Accounting Entity
A corporation is considered a ‘living’ enterprise i.e., a ‘fictional’ being.
Going Concern
A corporation is assumed to remain in existence for the foreseeable future.
Measurement
Financial statements only show measurable activities of a company. Financial statements must be reported in the national monetary unit (U.S. $ for U.S. companies).
Periodicity
A company’s continuous life can be divided into measured periods of time for which financial statements are prepared. U.S. companies are required to file quarterly (10-Q) and annual (10-K) reports.
Historical Cost
An accounting measurement basis where an asset is recorded at the amount paid to acquire it (including costs necessary to put it into use).
For depreciable assets, is subsequently carried at cost minus accumulated depreciation.
Changes in market value generally do not change the recorded amount under GAAP.
Example: $100,000 original purcahse price of Century bag stuffer machine. The machine depricates in value by $3,000/year. It has been 5 years. The balance sheet will show a book value $85,000.
Revenue Recognition
Revenues must be recorded when earned and measurable.
Matching Principle
Costs of a product must be recorded during the same period as revenue from selling it.
Disclosure
GAAP requires certain note disclosures to explain the financial statements. Companies provide disclosures that are required and material, scaling the level of detail from minimal (less material) to extensive (highly material / high risk).
Example: A company has a bank loan, the notes disclose key debt terms: interest rate, maturity date, collateral, and major covenants.
Estimates & Judgments
Certain measurements cannot be performed completely accurately and must therefore utilize conservative estimates and judgments.
Example of Estimates - Projecting how long a piece of equipment will last.
Example of Judgements - Deciding on the methods for inventory costing (FIFO or standard cost)
Materiality
An item is material if its size or nature (individually or in aggregate) could reasonably be expected to change or influence a user’s decision.
Example - A $100,000 error in revenue recognition for the same company would be material because it significantly changes profitability and could mislead investors
Consistency
For each company, preparation of financial statements must utilize measurement techniques and assumptions which are consistent from one reporting period to another.
Exmaple: A company values inventory using FIFO this year. Under consistency, it should keep using FIFO next year. If it switches to weighted-average (or another method), it must justify the change, apply it properly (often retrospectively), and disclose the change and its impact so financial statement users can still compare periods.
Conservatism
A downward measurement bias is used in the preparation of financial statements. Assets and revenues should not be overstated while liabilities and expenses should not be understated.
IFRS
Accounting standards followed by most developed countries
GAAP
guidelines for measuring & presenting financial information in a fair, consistent & straightforward basis
FASB
An organization that creates and updates most of U.S GAAP for non-governmental entities. FASB issues the financial accounting standards.
Form 10-K
An overview of a business, its finances as well as financial statements & regulations governing them. This is reported at the 60-90 days after the fiscal year ends. Audited by an independent firm.
Form 10-Q
Financial statements & non-financial statements that are reported within 40-45 days of the first three quarters.
Form 8-K
Filing done when a company undergoes or announces a materially significant event. Example - If Apple was to aquire Nvidia, that would be seen as material & a current report ath would be filled with the SEC that stakeholders would need to know about in real time.
Form 14-A
A document a public company files with the SEC to inform shareholders about matters they are being asked to vote on and to provide the information needed to make an informed decision. Example - reelecting the leader of the company or a new merger.
ASC
The filing system where the rules of (GAAP) are published.
Arranged by Topics-> Subtopics -> Sections -> Paragraphs.
Example: ASC 606 = Revenue from Contracts with Customers.
You’ll see references like ASC 606-10-25-1 (Topic 606, Subtopic 10, Section 25 “Recognition,” paragraph 1)
