exam 1

Question 1

Financial accounting-

Answer 1

Process of identifying, measuring, and communicating financial information about an economic entity to various user groups within the legal, economic, political, and social environment

Question 2

Economic entity

Answer 2

organization or a unit with activities that are separate from those of its owners and other entities

Question 2

Two categories of financial information

Answer 2

1) governed by rules set forth by accounting standard-setting bodies
Ex. financial statements and those footnotes
2) not governed by accounting standard-setting bodies
Ex. Letter to the owners, management’s discussion and analysis, auditors’ report, management report

Question 3

Financial accounting standards board’s 7 step standard-setting process:

Answer 3

1. Identification of an issue
2. Decision to pursue
3. Public meetings
4. Exposure draft
5. Public roundtables
6. Deliberation
7. Publication of the final standard

Question 4

Rules-based standard

Answer 4

contains specific, prescriptive procedures rather than relying on consistent theoretical framework

Question 5

Principles-based standard-

Answer 5

relies on theories, concepts, and principles of accounting that are linked to a well-developed theoretical framework

Question 6

Conceptual framework

Answer 6

sets forth theory, concepts, and principles to ensure that accounting standards are coherent and uniform
Purpose: to assist standard setters in developing and revising accounting standards
It doesn’t override accounting standards

Question 7

conceptual framework components:

Answer 7

Objective of financial reporting
Characteristics associated with high-quality financial information
Elements of the financial reporting system
Recognition and measurement criteria
Notes to the financial statements

Question 8

Qualitative Characteristics of financial reporting

Answer 8

fundamental and enhancing

Question 9

Fundamental charactistics

Answer 9

Basic characteristics that distinguish useful financial information from information that isn’t useful
- Relevance and faithful representation

Question 10

Relevant

Answer 10

capable of making a difference in decision making by exhibiting the following attributes:
Predictive value,
Confirmatory value,
Materiality

Question 11

Predictive value

Answer 11

information that can be used as an input into processes that help forecast future outcomes

Question 12

Confirmatory value

Answer 12

provides feedback about prior evaluations

Question 13

Materiality

Answer 13

information that would affect financial statement users’ decision if it were reported inaccurately or omitted

Question 14

Faithful representation

Answer 14

whether financial information depicts the substance of an economic event in a manner that is: Complete, Neutral, Free from error

Question 15

Complete

Answer 15

includes all information necessary for the financial statement user to understand the under

Question 16

Neutral

Answer 16

information is free from bias in both the selection and presentation of financial data

Question 17

Free from error

Answer 17

there are no mistakes or omissions in the description of an event or in the process used to produce the financial information

Question 18

4 enhancing characteristics

Answer 18

comparability, verifiability, timeliness, understandability

Question 19

comparability

Answer 19

financial statement users should be able to identify and understand similarities and differences among several entities

Question 20

verifiability

Answer 20

a group of reasonably informed financial statement users should be able to reach a consensus decision that reported information is a faithful

Question 21

timeliness

Answer 21

timely information- available to financial statement users early enough to make a difference in decision making

Question 22

understandability

Answer 22

information is understandable to reasonably informed financial statement users when financial statements classify, characterize, and clearly present all information

Question 23

Point in time elements

Answer 23

resources, claims to resources, or interests in resources as of a specific point in time and appear on the balance sheet
3 elements = assets, liabilities, equity

Question 23

Elements of Financial Reporting

Answer 23

Point in time elements, Period of time elements

Question 24

Period of time elements

Answer 24

the results of events and circumstances that affect an entity during a period of time and appear on the income statement, statement of comprehensive income, statement of shareholders’ equity

Question 25

7 period of time elements

Answer 25

Investments by owners Distributions to owners Revenues Gains Expenses Losses comprehensive income

Question 26

General recognition principles

Answer 26

Cost-benefit constraint- requires that the expected benefits from recognition exceed the costs of recognition Materiality threshold- requires that an item be recognized in the financial statements if its omission or misstatement would significantly influence the judgment of a reasonably informed statement user

Question 27

Expense recognition principles

Answer 27

Used to determine the period when a company reports an expense on the income statement Expenses are recognized when: The entity’s economic benefits are consumed in the process of producing or delivering goods or rendering services An asset has experienced a reduced (or eliminated) future benefit or when a liability has been incurred or increased without an associated economic benefit

Question 27

Revenue recognition principle

Answer 27

A company should recognize revenue when it is realized or realizable and earned Item is realized or realizable when a company exchanges a good or service for cash or claims to cash Revenues are considered earned when the seller has accomplished what it must do to be entitled to the revenues

Question 28

5 measurement bases

Answer 28

1) historical cost 2) current cost 3) current market value 4) net realizable value 5) present value of future cash flows

Question 29

historical cost-

Answer 29

amount of cash that the firm paid to acquire the asset May be adjusted for depreciation or amortization Arms-length transaction- a buyer and seller who are independent and unrelated parties

Question 29

current cost-

Answer 29

amount of cash that would be required if the firm acquired the asset currently

Question 29

current market value-

Answer 29

amount of cash that the firm would receive by selling the asset in an orderly liquidation

Question 30

net realizable value

Answer 30

amount of cash to be received in exchange for an asset, less the direct costs of disposal

Question 31

present value of future cash flows

Answer 31

results from discounting net cash flows the firm expects to receive on the exchange of an asset or to pay to liquidate a liability

Question 32

Cash basis accounting-

Answer 32

firms recognize revenues only when they receive cash and recognize expenses only when they pay cash

Question 33

Accrual basis accounting-

Answer 33

firms recognize revenues when control of a good or service passes to the customer and expenses when incurred

Question 34

Assumptions in Financial Reporting

Answer 34

Going concern concept, Business or economic entity concept, Monetary unit assumption, Periodicity assumption

Question 35

Going concern concept-

Answer 35

he entity will continue to operate indefinitely (not go into liquidation in the near future)

Question 36

Business or economic entity concept-

Answer 36

owners and the business affairs are separated and reported separately

Question 37

Monetary unit assumption-

Answer 37

all items are valued according to an accepted currency and assumed that the currency remains stable over time in terms of purchasing power

Question 38

Periodicity assumption-

Answer 38

entity is to divide its life into artificial time periods for the purpose of providing periodic reports on its economic activities