SFAC no. 6, Elements of Financial Statements

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You obtain it or control it today. It will provide benefits in the future. It occurred as a result of a transaction.
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Assets.
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You owe it as of today. You will sacrifice something in the future. It occurred as a result of a past transaction.
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Liabilities.
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The owner’s residual interest in the assets of an entity that remains after deducting liabilities.
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Equity (net assets)
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Total assets minus total liability is net assets as well as
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stockholder’s equity.
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Transactions or events that change owners’ equity include:
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Revenues and expenses. Gains and losses. Investments by owners. Distributions to owners. Changes within owners’ equity (stock dividends).
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Revenues are increases in assets or liabilities?
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Assets
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Revenues are decreases in assets or liabilities?
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Liabilities.
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Three characteristics of revenues are
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1) Accomplishments of the earning process. 2) Actual or expected cash inflows resulting from central operations. 3) Inflows reported gross
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Example of revenue increasing assets
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DR Cash or AR CR sales revenue
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Expenses are decreases in assets and increases in
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liabilities
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Expenses decrease
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assets
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Gains are
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increases in equity
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Losses are
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decreases in equity
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Increases in net assets resulting from transfers by other entities of something of value to obtain ownership is
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Investments by owners
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Dividends are an example of
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distributions to owners
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Comprehensive income is the change in equity during a period from transactions and other events from
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nonowner sources (all equity changes except investments and distributions by owners). FASB SFAC definition.
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MCQ: According to FASB conceptual framework, which of the following is an essential characteristic of an asset: a) The claims to an asset’s benefits are legally enforceable b) An asset is tangible c) An asset is obtained at a cost d) An asset provides future benefits
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The answer is D.
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Under the FASB Statement of Financial Accounting Concepts 5, comprehensive income excludes changes in equity resulting from which of the following? a) Loss from discontinued operations b) Prior period error correction c) Dividends paid to stockholders d) Unrealized loss on securities classified as available for sale
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The answer is C. Comprehensive income is the change in equity during a period from transactions and other events from non-owner sources EXCEPT investments and distributions by owners. FASB SFAC definition.
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According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is: a) allocation b) matching c) realization d) recognition
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The answer is D. Recognition is putting words and numbers on financial statements, such as account titles and amounts.
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According to the FASB conceptual framework, an entity’s revenue may result from: a) a decrease in an asset from primary operations b) an increase in an asset from incidental transactions c) an increase in a liability from incidental transactions d) a decrease in a liability from primary operations
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Revenues increase assets or reduce liabilities, which increases assets. Incidental transactions are GAINS OR LOSSES. Primary operations are revenues. A decrease in a liability from primary operations will increase revenues. The answer is D.
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Economic Entity Assumption:
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Economic activity can be identified with a particular unit of accountability. However you can define the entity by a higher level such as parent or a lower level such as subsidiary.
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Going Concern Assumption is the business will have a long life. The fair value cost is relevant or irrelevant if the business is a going concern?
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Irrelevant. That is another reason to use historical value instead of fair value. Historical value is used for PPE.
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The US Dollar is the common denominator for economic activity and provides an appropriate basis for accounting measurement and analysis.
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Monetary Unit Assumption
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The economic activities of an enterprise can be divided into artificial time periods.
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Periodicity Assumption
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Historical Cost Principle
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GAAP requires that most assets and liabilities be accounted for and reported on the basis of acquisition price because it’s the most reliable valuation. (there are exceptions to this)
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Revenue Recognition Principle
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Revenue is recognized when 1) realized or realizable and 2) earned. Revenues are realizable when assets received or held are readily converted to cash or claims to cash. Revenues are considered earned when an entity has substantially completed what it must do to be entitled to the benefits represented by the revenues. Recognition at the time of sale provides a reasonable test. Exceptions are recognition 1) DURING PRODUCTION 2) upon receipt of cash (installment sales method/cost recovery method), multiple deliverable revenue arrangements, and milestone method of recognition on research and development contracts.
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Matching principle
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Expenses are to be matched to the revenues whenever it is reasonable and practical to do so.
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Full Disclosure Principle
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Accountants use their judgment in deciding what is reported on financial statements Some items may appear in footnotes or supplementary information. Footnotes support or explain items. Supplementary information is less reliable, but relevant, such as segment reporting.
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Conservatism
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When in doubt, choose the solution that will be least likely to overstate assets and income.
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Which of the following accounting literature is not included in the FASB Accounting Standards Codification? a) AICPA Statements of Position b) FASB Statements c) Accounting Research Bullentins d) Statements of Auditing Standards
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The answer is D. Statements of Auditing Standards are issued by the AICPA for how to do audits.

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