Chapter #1

Question 1

Objective of general purpose financial reporting

Answer 1

To provide financial info 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 2

For capital providers to asses future net cash flow they need what info about the reporting entity

Answer 2

1. liquidity and solvency
2. needs for additional financing
3. likely hood of obtaining financing
4. future cash flow distributions

Question 3

Reporting changes in reporting entities economic resources can help users asses

Answer 3

1. Future cash flows
2. Financial performance, indicating managements abilities

Question 4

Limitations to accounting info

Answer 4

1. Based on estimates, judgments, and models
2. Does not provide all the info
3. Not designed to show the value of the entity, rather helps capitol providers estimate the value

Question 5

Pervasive Criterion

Answer 5

Qualitative characteristics that identify the info that is of most use to existing and potential investors, lenders, and creditors for decision making

Question 6

What are fundamental qualitative characteristics and what are they

Answer 6

2 Core qualities that make accounting information useful

1. Relevance
2. Faithful representation

Question 7

Predictive value

Answer 7

Info that can be used as an input to process employed by users to predict future outcomes

Question 8

Confirmatory value

Answer 8

Info that provides feedback about previous evaluations

*confirms or corrects prior expectations

Question 9

Materiality

Answer 9

Omission or misstatement of an item in a financial report is material if the magnitude is such that it impacts the judgment of a reasonable person relying on the report

*entity specific

Question 10

Relevance

Answer 10

Capable of making a difference in users decision making.

Question 11

Info is relevant if it has

Answer 11

1. Predictive value
2. Confirmatory value
3. Materiality

Question 12

Faithful representation

Answer 12

Events and transactions must faithfully agree with the true nature of what happened

Question 13

Info is faithful if it has

Answer 13

1. Completeness
2. Neutrality
3. Free from error

Question 14

Completeness

Answer 14

Includes all info necessary or users to understand the phenomenon being depicted

Question 15

Neutrality

Answer 15

Without bias

Question 16

Free form error

Answer 16

Does NOT mea accurate in all respects, rather no errors of omission in the description of the phenomenon and process used

Question 17

Info must be what to be useful

Answer 17

Relevant and faithfully represented

Question 18

Enhanced qualitative characteristics

Answer 18

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 19

Comparability

Answer 19

Within: Year to year, ensure trends have meaning - Consistency
Between: Same industry, but one method is not objective

Question 20

Verifiability

Answer 20

Others should obtain the same results

Question 21

Timeliness

Answer 21

Provided to decision makers at a time to influence their decisions

Question 22

Understandability

Answer 22

Reasonably informed users see the significant info - proper classification

Question 23

Historical cost

Answer 23

The amount paid to acquire an asset or incur liability

Included in the recording, but not reporting of PP&E and the initial recording of inventory

Question 24

Amortized cost

Answer 24

Amount originally recognized, then adjust (inc/dec) for things like amortization, depreciation, or principal payment

Depreciable assets are reported at this amount

Question 25

Net realizable value

Answer 25

The amount expected to be collected from customers after deducting uncollectible amounts Used when reporting AR

Question 26

Lower-of-cost-or-net-realizable-value

Answer 26

Estimated selling prices - cost to complete and sell Reporting inventory

Question 27

Par or stated value

Answer 27

Amount assigned per share of equity

Question 28

Face value

Answer 28

Debt: principal amount Receivables: Original amount owed

Question 29

Present value of future cash flows

Answer 29

Discounted amount of expected future cash flows

Question 30

Fair value

Answer 30

Price received to sell an asset or paid to transfer liability

Question 31

Assumptions

Answer 31

Economic entity - not always legal but record can be maintained Monetary unit - measurable money, stable measurement Going concern - will continue indefinitely Periodicity - cover specified time periods

Question 32

Principles

Answer 32

Measurement Revenue recognition Matching/expense recognition Full disclosure

Question 33

Key differences between financial and managerial accounting

Answer 33

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

Question 34

Financial accounting

Answer 34

Identifies, measures, classifies, summarizes, interprets and communicates finical info about economic entities to investors, lenders, and creditors so that they can make economic decisions, specifically resource allocation or capital allocation decisions

Question 35

GAAP

Answer 35

Generally accepted accounting principles (methods). Accrual accounting: recognize rev when earned and expense when incurred Followed by all public companies or companies that require an audit This does not include matching, consistency, or full disclosure

Question 36

SEC

Answer 36

Gov agency overseeing the selling of stocks and bonds to the public, regulates publicly held companies that take place in the public market, given the power by congress, but delegated that power to the accounting profession

Question 37

Sarbanes-Oxley Act (SOX)

Answer 37

Created the PCAOB, which sets auditing standards for public companies