What is a balance sheet?
summarizes a company's financial position at a given date. The balance sheet views resources from two perspectives:1. Specific resources the firm controls (e.g. cash, inventory, and equipment)2. The claims on the firm's resources by other persons or entities (e.g. investors, creditors, lenders, suppliers, employees, and other stakeholders)
What is the income statement?
summarizes the results of a company's income producing activities for a period of time. Also called a profit and loss statement.
What is the statement of cash flows?
summarizes a company's cash inflows and outflows for a period of time.Provides information that complements the income statement, demonstrating how cash flows differ from accrual-based income.Consists of three sections:1. Operating Activities2. Investing Activities3. Financing Activities
What is the statement of changes in stockholders' equity?
summarizes the changes in each item of stockholders' equity for a period of time.
What is financial reporting?
the process of communicating financial accounting information about a company to external users.
The supply of accounting information that companies report is determined primarily by the interactions between which two forces?
GAAP and IFRS
What does the SEC do?
Delegates its legal authority to set authoritative professional accounting standards for U.S. companies to the FASB and to set IFRS standards for international companies to the IASB.
Who votes on whether a new accounting rule goes into affect?
The 7 members of the Financial Accounting Standards Board
What is the International Accounting Standards Board (IASB)?
it's the international accounting standard setter, establishing the IFRS. The IASB includes 16 members
The Financial Accounting Standards Board's 6 initiatives include...
1. Conducting long-term joint projects with IASB.2. Participating in short-term joint convergence projects.3. Monitoring IASB projects.4. Conducting convergence research project.5. Explicitly considering convergence potential in all decisions.6. Having a liaison IASB member on site at the FASB offices.
What 4 things does the annual report include?
1. Balance Sheet2. Income Statement3. Statement of Cash Flows4. Statement of Changes in Stockholders' Equity
What is the Management Discussion and Analysis (MD&A)?
an extensive narrative discussion and quantitative analysis. It is provided by company managers and provides insight into:-strategies-Management's evaluation of the company's performance-business risk factors-expectations about the future
What do auditors do?
they check a company's financial documentation.
What are accounting principles?
Fundamental theories and truths that provide the foundation for financial accounting and financial reporting. Broad and definitional.
What are the concept statements? (SFAC)
o Establish principles of accountingo Objectives of financial reportingo Qualities of useful informationo Definition of basic elementso Types, measurements and presentation/classification of events
What are Accounting standards?
o Principles and concepts form the basis for GAAPo FASB's Accounting Standards Codification & Accounting Standards Updates
What is SFAC #8
Provided the Conceptual Framework for Financial Reporting
What is the primary objective of SFAC#8?
Provide decision useful information that is useful to existing and prospective investors, lenders, and other creditors in making decisions about providing resources to the entity.Information includes:- Expected Returns - primarily interested in amounts, timing, and uncertainty of cash flows they will receive (investors, lenders & creditors)-Changes in the firm's economic resources and claims i.e., financial performance - net income, comprehensive income & components, and cash flows
What information should financial reporting provide?
how the management of a company has discharged its stewardship responsibility to owners (stockholders) for using the company resources.
What is financial flexibility?
the ability of a company to use its financial resources to adapt to change.
What is operating capability?
the ability of a company to maintain a given physical level of operations.
What is decision-useful information?
Decision usefulness is identified and defined in terms of fundamental (necessary) qualitative characteristics and enhancing qualitative characteristics. For the information to be decision useful, the information should be: (1) relevant and (2) faithfully represented.
What are the 3 components to relevance?
predictive value, confirmatory value, materiality
Define predictive value
if it can be used to correctly forecast the outcome of some event(s) of a firm.
Define confirmatory value
if it can confirm or correct prior expectations.
Define materiality
how bad an omission or misstatement can be without it mattering.
A mistake being material means that...
it matters.
What qualitative factors should be considered when judging the materiality of a mistake?
1. have an effect on trends (particularly trends in profitability)?2. mask a change in earnings?3. change a loss into a profit?4. misrepresent compliance with loan agreements?5. increase management's compensation?
Define Faithful Representation
the transaction reflects the economic substance rather than legal form.
What 3 components confirm that faithful representation is present?
The inför must be complete (accurate), neutral (unbiased), and free from error.
What are the 4 enhancing characteristics of decision-useful financial information?
comparability, verifiability, timeliness, understandability.
What is going concern?
the assumption that an entity will continue indefinitely
What is a reporting entity?
The entity assumption assumes that a proprietorship, partnership, or corporation's financial activities are distinguished from other financial organizations in keeping its own financial records and reports.An entity should report for the company, not its owners. A company that owns another company should also report on companies that it owns.
Define the accounting principle of period of time
you have to report your financial statements for a specific frame of time.
Define the principle of mixed attribute measurement
Measures assets, liabilities, revenues, expenses, and other elements of the financial statements with the most relevant and faithful measurement available.
What is historical cost?
the amount paid for the asset
Define the principle of recognition
the process of formally recording something on a financial statement.
What must an item do to be recognized on a financial statement?
• Meet the definition of an element• Be measurable• Be relevant• Be representationally faithful
What is accrual accounting?
The process of measuring and reporting the economic effects of transactions, events, and arrangements in the period when those effects occur, even though the cash flows may occur in a different period. We recognize things on financial statements on the date of the transaction, not necessarily when the cash flows occur.
What is revenue recognized in accrual based accounting?
when a company satisfies its performance obligations, or promises within the contract with a customer
When are expenses recognized in accrual based accounting?
In ordera) due to cause and effect (direct relationship to revenue) e.g., sales commissions and product costs (i.e., material, labor, and overhead), b) due to systematic and rational allocation, e.g., depreciation, amortization, rent, insurance, or c) immediately (neither a nor b), e.g., period costs (e.g., officer salaries and admin. expenses).
What is the matching principle?
match expenses to the period in which the economic benefits are consumed by generating revenues. Ex- sell shoe, expense shoe
Define conservatism
The conservatism convention states that when alternative accounting valuations are equally possible, the accountant should select the one that is least likely to overstate assets and income in the current period.