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53 Cards in this Set
- Front
- Back
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primary objective of financial accounting?
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to convey relevant financial information to external users and decision makers
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define net operating cash flows
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the difference between cash receipts and disbursements from providing goods and services
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why is net operating cash flows a poor indicator of future operating cash flows?
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a cash receipt is not always from revenue; a disbursement is not always an expense
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why should all companies follow GAAP?
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so that everything is standard and easy to compare; produces complete and precise info
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what is the purpose of FASB's conceptual framework project?
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to define fair value and provide improved guidelines about how to measure it
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what are the components of relevant information?
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info that is important to investors and creditors in helping asses the amounts, timing, and uncertainty of future cash flows
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what are the components of faithful representation?
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completeness, neutrality, and free from material error
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explain: the benefits of accounting information must exceed the costs
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the benefits of financial statements must exceed the costs to produce them
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obligation to transfer cash or other resources as a result of a past transaction
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liability
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dividends paid by a corporation to its shareholders
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distribution to owners
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inflow of an asset from providing a good or service
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revenue
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the financial position of a company
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assets, liabilities, equity (balance sheet)
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increase in equity during a period from non-owner transactions
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comprehensive income
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increase in equity from peripheral or incidental transaction
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gain
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sale of an asset used in the operations of a business for less than the asset's book value
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loss
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the owners' residual interest in the assets of a company
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equity
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an item owned by the company representing probably future benefits
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assets
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revenue plus gains less expenses and losses
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net income
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an owners' contribution of cash to a corporation in exchange for ownership shares of stock
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investment by owners
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outflow of an asset related to the production of revenue
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expenses
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predictive value
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information is useful in predicting the future
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relevance
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pertinent to the decision at hand
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timeliness
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information is available prior to the decision
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distribution to owners
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decreases in equity resulting from transfers to owners
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confirmatory value
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information confirms expectation
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understandability
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users understand the information in the context of the decision being made
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gain
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result if an asset is sold for more than its book value
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faithful representation
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agreement between a measure and the phenomenon it purports to represent
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comprehensive income
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the change in equity from non-owner transactions
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materiality
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concerns the relative size of an item and its effect on decisions
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comparability
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important for making inter firm comparisons
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neutrality
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the absence of bias
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recognition
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the process of admitting information into financial statements
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consistency
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applying the same accounting practices over time
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cost effectiveness
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requires consideration of the costs and value of information
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verifiability
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implies consensus among different measures
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matching principle
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record expenses in the period the related revenue is recognized
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periodicity
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the life of an enterprise can be divided into artificial time periods
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historical cost principle
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the original transaction value upon acquisition
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realization principle
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criteria usually satisfied at point of sale
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going concern assumption
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the entity will continue indefinitely
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monetary unity assumption
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a common denominator is the dollar
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economic entity assumption
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the enterprise is separate from its owners and other entities
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full-disclosure principle
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all information that could affect decisions should be reported
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Jim Marley is the sole owner of X. He borrowed $X to buy a new home for his personal residence. this liability was not recorded in the records of the company.
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economic entity assumption
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X Co. Inc. distributes an annual report to its shareholders
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periodicity assumption
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X depreciates machinery and equipment over their useful lives
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matching principle and going concern assumption
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what are the 4 key broad accounting principles?
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historical cost, realization, matching, full-disclosure
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2 important reasons to base the valuation of assets and liabilities at their historic cost
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objective and verifiable
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4 basic assumptions
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economic entity assumption, going concern assumption, periodicity assumption, and monetary unit assumption
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describe the two criteria that must be satisfied before revenue can be recognized
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the earnings process is judged to be complete; there is reasonable certainty as to the collectibility of cash
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4 different approaches to implementing the matching principle
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(1) direct cause and effect (COGS) (2) association with specific timer period (salaries) (3) systematic rational allocation (prepaid rent) (4) in the period incurred (advertising)
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inputs companies should use when determining fair value
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(1) quoted market prices in active markets (2) inputs other than quoted prices (3) unobservable inputs that reflect the entity's own assumptions
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