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financial accounting

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concerned with providing useful financial information to various external decision makers that do not have direct access to a company's internal records primary focus: the information needs of investors and creditors

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managerial accounting

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the process of providing information to a company's internal decision makers (its managers)

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primary means of conveying financial information to external users?

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financial statements and related disclosure notes

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financial statements most frequently provided:

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1) balance sheet (statement of financial position) 2) income statement (statement of operations) 3) statement of cash flows 4) statement of shareholder's equity 5) and since 2012, either a statement of other comprehensive income immediately following the income statement or a statement of comprehensive income that includes info on the income statement as well as on the statement of other comprehensive income

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United States economy

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highly developed free-enterprise, with a majority of productive resources privately owned rather than government owned need for a mechanism that can allocate the scarce resources of our society in an efficient manner

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capital markets

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the mechanisms that foster efficient allocation of resources

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accrual accounting

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the model that best predicts future cash flows; provides a measure of periodic performance called net income, the difference between revenues and expenses. net income is considered a better indicator of future operating cash flows than is current net operating cash flow

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cash basis accounting

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a model that predicts future cash flows; the measure of performance called net operating cash flow, is the difference between cash receipts and cash disbursements from providing goods and services

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Generally Accepted Accounting Principles (GAAP)

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a dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting financial information

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Securities and Exchange Commission (SEC)

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- created by the U.S. Congress in 1934 with the Securities Exchange Act - has the power and responsibility for setting accounting and reporting standards (principles) for companies whose securities are publicly traded - has delegated the task of setting accounting standards to the private sector - has influenced FASB decisions on a number of occasions

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Financial Accounting Standards Board (FASB)

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- present private sector standard-setting body - has issued over 160 specific standards called Statements of Financial Accounting Standards (SFASs), as well as numerous interpretations, technical bulletins, and seven concept statements

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GAAP in the US is comprised of...

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160 SFASs, pronouncements of FASB's predecessors, various SEC pronouncements, and publications of the American Institute of Certified Public Accountants

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FASB Accounting Standards Codification project

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launched in 2007 to simplify the task of researching an accounting topic, with the objective of integrating and topically organizing all relevant accounting pronouncements comprising GAAP in a searchable online database became effective in July, 2009 and represents the single source of authoritative nongovernmental US GAAP

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International Accounting Standards Committee (IASC)

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formed in 1973 to develop global accounting standards because of the issues that multinational companies faced with having to comply with more than one set of standards

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International Accounting Standards Board (IASB)

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the reorganized IASC; a new standard-setting body that acts as an umbrella organization similar to the Financial Accounting Foundation (FAF) in the United States has a main objective of developing a single set of high quality, understandable, and enforceable global accounting standards to help participants in the world's capital markets and other users make economic decisions used in 115 jurisdictions including companies in the EU

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Norwalk Agreement

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signed in 2002 between FASB and IASB; pledges to remove existing differences between standards

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Roadmap

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2008; SEC proposed this for the potential use of financial statements prepared in accordance with IFRS; set forth milestones that could lead to the required use of IFRS by publicly traded US Companies

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condorsement

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process by which incorporation could occur; involves continuing the convergence process coupled with endorsement of additional IFRS by the FASB for inclusion in US GAAP if those standards are of sufficiently high quality

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auditors

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provide credibility to financial statements and disclosure notes by verifying that they are presented fairly in conformity with generally accept accounting principles

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Public Company Accounting Reform Act

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passed in 2002 because of Companies like Enron and WorldCom by Congress, referred to as the Sarbanes-Oxley Act for the two congressmen who sponsored the bill. law provides for the regulation of auditors and the types of services they furnish to clients, increases accountability for corporate executives, addresses conflicts of interest for securities analysts and provides for stiff criminal penalties for violators

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conceptual framework

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created by FASB to provide an underlying theoretical and conceptual structure for accounting standards

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decision usefulness

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ability to have an impact on a decision

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relevance

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information should be relevant to the decisions info is more relevant if it is more material

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predictive value

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ingredient of relevance; information helps predict future events

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confirmatory value

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ingredient of relevance; information helps confirm prior expectations

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faithful representation

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exists when there is agreement between a measure or description and the phenomenon it purports to represent

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completeness

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ingredient of reliability; a depiction of an economic phenomenon is complete if it includes all information that is necessary for faithful representation of the economic phenomena it purports to represent

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neutrality

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ingredient of reliability; assumes the information being relied on does not favor any particular group of companies nor influence behavior in any specific way

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free from error

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we would not expect all measurement to be error-free, however, the information should be free from material error if it is to be useful

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enhancing qualitative characteristics

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comparability, consistency, verifiability, timeliness, and understandability

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comparability

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the ability to help users see similarities and differences among events and conditions

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consistency

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the consistent application of accounting principles from period to period

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verifiability

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implies a consensus among different users

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timeliness

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when info is available to users early enough to allow them to use it in the decision process

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understandability

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means that users must understand the information within the context of the decision being made

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cost effectiveness

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the constraint to achieving the desired qualitative characteristics

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conservatism

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frequently cited characteristic of accounting information; not a desired qualitative characteristic

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assets

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probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Chapter 1 Environment and Theoretical Structure of Financial Accounting – Flashcards

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