Intermediate Accounting 1 Chapter 2

Front 1

Describe the usefulness of a conceptual framework

Back 1

The accounting profession needs a conceptual framework to 1. build on and relate to an established body of concepts and objectives
2. Provide a framework for solving new and emerging practical problems
3. Increase financial statement users' understanding of and confidence in financial reporting, and
4. Enhance comparability among companies' financial statements.

Front 2

Describe the FASB's efforts to construct a conceptual framework.

Back 2

The FASB issued six Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises. These concept statements procide the basis for the conceptual framework. They include objectives, qualitative characteristics, and elements. In addition, measurement and recognition concepts are developed.

Front 3

Understand the objectives of financial reporting.

Back 3

Financial reporting should provide information that is
1. Useful to those making investment and credit decisions who have a reasonable understanding of business activities.
2. Helpful to present and porential investors, creditors, and others in assessing future cash flows.
3. And about economic resources and the claims to and changes in them.

Front 4

Identify the qualitative characteristics of accounting information

Back 4

The overriding criterion by which accounting choices can be judged is decision usefulness--that is, providing information that is most useful for decision making. Relevance and reliability are the two primary qualities. Comparability and consistency are the secondary qualities that make accounting information useful for decision making.

Front 5

Describe the basic assumptions of accounting

Back 5

Four basic underlying financial assumptions are:
1. Economic entity: the activity of a company can be kept separate and distinct from its owners and any other business unit.
2. Going concern: The company will have a long life.
3. Moneytary unit: Money is the common denominator by which economic activity is conducted, and the monetary unit provides an appropriate basis for measurement and analysis.
4. Periodicity: The economic activities of a company can be divided into artificial time periods.

Front 6

Explain the application of the basic principles of accounting.

Back 6

1. Measurement Principle: GAAP permits the use of historical cost, fair value, and other valuation bases. Although historical cost principle (measurement based on acquisition price_ contincues to be an inportant basis for valuation, recording and reporting of fair value information is increasing.
2. Revenue recognition principle: A company generally recognizes revenue when (a) realized or realizable and (b) earned.
3. Expense recognition principle: As a general rule, companies recognize expenses when the service or the product actually makes its contribution to revenue (commonly referred to as matching).
4. Full disclosure principle: Cmpanies generally provide information that is of sufficient importance to influence the judgement and decisions of an informed user.

Front 7

Describe the impact that constraints have on reporting accounting information.

Back 7

The constraints and their impact are :
1. Cost/benefit relationship: The cost of providing the informationm must be weighed against the benefits that can be derived from using the information.
2. Materiality: Sound and acceptable standards should be followed if the amount involved is significant when compared with the other revenues and expenses, assets and liabilities, or net income of the company.
3. Industry Practices: Follow the general practices in the company's industry, which sometimes requires departure from basic theory.
4. Conservatism: When in doubt. choose the solution that will be least likely to overstate net income.

Front 8

Assumption

Back 8

Assumptions are 1. Economic entity
2. Going concern
3. Monetary Unit
4. Periodicity

Front 9

Comparability

Back 9

Information that is measured and reported in a similar manner for different companies is considered comparable it alloiws users to identify the real similarities and fdifferences in economic events between companies.

Front 10

Conceptual Framework

Back 10

A coherent system of interrelated objectives and fundamentals that can lead to consistent rules and that prescribes the nature, function, and limits of financial accounting and financial statements.

Front 11

Conservatism Constraint

Back 11

When in doubt, choose the solution that will be least likely to overstate net income.

Front 12

Consistency

Back 12

When a company applies the same accounting treatment to similar events, from period to period, they show consistent use of accounting standards. To change methods a company must show a preferable reason for the switch. If a switch is made can no longer easily compare new to old info.

Front 13

Constraints

Back 13

cost benefit relationship and materiality

Front 14

cost-benefit relationship

Back 14

They must weigh the costs of providing the information against the benefits that can be derived from using it. Difficulty is the costs and benefits aren't always apparent or measurable.

Front 15

Decision usefulness

Back 15

have to be useful to investor and creditor decisions.

