Accy 111 Chapter 1

Information is useful in predicting the future. The conceptual framework'squalitative characteristic of relevance

Pertinent to the decision at hand. The FASB's conceptual framework's qualitative characteristics of accounting information.

information is available prior to the decision

Decreases in equity resulting from transfers to owners

information confirms expectations

along with relevance, a primary decision specific quality

results in an asset is solf for more than its book value

agreement between a measure and the phenomenon it purports to represent.      Alongwith relevance, a fundamental decision-specific quality. The FASB's conceptualframework's qualitative characteristics of accounting information

the change in equity from nonowner transactions

concerns the relative size of an item and its effect on decisions ***Materiality - Information is material if it can have an effect on a decision made by a user. If an item is not material, GAAP need not be followed. For example, if a large corporation purchased a water cooler for one of its common areas for $120, the amount could be expensed rather than recorded as an asset even though the cooler will be useful for several years. Materiality is a judgment call. Materiality is concerned with both the dollar amount of an item and/or the nature of an item. It would probably be material if Microsoft received $1,000,000 in bribes from the Chinese for its technology. A $1,000,000 write-off of old equipment would probably be immaterial for Microsoft. . Constraints onqualitative characteristics of accounting information

important for making interfirm comparisons

accounting information should not favor a particular group. The absense of bias. The conceptual framework's qualitative characteristic of faithful representation

the process of admitting information into financial statements

applying the same accounting practices over time. This would apply if a corporation changed its inventory valuation method.

requires consideration of the costs and value of the infomation. Considers the value of using information relative to cost of providing it.

implies consensus among different measurers or observers

records expenses in the period the related revenue is recognized. cause-and-effectrelationship is implicit. Also includes depreciation over the useful life.

The process of includingdata in financial statements. Recording when products are billed and cash not receieved.

the life of an enterprise can be divided into artificial periods. Also includes distributing annual reports to shareholders.

the original transaction value upon aquisition. Asset and liabilitymeasurements should be based on the amount given or received in an exchangetransaction. Basis of measurement for fixed assets.

***Revenue ... criteria usually satisfied at point of sale. Revenue should be recognized only after the earnings process is virtually complete and there is reasonable certainty of collecting the asset to be received from the customer.

Guide to expense recognition. The recognitio of expenses exemplifies the application of the matching principle is COGS.

the entitiy will continue indefinitely. recognized as an assumption not a priniciple

a common denominator is the dollar.      Ignoresthe possibility of inflation. Monetary units are not included on financial statements.

the enterprise is seperate from its owners and other entitities

Information contains allinformation necessary for faithful representation.

**Recognized as a Principle. reporting all information that could affect decsions should be reported. requires a balance between relevence and cost effectiveness

not a qualitative characteristic, but a practical justification for some accounting choices. A branch of accounting that requires a high degree  of verification before making a legal claim to any profit. Accounting  conservatism will recognize all probable losses as they are discovered and most  expenditures as they are incurred. Revenue will be deferred until  it is verified. Having strict revenue-recognition criteria is one of the  most common forms of accounting conservatism. It is a practical justification for choosing among alternative accounting methods. Recognizing expected lossesimmediately, but deferring expected gains

used to identitfy and process external transactions

determine the dual effect on the accounting equation

record of the dual effect of a transaction in debit or credit form

transferring balances fromt he journal to the ledger

list of accounts and their balances after recording adjusting entries

information confirms expectations

users understand the information in the context of the decsion being made

The Securities and Exchange Commission is a federal agency that has the authority to set accounting standards. However, the SEC has always delegated the task to a private sector body, such as the current FASB.

The Emerging Issues Task Force (EITF) acts as a filter for the FASB. It includes 15 individuals from public accounting and private industry along with a representative from the FASB and an SEC observer. The task force focuses on emerging issues and attempts to reach a consensus, speeding up the standard-setting process.      Providestimely responses to financial reporting issues.

The act provides for the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for auditors and securities analysts, and requires that companies document and assess their internal controls, that auditors express an opinion on management's assessment of internal controls, and requires auditors to express their own opinion on company internal controls.

The law makes it unlawful for the auditors of public companies to perform a variety of non-audit services for audit clients. Prohibited services include bookkeeping, internal audit outsourcing, appraisal or valuation services, and various other consulting services. Other non-audit services, including tax services, require pre-approval by the audit committee of the company being audited.

Its EITF Issues areGAAP when entered in the Accounting Standards Codification. Sets accounting standardsin the U.S. The standard setting process includes (correct order) Research, discussion paper, exposure draft, accounting standards update.

Sets global accountingstandards

Itestablished GAAP before the FASB.

Generally accepted accountingprinciples.

It is the nationalorganization for CPAs in the U.S.

It has the authority to set U.S. accounting standards. Regulates the financial reporting for public companies. Issues accounting standards in the form of Financial Reporting Releases.

Outflows of resources togenerate revenues

Net assets

Cashdividends.

Transfers of resources inexchange for common and preferred stock

Claims of creditors againstthe assets of a business

     Netoutflows from peripheral transactions

     Probablefuture economic benefits controlled by an entity

Increases in equity fromthe sale of goods and/or services. 

All changes in equityexcept owner transactions. 

     Establishesauditing standards in the U.S for public companies. 

Primary nationalorganization of accountants working in industry

Parent organization of theIASB

     FASB'spredecessor. 

     TheFASB's parent organization. 

The matching principle

revenues minus expenses

timeliness, comparability, verifiability

Those who have a reasonableunderstanding of business and economic activities.

Faithful representation andrelevance.

Comparability andtimeliness.

making decisions

The earnings process iscomplete and collection is reasonably assured

subtract available cash from expenses paid (not accrued)

Subtract cash collected from customers from amounts billed to customers.

What was billed! not actually what was paid!

• what is owed not what is accrued.
• -5600 owed from year before
• -18000 balance in expense a/c
• = 23600 owed in liability account