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Definition
| What does the SEC recommend that future accounting standards should follow? |
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1) To develop a conceptual framework of accounting theory.
2) To establish standards (GAAP) for financial accounting practices |
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Definition
| Two Objectives of the FASB: |
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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 |
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Definition
| Objectives of Financial Reporting by Business Enterprises: |
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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) |
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Definition
| According to SFAC #1 financial statements or reportings should include what two things: |
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| Return on Investment (ROI) |
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Definition
| provides a measure of overall company performance |
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| the uncertainty or unpredictability surrounding a company's future results |
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| the ability of a company to use its financial resources to adapt to change |
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| refers to how quickly a company can convert its assets into cash to pay its bills |
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| the ability of a company to maintain a given physical level of operations |
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| True or False: If Earnings look great then the cash flow is also great. |
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Definition
| For information to be decision useful (the overall qualitatvie characteristic for accounting information)it must be what two things? |
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1) Predictive Value
2) Feeback Value
3) Timeliness |
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Definition
| 3 Ingredients to be Relevant: |
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Definition
| if it can be used to correctly forecast the outcome of some event(s) of a firm |
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Definition
| if it can confirm or correct prior expectations |
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| user has access to it before a decision has to be made |
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Definition
| Informations is what if it has the potential to make a difference in a decsion |
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Definition
| Information that is reasonably free from error and bias and faithfully represents what it purports to represent |
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1) Verifiability
2) Representational faithfulness
3) Neutrality |
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Definition
| Three components to Reliablitly: |
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Definition
| the info presented is unbiases |
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| Representational Faithfulness |
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Definition
| the transaction reflects the economic substance rather than legal form. (Validity) |
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Definition
| the info can be substantiated by accountants who can agree that the measurement method is without material error or bias |
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1) Comparability
2) Consistency |
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Definition
| The Two Secondary Qualitative Characteristics of Acctng. Info: |
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| information is similar across companies |
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| informations is similar across time |
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1) Benefits of the information must exceed the costs
2) Dollar amounts must be material |
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Definition
| Constraints to the Hierarchy of Qualitative Characterisitcs of Accounting Info: |
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Term
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Definition
| True or False: Relevance is Qualitative and Materiality is Quantitative |
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Term
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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 |
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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? |
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Definition
| 5 Materiality Considerations: |
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1) Assets
2) Liabilites
3) Equity
4) Comprehensive Income
5) Revenues
6) Expenses
7) Gains and Losses |
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Definition
| Seven Elements of a Financial Statement: |
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Term
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Definition
| result from perpheral or incidental transactions of an entity (other than additional investment or disinvestment) |
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Term
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Definition
| are actual or expected cash outflows (or equivalent) that are the result of the entity's ongoing major or central operations |
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| 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 |
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Definition
| the change in owner's equity from nonowner sources (not the same as income) |
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Definition
| i.e. No personal information on a financial statement if a sole propiertorship |
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| assumes that the company will continue to operate in the near future, unless substantial evidence to the contrary exists |
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Term
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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. |
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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) |
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Term
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Definition
| Usually, the exchange price is retained in the accounting records as the value of an item until it is removed from the records |
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Definition
| Revenue is recognized when (a) realized or reliazable and (b) earned- usually at the point of sale. |
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| Matching and Accrual Accounting |
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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 |
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Term
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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 |
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Term
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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). |
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Term
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Definition
| an industry specific reporting rule that differs from the general rules and has been approved by a standard setting body |
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| Assets, Liabilities, and Equity |
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Definition
| Balance Sheet contains what? |
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| Revenues, Expenses, Gains, and Losses |
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Definition
| Income Statement contains what? |
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| Operating, Investing, and Financing Cash Flows |
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Definition
| Stmt. of Cash Flows contains what? |
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| Inv. by and Dist. to Owners |
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Definition
| Stmt. of Changes in Equity contains what? |
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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 |
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Definition
| Recent Focus on Objectives Oriented Principles |
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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. |
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Definition
| In response to the ad-hoc nature of CAP and APB standards, the Conceptual Framework was mean to: |
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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 |
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Definition
| Conceptual Framework is comprised of seven Statements of Financial Accounting Concepts (SFACs) |
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