Front 16

Earned (revenue)

Back 16

Revneues are considered earned when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. Often the point of sale.

Front 17

Econimic Entity Assumption

Back 17

Means that economic activity can be identified with a particular unit of accountability. A company keeps its activity separate from its owners and any other buysiness unit.

Front 18

Elements, basic

Back 18

Assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses.

Front 19

expense recognition principle

Back 19

Match efforts (expenses) with accomplishment (revenues).

Front 20

Fair Value Principle

Back 20

When you report the price that would be recieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at hte measurement date on the financial statemnets.

Front 21

Fair Value Option/Fair Value Principle

Back 21

They are allowed to use fair value as the basis for measurement of financial assets and financial liabilities because it is more relevant than historical cost because it reflects the current cash equivalent.

Front 22

Feedback Value

Back 22

information that helps users confirm or correct prior expectations has feedback value.

Front 23

Full Disclosure Principle

Back 23

Recognizes that the nature and amount of information included in financial reports reflexts a series of judgemental tradeoffs. These tradeoffs strive for sufficient detail to disclose matters that make a differents in a condensed way to make the information understandable.

Front 24

Going Concern Assumption

Back 24

Assumes the company will have a long life. This is important becase depriciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company.

Front 25

Historical Cost Principle

Back 25

The cost of the liability or asset. The price that was established by the exhcange transaction is the "cost" of the liability. It is thought to be reliable and is a veriafiable benchmark for measuring historical trends.

Front 26

Industry Practices

Back 26

The peculiar nature of some industries and business concerns can require departure from basic theory. But still shouldn't violate basic accountin theory.

Front 27

Materiality

Back 27

An item is material if it makes a differerence. If it does it must be disclosed. If not then it can' be ignored. It is determined to make a difference based on relative size and important generally thought insignificant if less than 5% of net income. On the balance sheet recievabls should be shown at net realizable value.

Front 28

Money Unit Assumption

Back 28

Means that the monetary unit is relevant, simple, universally available, understandable, and useful so it is the common denominator of econ. activity. In the US this is the dollar. One problem is that it is assumed to be stable whereas the dollar is not really stable.

Front 29

Neutrality

Back 29

Means a company cannot select information to favor one set of interested parties over another. Have to present harmful information to your company as well.

Front 30

Notes to Financial Statemtn

Back 30

Amplify or explain the items presented in the main body of the statements. If it is incomplete example of performance mustbe stated in the notes.

Front 31

Conservatism Constraint

Back 31

When in doubt, choose the solution that will be least likely to overstate net income. Not an accounting principle. However, it is used when valuing inventory or estimating bad debts. Protect rom poor maagement decisions.

Front 32

Consistency

Back 32

When a company applies the same accounting treatment to similar events, from period to period, they show consistent use of accounting standards. To change methods a company must show a preferable reason for the switch. If a switch is made can no longer easily compare new to old info.

Front 33

Constraints

Back 33

cost benefit relationship and materiality

Front 34

cost-benefit relationship

Back 34

They must weigh the costs of providing the information against the benefits that can be derived from using it. Difficulty is the costs and benefits aren't always apparent or measurable.

Front 35

Decision usefulness

Back 35

have to be useful to investor and creditor decisions.

Front 36

Earned (revenue)

Back 36

Revneues are considered earned when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. Often the point of sale.

Front 37

Econimic Entity Assumption

Back 37

Means that economic activity can be identified with a particular unit of accountability. A company keeps its activity separate from its owners and any other buysiness unit.

Front 38

Elements, basic

Back 38

Assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses.

Front 39

expense recognition principle

Back 39

Match efforts (expenses) with accomplishment (revenues).

Front 40

Fair Value Principle

Back 40

When you report the price that would be recieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at hte measurement date on the financial statemnets.

Front 41

Period Costs

Back 41

such as officers' salariesand other admin expenses attach to the period and don't have a direct relationship between period costs and revenue so they are charged immediately even though results might be apparent in the future.

Front 42

Periodicity Assumption

Back 42

--Implies that a company can divide its activities into artificial time periods. These periods may vary but they are often monthly, quarterly, and yearly. The quicker the release the more likely info will have errors. This provides an interesting example of the trade off between releveance and reliability in preparing financial data.

