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Unit 4: Generally Accepted Accounting Principles (GAAP)
Terms in this set (26)
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles are principles, rules, and standards to be followed in preparing and reporting financial statements which are the primary source of information in financial analysis.
GAAP Assumptions (4)
1. Separate Entity
2. Stable Monetary Unit
3. Fixed Time period
4. Going Concern
Separate Entity Assumption
The Separate Entity Assumption provides that the financials of a business be kept separate from the owner's personal finances
Stable Monetary Unit Assumption
Items must be recorded in their monetary value and a stable currency
Fixed Time Period Assumption
Fixed Time Period Assumption provides that financial statements can be prepared in different but specific time periods, such as monthly, quarterly or annually.
Going Concern Assumption
a business is assumed to operate for a long time. if liquidation is imminent, a company may cease to be a going concern.
GAAP Principles (4)
1. Full disclosure
2. Historical Cost
4. Revenue/Expense Recognition
Full disclosure principle
The Full disclosure principle asserts that all relevant financial information must be disclosed
Historical Cost principle
assets and expenses are reported in their original or acquisition cost.
Revenue/Expense Recognition principle
revenue is recognized when earned. An expense is recognized when it actually contributed to revenue.
the matching principle requires that expenses incurred be matched with the corresponding revenues earned.
GAAP Constraints (4)
4. industry practices
the more conservative method applies when more than one way of reporting financial information can be used (results in a lesser amount of income or assets)
costs incurred in maintaining an account system must not exceed the benefits derived from it (allows companies to expect benefits that exceed incurred costs)
GAAP may be avoided if such avoidance has no material effect on the interpretation of financial data
industry practices contraint
in financial reporting, widely used industry practices may be applied in conjunction with GAAP (if no specific GAAP applies)
Public companies are require to have their financials audited by a public accounting firm (T/F) ?
When does a public accounting firm prepare an auditor's report? (3)
a public accounting firm prepares an auditors report following an audit, a review or a compilation.
a comprehensive examination of a co.'s financial statements
a review only provides limited evaluation of a co.'s financial statements
unlike an audit and review, a compilation does not involve any level of assessment of a company's financial statements.
Qualified auditor's opinion v. unqualified auditor's opinion
unqualified - the auditor accepts the maximum degree of responsibility for thoroughly auditing all the financials and finding them in good order
qualified - the auditor accepts the maximum degree of responsibility for thoroughly auditing all the financials except for the items explained in the qualification
a qualified opinion can be either (2)
a qualified opinion can be:
- an adverse opinion (the financial statements did not materially comply with the GAAP)
- a disclaimer (the auditor is unable to express an opinion and does not accept any responsibility for the reliability of the financials)
2 types of unaudited financial statements
1. review - the financials were reviewed and the auditor performed limited inquiry & analytical procedures
2. compilation - the financials were prepared and compiled but does not include any review or verification procedures (the CPA assumes no responsibility for accuracy)
When is a Review usually conducted ?
1. quarter end financials statements of public companies
2. some private companies
When is only an audit or compilation usually done?
for small private companies
Cars, boats, motorcycles that have been paid for and are owned.
T/F) A hockey stick pattern indicates that a business is using the bad debt account to cook the books
Type of loan used for large purchases such as a house or car with fixed monthly payments that will result in the item being paid off in full at the end of the term
When using the direct method, why is cash received from customers greater than sales revenue on the income statement when accounts receivable decreases?
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