Accounting Chapter 1: Ethics


beliefs that separate right from wrong
- accepted standards of good and bad

ethics in accounting affects what ?

1. the salaries and bonuses paid to workers
2. the success of products and services
3. can lead . to bad decision that harm workers and the business

Ethical decision making
( 3 STEPS )

1. Identify ethical concerns
2. analyze options: consider the CONSEQUENCES
3. make ethical decision: choose best option after weighing all the consequences

Fraud Triangle
( 3 Factors that push people to commit fraud )


Fraud Triangle: Opportunity

a person must be able to commit fraud with a LOW RISK of getting caught

Fraud Triangle: Pressure

INCENTIVE or pressure to commit fraud

Fraud Triangle: Rationalization

ATTITUDE or justification of the crime

internal control

procedures to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies
ex: good records, physical controls (locks), and independent reviews

Sarbanes-Oxley Act
( also called SOX )

helps stop financial abuse
requires documentation and verification of INTERNAL CONTROLS and emphasizes effective internal controls


verify the effectiveness of internal controls
- auditors are external users

Dodd-Frank Wall Street Reform and Consumer Protection Act
( does 2 things )

1. Clawback (money recovery) mandates recovery of excessive pay
2. whistleblower (snitch for illegal actions) gets payed 10% to 30% of sanctions exceeding 1$ million


an employee who exposes unethical or illegal conduct within the federal government or one of its contractors
Can lead to an ETHICAL RISK is over used by accountants

Generally Accepted Accounting Principles (GAAP)

common set of accepted accounting principles that must be followed for financial statements
GAAP wants information to have RELEVANCE and FAITHFUL REPRESENTATION to reflect the business results
accountants who audit must disclose if they do not comply with

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.
tasked with setting up GAAP

Securities and Exchange Commission (SEC)

a U.S. government agency that oversees proper use of GAAP by companies that sell stock and debt to the public

__________ sets up GAAP which is used for ______________. GAAP is overseen by ______________ to make sure proper use of stocks and debt.

1. FASB: Financial accounting standards Board
2. to make sure the common set of accepted accounting principles are followed for financial statements
3. SEC: securities and Exchange commission

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

International Financial Reporting Standards (IFRS)

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

conceptual framework

The basic concepts that underlie the preparation and presentation of financial statements for external users
issued by the FASB

4 objectives of conceptual framework

Qualitative characteristics
Recognition and measurement

Conceptual Framework: Objectives

to provide info useful to investors, creditors, and others
evidence + data

Conceptual Framework: Qualitative characteristics

give proof to back up your information

Conceptual Framework: ELEMENTS

define items in financial statement

Conceptual Framework: Recognition and measurements

set criteria for an an item to be recognized as an element
how it can be measured

2 types of accounting principles building blocks for GAAP

1. general principles
2. specific principles

general principles

the assumptions, concepts, and guidelines for preparing financial statements
-revenue recognition
-expense recognition
-full disclosure
encountered assumptions:
-time periods
-business entity
-going concerns
-monetary unit

Specific Principles

detailed rules used in reporting business transactions and events

Measurement principle (cost principle)

accounting information is based on actual cost
- cost is measure by the cast paid
- if there was an exchange (truck for car), cost is measured as the cash value of what is given up or received .
ex: a company pays 500$ for equipment. The cost principle re

Revenue recognition principle

revenue sales is the amount received from selling products and services in cash or credit sales
revenue is recognized (RECORDED) when:
1. the amount expected is given from the customer
2. when goods or services are provided to the customer
spilt the bill

Expense recognition principle (matching principle)

a company records the expenses it incurred to generate the revenue reported
ex. if you spend 200 dollars on gas over the summer (June and July) but pay it in AUGUST!!
if revenue is earned over time, record $100 expense in Jnne and $100 in July

Full Disclosure Principle

the company reports the details behind financial statements that would impact users' decision
Footnotes on statements to keep the public informed and increase consumer confidence
-justifications of change in accounting principles
amount of mater