Front 43

Predictive Value

Back 43

it helps usere predict the ultimate outcome of past, present, and future events

Front 44

4 accounting principles

Back 44

measurement, revenue recognition, expense recognition, and full disclosure

Front 45

product costs

Back 45

material, labor, and overhead attach to the product. Companies carry these costs into future periods if they recognize the revenue from the product in later periods

Front 46

realized revenue

Back 46

occurs when a company exchanges products (goods or services), merchandise, ot other assets for cash or claims to cash

Front 47

realizable revenue

Back 47

is when assets received or held are readily convertible into cash or claims to cash. They are readily convertible whey they are salable or interchangeable in an active market at readily determinable prices without significant additional cost.

Front 48

relevance

Back 48

to be relevant it needs predictive value or feed back value and has to be presented in a timely manner. It has to be capable of making a difference in a decision.

Front 49

reliability

Back 49

Information is reliable to the extent it is verifiable, is a faithful representation, and is reasonably free of error and bias

Front 50

representational faithfulness

Back 50

means the numbers and descriptions matched what really existed or happened.

Front 51

revenue recognition principle

Back 51

A company records revenues in the period when realized or realizable and when earned. Normally the date of sale but circumstances may dictate otherwise.

Front 52

understandibility

Back 52

The quality of information that lets reasonably informed users see its significance

Front 53

verifiability

Back 53

Occurs when independent measurers, using the same methods obtain similar results.

Front 54

Assets

Back 54

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Front 55

Liabilities

Back 55

Probable future sacrifices of economic benefits arising frompresent obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Front 56

Equity

Back 56

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Often called stockholders equity or shareholders equity.

Front 57

Investments by owner

Back 57

Increases in net assets (equity) of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise.

Front 58

Distributions to owners

Back 58

Decreases in net assets (equity) of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interests or (equity) in an enterprise

Front 59

Comprehensive income

Back 59

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting fron investments by owners and distributions to owners.

Front 60

Revenues

Back 60

Inflows or other enhancements of assets of an entity or settlement of its liabilities ( or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations

Front 61

Expenses

Back 61

Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

Front 62

Gains

Back 62

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Front 63

Losses

Back 63

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

Front 64

ignoeres the economic consequences of a standard or rule

Back 64

neutrality

Front 65

two qualitative characteristics that are related to both relevance and reliability

Back 65

comparability and consistency

Front 66

arises from income statement activities that constitute the entity's ongoing major or central operations

Back 66

revenues, expenses

Front 67

decreases assets during the period by purchasing the company's own stock

Back 67

distributions to owners

Front 68

includes all changes in equity durning the period except those resulting from investments by owners and distributions by owners

Back 68

comprehensive income

Front 69

all significant postbalance sheet events are reported

Back 69

full disclosure principle

Front 70

all important aspects of bond indentures are presented in financial statements

Back 70

full disclosure

Front 71

rationale for accrual accounting

Back 71

revenue and expense recognition principles

Front 72

the use of consolidated statements is justified

Back 72

economic entity assumption

Front 73

an allowance for doubtful accounts is established

Back 73

expense recognition principle

Front 74

All payments out of petty cash are charged to misc exp.

Back 74

materiality

Front 75

significant and petty cash relate to

Back 75

materiality

Front 76

contra equity accounts

Back 76

treasury stock

Front 77

contra liability

Back 77

discount on BP and Premium on BP

Front 78

contra asset

Back 78

accumulated depr.
depletion
amortization

Front 79

don't report at liquidation because that violates the principle of

Back 79

going concern

Front 80

allow for doubtful

Back 80

we record an expense so we want to match it in the period in which it is incurred so its' expense recognition

Front 81

Valuation
Trade securities
accounts/notes receivable
prepaid exp
land
building/fixed assets
intangible assets
natural resources
inventories
accounts payable
bonds
preferred and common stock

Back 81

trade securities=market/fair value
accounts/ notes receivable--net receiovable value
prepaid exp--cost-write offs
land--cost
building/fixed assets--cost-accumulated depr.
intangibles--cost-amortization
natural resources--cost-depletion
inventories--lower of cost or market
accounts payable--amount payable when due same for all current liabilities
bones--+premium or - unamortized discount
preferred and common stock--at par or stated value

Front 82

Beginning inventory + purchases Less: Discounts or sales returns and allowances= cost of goods available for sale less ending inventory=cost of goods sold

Back 82

kk

Front 83

Financial Accounting

Back 83

Cioncerned with providing relevant financial information to various external users.

