Term
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Definition
primary tool for conveying financial info to external parties
Balance Sheet (Stmt of Financial Position)
Income Statement (Stmt of Operations)
Statement of Cash Flows
Statement of Shareholders' Equity |
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Term
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Definition
1) used to communicate to external parties
2) ... via Financial Statements
3) ...to assess risk and return |
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Term
| other tools for conveying financial info to external users |
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Definition
news releases
management forecasts
prospectuses
reports filed with regulatory agencies |
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Term
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Definition
decide how much resources are allocated to each private enterprise in a free-enterprise economy
... by favoring corporations that are using resources most efficiently and desirably, and thus yielding the most profit |
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Term
| "efficient allocation" of resources |
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Definition
1) allocation to the private enterprise that will use them best to provide goods and services desired by society
2) achieve if everyone is making free choices |
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Term
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Definition
1) transfer of stocks and bonds among individuals and institutions
2) no new cash goes to corporation for these transactions
3) create a dynamic whereby buyers are more comfortable with the primary market purchase b/c they have a seoncdary market to sell their stocks/bonds |
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Term
| “rate of return" (aka “return on investment”) |
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Definition
1) Used as a tool to ascertain how well the company is using their resources and producing income.
2) “Key variables” in the decision to invest or not invest
3) Expressed as a percentage Formula (Dividends + Share Price Appreciation) / Initial Investment
4) Along with uncertainty (risk), rate of return are two of the most important variables to consider prior to investing. |
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Term
| Why do a company's stockholders demand a higher expected rate of return than their bondholders? |
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Definition
| There is generally more uncertainty for stockholders. Amount and timing of return for stockholders is more unknown. |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| yields NET OPERATING CASH FLOW, a measure of periodic performance, which is the difference bt cash receipts and cash disbursements from operations |
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Term
| Why are operating cash flows frequently a poor indicator of a company's long-run cash-generating ability (include an example in your answer)? |
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Definition
| They are not always accurate over a short period of time. |
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Term
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Definition
| yields NET INCOME, a better indicator of future operating cash flows than current net cash flows |
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Term
| Why is accrual accounting a better measure of a firm's value? |
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Definition
| “Resources” refers to the net of all assets and liabilities. Resources are a more comprehensive measure of a firm's value than cash, and therefore, the change in resources (i.e. income) is a better measure of a company's long-run cash generating ability than operating cash flows. |
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Term
| Why is accrual accounting better? |
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Definition
| accrual accounting (i.e., resource flows) is generally a better measure than cash flows from operating activities. |
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Term
| Generally accepted accounting principles (GAAP) |
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Definition
| a dynamic set of both broad and specific guidelines that companies follow when measuring and reporting the information in their financial statements and related notes |
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Term
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Definition
| Set standards for initial public offerings (IPO) |
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Term
| 1934 Securities Exchange Act |
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Definition
| created the Securities and Exchange Commission (SEC) |
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Term
| Securities Exchange Commission |
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Definition
| sets accounting standards in the U.S. |
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Term
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Definition
Committee on Accounting Procedure (CAP) – replaced in 1938-1959; a committee of …
AIA (American Institute of Accountants) – in 1957 renamed …
American Institute of Certified Public Accounts – formerly the
Accounting Principles Board – replaced CAP; 1959-1973 |
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Term
| Financial Accounting Standards Board (FASB) |
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Definition
1) the current accounting rulemaking body in the United States
2) SEC has largely delegated standard-setting to FASB
3) FASB rules are only meaningful to the extent that they are supported by the SEC; If the lobbyists are not satisfied, they can lobby the SEC or Congress to put pressure on the FASB. |
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Term
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Definition
1) The collective body of standards
2) organized by topic
3) Each topic and subtopic are numbered so that someone can quickly and reliably communicate precisely which standard they are referring to. |
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Term
| Emerging Issues Task Force (EITF) |
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Definition
| sets standards on issues in which the FASB has not yet had time to consider, because FASB’s due process is lengthy. |
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Term
| “economic consequence” of an accounting standard |
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Definition
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Term
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Definition
1) to create standards which result in the best quality information being communicated to investors
2) standards frequently reflect deviations from this goal b/c of political considerations and perceived potential adverse consequences |
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Term
| International Accounting Standards Board (IASB) |
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Definition
1) sets standards which many countries have chosen to adopt
2) Since 2001, FASB and IASB have been trying to converge their standards to encourage foreign investing
3) 3. The SEC is currently considering whether to require U.S. companies to use International Financial Reporting Standards (IFRS) rather than U.S. GAAP. |
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Term
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Definition
FASB and IASB each acknowledged their commitment to the development of high-quality in Norwalk, CT in 2002
compatible accounting standards that could be used for both domestic and cross-border
financial reporting. |
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Term
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Definition
1) International Financial Reporting Standards
2) global version of GAAP |
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Term
| Reasons SEC should require U.S. corps to use IFRS |
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Definition
1) it’s becoming more and more common in many other countries/markets
2) IFRS is “gaining support around the globe
3) it will improve comparability of financial reporting and facilitate access to capital
4) competition bt. alternative standard-setting regimes is healthy and can lead to improved standards |
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Term
| Reasons SEC should NOT require IFRS in U.S. |
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Definition
1) they would not fit the stringent legal and regulatory requirements of U.S. business
2) difference among countries in implementation and enforcement |
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Term
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Definition
1) Offers credibility to financial statements.
