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Intermediate Accounting
Study Terms and Notes Ch. 2
50
Accounting
08/20/2009

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Term
Objectives-Oriented
Definition
What does the SEC recommend that future accounting standards should follow?
Term
1) To develop a conceptual framework of accounting theory.

2) To establish standards (GAAP) for financial accounting practices
Definition
Two Objectives of the FASB:
Term
1) Provide information that is useful to present and potential investors, creditors, and other sophisticated external users for making decisions about economic activities

2) Provide these users information about the (a) amount, (b) timing, and (c) uncertainty of the cash flows received from the firm

3) More specifically, provide these users information about: The firm's economic resources and claims to those resources and any changes in the firm's economic resources and claims
Definition
Objectives of Financial Reporting by Business Enterprises:
Term
1) How the management of a company has discharged its stewardship responsibility to owners (stockholders) for using the company resources

2) explanations and interpretations by management to help external users understand the financial info provided (full disclosure)
Definition
According to SFAC #1 financial statements or reportings should include what two things:
Term
Return on Investment (ROI)
Definition
provides a measure of overall company performance
Term
Risk
Definition
the uncertainty or unpredictability surrounding a company's future results
Term
Financial Flexibility
Definition
the ability of a company to use its financial resources to adapt to change
Term
Liquidity
Definition
refers to how quickly a company can convert its assets into cash to pay its bills
Term
Operating Capability
Definition
the ability of a company to maintain a given physical level of operations
Term
False
Definition
True or False: If Earnings look great then the cash flow is also great.
Term
1) Relevant

2) Reliable
Definition
For information to be decision useful (the overall qualitatvie characteristic for accounting information)it must be what two things?
Term
1) Predictive Value

2) Feeback Value

3) Timeliness
Definition
3 Ingredients to be Relevant:
Term
Predictive Value
Definition
if it can be used to correctly forecast the outcome of some event(s) of a firm
Term
Feeback Value
Definition
if it can confirm or correct prior expectations
Term
Timeliness
Definition
user has access to it before a decision has to be made
Term
Relevant
Definition
Informations is what if it has the potential to make a difference in a decsion
Term
Reliable
Definition
Information that is reasonably free from error and bias and faithfully represents what it purports to represent
Term
1) Verifiability
2) Representational faithfulness
3) Neutrality
Definition
Three components to Reliablitly:
Term
Neutrality
Definition
the info presented is unbiases
Term
Representational Faithfulness
Definition
the transaction reflects the economic substance rather than legal form. (Validity)
Term
Verifiability
Definition
the info can be substantiated by accountants who can agree that the measurement method is without material error or bias
Term
1) Comparability

2) Consistency
Definition
The Two Secondary Qualitative Characteristics of Acctng. Info:
Term
Comparability
Definition
information is similar across companies
Term
Consistency
Definition
informations is similar across time
Term
1) Benefits of the information must exceed the costs

2) Dollar amounts must be material
Definition
Constraints to the Hierarchy of Qualitative Characterisitcs of Accounting Info:
Term
True
Definition
True or False: Relevance is Qualitative and Materiality is Quantitative
Term
Materiality
Definition
the magnitude of an omission or misstatement of accounting info that makes it likely the judgement of a reasonable person relying on the info would have been influenced by the omission or misstatement
Term
1) have an effect on trends?
2) mask a change in earnings?
3) change a loss into a profit?
4) misrepresent compliance with loan agreements?
5) increase management's compensation?
Definition
5 Materiality Considerations:
Term
1) Assets

2) Liabilites

3) Equity

4) Comprehensive Income

5) Revenues

6) Expenses

7) Gains and Losses
Definition
Seven Elements of a Financial Statement:
Term
Gains and Losses
Definition
result from perpheral or incidental transactions of an entity (other than additional investment or disinvestment)
Term
Expenses
Definition
are actual or expected cash outflows (or equivalent) that are the result of the entity's ongoing major or central operations
Term
Revenues
Definition
inflows (enhancement of assets or settlemtn of liabilites) from delivering or producing goods, services , or other activities that represent the ongoing major or central operations of the entity
Term
Comprehensive Income
Definition
the change in owner's equity from nonowner sources (not the same as income)
Term
Economic Entity
Definition
i.e. No personal information on a financial statement if a sole propiertorship
Term
Going Concern
Definition
assumes that the company will continue to operate in the near future, unless substantial evidence to the contrary exists
Term
Periodicity
Definition
In accordance with this assumption , a company prepares financial statements at the end of meaningful and consistent time frames. This assumption is the basis for the adjusting entry process at period-end.
Term
Monetary Unit
Definition
There must be some basis for measuring the exchange of goods or services. The reporting country's currency is the unit of exchange. In U.S., the dollar is unadjusted for inflation (STABLE UNIT OF MEASURE)
Term
Historical Cost
Definition
Usually, the exchange price is retained in the accounting records as the value of an item until it is removed from the records
Term
Revenue Recognition
Definition
Revenue is recognized when (a) realized or reliazable and (b) earned- usually at the point of sale.
Term
Matching and Accrual Accounting
Definition
The matching principle states that to determine the income of a company for an accounting period, the company computes the total expense involved in obtaining the revenues of the period and relates these total expenses to the total revenues recorded in the period
Term
Conservatism
Definition
when alternative accounting valuations are equally possible, the accountant should select the one that is least likely to overstate assets and income in the current period
Term
Full Disclosure
Definition
Information that could make a difference in the user's decision process must be disclosed - includes qualitative and non- financial info that is necessary to make the report complete and not misleading (e.g. depreciation method used, 5 -year schedule of loan repayments, significant provisions of contracts, contingent events that might result in gain or loss).
Term
Industry Practice
Definition
an industry specific reporting rule that differs from the general rules and has been approved by a standard setting body
Term
Assets, Liabilities, and Equity
Definition
Balance Sheet contains what?
Term
Revenues, Expenses, Gains, and Losses
Definition
Income Statement contains what?
Term
Operating, Investing, and Financing Cash Flows
Definition
Stmt. of Cash Flows contains what?
Term
Inv. by and Dist. to Owners
Definition
Stmt. of Changes in Equity contains what?
Term
The SEC has recommended that future accounting standards should not follow a rules-base or principles based only approach, but should be objectives-oriented.

Should be built on an improved and consistently applied conceptual framework

Clearly state the accounting objective

Minimize exceptions

Avoid the use of bright-line tests
Definition
Recent Focus on Objectives Oriented Principles
Term
To guide the FASB in establishing accounting standards.
To provide a frame of reference for resolving accounting questions in situations where a standard does not exist.
To determine the bounds for judgment in the preparation of financial statements.
To increase users’ understanding of and confidence in financial reporting.
To enhance comparability.
Definition
In response to the ad-hoc nature of CAP and APB standards, the Conceptual Framework was mean to:
Term
SFAC #1 - Objectives of Financial Reporting by Business Enterprises
SFAC #2 - Qualitative Characteristics of Accounting Information
SFAC #3 - Elements of Financial Statements of Business Enterprises
SFAC #4 - Objectives of Financial Reporting by Nonbusiness Orgs.
SFAC #5 - Recognition and Measurement in F/S of Bus. Enterprises
SFAC #6 - Elements of F/S, a replacement of SFAC #3
SFAC #7 - Using Cash Flow Information and Present Value in Accounting Measurements
Definition
Conceptual Framework is comprised of seven Statements of Financial Accounting Concepts (SFACs)