FAR SU1 Flashcards
Memorize SU1 (98 cards)
1
Q
What is the Financial Accounting Standards Board?
A
Sarbanes-Oxley Act of 2002 authorized the SEC to recognize a standard setter for U.S. GAAP to be applied by nongovernmental entities. The SEC formally recognized the FASB as that standard setter.
2
Q
What is the International Accounting Standards Board?
A
It is an independent group of experts that are responsible for:
- The development and publication of International Financial Reporting Standards (IFRS), including the IFRS for Small and Medium-sized Enterprises (SMEs).
- Approving Interpretations of IFRS as developed by the IFRS Interpretations Committee.
3
Q
What is the Governmental Accounting Standards Board?
A
The GASB was established by the FAF as the primary standard setter for state and local governmental entities
4
Q
What is the Federal Accounting Standards Advisory Board?
A
The FASAB establishes accounting principles for the federal government and issues Statements of Federal Financial Accounting Standards.
5
Q
What is the Financial Accounting Foundation?
A
An independent body established by the accounting profession in 1972. Oversees the:
- The Financial Accounting Standards Advisory Council (FASAC)
- The Private Company Council (PCC)
- The Emerging Issues Task Force (EITF)
- Financial Accounting Standards Board (FASB)
6
Q
What is the Financial Accounting Standards Advisory Council?
A
Advises the FASB on priorities and proposed standards and evaluates its performance.
7
Q
What is the Private Company Council?
A
a. Proposes exceptions to and modifications of U.S. GAAP for private companies and
b. Advises the FASB on private company issues before new pronouncements are issued.
8
Q
What is the Emerging Issues Task Force?
A
Addresses new and unusual accounting issues that require prompt action to avoid differences in accounting treatments. An example is the guidance provided regarding losses from the 9/11 attacks.
a. Many consensus positions of the EITF have been included in Accounting Standards Updates (ASUs).
b. Unlike the FASAC and the PCC, the EITF was created by the FASB.
9
Q
What is the FASB process to issue final pronouncements?
A
- Financial reporting issues are identified based on communications with stakeholders, research, and other activities.
- The decision to add a project to the technical agenda is based on an analysis by the FASB’s staff.
- Deliberation of the issues occurs at a public meeting(s).
- An Exposure Draft is published to solicit broad stakeholder responses. (Sometimes, a Discussion Paper also may be issued at an early stage for input.)
- A public meeting regarding the Exposure Draft may be held if needed.
- The staff analyzes the information obtained in the preceding steps. The FASB then redeliberates the proposals with stakeholder input at a public meeting(s).
- The FASB votes on a final draft proposal. If a majority of the seven board members approves, an Accounting Standard Update (ASU) is issued to amend the Accounting Standards Codification (ASC).
10
Q
What are NFPs Distinguishing Characteristics?
A
- Lack defined ownership interests
- They report net assets rather than equity (assets – liabilities).
- Investor-owned entities that provide economic benefits directly to owners, members, or participants (e.g., credit unions or employee benefit plans) are not considered not-for-profit entities.
11
Q
NPF Financials Reporting Objectives
A
- Useful to providers in making resource allocation decisions
- Useful in assessing services and the ability to provide services
- Useful in assessing management stewardship and performance
- About economic resources, obligations, net resources, and changes in them
- About managers’ explanations and interpretations to help users understand financial information
12
Q
Governmental-Type Activities
A
Characteristics of the governmental environment:
- The representative form of government and the separation of powers
- National, state, county, and city governments and the interflow of revenues
- The expectations of taxpayers about the services they receive
- A budget as a policy decision and a legally binding control
- Use of fund accounting
- Governments at the same level with dissimilar functions.
- Assets, e.g., highways and bridges that do not earn revenue
- Citizens who want the maximum services for the minimum taxes
13
Q
Users of Governmental-Type Activities
A
- Citizens (those to whom the government is directly accountable)
- Legislative and oversight bodies (representatives of the citizenry)
- Investors and creditors (providers of financing)
14
Q
Uses of Governmental Reporting
A
- Comparing actual results with budgeted amounts
- Assessing financial condition and operating results
- Determining compliance with laws, rules, and regulations
- Evaluating efficiency and effectiveness
15
Q
Business-Type Activities
A
need to enter here
16
Q
Government Reporting Objective
A
Accountability is the primary objective of all governmental financial reporting. It is based on the public’s right to know.
