1 Conceptual Framework

Question 1

Name the 4 Enhancing Qualitative Characteristics

Answer 1

1. Comparability - between sets of info
2. Verifiability - by different users
3. Timeliness - in time to make a difference
4. Understandability

CUT like a V

Question 2

What are the 4 accounting assumptions?

Answer 2

1. Entity Assumption – each business org is a separate entity. Is separate from owners. Owners own shares, don’t own entity’s assets
2. Going-Concern Assumption (Continuity Assumption) – business assumed to have an indefinite life, beyond life of owners
3. Unit-of-Measure Assumption – measure using monetary unit of country where operate
4. Time Period Assumption – indefinite life of business broken into smaller time frames (year and shorter) for evaluation/reporting

Question 3

Who do the objectives of financial reporting focus on?

Answer 3

The USERS of the financial information (the financial statements)

Question 4

What is the objective of financial reporting?

Answer 4

• objective of general-purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers.
• Useful information includes: -

1. amount, timing, and uncertainty of cash flows; -
2. Ability to generate future net cash inflows; -
3. economic resources (assets) and claims to those resources (liabilities) that provides insight into financial strengths and weaknesses, and its liquidity and solvency; -
4. The effectiveness with which management has met its stewardship responsibilities; -
5. effect of transactions and other events that change an entity’s economic resources and the claims to those resources.

Question 5

What do a full set of financial statements include?

Answer 5

1. Balance Sheet - Financial Position at End of Year
2. Income Statement - Earnings for Year
3. Statement of Cash Flows - Cash Flows during Year
4. Statement of Changes in Owners’ Equity - Investments by and Distributions to Owners during year
5. Statement of Comprehensive Income (with IS or separate)

Question 6

What are the ten Elements of Financial Statements?

Answer 6

1. Assets – probable future benefit
2. Liabilities – probable future sacricfieces of economic benefit
3. Equity – residual interest in firm’s assets = net assets
4. Investments by Owners – increases in net assets of an entity from transfers by owners
5. Distributions to Owners – decreases in Net assets of entity to owners
6. Comprehensive Income – accounting income plus certain holding gains/losses
7. Revenues – increases in A/settle L
8. Expenses – decreases in A / incr liabilitiesprovide benefit to firm
9. Gains – increases in equity or net assets, from
   
   1. Gain contingencies are not recognized
10. Losses – decreases in equity or net assets, from no benefit provided ot firm

Question 7

What is the pervasive constraint that overrides the usefulness of information?

Answer 7

Cost vs. Benefit (cost to present shouldn’t exceed benefit)

Question 8

What is Comprehensive Income?

Answer 8

All changes in equity (net assets) other than “owner” sources (investments and distributions)

Question 9

What is meant by Matching?

Answer 9

Recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized

Question 10

What is meant by Allocation?

Answer 10

Spreading a cost over more than one period (i.e. depreciation)

Question 11

What is meant by Recognition?

Answer 11

Booking an item in the financial statements

Question 12

What is meant by Realization?

Answer 12

Converting non-cash resources into cash or a claim to cash

Question 13

When does realization occur?

Answer 13

Goods or services have been provided (seller performance is substantially complete); Collectibility of cash is assured - revenue is realizable (buyer performance is complete or assured); Expenses of providing goods and services can be determined. This criterion becomes important when service or production is provided over an extended period of time.

Question 14

What are the Qualitative Characteristics of Financial Reporting?

Answer 14

RELEVANCE - makes a difference to the user Includes:

1. Predictive Value - Future Trends
2. Confirming Value - Past Predictions
3. Materiality - Could affect User Decisions

FAITHFUL REPRESENTATION

1. Completeness - Nothing omitted that would impact the decision-making of a user
2. Neutrality - Information is presented is without bias
3. Free from Error - No material errors or omissions

Question 15

How does Conservatism affect the recording of accounting transactions?

Answer 15

When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company least optimistic

Question 16

What is an accrual?

Answer 16

• Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
• Economic event before cash activity

Question 17

What is a deferral?

Answer 17

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense) cash activity before economic event

Question 18

What was the Wheat Committee responsible for?

Answer 18

The formation of FASB 1971 - prior was AICPA

Question 19

What steps does FASB take to issue a new accounting standard?

