Chapter 1 Financial Accounting and Accounting Standards

question

Essential Characteristics of accounting are
answer

1. the identification, measurement, and communication of financial information about 2. economic entities to 3. interested Parties
question

Financial Accounting is
answer

the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties
question

Managerial Accounting is
answer

the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control and evaluate a company’s operations
question

Financial Reporting –
answer

The financial information a company provides to help users with capital allocation decisions about the company
question

Users (present and potential)
answer

Investors and creditors use financial reports to make their capital allocation decisions
question

Capital Allocation –
answer

The process of determining how and at what cost money is allocated among competing interests
question

Objective of Financial Reporting –
answer

Provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors
question

general-purpose financial statements
answer

statements that provide financial reporting information to a wide variety of users.
question

Entity Perspective –
answer

Companies are viewed as separat end distinct from their owners (present shareholders)
question

Proprietary Perspective –
answer

a perspective that financial reporting should be focused only on the needs of shareholders (not considered appropriate)
question

decision-usefulness approach
answer

Financial reporting using this approach and, investors like it, because it provides information that is useful for making decisions.
question

Accrual-basis accounting –
answer

ensures that a company records events that change its financial statements in the periods in which the events occur
question

Generally Accepted accounting principles (GAAP)
answer

Common set of accounting standards and procedures
question

The three organizations that were/are instrumental in the development of financial accounting standards (GAAP) in the United States
answer

1. Security and Exchange Commission (SEC) 2. American Institute of Certified Public Accountants (AICPA) 3. Financial Accounting Standards Board (FASB)
question

Federal Government established this commission to help develop and standardize financial information presented to stockholders following the Great Depression. It is a federal agency
answer

Securities and Exchange Commission (SEC)
question

The SEC administers this act among several others
answer

Securities Exchange Act of 1934
question

The SEC relies on…
answer

FASB to develop accounting standards
question

The American Institute of Certified Public Accountants (AICPA) –
answer

is the national professional organization of practicing Certified Public Accountants (CPA’s)
question

AICPA Developed ___ in 1939 and ___ in 1959 and ____ in 1973 at the urging of SEC
answer

1. CAP (Committee on Accounting Procedure) 2. APB (Accounting Principles Board) 3. FASB (Financial Accounting Standards Board)
question

Major Purposes of the APB (Accounting Principles Board) –
answer

1.advance the written expression of accounting principles 2. determine appropriate practices and 3. narrow the areas of difference and inconsistency in practice
question

APB Opinions
answer

APB board’s official pronouncements, they were intended to be based mainly on research studies and be supported by reason and analysis.
question

Wheat Committee
answer

a study group on establishment of accounting principles that examined the organization and operation of the APB and determined the necessary changes to attain better results. Reported results to AICPA and this was used to replace APB with the FASB
question

The Wheat Committee’s recommendations resulted in the creation of a new standard-setting structure composed of three organizations
answer

1. The Financial Accounting Foundation (FAF) 2. The Financial Accounting Standards Board (FASB) 3. The Financial Accounting Standards Advisory Council (FASAC)
question

Financial Accounting Foundation (FAF) purpose:
answer

1. select members of FASB and Advisory Council 2. Funds their activities 3. oversees the FASB’s activities
question

Financial Accounting Standards Board (FASB) purpose:
answer

establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information
question

Differences between FASB and APB
answer

1. Smaller Membership 2. Full-time, remunerated membership 3. Greater autonomy 4. Increased independence 5. Broader representation
question

The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of how many of the 7 board members?
answer

4 of the 7 Board members
question

Financial Accounting Standards Advisory Council (FASAC) purpose:
answer

to consult on major policy issues, technical issues, project priorities and selection and organization of task forces
question

FASB issues two major types of pronouncements:
answer

1. Accounting Standards Updates 2. Financial Accounting Concepts
question

Accounting Standards Update
answer

These updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC
question

Emerging Issues Task Force (EITF)
answer

the purpose of the task force is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices.
question

This task force deals with short-term emerging issues so that FASB can hopefully work on more pervasive long-term problems
answer

EITF
question

Statements of Financial Accounting Concepts
answer

The series sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. The board intends to form a cohesive set of interrelated concepts, conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent manner.
question

The FASB issues___,____,____
answer

1. Standards (160) 2. Interpretations (48) 3. FASB staff Positions (100)
question

FASB developed the Financial Accounting Standards Board Accounting Standards Codification (The Codification) to provide…
answer

in one place all the authoritative literature related to a particular topic
question

To provide easy access to the Codification, FASB developed –
answer

Financial Accounting Standards Board Codification Research System (CRS)
question

CRS is an …
answer

online, real-time database that provides easy access to the Codification
question

User groups
answer

Quite possibly the most powerful force influencing the development of GAAP.
question

GAAP is as much a product of –
answer

political action as it is of careful logic or empirical findings
question

Economic Consequences –
answer

means the impact of accounting reports on the wealth positions of issuers and users of financial information and the decision-making behavior resulting from that impact
question

Public Company Accounting Oversight Board (PCAOB)
answer

oversight board established und SOX for accounting practices. They have oversight and enforcement authority and establish auditing, quality control, and independence standards and rules.
question

Section 404 of the Sarbanes-Oxley Act
answer

requires public companies to attest to the effectiveness of their internal controls
question

Internal controls
answer

a system of checks and balances designed to prevent and detect fraud and errors
question

eXtensible Business Reporting language (XBRL)
answer

a way for companies to format their financial reports which permits quicker and lower-cost access to companies’ financial information
question

Sarbanes-Oxley Act
answer

increased the resources for the SEC to combat fraud and curb poor reporting practices. This led to approving new auditor independence rules and materiality guidelines for financial reporting.
question

Expectations Gap
answer

what the public thinks accountants should do and what accountants think they can do
question

Two sets of rules accepted for international use
answer

1. GAAP 2. IFRS (International Financial Reporting Standards)
question

Who issues the IFRS
answer

International Accounting Standards Board (IASB)
question

Norwalk agreement
answer

a memorandum of understanding by FASB and IASB formalizing their commitment to the convergence of GAAP and IFRS

Get instant access to
all materials

Become a Member