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What do investors and creditors use to assess risk and return?

Investors and creditors use information to assess risk and return.

What is the primary focus of financial accounting?

The primary focus of financial accounting is on the information needs of investors and creditors.

What do financial statmements convey?

Financial statements convey financial information to external users.

Financial Accounting

A type of accounting that is primarily concerned with producing information for external users.

Managerial Accounting

A type of accounting that deals with the concepts and methods used to provide information to an organization's internal users, that is, its managers.

Most frequently provided financial statements:

1. Balance Sheet or Statement of Financial Position
2. Income Statement or Statement of Operations
3. Statement of Cash Flows
4. Statement of Shareholders' Equity

Financial Reporting

It refers to the process of providing financial statements to external users.

Capital Markets

...provides a mechanism to help our economy allocate resources efficiently.

Coporation

It is a form of business that aquires capital from investors in exchange for owership interest and from creditors by borrowing..

Secondary Market Transaction

Provides for the transfer of stocks and bonds among individuals and institutions.

Primary Market Transaction

Provides for the transfer of capital from investors to the corporation. Money is new and opportunites for stocks and bonds come directly from the company.

Why do people invest or loan?

Investors and creditors both are interested in earning a fair return on the resources provided.

Rate of Return

is the percentage of increase or decrease in the value of your investments from earned interest.

What are key variables in the investment decision?

The expected rate of return and uncertainty, or risk, of that return are key variables in the investment decision.

When will a company be able to provide a return to investors and creditors?

A company will be able to provide a return to investors and creditors only if it can generate a profit from selling its products or services.

What is the objective of financial accounting?

The objective of financial accounting is to provide investors and creditors with useful information for decision making.

FASB

Financial Accounting Standards Board

Accrual Accounting

method of accounting where revenue and expenses recognized at the time they are incurred or earned (whether or not cash chages hands)

Cash Basis Accounting

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Net Operating Cash Flow

the difference between cash receipts and cash disbursements from providing goods and services. It may not be indicative of the company's long-run cash-generating ability.

What may not be an accurate predictor of future operating cash flows (over short periods of time)?

Operating Cash Flow

Net Income

the difference between revenues and expenses

Net income is considered a better...

indicator of future cash flows than is current net operating cash flow.

When was the SEC created?

The SEC was created by Congress in 1934 with the Securities and Exchange Act.

Who sets accounting standards?

The SEC has the authority to set accounting standards for companies, but has delegated the task to the private sector.

SEC

Securities and Exchange Commission

CAP

Committee on Accounting Procedure

AIA

American Institute of Accountants

AICPA

American Institute of Certified Public Accountants

APB

Accounting Principles Board

Who currently sets accounting standards?

FASB

What does the Emerging Issues Task Force (EITF) do?

The Emerging Issues Task Force identifies financial reporting issues and attempts to resolve them without involving the FASB.

What else has FASB done besides issuing specific accounting standards?

The FASB has formulated a conceptual framework to provide an underlying theoretical and conceptual structure for accounting standards.

How do FASB, SEC, and GAP relate within the U.S. ?

The FASB Accounting Standards Codification is now the only source of authoritative U.S. GAAP. Exceptions are rules and interpretive releases of the SEC, which remain as sources of authoritative GAAP.

What is the hierarchy of accounting standard-setting authority?

...

What mus the FASB consider if it introduces a new standard?

The FASB must consider potential economic conseuences of a change in an accounting standard or the introduction of a new standard.

What else can prevail in standard setting?

Public pressure sometimes prevails over conceptual merit in the standard-setting arena.

What does FASB doe before issuing an accounting standards update?

The FASB undertakes a series of information-gathering steps before issuing an accounting standards update.

Many U.S. and foreign companies...

operate and raise capital in more than one country.

The International Accounting Standards Board (IASB) is...

dedicated to developing a single set of global accounting standards.

International Financial Reporting Standards are...

gaining support around the globe.

The commitment to narrowing differences between U.S. GAAP and international standards has...

influenced many FASB standards.

The SEC Roadmap proposes...

that IFRS be required by U.S. companies by 2014.

Auditors...

express an opinion on the compliance of financial statements with GAAP.

Auditors offer...

credibility to financial statements.

Certified Public Accountants (CPAs) are...

licensed by states to provide audit services.

A principles-based, or objectives-oriented, approach to standard setting stresses...

professional judgment, as opposed to following a list of rules.

Ethics....

deals with the ability to distinguish right from wrong.

The conceptual framework does not prescribe GAAP. It ...

provides an underlying foundation for accounting standards.

