51 terms

Accounting Ch. 2

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What are the two fundamental qualities?
1. Relevance
2. Faithful Representation
What are the three major characteristics of relevant information?
1. Predictive Value
2. Confirmatory Value
3. Materiality
What are the three major characteristics of faithful representation?
1. Completeness
2. Neutrality
3. Free from error
What are the four enhancing qualities?
1. Comparability
2. Verifiability
3. Timeliness
4. Understandibility
What are the ten basic elements of Financial Statements?
1. Assets
2. Liabilities
3. Equity
4. Investment by owners
5. Distributions to owners
6. Comprehensive income
7. Revenues
8. Expenses
9. Gains
10. Losses
What are the four basic assumptions?
1. Economic entity
2. Going concern
3. Monetary Unit
4. Time Period
What are the four basic principles?
1. Measurement
2. Revenue Recognition
3. Expense Recognition
4. Full Disclosure Principle
What are the three basic constraints?
1. Cost-Benefit
2. Industry Practice
3. Materiality
What are the two attributes for Measurement principle?
1. Historical Cost
2. Fair Value
Fundamental Qualities
The main qualities that accounting information must have in order to be useful.
Relevance
The information has to do with the decision at hand.
Predictive Value
The information is useful in forecasting future outcomes.
Confirmatory Value
The information allows users to confirm or correct prior expectations.
Materiality
The information must make a difference in a user's decision.
Faithful Representation
The information represents what it is supposed to represent.
Completeness
All information that is necessary for faithful representation is provided.
Neutrality
The information is unbiased.
Free From Error
The information gives an accurate representation of a financial item.
Enhancing Qualities
Additional qualities that enhance the usefulness of accounting information.
Comparability (Consistency)
Information can be compared for different companies. (Consistency over time for the same company)
Verifiability
Occurs when independent measures, using the same methods, provide similar results.
Timeliness
Having information available to users when needed to make a decision.
Understandability
Allows reasonably informed users to understand the information.
Assets
Probable future economic benefits controlled by the entity.
Liabilities
Probable future sacrifices of economic benefits.
Equity
Residual interests of the owners.
Investment by Owners
Increase in net assets resulting from transfers by owners.
Distributions to Owners
Decreases in net assets resulting from transactions other than those with owners.
Comprehensive Income
Change in net assets caused by all transactions other than those with owners.
Revenues
Inflows of resources resulting from the delivery of goods or services.
Expenses
Outflows of resources resulting from the delivery of goods or services.
Gains
Increases in net assets resulting from peripheral transactions other than revenues or investment by owners.
Losses
Decreases in net assets resulting from peripheral transactions other than expenses or distributions to owner.
Economic Entity Assumption
Accounting is done for specific business entities.
Going Concern Assumption
Unless otherwise indicated, it is assumed that the entity will continue to operate.
Monetary Unit Assumption
The monetary unit (for example the "dollar") is used to express economic activity.
Time Period Assumption
Accounting is done for specific time periods.
Measurement Principle
Determining the dollar amount of a recorded transaction.
Historical Cost
Companies account for and report many assets and liabilities on the basis of acquisition price.
Fair Value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Revenue Recognition Principle
Revenue is generally recognized when the company satisfies its performance obligation. (When --> Recognition)
Step 1 of the Revenue Recognition Principle
Identify the contract with the customer.
Step 2 of the Revenue Recognition Principle
Identify the separate performance obligations in the contract.
Step 3 of the Revenue Recognition Principle
Determine the transaction price.
Step 4 of the Revenue Recognition Principle
Allocate the transaction price to the separate performance obligations.
Step 5 of the Revenue Recognition Principle
Recognize revenue in the accounting period when each performance obligation is satisfied.
Expense Recognition Principle
Expenses are recorded in the same period as the related revenue or the related benefit.
Full Disclosure Principle
All important information should be disclosed. (There is a tradeoff between sufficient detail and sufficient summarization.)
Cost-Benefit Constraint
The cost of providing information should not exceed its usefulness.
Industry Practice
Industry practice sometimes indicated that a departure from GAAP may be appropriate.
Materiiality
Sometimes, convenience may allow for a departure from GAAP if the amount is not material.
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