Front 84

managerial accounting

Back 84

deals with the concepts and methods used to provide info to an org.'s internal users, that is, the managers.

Front 85

Capital Markets

Back 85

the composite of all investors and creditors.

Front 86

Secondary Market transactions

Back 86

Transfers of stocks and bonds among individuals and institutions are referred to as secondary market transactions. Corp's receive no new cash in one of these types of transactions.

Front 87

In order to provide investors with a return what must the company do?

Back 87

The co. must generate profit.

Front 88

Net Operating Cash Flow

Back 88

measure the difference between cash receipts and dispursements over a period from transactions related to providing goods and services to a customer.

Front 89

Accrual Accounting

Back 89

Measures the entity's accomplishments and resource sacrifices during the period, regardless of when cash is received or paid.

Front 90

GAAP

Back 90

dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the info in their financial statements and related notes.

Front 91

Securities and Exchange Commission.

Back 91

Created in 1934 Congress gave the SEC the authority to set accounting and reporting standards for copanies whose securities are publically traded. However, they have delegated the task of setting accounting standards to the private sector. Power is still with them. If they don't like a standard they can force a change in it. Issues its own standards in the form of financial reporting releases.

Front 92

Objective of Financial Accounting

Back 92

To provide information to investors/creditors to help them predict future cash flows. Net incom is a better predictor of future cash flows than most other measures including op cash flows on the statement of cash flows.

Front 93

Committee on Accounting Proceedures

Back 93

1938-1959 CAP first private sector body to assume the task of setting accounting standards.

Front 94

Accounting Principles Board

Back 94

Replaced CAP 1959-1973 members belonged to the American Institute of Certified Public Accountants. Issued 31 Acconting Principles and dealt with specific accounting and reporting problems. These principles have still held today.

Front 95

Financial Accounting Standard Board

Back 95

1973-present. 5 full time members. members include reps from accounting profession, profit oriented companies, accounting educators, and gov parent organization.

Front 96

Emerging Issues Tax Force

Back 96

public and private accts. + 1 FASB member + 1 SEC. Designed to deal with individuals who are aware of emerging reporting issues. They consider the issues and attempt to reach consensus on how to account for them. If consensus is reached, no FASB action is required they issue an EITF issue and these pronouncements become GAAP. If consensus isn't reached, the FASB takes over.

Front 97

Accounting Standards Codification System (ASC)

Back 97

All elements of GAAP put into 1 codification system. ASC

Front 98

IFRS/GAAP convergence

Back 98

International Financial REporting Standards. We have a sophisticated legal system. Not true of other countries. They may have totally diff methods/principles for accounting. There is a desire for them to be more alike than different. Timeline is uncertain. There is an option to use IFRS however, not required at this point. It has been put on hold atm. IFRS is much more principle based than GAAP.

Front 99

Auditor

Back 99

independent intermediary to help ensure that management has in fact appropriately applied GAAP. They examine financial statements to express a professional independent opinion. Auditor adds credibility to the financial statements increasing the capital market participants. CPA's are the only ones allowed to do that.

Front 100

Sarbanes Oxley Act of 2002

Back 100

Implemented in response to Acct. scandals like Enron. There was financial fraud not detected by auditors. They believed it was not their role to find it. Fraud is very easy to create and very hard to detect. Public said if you aren't finding it then who will?

SOX- Increased responsibility for internal contro and its testing.
CEO and CFO now have to sign financials and state they aren't aware of collusion or fraud. Most of them knew it was occurring and endorsed it.
Limited non audit services to audit clients. Used to be that they would go in to do an audit and offer other services such as setting up computter systems. This was a conflict of interest and was eliminated after SOX.

