Chapter 1 Flashcards
Financial Statements and Reporting- Ch1
What are the essential characteristics of accounting?
The identification, measurement, and communication of financial information about economic entities to interested parties.
What are the major financial statements in accordance to GAAP? (5)
- Income Statement
- Statement of Owners’ or Stockholder’s Equity
- Balance Sheet
- Statement of Cash Flows
- Note disclosure
What is the purpose of information presented in notes to financial statements?
The provide disclosure required by GAAP
How does Accounting assist in the efficient use of scarce resources?
Capital allocation
Capital allocation
The process of determining how and at what cost money is allocated among competing interests
An effective process of capital allocation is critical to a healthy economy, which
Promotes productivity
Encourages innovation
Provides an efficient and liquid market for buying and selling securities
What is the objective of financial reporting?
Provide financial information about the reporting entity that is useful to:
-Present and potential equity investors
-lenders
-and other creditors
in making decisions in their capacity as capital providers
General Purpose Financial Statements
- Provide financial reporting information to a wide variety of users
- provide the most useful information at the least cost
Who are the primary users of general purpose financial statements
Equity investors and Creditors
Entity Perspective
Companies viewed as separate and distinct from their owners
Decision-Usefulness
Investors are interested in assessing the company’s:
- ability to generate net cash flows
- management’s ability to protect and enhance the capital providers’ investments
Three parties that are involved in standard setting
- SEC (Securities and Exchange Commission)
- AICPA (American Institute of Certified Public Accountants)
- FASB - (Financial Accounting Standards Board)
SEC
- Security Exchange Commissions
- Established by federal governmen
- oversee accounting and reporting for public companies
- encourage private standards setting body
- requires public companies to adhere to GAAP
- oversight
- enforcement authority
AICPA
American Institute of Certified Public Accountants
-national professional organization
Established the following:
-Committee on Accounting Procedure (no longer exists)
-Accounting Principles Board (no longer exists)
-Resulted in a new board (FASB)
FASB
Financial Accounting Standards Board
- Financial Accounting Foundation (selects members of the FASB, funds exercises, general oversight)
- FASB- Mission to establish and improve standards of financial accounting and reporting
- Financial Accounting Standards Advisory Council- Consult on major policy issues
What are the differences between FASB and APB?
FASB has:
- smaller membership
- increased autonomy
- full-time, remunerated membership
- increased independence
- broader representation
What is the first step taken in the establishment of a typical FASB statement:
Topics are identified and placed on the Board’s agenda
What are the five steps of the due process system of FASB
- Topics are identified and placed on the board’s agenda.
- R&A conducted and preliminary views of pros and cons issued
- Public hearing on proposed standard
- Board evaluates research and public response and issues exposure draft
- Board evaluates responses and changes exposure drafts, if necessary. Final standard issued.
GAAP
- has substantial authoritative support
- Major sources: FASB standards, interpretations, and staff positions
- APB opinions
- AICPA Accounting Research Bulletins
Which of the following Accounting pronouncements is the most authoritative?
AICPA Accounting Principles Board Opinion
FASB codification
- provides all the authoritative literature to a related topic in one place
- creates one level of GAAP
Expectations gap
what the public thinks accountants should do vs what accountants thinks they can do
What are some financial reporting challenges?
- non-financial measurements
- forward-looking info
- soft assets- walmart’s expertise in supply chain
- timeliness
- understandability
