Accounting CH. 1 and 2 study guide – Flashcards
Unlock all answers in this set
Unlock answersquestion
Differentiate broadly between financial accounting and managerial accounting.
answer
Both financial and managerial accounting measures, classifies, and summarizes in report form enterprise activities. Financial: specifically gives info related to the enterprise as a whole for use by parties both internal and external to a business enterprise. Managerial: specifically, communication is for the use of internal, managerial parties, and relates more to subsystems of the entity.
question
Managerial accounting
answer
is management decision oriented and directed more toward product line, division, and profit center reporting.
question
Differentiate between "financial statements" and "financial reporting"
answer
•"Financial statements": balance sheet, income statement, statement of cash flows, and statement of changes in owners' or stockholders' equity. •"Financial reporting": includes the basic financial statements and any other means of communicating financial and economic data to interested external parties.
question
How does accounting help the capital allocation process?
answer
If the co. financial performance is measured accurately, fairly, and on a timely basis, the right mangers and companies are able to attract investment capital. If they provide unreliable and irrelevant info it will lead to poor capital allocation and will adversely affect the securities market.
question
What is the objective of financial reporting?
answer
To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity through equity investments and loans or other forms of credit.
question
Decision usefulness
answer
investors are interested in determining the co's. ability to generate net cash inflows and management's ability to protect and enhance the capital providers' investments.
question
Briefly explain the meaning of decision-usefulness in the context of financial reporting.
answer
it should help investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. In order for investors to make these assessments, the economic resources of an enterprise, the claim to those resources, and the changes in them must be understood.
question
Of what value is a common set of standards in financial accounting and reporting?
answer
Setting a "common set of standards" for all businesses and entities allows financial statements to be reasonable comparable. If we didn't have these standards everyone would develop their own theory structure and set of practices, resulting in non comparable financial statements.
question
What is the likely limitation of "general-purpose financial statements"?
answer
It will not satisfy the specific needs of all interested parties. Since interested parties needs vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied users.
question
In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
answer
SEC has the power to prescribe accounting practices and principles to be employed by the companies that fall within its jurisdiction. They receive audited financial statements from nearly all companies that issue securities to the public or are listed on the stock exchanges. They are interested in the content, accuracy, and credibility of statements.
question
In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards? (pt. 2)
answer
The SEC use to rely on the AICPA to regulate the profession and develop and enforce accounting principles. LATELY, the SEC has a more active role in the development of accounting standards (especially the are of disclosure requirements). SEC said the FASB's statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. SEC supports the development of accounting principles in private sectors.
question
What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
answer
-What: a special committee of AICPAs that between 1939-1959 they issued 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems -Accomplishments: these bulletins provided solutions to immediate problems and narrowed the range of alternative practices. -Failings: The committees problem-by-problem approach failed to provide a well defined and well structured body of accounting theory that was needed. The committee was replaced by the Accounting Principles Board in 1959.
question
For what purpose did the AICPA create the Accounting Principles Board?
answer
To advance the written expression of accounting principles, to determine appropriate practices, and to narrow the differences and inconsistencies in practice. Basically, to develop an overall conceptual framework to assist in the resolution of problems AS they became evident and to do substantive research on individual issues before pronouncements were issued.
question
Accounting Research Bulletins
answer
pronouncements on accounting practice issued by the Committee on Accounting Procedures between 1939 and 1959; since 1964 they have been recognized as accepted accounting practice unless superseded in part or in whole by an opinion of the APB or an FASB standard.
question
Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates.
answer
-APB Opinions: issued by the APB from 1959-1973, unless superseded by FASB Statements, are recognized as accepted practice and constitute the requirements to be followed by all business enterprises. -Accounting Standards Updates: pronouncements of the FASB that are incorporated into the FASB codification, represent the accounting profession's authoritative pronouncements on financial accounting and reporting practices.
question
If you had to explain or define "generally accepted account principles or standards," what essential characteristics would you include in your explanation?
answer
GAAP or standards have "substantial authoritative support." Concise of accounting practices, procedures, theories, concepts, and methods that are recognized by a large majority of practicing accountants and other members of the business and financial community. Bulletins issued by the Committee on Accounting Procedure, opinions rendered by APB, and statements issued by the FASB constitute "substantial authoritative support"
question
In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
answer
1) FASB has a smaller membership 2) full-time compensated members 3) FASB has greater autonomy 4) increased independence 5) FASB has broader representation that APB
question
How are FASB preliminary views and FASB exposure drafts related to FASB "statements"?
answer
Technical staff of the FASB conducts research on an identified accounting topic and prepares a "preliminary views", released by the Board for public reaction. The Board analyzes and evaluates the public response to the preliminary views, deliberates on the issues, and issues an "exposure draft" for public comment. After studying the public's reaction to the exposure draft, the Board may reevaluate its position, revise the draft, and vote on the issuance of the financial statement.
question
Exposure drafts (FASB)
answer
it is a tentative "Statement"
question
Preliminary views (FASB)
answer
present all facts and alternatives related to a specific topic/problem.
question
Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.
answer
-Accounting Standards Updates: constitute GAAP and dictate acceptable financial accounting and reporting practice as promulgated by the FASB. -Statements of FAC: do NOT establish GAAP, instead set forth fundamental objectives and concepts that the FASB intends to use as a basis for developing future standards. Concepts serve as guidelines in solving existing/emerging accounting problems in a consistent, sound manner. -Both: may develop through the same process from discussion memorandum, to exposure draft, to a final approved statement.
question
What is Rule 203 of the Code of Professional Conduct?
answer
Prohibits a member of the AICPA from expressing an opinion that financial statements conform with GAAP if those statements contain a material departure from an accounting principle promulgated by the FASB, or its predecessors, the APB and the CAP, unless the member can demonstrate that because of unusual circumstances the financial statements would otherwise have been misleading.
question
Failure to follow Rule 203 of the Code of Professional Conduct can result in...
answer
a loss of a CPA's license to practice. This rule requires auditors to follow FASB standards.
