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
Distribution to owners
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.
Revenue recognition or the realization principle
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.
historical cost principle
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.
going concern assumption
the entitiy will continue indefinitely. recognized as an assumption not a priniciple
monetary unit assumption
a common denominator is the dollar. Ignoresthe possibility of inflation. Monetary units are not included on financial statements.
economic entity assumption
the enterprise is seperate from its owners and other entitities
Information contains allinformation necessary for faithful representation.
full disclosure principle
**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
unadjusted trial balance
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
What is the SEC and how is it involved with accounting standard setting?
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.
What is the EITF and what is its purpose?
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.
What are the key provisions of the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002?
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.
What provisions did the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002 make for performance of non-audit services by an audit firm?
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.
Financial AccountingStandards Board FASB
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.
SEC Securities and ExchangeCommission
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
. Distributions toowners
Investments by owners
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
TheFASB's parent organization.
In a recent annual report,Apple Computer reported the following in one of its disclosure notes:"Warranty Expense: The Company provides currently for the estimated costfor product warranties at the time the related revenue is recognized."This note exemplifies Apple's use of:
The matching principle
revenues minus expenses
What enhances the qualitative characteristics of accounting information?
timeliness, comparability, verifiability
The enhancing qualitativecharacteristic of understandability means that information should be understoodby:
Those who have a reasonableunderstanding of business and economic activities.
Fundamental qualitative characteristics of accounting information are:
Faithful representation andrelevance.
Enhancing qualitative characteristics of accounting information include:
Of the following, the mostimportant objective for financial reporting is to provide information usefulfor:
Revenue should not berecognized until:
The earnings process iscomplete and collection is reasonably assured
Net operating cash flow for a year
subtract available cash from expenses paid (not accrued)
Accounts receivable for balance sheet
Subtract cash collected from customers from amounts billed to customers.