FASB: A common goal of the Boards- a goal shared by their constituents-

is for their standards to be clearly based on consistent pinciples. To be consistent, principles must be rooted in fundamental concepts rather than a collection of conventions.

8 Phases of the Joint Conceptual Framework

A. Objective and Qualitative Characteristics
B. Elements and Recognition
C. Measurement
D. Reporting Entity
E. Presentation and Disclosure
F. Framework for a GAAP Hierarchy
G. Applicability to the Not-For-Profit Sector
H. Remaining Issues

The primary objective of financial reporting is....

to provide useful information to capital providers.

To be useful, information...

-must make a difference in the decision process.
-should possess the qualities of relevance and faithful representation.

Faithful representation means...

agreement between a measure and a real-world phenomenon that the measure is suppose to represent.

Accounting information should be...

comparable across different companies and over different time periods.

Information is timely if...

it is available to users before a decision is made.

The costs of providing financial information include...

any possible adverse economic consequences of accounting standards.

Information is cost effective if...

the perceived benefit of increased decision usefulness exceeds the anticipated costs of providing that infomation.

Information is material if...

it has an effect on decisions.

Professional judgment determintes what...

amount of information is material in each situation.

Conservatism is...

a justification for some accounting practices, not a desired qualitative characteristic of financial information.

10 Elements of Financial Statements

1. Assets
2. Liabilities
3. Equity (or net assets)
4. Investments by owners
5. Distributions to owners
6. Comprehensive Income
7. Revenues
8. Expenses
9. Gains
10. Losses

Assets

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

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entitites in the future as a result of ast transactions or events

Equity (or net assets)

Called shareholders' equity or stockholders' equity for a corporation, it is the residual interest in the assets of an entity that remains after deducting its liabilities

Investments by owners

Increses in equity of a particular business enterprise resulting frm transfers to it from other entities of something of value to obtain or increase ownership interests in it

Distribution to owners

Decreases in equity of a particular enterprise resulting from transfers to owners

Comprehensive Income

The change in equity of a business enterprise during a period from transactoins and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

Revenues

Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations

Expenses

Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major central operations

Gains

Increases in equity from peripheral or incidental transactions of an entity

Losses

Represent decreases in equity arising from peripheral or incidental transactions of an entity

4 Requirements for recognition

1. Definition- The item meets the definitio of an element of financial statements.
2. Measurability- The item has a relevant attribute measurable with sufficient reliability.
3. Relevance- The information about it is capable of making a differene in user decisions.
4. Reliability- The information is represntationally faithful, verifiable, and neutral.

The economic entity assumption...

presumes that economic events can be identifieid specifically with an economic entity.

Financial statements of a company presume...

the business is a going cocern.

The periodicity assumption allows...

the life of a company to be divided into aritificial time periods to provide timely information.

The monetary unit assumption states...

that financial statement elements should be measured in terms of the United States dollar.

The historical cost principle states that...

asset and liability measurements should be based on the amount given or received in the exchange transaction.

Historical Cost measurement provides...

relevant cash flow information and also is highly verifiable.

A departure from historical cost valuation...

sometimes is appropriate.

Revenue should be recognized...

when the earnings process is virtually coplete and colleciton is reasonable assured.

Both revenue recognition criteria usually are...

met at the point-of-sale.

Revenue is recognized when...

earned, regardless of when cash is actually received.

Expenses are recognized...

in the same reporting period as the related revenues.

Financial Accounting (def)

provides relevant financial information to various external users.

Managerial Accounting (def)

deals with the concepts and methods used to provide information to an organization's internal users (i.e., its managers)

Financial Reporting (def)

process of providing financial statement information to external users.

Capital Markets (def)

mechanisms that foster the allocation of resources efficiently.

Corporation (def)

the dominant form of business organiation that acquries captial from investors in exchange for ownership interest and from creditors by borrowing.

Secondary Market Transactions (def)

provide for the transfer of stocks and bonds among individuals and institutions.

Rate of Return (def)

(dividends + share price appreciation) / Initial Investment

Cash Basis Accounting (def)

difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers.

Accrual Accounting (def)

measurement of the entity's accomplishmets and resource sacrifices during the period, regardless of when cash is received or paid.

Net Operating Cash Flow (def)

...

Generally Accepted Accounting Principles (def)

set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.

Securities and Exchange Commission (SEC) (def)

responsible for setting accounting and reporting standards for companies whose securities are publicly traded.

Committee on Accounting Procedure (CAP) (def)

the first private sector body that was delegated the task of setting accounting standards.