Answer 19

1. Considers whether to add a project to its agenda (with FAF)
2. Conducts research on the topic and issues a Discussion Memorandum detailing the issues surrounding the topic;
3. Holds public hearings on the topic;
4. Evaluates the research and comments from interested parties and issues an Exposure Draft - the initial accounting standard;
5. Solicits additional comments, modifies the Exposure Draft if needed;
6. Finalizes the new accounting guidance and approves with a majority vote
7. Issues an Accounting Standards Update (ASU).

Question 20

Define Revenue

Answer 20

Revenue refers to increases in assets or the extinguishment of liabilities stemming from the delivery of goods or the provision of services -

Question 21

Waht is an investment by owners?

Answer 21

Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest

Question 22

Who authorized the Financial Accounting Standards Board to establish accounting standards in the US?

Answer 22

Securities and Exchange Commission (SEC)

Question 23

What type of companies are required to submit their financial statements to the SEC?

Answer 23

Publicly-held entities

Question 24

When do you recognize a financial statement element and how do you measure it?

Answer 24

a) It meets the DEFINITION of an element (asset, liability) b) The element is capable of being MEASURED in MONETARY TERMS c) The item is RELEVANT and FAITHFULLY REPRESENTED (it’s useful)

Question 25

In present value accounting measurements what is the difference between the **_Traditional_** and **_Expected_** approaches?

Answer 25

Used to measure cash flows: - **_Traditional_** approach uses the *_single most likely_* cash flow amounts (risk/uncertainty: included in interest rate) * uncertainty/risk captured by risk premium interest rate **_Expected_** Approach uses the *_weighted average of the different_* possibilities (risk free rate, uncertainty in: timing and amount of possible cash flows) * uncertainty captured by: * timing: weighted estimate of years * amount: weighted estimate of amount of cash flow

Question 26

Under accrual accounting, when are revenue or gains recognized?

Answer 26

When they are earned (earnings process is complete) and realizable (cash or a claim to cash has been received)

Question 27

What are losses?

Answer 27

Decreases in equity as a result of transactions that are not part of the company's main or central operations and that do not result from expenses or distributions made to owners of the entity.

Question 28

Can an entity's revenue result from a decrease in a liability from primary operations?

Answer 28

Yes (think unearned revenue)

Question 29

Relative to International Financial Reporting Standards, is U.S. GAAP more principle-based or rule-based?

Answer 29

Rule-based

Question 30

What organization was created by the FASB and charged with evaluating existing GAAP to determine if there are requirements, including disclosures, from which nonpublic entities should be exempt; or simplified accounting approaches that may be applied to transactions or financial statements that will reduce the costs of reporting without diminishing the quality/value of information?

Answer 30

Private Company Council (PCC)

Question 31

When are Revenues recognized?

Answer 31

Revenues are recognized when EARNED - the earnings process (the provision of goods or services to the customer) is complete - and REALIZABLE - an exchange has taken place, typically cash collected, but it may include a promise to pay in the future (ala a receivable).

Question 32

What is the primary objective of accounting?

Answer 32

To measure income

Question 33

What are the 2 Levels of Authority within the FASB codification?

Answer 33

Authoritative 1. Accounting stds codification 2. SEC Non-Authoritative

Question 34

What are the Secondary Constraints of Financial Reporting?

Answer 34

Consistency - Year vs. Year Comparability - Company vs. Company

Question 35

What is an accrued liability?

Answer 35

Expense that has been incurred but not paid Example: rents payable

Question 36

What is a gain?

Answer 36

Increase in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Question 37

What is an operating cycle?

Answer 37

Average time it takes to turn materials or services into Cash

Question 38

What are accrued expenses?

Answer 38

Those incurred but not paid. Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale) Period costs - Expenses amortized and recognized with the passage of time

Question 39

GAAP rules address

Answer 39

Recognition Measurement Disclosure

Question 40

4 FASB framework assumptions 4 principles

Answer 40

ASSUMPTION entity assumption going concern unit of measure time period assumption PRINCIPLES measurement revenue recognition expense recognition (matching) full disclosure (adequate disclosure)

Question 41

6 SUBSECTION of Conceptual Framework

Answer 41

1. Objective of financial reporting 2. Qualitative characteristics of accounting information 3. Accounting assumptions 4. Basic accounting principles 5. Cost constraint 6. Elements of financial statements

Question 42

FS - Recognition/Measurement Criteria (4)

Answer 42

1. Definition – defin of FS element is met 2. Measurability – there is an attribute to be measured and cost used 3. Relevance – info in FS is capable of influencing decisions; timely, predictive ability, feedback value, material 4. Faithful representation: info is complete, neutral, free from material error