17
Q
Types of Accountability in Government Financial Reporting
A
- Fiscal accountability
2. Operational accountability
18
Q
What is Fiscal Accountability?
A
Fiscal accountability is the responsibility of a government to justify that its actions comply with public decisions about obtaining and expending public resources in the short term.
19
Q
What is Operational Accountability?
A
Operational accountability is the responsibility to report the extent to which accounting objectives have been met efficiently and effectively using available resources.
a. It is also the responsibility to report whether those objectives can be met for the foreseeable future.
20
Q
State & Local Government Financial Reporting Objectives
A
- Public accountability
- Evaluating operating results.
- Assessing services provided.
21
Q
What is Public Accountability? (objective)
A
The government should provide information about:
- Whether current revenues suffice to pay for current services
- Compliance with the budget and other requirements
- Service efforts, costs, and accomplishments
22
Q
What is Evaluating Operating Results? (objective)
A
The government should provide information about
- Sources and uses of financial resources
- How its activities were financed and its cash needs were met
- Whether its financial condition improved or declined
23
Q
What is Assessing Services Provided? (objective)
A
The government should provide information about
- Financial position and condition
- Noncurrent nonfinancial resources
- Legal or contractual restrictions and potential risks
24
Q
Assumptions of Financial Accounting
A
- Economic-entity assumption
- Going-concern assumption
- Monetary-unit assumption
- Periodicity assumption
25
Principles of Financial Accounting
1. Revenue recognition and matching principles
2. Historical cost principle
3. Full-disclosure principle
26
Constraints of Financial Accounting
1. Cost constraint
2. Industry practices constraint
3. Conservatism constraint
27
What is the Economic-Entity Assumption?
The reporting (accounting) entity is separately identified for the purpose of economic and financial accountability. The economic affairs of owners and managers are segregated from those of the reporting entity.
28
What is the Going- Concern Assumption?
Unless evidence indicates otherwise, every business is assumed to be a going concern that operates indefinitely. As a result, the liquidation basis of accounting is not used. It is assumed that the entity will not be liquidated in the near future.
29
What is the Monetary-Unit Assumption?
Accounting records are stated in units of money. The changing purchasing power of the monetary unit is assumed not to be material.
30
What is the Periodicity Assumption?
Economic activity can be divided into distinct time periods. This assumption requires reporting estimates in the financial statements. It sacrifices some degree of faithful representation (i.e., accuracy) of information for increased relevance.
31
What is Revenue Recognition and Matching Principles?
The revenue recognition and matching principles have been formally incorporated into the conceptual framework as recognition and measurement concepts. Revenue is reported in the period earned, and costs required to produce those revenues are matched to those revenues.
32
What is Historical cost principle?
Transactions are recorded initially at cost because it is the most objective determination of fair value. It is a reliable measure. However, more and more items are being reported at fair value under the assumption they would be liquidated to pay for obligations.
33
What is Full-disclosure principle?
Financial statements report any and all information that could influence investor and creditor decisions.
1. Full disclosure often requires footnotes in addition to GAAP, but it does not substitute for reporting in accordance with GAAP.
34
What is Cost Constraint?
The costs of all financial reporting should be justified by the benefits.
35
What is Industry Practices Constraint?
GAAP may be modified in certain industries to avoid reporting misleading or unnecessary information.
1. For example, banks and insurers typically measured marketable equity securities at fair value before this treatment became generally accepted. Fair value and liquidity are most important to these industries.
36
What is Conservatism Constraint?
This constraint is a response to uncertainty. When alternative accounting methods are appropriate, the one with the less favorable effect on net income and total assets is preferable.
37
Name the Fundamental Qualitative Characteristics
1. Relevance
| 2. Faithful representation
38
Define as Relevance pertaining to the Fundamental Qualitative Characteristic
Information is relevant if it can make a difference in user decisions. To do so, it must have predictive value, confirmatory value, or both.
39
Characteristics of Faithful Representation
a. Completeness (containing what is needed for user understanding)
b. Neutrality (unbiased in its selection and presentation)
c. Freedom from error
40
What is Predictive Value? (Relevance)
Information has predictive value if it can be used as an input in a predictive process.
