Chapter 01: Basic knowledge

Question 1

Financial accounting characteristics

Answer 1

Identifies, measures, classifies, summarizes, interprets, and communicates financial information about economic entities to investors, lenders, and other creditors, so they can make economic decisions, specifically “resource allocation” or “capitol allocation” decisions”

Question 2

Key differences between financial/ managerial accounting

Answer 2

Financial: External, Regulated, Past focused
Managerial: Internal, Unregulated, Future-focused

Question 3

Explain SEC Reporting

Answer 3

Reporting information to the SEC based on the rules and guidelines of the Commission.

Question 4

Who must follow the SEC

Answer 4

1. Public entities
2. Entities that issue financial instruments in public markets

Question 5

What is the general purpose of Financial reporting

Answer 5

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

Question 6

What does it mean when we say the financial statements are general-purpose purpose

Answer 6

They are not intended to satisfy the needs of all users, especially those users who are in a specific, unique relationship with the reporting entity.

Question 7

What are potential users also interested in when given a financial statement

Answer 7

1. The company’s ability to generate future cash flows
2. management’s ability to efficiently and effectively use the economic resources of the entity

Question 8

What are the auditors 5 opinion types

Answer 8

1. Unmodified- Clean
2. Unmodified opinion with emphasis -of -matter- Notes on something
3. Qualified opinion-Something stood out but should still pass
4. Adverse opinion-Does not pass
5. Disclaimer opinion- Not enough information

Question 9

What are the 5 major financial statements

Answer 9

1. Income Statement
2. Statement of Comprehensive Income
   3.. Statement of retained Earnings
3. Balance Sheet
4. Statement of Cash Flows

Question 10

Which 2 financial statements may be combined as a single statement

Answer 10

Income statement and Statement of Comprehensive Income
= Statement of Income and Comprhensive income

Question 11

Generally Accepted Accoutning Principled

Answer 11

The set rules, guidelines, and procedures companies must follow within the US whne preparing financial statements

Question 12

What is GAAP designed to ensure

Answer 12

Consistency, transparency, and comparability, in financial reporting across different entities

Question 13

Examples of GAAP methods include

Answer 13

LIFO, Straigt-line depreciation, and allowance method of accounting for bad debts

Question 14

Examples of NON GAAP methods include

Answer 14

Full-disclosure, matching, consistency

Question 15

GAAP is accrual accounting rather than cash accounting which means what

Answer 15

Revenues are recorded when earned (not when cash is recieved) and expenses are recorded when incurrred (not when cash is paid)

Question 16

Who must follow GAAP

Answer 16

1. Public companies
2. Companies that require an audit

Question 17

What is the Securities and Exchange Commission (SEC)

Answer 17

A governmental agancy overseeing the selling of stock and bonds to the public.

Question 18

What does the SEC do

Answer 18

Regualtes publicly help entities and comapnies that issue financial instruments in public markets

Question 19

Who gave the SEC power

Answer 19

Congress gave the SEC the power to set accoutning rules/standards for all American comapnies, but in 1938 it delegated that authoirty ot the accouting profession

Question 20

What is the American Institute of Certified Public Accountants (AICPA)

Answer 20

An organization composed of practicing CPA’s

Question 21

What does the AICPA do

Answer 21

Offers leadership and advice on proper accoutning methodologies in the early 1900’s, does not set accounting standards

Question 22

What is the Financial Accounting Standards Board (FASB)

Answer 22

An independent organization established to create and update accounting rules to ensure financial statements are transparent, consistent, and useful for decision making

Question 23

The FASB operates under whos supervision

Answer 23

1. Financial Accouting Foundation (FAF)
2. Financial Accounting Standards Advisory Council (FASAC)

Question 24

What does the FAF do

Answer 24

Appoints members of the FASB and the FASAC

Question 25

What does the FASAC do

Answer 25

1. Consults with FASB on major topics and policy issues 2. Assits with selection and organization of task force

Question 26

What are the FASB pronouncements

Answer 26

1. Statement of Financial Concepts (SFAC) 2. Accoutning Standards Updates (ASU)

Question 27

What is the SFAC

Answer 27

the conceptual framework of accounting and are the concepts which FASB should use when it writes new financial reporting standards

Question 28

Whst is the ASU

Answer 28

Outlines the appropriate way of accoutning for a particular situation or event - this is considered a pirmary source of GAAP

Question 29

Why is ASU considred a primary source of GAAP

Answer 29

once it is approved, its guidance will be inserted into the FASB Codefication

Question 30

The Due Process (development of the ASU)

Answer 30

1. Board recieves request/recommendation 2. Invitation to comment 3. Discussion paper 4. Preliminary Views 5. Exposure draft 6. Final ASU Issued