4) The objective of financial reporting is to provide financial information about the company to current and future investors, lenders and creditors.
6) Having a common set of standards for financial reporting is very important because otherwise each company would have its own way of recording its data. Then it would be complicated for accountants to compare two companies or to see how each got their figures.
10) The APB was created to advance the written expression of accounting principles determine appropriate practices narrow the areas of inconsistency in practice.
14) FASB preliminary views are drafts that gather public opinion and research. Once the research is gathered, exposure drafts are created. The exposure drafts are reviewed again before they officially become FASB statements.
16) Code 203 prohibits a member of AICPA from expressing their opinion on financial statements.
20) The advantages of having a Codification of generally accepted accounting principles include the reduction in time having to decipher existing GAAP and also the more concise and easier language used to help make GAAP mainstream for accountants.
25) The gap is the difference between what accounts can do and what they think they can do. The profession is creating standards in order to close the gap and keep standards.
26) The Sarbanes-Oxley Act of 2002 or SOX was passed in response to the publicized corporation scandals of Enron Corporation and WorldCom. The legislation requires companies to have effective financial controls. CEOs and CFOs must personally sign off on their company’s financial statements so that they are now subject to criminal violations, if any. Each company must disclose their Code of Ethics and why they have one, or why not if they do not. Also, employees who blow the whistle on their employer are protected under this Act.
27) In the accounting profession there are some difficulties in reporting. For example, the measurement for nonfinancial performance levels, like customer satisfaction or assets we cannot measure, like image and branding or market dominance are some issues. We also see that financial statements do not look into the future to see how well a company can do. A way to fix that along with the issue of timeliness could be to report more often such as monthly or quarterly so we can see operations on a smaller scale. With this we can fix larger issues sooner rather than noticing it at the end of the year and see unexpected numbers. Lastly, even though accountants prepare the financial statements, they need to be readable and
CA 1-4
a) Financial accounting reports at the end of a given period on a broader scale than managerial accounting, which is specific and can be produced at any time. Managerial accounting is internal, optional, and used for decision-making whereas financial accounting is mandatory, regulated by GAAP or IFRS, and is used to communicate the financial position of a company.
b) The most frequently provided financial statements are the Balance Sheet, which includes assets, liabilities, and equity, and the Profit and Loss or Income Statement that shows revenues and expenses for a given period.
c) Financial reports help to show financial effects of transactions. This includes bank statements or loan amortizations. A financial statement is also a financial report, but more formal. These show the financial position of a company at the given time.
CA-12
a- AICPA- American Institute for Public Accountants
b- CAP- Committee on Accounting Procedure
c- EITF- Emerging Issues Task Force
d- APB- Accounting Principles Board
e- FAF- Financial Accounting Foundation
f- FASAC- Financial Accounting Standards Advisory Council
g- GAAP- Generally Accepted Accounting Principles
h- CPA- certified public accountant
i- FASB- Financial Accounting Standards Board
j- SEC- Securities and Exchange Commission
K- IASB- International Accounting Standards Board
Chapter 2
1) It establishes a set of rules in financial reporting. It important because it sets hundreds of standards.
2) The main objective is to provide financial information that is useful or important to stockholders or potential investors.
3) Qualitative Characteristic means distinguishing better information from inferior information.
4) Relevance- making sure the information is pertaining to the company and all important
information is reported. Faithful reporting- making sure all reporting is accurate and truthful.
5) it is omitted or misstated information that would influence decisions. This is important
because if information is not reported truthfully then people could wrongly invest in a
company and lose a lot of money.
12) The four basic assumptions that underlie the structure of financial accounting are economic entity, going concern, monetary unit, and periodicity. The going concern assumption states that the company will last. The monetary unit assumption means that money provides a basis for accounting measurement because it equals economic activity. The periodicity assumption states that a company can divide its economic activities into time periods like yearly, quarterly, or monthly. Lastly, the economic entity assumption implies that economic activity can be shown with accountability, separates from owners or other business units.
16) Fair value means the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, making it a market-based measure.
19) The revenue recognition principle states that companies record revenue when they perform an obligation. The revenue is only recorded in the period the obligation is performed, not paid for.
20) A performance obligation is an agreement for a company to provide goods or services for a price. This helps to recognize revenue correctly because revenue is earned when a service or good is provided, not when cash is received. Otherwise, a company could earn revenue without doing anything but collect cash.
21) The five steps to recognizing revenue are 1. identify the contract with the customer, 2. identify the separate performance obligations in the contract, 3. determine the transaction price, 4. allocate the transaction price to the separate performance obligations, and 5. recognize revenue when each performance obligation is satisfied.
25) The four characteristics an item must have to be recognized in the financial statements are definitions, measurability, relevance, and reliability. Definitions relates to the item needing to meet the definition of an element of a financial statement. Measurability means that the item has measurable attributions. Relevance relates to the item’s ability to make a difference in decision-making for the reporting entity. Reliability implies the information is faithful, neutral, and verifiable.
26)
(a) In order to be recognized in the main body of financial statements, an item must meet the definition of an element. The item must be measured, recorded in the books, and passed through the double-entry system of accounting.
(b) Information provided in the notes to the financial statements explains the items presented in the main body of the statements and is essential to understanding the performance and position of the company. Information in the notes does not have to be quantifiable or considered as elements of financial statements.
(c) Supplementary information includes items that present a different perspective from the financial statements. Management includes their take on the financials and any explanations they have.
CA 2-2
(a) The FASB’s conceptual framework can provide many benefits. These include increased knowledge of financial statements and confidence in them, the ability for accountants to solve emerging problems, and the establishment of more consistent practices. Conceptual frameworks are used to greatly help accountants by providing a basis for accounting rules.
(b) The most important quality for accounting information according to the conceptual framework is usefulness. Usefulness relates to whether a piece of information is material in making decisions or not. Useful information can be relevant, verifiable, understandable, and consistent. All of these qualities contribute to how much of an effect an item has on financial statements and what it says about the business.
(c) Three key qualities for accounting information from the Statement of Financial Accounting Concepts No. 8 are faithful representation, verifiability, and understandability. Faithful representation insists the information in financial statements is true and telling of what occurred in the business. This is important because it shows the true events that happened financially, making the statements reliable for decision-making. Verifiability occurs when two different measures of something result in similar findings. This is important because verifying that inventory is correct by two different methods can only confirm that the reported inventory is true, and that current practices are reliable. Understandability is greatly important because many decision-makers in a company are not accountants, nor can they always decipher the information on a financial statement without aid. If the statements are presented in a manner that is easy to look at and follow, the users can easily see the usefulness and purpose of the reported information.
References:
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, (16th ed.).
Wiley Global Edition.