Ch 1 The Environment and Conceptual Framework of Financial Reporting

Question 1

decision-usefulness

Answer 1

provide useful information for decision-making

Question 2

financial statements

Answer 2

balance sheet, income statement, statement of cash flows, statement of stockholders’ equity

Question 3

financial reporting

Answer 3

the financial information a company provides to help users with capital allocation decisions about the company

Question 4

GAAP

Answer 4

common set of standards and procedures

Question 5

Securities and Exchange Commission

Answer 5

SEC, a federal agency to help develop and standardize financial information presented to stockholders

Question 6

Financial Accounting Standards Board

Answer 6

FASB, the major standard-setting organization in the private sector

Question 7

FAF

Answer 7

Financial Accounting Foundation (FAF)

Question 8

Financial Accounting Standards Advisory Council

Answer 8

FASAC, consults with FASB on major policy and technical issues and helps select task force members

Question 9

financial accounting standards

Answer 9

accounting standards updates

Question 10

American Institute of the Certified Public Accountants

Answer 10

AICPA, the national organization of practicing certified public accountants

Question 11

conceptual framekwork

Answer 11

establishes the concepts that underlie financial reporting

Question 12

objective of financial reporting

Answer 12

serves as the foundation of the conceptual framework

Question 13

general-purpose financial statements

Answer 13

help users who lack the ability to demand all the financial information they need from a company and therefore must rely on the information provided in financial statements

Question 14

qualitative characteristics

Answer 14

helps distinguish better (more useful) information from inferior (less useful) information for meeting the objective of financial reporting

Question 15

predictive value

Answer 15

accounting information that helps users form their own expectations about the future

Question 16

confirmatory value

Answer 16

accounting information that helps users confirm or correct prior expectations

Question 17

materiality

Answer 17

a company-specific aspect of relevance; information is material if omitting it or misstating it would influence decisions that users make on the basis of the reported financial information

Question 18

faithful representation

Answer 18

the numbers and descriptions match what really existed or happened

Question 19

completeness

Answer 19

all the information that is necessary for faithful representation is provided

Question 20

neutrality

Answer 20

a company cannot select information to favor one set of interested parties over another

Question 21

free from error

Answer 21

information that is more accurate because there are no errors

Question 22

comparability

Answer 22

enables users to identify the real similarities and differences in economic events between companies

Question 23

consistency

Answer 23

when a company applies the same accounting treatment to similar events, from period to period

Question 24

verifiability

Answer 24

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

Question 25

timeliness

Answer 25

having information available to decision-makers before it loses its capacity to influence decisions

Question 26

understandability

Answer 26

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

Question 27

assets

Answer 27

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

Question 28

liabilities

Answer 28

probable future sacrifices of economic benefits arising from present 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

Question 29

equity

Answer 29

residual interest in the assets of an entity that remains after deducting its liabilities; in a business enterprise, the equity is the ownership interest

Question 30

investments by owners

Answer 30

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

Question 31

distributions to owners

Answer 31

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

Question 32

comprehensive income

Answer 32

change in net assets( equity) 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 from investments by owners and distributions to owners

Question 33

revenues

Answer 33

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

Question 34

expenses

Answer 34

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

Question 35

gains

Answer 35

increases in net assets (equity) 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 ownerso

Question 36

losses

Answer 36

decreases in net assets (equity) 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 hose that result from expenses or distributions to owners

Question 37

economic entity assumption

Answer 37

economic activity can be identified with a particular unit accountability

Question 38

going concern assumption

Answer 38

the company will have a long life

Question 39

monetary unit assumption

Answer 39

money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis

Question 40

periodicity assumption

Answer 40

a company can divide its economic activities into artificial time periods

Question 41

historical cost principle

Answer 41

GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price

Question 42

fair value principle

Answer 42

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

Question 43

performance obligation

Answer 43

when a company agrees to perform a service or sell a product to a customer

Question 44

revenue recognition principle

Answer 44

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

Question 45

expense recognition principle

Answer 45

related to net changes in assets and earning revenues

Question 46

product costs

Answer 46

material, labor, and overhead

Question 47

period costs

Answer 47

salaries and other administrative expenses

Question 48

full disclosure principle

Answer 48

the nature and amount of information included in financial reports reflects a series of judgmental trade-offs

Question 49

notes to financial statements

Answer 49

amplify or explain the items presented in the main body of the statements

Question 50

supplementary information

Answer 50

includes details or amounts that present a different perspective from that adopted in the financial statements

Question 51

cost constraint

Answer 51

weighing the costs of providing the information against the benefits that can be derived from using it

Question 52

expectation gap

Answer 52

what the public thinks accountants should do vs what accountants think they can do