response to a variety of accounting problems (1939-1959)

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Accounting Principles Board

Back 17

Created by AIPCA
Composed of public accountants, industry and academia.
Issues APA Opinions

Major purposes:
-advance written expression of acct. principles
-determine appropriate practices,
-narrow areas of difference and inconsistency in practice

Front 18

Wheat Committee

Back 18

Examined APB and determined necessary changes to obtain better results. Led to creation of
-FAF
-FASAC
-FASB

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Financial Accounting Foundation

Back 19

selects members of the FASB and Advisory Council, funds their activities and generally oversees FASB's activities

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FASB

Back 20

Mission=to establish and improve standards of financial accounting and reporting for the guidance and education of the public which includes issuers, auditors and users of financial info.

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Differences of AFA and FASB

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FASB:
Smaller membership, full-time remunerated membership, greater autonomy, increased independence, broader representation

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Financial Accounting Standards Advisory Council

Back 22

FASAC consults with FASB on major policy and technical issues and also helps select task force members

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FASB Standards Statement

Back 23

Requires support of 4 of 7 board members.
Considered GAAP

Front 24

FASB Pronouncements

Back 24

1-Standards, Interpretations and Staff positions
2-Financial Accounting Concepts
3-Emerging Issues Task Force

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Standards

Back 25

considered generally accepted accounting principles

Front 26

interpretations

Back 26

issued by FASB
modify or extend the existing standards
have same authority as standards

Front 27

staff positions

Back 27

issued by FASB
provide interpretive guidance and also minor amendments to standards and interpretations
same authority as standards and interpretations
(used in lieu of technical bulletins)

Front 28

Statements of Financial Concepts

Back 28

Sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting.
Does not establish GAAP

Front 29

Emerging Issues Task Force

Back 29

EITF composed 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.
-ie:accouting for pension plans, revenue from barter transactions by Internet companies and excessive amounts paid to takeover specialists

mostly works with short term, emerging issues, while FASB deals with long term problems

Front 30

Governmental Accounting Standards Board

Back 30

GASB
Similar to structure of FASB
Deals with state and local govt. reporting, while FASB reports for all other entities

Front 31

AcSEC Accounting Standards Executive Committee

Back 31

committee authorized to speak for the AICPA in the area of financial accounting and reporting through various written communications
-audit and accounting guides
-statements of position (sop)
-practice bulletins

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Audit and Accounting Guides

Back 32

summarize the acct. practices of specific industries and provide specific guidance on matters not addressed by FASB.
(ex: accouting for casinos, airlines, colleges, universities, banks, insurance companies)

Front 33

Statements of Position (SOP)

Back 33

Provide guidance on financial reporting topics until the FASB sets standards on the issue in question.
May update, revise, and clarify audit and accounting grades or provide free-standing guidance.

Front 34

Practice Bulletins

Back 34

indicates AcSEC's views on narrow financial reporting issues not considered by FASB

Front 35

Major sources of GAAP

Back 35

-FASB Standards, Interpretations and Staff Positions
-APB Opinions
-AICPA Accounting Research Bulletins

Front 36

economic consequences

Back 36

impact of accounting reports on wealth positions of issuers and users of financial information, and the decision making behavior resulting from that impact

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Sarbanes-Oxley Act

Back 37

2002
increases the resources for the SEC to combat fraud and curb poor reporting practices.
-est. oversight board, Public Company Accounting Oversight Board
-implements stronger independence rules for auditors
-requires CEOs and CFO to personally certify financial statements are accurate and forfiet bonuses when there is an accouting restatement
-Requires bodes of ethics for senior financial officers

Front 38

Internal Controls

Back 38

Sarbanes Oxley Act
System of checks and balances designed to prevent and detect fraud and errors

Front 39

Expectations Gap

Back 39

what the public thinks accountants SHOULD do and what accountants think they can do

Front 40

IASB

Back 40

International Accounting Standards Board
not as extensive and detailed as GAAP

Front 41

Three Considerations the FASB must keep in mind during standard setting

Back 41

1-improvement in financial reporting
2-simplification of accounting literature and the accounting process
3-international convergence