Chapter 1 Terms
Financial accounting provides information that enables users to evaluate economic entities and make efficient _______________ decisions based on the risks and returns of a particular investment.
resource allocation
Conceptual Framework's Role in Standard Setting
Providing theoretical practices for standard setters to create financial reporting standards
is "an attitude that includes a questioning mind and a critical assessment of audit evidence."
Auditors exercise professional skepticism, which
Techniques to mitigate cognitive biases
1. Be organized/methodical in decision-making
2. Generate alternatives even when you think you found the right answer
3. Document your rationale about the alternatives - this may change your thinking
4. Delay final judgement until you have all information & considered all alternatives
Notes to the financial statements
further explain the information that is recognized on the face of the financial statements.
It sets auditing standards and oversees the audits of public companies in the United States
What is the Public Company Accounting Oversight Board (PCAOB)?
the conceptual framework stipulates that standard setters should compare the cost of requiring information to the benefits derived from presenting this information when developing accounting standards. Standard setters consider costs for both reporters and users.
Cost constraint
Groups and summarizes all current standards by topic
Codification
Firms recognize expenses when
1. The entity's economic benefits are consumed in the process of producing or delivering goods or rendering services.
2. An asset has experienced a reduced (or eliminated) future benefit, or when a liability has been incurred or increased, without an associated economic benefit.
Monetary unit assumption
an entity must measure and report its economic activities in dollars. This assumption ignores any inflation or deflation experienced in the economy in which the entity operates.
relies on theories, concepts, and principles of accounting that are linked to a well-developed theoretical framework
Principles-based standard
represent resources, claims to resources, or interests in resources as of a specific point in time and appear on the balance sheet
Point-in-time elements
Non-authoritative material such as the FASB concepts statements, IFRS, AICPA Issues Papers, industry practice, and textbooks
US GAAP Hierarchy Level 3
Three main approaches to determine when to report an expense
1. Match with revenues
2. Expense in period incurred
3. Systematically allocate over period of use
the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties
fair value
Basing the decision on whether an economic resource is received and it meets the definition of an asset, such as accounts receivable
Asset/liability approach
Three main approaches to determine when to report an expense
1. Match with revenues
2. Expense in period incurred
3. Systematically allocate over period of use
occurs when managers manipulate financial information and misrepresent the firm's financial position and performance
Earnings management
The notes should contain information about:
1. The line items on the financial statements,
2. The reporting entity, or
3. Past events and current conditions that have not yet been recognized in the financial statements but that might affect the entity’s cash flows.
Basing the decision on whether an economic resource is received and it meets the definition of an asset, such as accounts receivable
Asset/liability approach
because they provide information to a wide spectrum of user groups: investors, creditors, financial analysts, customers, employees, competitors, suppliers, unions, and government agencies.
Why are published financial statements called general-purpose financial statements?
involves a buyer and seller who are independent and unrelated parties, each bargaining to maximize their own wealth
arms-length transaction
When the FASB issues a new pronouncement, it is referred to as an ________.
Accounting Standards Update (ASU). Once approved, ASUs are incorporated into the Codification
Five steps that are applied to determine the timing and measurement of revenue
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 separate performance obligations
5. Recognize revenue when each performance obligation is satisfied
a standard that is somewhere in between a pure principles-based standard and a pure rules-based standard
Objectives-oriented standard