41
What is Confrimatory Value? (Relevance)
Information has confirmatory value for prior evaluations if it provides feedback that confirms or changes (corrects) them.
42
Substance Over Form
The concept of substance over form guides accountants to present the financial reality of a transaction, not merely its legal form.
An example is the consolidation of a legally separate subsidiary by a parent. Presenting a parent and a separate entity that it controls as one reporting entity is faithfully representational.
43
Name the Enhancing Qualitative Characteristics
1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
44
Define the Enhancing Qualitative Characteristics of "Comparability"
Comparability. Information should be comparable with similar information for (a) other entities and (b) the same entity for another period or date. Thus, comparability allows users to understand similarities and differences.
Consistency is a means of achieving comparability over time and between periods. It is the use of the same methods (e.g., accounting principles) for the same items.
45
Define the Enhancing Qualitative Characteristics of "Verifiability"
Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (not necessarily unanimity) that it is faithfully represented.
For example, an arm’s length transaction between independent parties suggests verifiability.
46
Define the Enhancing Qualitative Characteristics of "Timeliness"
Information is timely when it is available in time to influence decisions.
47
Define the Enhancing Qualitative Characteristics of "Understandability"
Understandable information is clearly and concisely classified, characterized, and presented.
48
Qualitative Characteristics of State and Local Government Reporting
1. Understandability
2. Reliability
3. Relevance
4. Timeliness
5. Comparability
6. Cost-benefit limitations
49
Elements of Financial Statements
A full set of financial statements should report the following:
1. Financial position at the end of the period
2. Earnings for the period
3. Comprehensive income for the period
4. Cash flows during the period
5. Investments by and distributions to owners during the period
50
Statement of Financial Position (Balance Sheet)
Assets = Liabilities + Equity (net assets of a not-for-profit entity
51
What are Assets?
Assets have probable future economic benefits and are owned or controlled by an entity as a result of past transactions or events.
52
What are Liabilities?
Liabilities are probable future sacrifices of economic benefits. They are existing obligations of a specific entity to transfer assets or provide services to other entities as a result of previous transactions or events. Valuation allowances, such as discounts on bonds payable, are part of the related liability, not liabilities or assets.
53
What are Valuations Allowance (Contra Assets)?
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Valuation allowances (contra accounts), such as (1) accumulated depreciation, (2) uncollectible accounts receivable, or (3) premium on bonds receivable, are part of the related assets, not assets or liabilities.
(Not all assets are recognized, e.g., contingent amounts.)
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54
What is Equity (net assets of a not-for-profit entity)?
Equity (net assets of a not-for-profit entity) is the residual interest in the assets of an entity after subtracting liabilities.
55
What are Investment by Owners?
Investments by owners are increases in equity of a business entity during a period. They result from transfers by other entities of something of value to increase ownership interests. Investments are the most commonly transferred item, but services also can be exchanged for equity interests.
(This element does not apply to NFPs.)
56
What are Distributions to Owners?
Distributions to owners are decreases in equity during a period. They result from transferring assets, providing services, or incurring liabilities. A distribution to owners decreases ownership interests.
(This element does not apply to NFPs.)
57
Statement of Earnings (Net Income), Income Statement, or Statement of Results or Operation
1. Revenues
2. Gains
3. Expenses
4. Losses
58
What are Revenues?
Revenues are inflows or other enhancements of assets or settlements of liabilities (or both) from
a. Delivering or producing goods,
b. Providing services, or
c. Other activities that qualify as ongoing major or central operations.
59
What are Gains?
Gains are increases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except revenues or investments by owners. They may be described as operating or nonoperating depending on their relation to the entity’s ongoing major or central operations.
60
What are Expenses?
Expenses are outflows or other uses of assets or incurrences of liabilities (or both) from
a. Delivering or producing goods,
b. Providing services, or
c. Other activities that qualify as ongoing major or central operations.
61
What are Losses?
Losses are decreases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners. They may be described as operating or nonoperating depending on their relation to the entity’s ongoing major or central operations.
62
What is Comprehensive Income?
Comprehensive income is the periodic change in equity of a business entity from nonowner sources. It includes earnings (net income) and its components (e.g., gross margin, income or loss from continuing operations and discontinued operations). But it excludes the effects of investments by owners and distributions (e.g., dividends paid) to owners.