2) provides an independent opinion on the “fairness” of the statements with regard to their compliance with GAAP
3) Auditors are prohibited from providing internal accounting services to their audit clients
4) Only certified public accountants (CPAs) are allowed to perform audits
5) Management, not the auditor, is responsible for the financial statements. |
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| Analytical Model for Ethical Decisions - strengths |
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Definition
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Term
| Analytical Model for Ethical Decisions - weaknesses |
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Definition
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Term
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Definition
1) set of cohesive OBJECTIVES and FUNDAMENTAL CONCEPTS on which financial accounting and reporting is based
2) guides FASB's standards setting |
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Term
| Why must accountants understand FASB's conceptual framework, i.e., the reasons behind the rules? |
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Definition
1) to use professional judgment
2) to apply the rules to complex situations
3) to understand the practical meaning of the rules |
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Term
| Overriding objectives of Financial Reporting |
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Definition
| efficient allocation of resources in capital markets through the decision usefulness of financial information |
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Term
Conceptual Framework:
Fundamental Qualitative Characteristics |
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Definition
PRIMARY
1) Relevance
2) Faithful Representation
ENHANCING
1) Comparability (including consistency)
2) Verifiabity
3) Timeliness
4) Understandability |
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Term
| Fundamental Qualitative Characteristics: Relevance |
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Definition
1) Predictive Value
2) Confirmatory Value |
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Term
| Fundamental Qualitative Characteristics: Faithful Representation |
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Definition
1) Completeness
2) Neutrality
3) Free from Material Error |
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Term
| Conceptual Framework: Objective |
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Definition
1) "decision useful" information
2) to provide financial information that is useful to capital providers, i.e., |
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Term
| Graphic - The Conceptual Framework |
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Definition
Objective
Fundamental Qualitative Characteristics .. Elements ... Recognition & Measurement Concepts
Constraints ... Financial Statements |
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Term
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Definition
1) the ability to be useful in decision making
2) information that is RELEVANT and FAITHFULLY REPRESENTED |
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Term
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Definition
1) = relevant to the decision at hand
2) able to confirm the present and predict the future |
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Term
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Definition
1) completeness
2) neutrality - no predetermined result
3) free from material error |
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Term
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Definition
| transactions and events should be accounted for similarly if their nature is similar and different if they are dissimilar; this concept primarily applies across companies. Comparability encompasses consistency, which means that similar transactions are accounted for similarly across time. IFRS USES THE TERM “COMPARABILITY” TO MEAN WHAT IS CALLED “CONSISTENCY” IN GAAP. IFRS DOES NOT HAVE A CORRESPONDING TERM FOR WHAT GAAP CALLS “COMPARABILITY.” |
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Term
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Definition
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Term
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Definition
| Verifiable information has sufficiently objective and clear evidence about its nature that different preparers will account for it the same way.” |
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Term
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Definition
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Term
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Definition
| ... refers to information capable of making a difference in a user’s decisions. Immaterial information has no benefits. Both costs and benefits are difficult to quantify, and therefore, this issue is often a source of controversy |
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Term
| five fundamental elements of financial statements |
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Definition
assets
liabilities
equity
revenue
expense |
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Term
| Broad Accounting Principles |
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Definition
1) Historical Cost Principle
2) Realization Principle
3) Matching Principle
4) Full Disclosure Principle |
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Term
| Historical cost principle |
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Definition
| Using historical cost principle results and measurements which are highly reliable because of their verifiability. The measurement has high confirmatory value. |
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Term
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Definition
| revenues should be recognized when earned and receivable. “Earned” means the company has completed or substantially completed the activities necessary to be entitled to the receivable. “Receivable” means that there is reasonable certainty that the cash will be collected. |
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Term
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Definition
| ... that after revenue has been recognized, any costs which are directly related to that revenue should be recognized as expenses rather than assets. Note that expenses are matched to revenues, not the other way around. Some matches are very direct (e.g., cost of goods sold). Other matches are indirect (e.g., depreciation). If matching cannot be achieved, the cost is expensed immediately (e.g., CEO salary). |
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Term
| 4 basic assumptions underlying GAAP |
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Definition
1) economic entity assumption
2) going concern assumption
3) periodicity assumption
4) monetary unit |
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Term
| economic identity assumption |
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Definition
| presumes that economic events can be identified specifically with an economic identity |
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Term
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Definition
| in the absence of info to the contrary, it is anticipated that a business entity will continue to operate indefinitely |
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Term
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Definition
| allows the life of a company to be divided into artificial time periods to provide timely information |
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Term
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Definition
| financial statement elements should be measured in terms of the U.S. dollar |
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