Chapter 1 – Financial Accounting Answers

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APB
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Accounting Principles Board – Private standard-setting organization – Mission was to develop an overall conceptual framework. official pronouncements, called APB Opinions, – APB Opinions based mainly on research studies and be supported by reasons and analysis. – Issued 31 opinions in its lifetime.
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Accounting Research Bulletins
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– 51 bulletins from the Committee on Accounting Procedure (CAP) – Issued to deal with accounting problems. – Subsequently AICPA created the Accounting Principles Board to provide a structured body of accounting principles.
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Accounting Standards Update
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– Process by which a new FASB standard, staff position, etc., is included in the FASB Codification. – Update includes: background and basis for conclusions for the new pronouncement in a common format, regardless of the form in which such guidance may have been issued. – Updates are also issued for amendments to the SEC content in the Codification
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Accrual-basis Accounting
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Accounting approach, in which a company records events that change its financial statements in the periods in which the events occur, rather than only in the periods in which it receives or pays cash. Thus, a company recognizes revenues when it earns them rather than when it receives cash, and it recognizes expenses when it incurs them rather than when it pays them
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AICPA
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American Institute of Certified Public Accountants National professional organization of practicing Certified Public Accountants (CPAs), whose various committees and boards have been an important contributor to the development of GAAP.
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APB Opinions
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– The official pronouncements of the Accounting Principles Board, – Based mainly on research studies and be supported by reasons and analysis. – Between its inception in 1959 and its dissolution in 1973, the APB issued 31 opinions
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Auditing Standards Board
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The arm of the AICPA that had been responsible for developing auditing standards. The Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act, now oversees the development of auditing standards
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CAP
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Committee on Accounting Procedure Committee established by the AICPA in 1939 at the urging of the SEC to deal with accounting problems. The CAP issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board in 1959
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decision-usefulness
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Approach that requires that financial reporting be useful to investors by helping them assess (1) the company’s ability to generate net cash inflows and (2) management’s ability to protect and enhance the capital providers’ investments
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EITF
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Emerging Issues Task Force Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. – FASB reviews and approves all EITF consensuses – SEC views consensus solutions as preferred accounting
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Entity Perspective
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The view that companies are distinct and separate from their owners (present shareholders).
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Expectations Gap
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The difference between what the public thinks accountants should do and what accountants think they can do
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Financial Accounting
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The accounting process that culminates in the preparation of financial reports for use by both internal and external parties
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FASB
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Financial Accounting Standards Board – Major organization; standard-setting structure for financial accounting. – Mission = establish and improve standards of financial accounting & reporting for the guidance & education of the public. – FASB consists of 5 members, appointed for 5-year terms by the Financial Accounting Foundation. – Standards issued by the FASB are considered Generally Accepted Accounting Principles (GAAP)
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Codification
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Financial Accounting Standards Board Codification – Developed by the FASB, it provides in one place all the authoritative literature related to a particular topic
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CRS
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FASB Codification Research System Online, Database that provides easy access to the Codification, through a topically organized structure, subdivided into topics, subtopics, sections, and paragraphs, using a numerical index system
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Financial Reporting
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Reporting of financial information other than in formal financial statements. Examples: President’s letter, supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and social or environmental impact statements
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Financial Statements
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The principal means through which a company communicates its financial information. – Statements reflect the collection, tabulation, and final summarization of the accounting data. – Statements most frequently provided are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners’ or stockholders’ equity. Note disclosures are an integral part of a company’s financial statements
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GAAP
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Generally Accepted Accounting Principles The common set of accounting standards and procedures, for which either an authoritative accounting rule-making body has established a principle of reporting in a given area, or over time, a given practice has been accepted as appropriate because of its universal application.
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General-Purpose Financial Statements
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Provide financial reporting information to a wide variety of users at the LEAST cost
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IASB
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International Accounting Standards Board – Organization, based in London, that sets accounting standards accepted for international use. – Although many of these international standards are similar to U.S. GAAP, the FASB and the IASB are currently working on a convergence project to result in one set of high-quality standards
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IFRS
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International Financial Reporting Standards – All the accounting rules accepted for international use, issued by the International Accounting Standards Board
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Objective of Financial Reporting
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Goal for financial accounting and reporting, established by the accounting profession: To provide information about the reporting entity that is useful to present and potential to equity investors, lenders, and other creditors in decisions about providing resources to the entity
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PCAOB
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Public Company Accounting Oversight Board Organization Established by the Sarbanes-Oxley Act of 2002 that has oversight and enforcement authority for accounting practices and that establishes auditing, quality control, and independence standards and rules
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Sarbanes-Oxley Act of 2002
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Legislation, enacted by the U.S. Congress, intended to combat accounting fraud, curb poor reporting practices, and make sweeping changes to the institutional structure of the accounting profession
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SEC
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Securities and Exchange Commission – Federal Agency established to help develop and standardize financial information presented to Stockholders. – Administers the Securities Exchange Act of 1934 and several other acts. – Most companies that issue securities to the public are required to file audited financial statements with the SEC. – SEC has powers to prescribe the accounting practices and standards to be employed by companies that fall within its jurisdiction
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Staff Positions
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Issued by the FASB, these provide interpretive guidance and also minor amendments to standards and interpretations
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Standards Statement
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– Statements issued by the FASB that are considered GAAP and thereby binding in accounting practice. – Statements go through a rigorous due process system (discussion memo, public hearing, exposure draft). – Passage of a new Standards Statement requires the support of 3 of the 5 board members
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Wheat Committee
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– Study Group on Establishment of Accounting Principles, chaired by Francis Wheat, that examined the organization and operation of the Accounting Principles Board and determined the changes needed to attain better productivity and more timely correction of accounting abuses. – Study Group submitted its recommendations to the AICPA Council in the spring of 1972, which adopted the recommendations in total and implemented them by early 1973
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Statement of Financial Accounting Concepts
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– Series of statements by the FASB that set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. – Unlike a Standards Statement, these statements of concepts DO NOT establish GAAP. – However, this cohesive set of interrelated concepts is intended to be a conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner
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Interpretations
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Statements issued by the FASB that modify or extend existing standards. Interpretations have the same authority as standards for purposes of determining GAAP

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