(This element does not apply to NFPs.)
63
Comprehensive Income Financial Capital Maintenance Concept
It distinguishes return on capital from a return of capital. Thus, comprehensive income is a return on capital.
Under this concept, the effects of any recognized price changes on assets and liabilities are holding gains and losses. These are included in return on capital. Examples of holding gains and losses recognized in comprehensive income but not earnings are:
1. Changes in the fair value of available-for-sale debt securities and
2. Foreign currency translation adjustments.
64
Comprehensive Income Physical Capital Concept
Under a physical capital concept, a return on investment (in terms of physical capital) results only if the physical productive capacity (or the resources needed to achieve that capacity) at the end of the period exceeds the capacity at the beginning after excluding the effects of transactions with owners. This concept requires many assets to be measured at current (replacement) cost.
65
What are Financial Statements?
Primary means of communicating financial information to external parties.
66
In the Financial Statements, what additional information is included?
1. Notes. Notes provide essential information to amplify or explain financial statement accounts, for example, by describing the accounting policies used and making other disclosures required by GAAP
2. Supplementary Information. This information is includes additional information not included in the statements or notes. it may be include relevant information that does not meet all recognition criteria, such as management's discussion and analysis (MD&A)
67
IFRS Financial Statement Elements Difference
The elements of financial statements under IFRS are :
1. Assets
2. Liabilities
3. Equity
4. Income (including revenues and gains)
5. Expenses (including losses)
68
Elements of Financial Statements of State and Local Governments
1. Assets
2. Liabilities
3. A Deferred Outflow of Resources
4. A Deferred Inflow of Resources
5. Net Position
69
What is included in the Resource Flows Statements?
| State and Local Governments
Outflows and Inflows
1. An outflow of resources is a consumption of net assets that applies to the reporting period.
2. An inflow of resources is an acquisition of net assets that applies to the reporting period.
70
What are the Measurement Attributes?
| State and Local Governments
1. Historical cost
2. Fair value
3. Replacement cost
4. Settlement amount
71
What are the Measurement Approaches?
| State and Local Governments
1. Initial Amount
| 2. Remeasured Amount
72
What is the Initial Amount Measurement Approach?
| State and Local Governments
An initial amount reflects a transaction date. It is a price or amount assigned when an asset was acquired or a liability was incurred, including later modifications derived from the initial amount (e.g., depreciation or impairment).
73
What is the Initial Remeasured Measurement Approach?
| State and Local Governments
A remeasured amount reflects conditions on the financial statement date. It is a new carrying value not based on prior amounts reported.
Remeasured amounts are appropriate for
i. Financial assets (assets to be converted to cash) and
ii. Liabilities for which the timing and amount of payments is uncertain.
74
What is the Historical Cost Measurement Attribute?
| State and Local Governments
Historical cost is (a) the price paid to acquire an asset or (b) the amount received for the incurrence of a liability in an actual exchange transaction.
75
What is the Fair Value Measurement Attribute?
| State and Local Governments
Fair value is the price that would be (a) received to sell an asset or (b) paid to transfer a liability in an orderly transaction between market participants at the measurement date.
76
What is the Replacement Cost Measurement Attribute?
| State and Local Governments
Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
77
What is the Settlement Amount Measurement Attribute?
| State and Local Governments
Settlement amount is the amount at which (a) an asset could be realized or (b) a liability could be liquidated with the counterparty, other than in an active market.
78
What are the Recognition Criteria?
The are four fundamental recognition criteria apply:
1. The item must meet the DEFINITION of an element of financial statements.
2. It must have a relevant attribute MEASURABLE with sufficient reliability.
3. The information must be RELEVANT. It must be capable of making a difference in user decisions.
4. The information must be RELIABLE. It must be representationally faithful, verifiable, and neutral.
79
Expense Recognition Principles
1. Associating cause and effect (also known as matching)
2. Systematic and rational allocation
3. Immediate recognition
80
What is the Associating Cause and Effect (also known as matching) Principle?
The simultaneous recognition of revenues and expenses that directly result from the same transactions or other events.
a. An example is sales revenue and the related cost of goods sold, shipping expenses, and selling expenses.
b. Another example is estimated bad debt expense and the related credit sales.
