Role and Standard Setting Process (GAAP)

Question 1

What is the Financial Accounting Standards Board (FASB)?

Answer 1

The FASB established financial accounting standards for business entities.

Question 2

What are the final three steps in the standard setting process?

Answer 2

(1) Evaluate research and comments from interested parties and issue an exposure draft
(2) Solicit additional comments
(3) Finalize new accounting guidance and issue Accounting Standards Update (ASU)

Question 3

How do user groups influence the outcome of FASB standards?

Answer 3

Users influence standards by providing input during the due process procedure.

Question 4

What does the Securities and Exchange Commission (SEC) do?

Answer 4

It administers the US securities laws, most notably the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as others.

Question 5

What comprises United States Generally Accepted Accounting Principles (GAAP)?

Answer 5

The FASB Accounting Standards Codification comprise authoritative US GAAP for publicly traded companies. SEC pronouncements are also GAAP.

Question 6

What are the first three steps the FASB uses when issuing a new accounting standard?

Answer 6

(1) Considers whether to add a project to its agenda in consultation with the Financial Accounting Foundation (FAF)
(2) Conducts research
(3) Holds a public hearing on the topic

Question 7

What is the role of the Financial Accounting Advisory Council (FASAC)?

Answer 7

The FASAC provides guidance on major policy issues, project priorities, and the formation of task forces.

Question 8

What is the role of the Financial Accounting Foundation (FAF)?

Answer 8

The FAF exercises oversight of the FASB, appoints the members of the FASB and ensures funding.

Question 9

What is the American Institute of Certified Public Accountants (AICPA)?

Answer 9

The AICPA is the professional organization for participating CPAs.

Question 10

What is the main purpose of the SEC?

Answer 10

The main purpose of the SEC is to promote efficient allocation of capital by maintaining open, orderly and fair securities markets.

Question 11

Which agency enforces GAAP?

Answer 11

Securities and Exchange Commission (SEC)

Question 12

What is the classification of assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business, whichever is longer?

Answer 12

The classification is current assets.

Question 13

What topics does the FASB Accounting Standards Codification not include?

Answer 13

(1) Other comprehensive basis of accounting
(2) Cash basis
(3) Income tax basis
(4) Regulatory accounting principles

Question 14

What is the Accounting Principles Board?

Answer 14

The entity that published thirty-one opinions, some of which are now part of the Codification.

Question 15

What are long-term assets?

Answer 15

Assets that are not classified as current assets. Long-term assets are reported on the balance sheet and represent a company’s property, equipment, and other capital assets (reduced by depreciation) expected to be usable for more than one year.

Question 16

What are the seven key components of the general purpose financial report?

Answer 16

(1) Income Statement
(2) Balance Sheet
(3) Statement of Cash Flows
(4) Statement of Retained Earnings
(5) Statement of Comprehensive Income
(6) Footnote Disclosures
(7) Auditor’s Opinion

Question 17

What purpose does the FASB Accounting Standards Codification serve?

Answer 17

The FASB Accounting Standards Codification is the sole source of authoritative US GAAP for non-governmental entities, except for the SEC guidance.

Question 18

What body developed GAAP?

Answer 18

The Financial Accounting Standards Board (FASB).

Question 19

When is revenue recognized under accrual accounting?

Answer 19

Revenues are recognized when earned and collection is reasonably assured, regardless of the period of cash collection.

Question 20

When are expenses recognized under accrual accounting?

Answer 20

Expenses are recognized when incurred, regardless of the period of cash payment.

Question 21

What does GAAP address?

Answer 21

Recognition, measurement and disclosure.

Question 22

What are cash equivalents?

Answer 22

Short-term investments that are convertible into a known and fixed amount of cash and have an original maturity to the purchaser of three months or less.

Question 23

What are the categories that are listed on the statement of cash flows?

Answer 23

(1) Operating
(2) Investing
(3) Financing

Question 24

What is the purpose of the statement of cash flows?

Answer 24

To explain the change in cash and cash equivalents that has occurred during the past accounting year.

Question 25

Where and how are prior period adjustments shown?

Answer 25

Statement of Retained Earnings as adjustments to the beginning balance of retained earnings in the year that the error is discovered.

Question 26

How are long-term assets and liabilities defined?

Answer 26

By exclusion from current assets and current liabilities.

Question 27

How are liabilities presented on the balance sheet?

Answer 27

Liabilities are shown in order of maturity. Current liabilities are presented first, and then long-term liabilities are presented.

Question 28

Name the two different formats of presentation for the balance sheet.

Answer 28

Account Form and Report Form

Question 29

What are current liabilities?

Answer 29

Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer and which will be met through the transfer of a current asset or the creation of another current liability.

Question 30

What approach is used when financial statements are prepared?

Answer 30

The all-inclusive approach.

Question 31

How is owner’s equity presented on the balance sheet?

Answer 31

In order of permanence.

Question 32

How are assets presented on the balance sheet?

Answer 32

Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first and less liquid assets are shown last (such as property, plant and equipment).

Question 33

What are some items that are in other comprehensive income?

Answer 33

Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities.

Question 34

What is the lowest structure of the FASB Accounting Standards Codification?

Answer 34

Paragraphs

Question 35

What are the major areas in the FASB Accounting Standards Codification?

Answer 35

General Principles 100; Presentation 200; Assets 300; Liabilities 400; Equity 500; Revenue 600; Expenses 700; Broad Transactions 800; Industry 900

Question 36

How are changes to the FASB Accounting Standards Codification accomplished?

Answer 36

Accounting Standards Updates (ASU)

Question 37

What is the reason for the FASB Accounting Standards Codification?

Answer 37

To put all accounting guidance in one place.

Question 38

What is the highest structure of the FASB Accounting Standards Codification?

Answer 38

The highest structure is areas.