American Institute of Accountants (AIA) (def)

national organization of professional public accountants.

American Institute of Certified Public Accountants (AICPA) (def)

national organization of professional public accountants.

Accounting Principles Board (APB) (def)

the second private sector body delegated the task of setting accounting standards.

Financial Accounting Standards Board (FASB) (def)

the current private sector body that has been delegated the task of setting accounting standards.

Financial Acccounting Foundation (FAF) (def)

responsible for selecting the members of the FASB and its Advisory Council, ensuring adequate funding of FASB activities, and exercising general oversight of the FASB's activities.

Emerging Issues Task Force (EITF) (def)

responsible for providing more timely responses to emerging financial reporting issues.

Conceptual Framework (def)

...

Government Accounting Standards Board (GASB) (def)

responsible for developig accounting standards for governmental units such as states and cities.

International Accounting Standards Committee (IASC) (def)

umbrella organization formed to develop global accounting standards.

International Accounting Standards Board (IASB) (def)

objectives are to develop a single set of high-quality, understandable global accounting standards, to promote the use of those standards, and to bring about the convergence of national accounting standards and International Accounting Standards.

International Financial Reporting Standards (IFRSs) (def)

developed by the IASB and used by more than 100 countries.

Auditors (def)

independent intermediaries who help ensure that management has appropriately applied GAAP in preparing the company's financial statements.

Certified Public Accountants (CPAs) (def)

licensed individuals who can represent that the financial statements have been audited in accordance with generally accepted accounting standards.

Objectives- Oriented / Principles- Based Accounting (def)

approach to standard setting stresses professional judgment, as opposed to following a list of rules.

Rules- Based Accounting Standards (def)

a list of rules for choosing the appropriate accounting treatment for a transaction.

Ethics (def)

a code or moral system that provides criteria for evaluating right and wrong.

Institute of Management Accountants (IMA) (def)

primary national organization of accountants working in industry and government.

Institute of Internal Auditors (def)

national organization of accountants providing internal auditing services for their own organizaitons.

Conceptual Framework (def)

deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting standards.

Decision Usefulness (def)

the quality of being useful to decision making.

Relevance (def)

one of the primary decision-specific qualities that make accounting information useful; made up of predictive value and/or feedback value.

Faithful Representation (def)

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

Predictive Value/ Confirmatory Value (def)

confirmation of investor expetations about future cash-generating ability.

Complete (def)

...

Neutrality (def)

neutral with respect to parties potentially affected.

Free From Material Error (def)

...

Comparability (def)

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

Consistency (def)

permits valid comparisons between different periods.

Verifiability (def)

implies a consensus among different measurers.

Timeliness (def)

information that is available to users early enough to allow its use in the decision process.

Understandability (def)

users must understand the information within the contet of the decision being made.

Cost Effectiveness (def)

the perceived benefit of incresed decision usefulness exceeds the anticipated cost of providing that information.

Materiality (def)

if a more costly way of providing information is not expected to have a material effect on decisions made by those using the information, the less costly method may be acceptable.

Conservatism (def)

practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.

Recognition (def)

process of admitting information into the basic financial statements.

Measurement (def)

process of associating numerical amounts to the elements.

Going Concern Assumption (def)

in the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.

Periodicity Assumption (def)

allows the life of a company to be divided into artificial time periods to provide timely information.

Fiscal Year (def)

the annual time period used to report to external users.

Historical Costs (def)

original transaction value.

Realization Principle (def)

requires that the earnings process is judged to be complete or virtually complete, and there is reasonable certainty as to the collectibility of the asset to be received (usually cash) before revenue can be recognized.

Point-of-Sale (def)

the goods or services sold to the buyer are delivered (the title is transferred).

Matching Principle (def)

expenses are recognized in the same period as the related revenues.

Full-Disclosure Principle (def)

the financial reports should include any information that could affect the decisions made by external users.

Parenthetical Comments (def)

aka Modifying Comments

Disclosure Notes (def)

additional insights about company operations, accounting principles, contractual agreements, and pending litigation.

Supplemental Financial Statements (def)

reports containing more detailed information than is shown in the primary financial statements.

Revenues (def)

inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major, or central, operations.

Expenses (def)

outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing good, rendering services, or other activities that constitute the entity's ongoing major, or central, operations.

The process of providing financial information to external decision makers is referred to as:

Financial accounting.

Financial statements generally include all of the following except:

Federal income tax return

The primary objectives of financial reporting is to provide information:

Useful in decision making

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