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24 Cards in this Set

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GAAP
Generally Accepted Accounting Principles
What are the 2 standards setting organizations
Financial Accounting Standard Board (FASB) and
Securities and Exchange Commission (SEC)
Reliability
The information is free of error and bias
Comparability
results when different companies use the same accounting principles
Consistency
use the same accounting principles and method from year to year
Business Entity Concept
(Principle)
(Separate-entity assumption)
Thus for accounting purposes and enterprise is assumed to be an accounting unit separate and apart from owners creditors and other entities. Indicates that personal and business record keeping should be separately maintained
Objectivity concept (Principle)
(reliability principle
Accounting should be based on objective data and objective determinations to the fullest extent possible. It should be free from bias. The accounting data recorded and reported should be verifiable. The transactions should be “arms length”
Cost Principle Concept (concept)
Cost (the exchange of economic consideration between two independent parties) is the appropriate basis for initial recording and subsequent accounting for assets, liabilities revenues and expenses.
Indicates that market value changes subsequent to purchase are not recorded in the accounts (violation of cost concept)

Market value changes subsequent to purchase are not recorded in the accounts…

Leask company has inventory on hand that cost $400K. Leask reports inventory on its balance sheet at the current market value of $425K….
Going concern assumption Continuing Concern principle (continuity assumption)
For accounting an entity is assumed to be a “ going concern” that is for accounting purposes, it is assumed that the entity will not liquidate in the foreseeable future, but will continue to carry out its business objectives in a orderly way
McKenna Hospital Supply Corporation reports only current assets and current liabilities on its balance sheet. Plant, property and equipment are reported as current assets. Bonds payable are reported as current liabilities. Liquidation of the company is unlikely
Monetary Unit Assumption: (Unit of measure concept: stable dollar concept)
Assumes the dollar is the measuring stick, used to report on financial performance.

The death of the president is not recorded in the accounts
Time period assumption
(This divides the life of the business into years / months / quarters)
Financial data must be reported for relatively short time periods; years. Months, quarters. Accounting assumes that financial results must be reported for short time periods. This leads to the necessity for the accrual and deferral of revenues and expenses. Using the time period assumption the life of a business may be divided into equal time periods.
Comparability principle (Consistency Principle)
The accounting process must apply all concepts, principles, standards, and measurements approaches on a consistent basis from one period to the next in order to derive financial data that are comparable over time.
Reporting principle (Full-Disclosure Principle)
The full disclosure principle is when financial reporting should be complete and understandable to the prudent user (i.e investor) and should include all significant information relating to the economic affairs of the entity i.e. footnotes
Remember all relevant financial information should be reported

All important information related to inventories is presented in the financial statements or in the footnotes….
Revenue Recognition Principle Concept or Realization; Revenue; Recognition
Revenue is the consideration received for the aggregate of goods and services transferred by an entity to its customers. Under this principle revenue is realized (ie earned and recognized) when ownership to the goods sold is transferred or when the services are rendered
Revenue is recorded at the point of sale

Mull Company recognizes revenue at the end of the production cycle, but before sale. The price of the product as well as the number that can be sold is not certain….
Matching principle:
Under the matching principle all of the costs incurred in generating that revenue, regardless of the period in which the cost were incurred must be identified with the period in which the revenues are recognized. The cost of generating particular revenues are matched with those revenues period by period
So expenses should be allocated to revenue in proper period.
Requires recognition of expenses in the same period as related revenues
An allowance for doubtful accounts is established

Martinez Company uses the direct write off method of accounting for uncollectible accounts …. (allowance for doubtful accounts is established)
Exception Principle
A reasonable degree of flexibility is essential. As a consequence certain exceptions to the basic concepts, standards and procedures are necessary. Generally 3 types of exceptions are permitted.
Materiality:
Conservatism:
Industry Standards
Materiality:
When an item is likely to influence the decision of reasonable prudent investor or creditor
Conservatism:
when in doubt, chose the method that will likely to overstate assets and will not overstate income
Industry Standards
percent of completion time
International Accounting standards
Must be used when dealing with a international firm or you are operating outside the US, but must also be converted back to dollars ….
Cash Basis:
Revenues and expenses are reported in the income statement in the period in which cash is received or paid. Net income is the difference between cash receipts (revenues) and cash payments (expenses
Accrual Basis
Revenues are reported in the income statement in the period in which the revenue is earned (regardless of when the cash is received).
Revenue recognition concept.
Expenses are report in the same period as the revenues to which they relate ..
Matching concept
Net income is the difference between revenues eared and expenses incurred.