81
What is the Systematic and Rational Allocation Principle?
Systematic and rational allocation procedures do not directly relate costs and revenues but are applied when a causal relationship is “generally, but not specifically, identified.”
a. An example is depreciation or amortization.
82
What is the Immediate Recognition Principle?
When costs cannot be directly or feasibly related to specific revenues. The benefits of some of these costs are used up in the period in which they are incurred. R&D costs, writeoffs of worthless assets, utilities expense, and employees’ monthly salaries are examples.
a. But other costs are immediately recognized because the period(s) to which they relate may not be feasibly determinable.
83
Elements of Present Value
1. Estimates of future cash flows
2. Expected variability of their amount and timing
3. The time value of money based on the risk-free interest rate
4. The price of uncertainty inherent in an asset or liability
5. Other factors, such as lack of liquidity or market imperfections
84
Regulation S-X
Regulation S-X applies to the reporting of interim and annual financial statements, including notes and schedules.
85
Regulation S-K
Regulation S-K provides disclosure standards, including many that are nonfinancial. Regulation S-K also covers certain aspects of corporate annual reports to shareholders.
86
Regulation S-B
Regulation S-B applies to small business issuers and nonaccelerated filers. The disclosure requirements for smaller companies that file periodic reports and registration statements with the SEC have been reduced.
87
Regulation S-T
Regulation S-T governs the types of documents the SEC requires to be filed electronically.
88
What are Financial Reporting Releases (FRRs)?
Financial Reporting Releases (FRRs) announce accounting and auditing matters of general interest.
89
What are Staff Accounting Bulletins (SABs)?
Staff Accounting Bulletins (SABs) are issued as interpretations to be followed by the SEC staff in administering disclosure requirements.
Because they are the views of the staff, SABs are not legally required to be followed by registrants, but an entity should have a good reason not to comply.
90
Form 10-K
Form 10-K is the annual report to the SEC.
91
Form 10-Q
Form 10-Q is the quarterly report of operations and financial condition to the SEC.
92
Form 20-F
Form 20-F is the annual report to the SEC filed by foreign private issuers. It is similar to Form 10-K. The financial statements in Form 20-F may be prepared in accordance with U.S. GAAP or IFRS.
93
Form 8-K
Form 8-K is a current report to disclose material events.
Some examples of material events:
1. A change in control of the registrant
2. Acquisition or disposition of a significant amount of assets not in the ordinary course of business
3. Bankruptcy or receivership
4. Resignation of a director
5. A change in the registrant’s certifying accountant
94
How many days to file a Form 10-K?
a) 60 days of the last day of the fiscal year by large accelerated filers ($700 million or more in publicly held stocks, i.e., shares held by the public and not insiders),
b) 75 days by accelerated filers ($75 million to $700 million),
c) 90 days by nonaccelerated filers (less than $75 million).
95
How many days to file a Form 10-Q?
a) 40 days of the last day of the first three fiscal quarters by large accelerated filers ($700 million or more in publicly held stocks) and accelerated filers ($75 million to $700 million)
b) 45 days by nonaccelerated filers (less than $75 million). An entity required to file Form 10-K also must file Form 10-Q for each of the first three quarters.
96
How many days to file a Form 8-K?
Within 4 business days after the material event occurs.
97
How many days to file a Form 20-F?
Similar to Form 10-K:
a) 60 days of the last day of the fiscal year by large accelerated filers ($700 million or more in publicly held stocks, i.e., shares held by the public and not insiders),
b) 75 days by accelerated filers ($75 million to $700 million),
c) 90 days by nonaccelerated filers (less than $75 million).
98
Basic Information Package Includes
a. Standardized financial statements
b. Selected financial information in columnar format for the preceding 5 fiscal years and presentation of financial trends
c. Management’s discussion and analysis (MD&A) of financial condition and results of operations
d. Dividends and market prices of common stock
e. Description of the business
f. Locations and descriptions of physical properties
g. Pending litigation, e.g., principal parties, allegations, and relief sought
h. Management and general data for each director and officer
i. Compensation of the five highest-paid directors and officers
j. Security holdings of directors, officers, and those owning 5% or more of the security
k. Matters submitted to shareholders for approval