Front 101

Conceptual Framework

Back 101

a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting.

Front 102

Faithful Representation

Back 102

agreement between a measure or description and the phenomenon it purports to represent. Must be complete, neutral, and free from error.

Front 103

Verifiability

Back 103

Consensus among different measurers. objectivity is often linked to this term. historical cost is objective, however fair value is subjective. A measure that is subjective is difficult to verify, which makes it less reliable to users.

Front 104

Timeliness

Back 104

Information is timely when it is avail to users intime to influence their decision. This means we have to provide info to external users on a reg basis.

Front 105

Understandability

Back 105

Users must understand the info within the context of the decisions being made. Overriding goal is to provide comprehensible info to those with a reasonable understanding of bus and econ activigty and are willing to study.

Front 106

Cost effectiveness

Back 106

Have to make sure the benefit of providing the info exceeds the cost of providing it. This includes cost of gathering, processing, and disseminating the info.

Front 107

Recognition

Back 107

should be recognized when it meets 4 criteria:
1. definition of an element of financial statement.
2. measurability has relevant attribute measurable with reliability.
3. relevance capable of making a diff in user decisions.
4. reliability representally faithful, verifiable, and neutral.

Front 108

Measurement

Back 108

2 choices: the choice of a unit of measurement, and the choice of an attribute to be measured. example monetary unit.

Front 109

Recognition

Back 109

should be recognized when it meets 4 criteria:
1. definition of an element of financial statement.
2. measurability has relevant attribute measurable with reliability.
3. relevance capable of making a diff in user decisions.
4. reliability representally faithful, verifiable, and neutral.

Front 110

Measurement

Back 110

2 choices: the choice of a unit of measurement, and the choice of an attribute to be measured. example monetary unit.

Front 111

Realization Principle

Back 111

When to recognize revenue is critical. 2 criteria before revenue can be recognized:
1. earnings process is judged to be complete.
2. reasonable certainty of the collectibility of the asset. Usually at the point of sale is considered appropriate. Should be recognized in the period in which it is earned, not necessarily when cash is recieved.

Front 112

Matching principle

Back 112

expenses are recognized in the same period as the related Revenues. Many expenses are not directly related to revenue.So we develop period costs. And we systematically and rationally allocate things such as prepaid rent and interest expense. Cost of advertising is difficult so they are just always recorded in the period in which they are incurred.

Front 113

Fair Value

Back 113

The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Front 114

Source documents

Back 114

used to identify and process external transactions

Front 115

Transaction analysis

Back 115

determine the dual effect on the accounting equation

Front 116

journal

Back 116

record of the dual effect of the transaction in debit/credit form.

Front 117

posting

Back 117

transferring balances from the journal to the ledger.

Front 118

unadjusted trial balance

Back 118

list of accounts and their balances before recording adjusting entries.

Front 119

adjusting entries

Back 119

internal events recorded at the end of a reporting period.

Front 120

adjusted trial balance

Back 120

list of accounts and their balances after recording adjusting entries.

Front 121

financial statements

Back 121

primary means of disseminating info to external decision makers.

Front 122

closing entries

Back 122

to zero out the owners' equity temp accounts.

Front 123

post closing trial balance

Back 123

list of accounts and their balances after recording closing entries.

Front 124

Worksheet

Back 124

a means of organizing info: not part of the formal accounting system

Front 125

Who uses SEC?

Back 125

Users

Front 126

Who uses Financial Executives International?

Back 126

Preparars

Front 127

Who uses the American Institute of Certified Public Accountants?

Back 127

Auditors

Front 128

Who uses Institute of Management Accountants

Back 128

preparers

Front 129

Who uses Association of Management and Research?

Back 129

Users.

Front 130

predictive value

Back 130

info that is useful in predicting the future.

Front 131

relevance

Back 131

pertinent to the decision at hand.

Front 132

timeliness

Back 132

information is avail prior to the decision

Front 133

confirmatory value

Back 133

information confirms expectations

Front 134

faithful representation

Back 134

agreement between the measure and the phenonenon it purports to represent.