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Int. Acct. I
Ch. 1 The Environment and Conceptual Framework of Financial Reporting
| Term | Definition |
|---|---|
| What is the conceptual framework of financial reporting? | It’s the process that a private and independent standard-setter—the Financial Accounting Standards Board (FASB)—uses to develop a set of generally accepted reporting standards. At the heart of this framework is the objective of financial reporting. |
| decision-usefulness | providing useful information for decision making |
| financial statements | income statements, statement of owners’ (stockholders’) equity, balance sheet, and statement of cash flows |
| financial reporting | the reporting of financial statements; the financial information a company provides to help users with capital allocation decisions about the company |
| capital allocation | the process of determining how and at what cost money is allocated among competing interests |
| generally accepted accounting principles (GAAP) | common set of standards and procedures |
| securities and exchange commission (SEC) | a federal agency, to help and standardize financial information presented to stockholders |
| Financial Accounting Standards Board (FASB) | the major standard-setting organization in the private sector |
| Financial Accounting Foundation (FAF) | operates with oversight with FASB; selects members of the FASB and its advisory councils and exercises general oversight |
| Financial Accounting Standards Advisory Council (FASAC) | consults with the FASB on major policy and technical issues and also helps select task force members. |
| due process | operations in full view of the public that gives interested persons ample opportunity to make their views known |
| financial accounting standards | accounting standards updates |
| Statements of Financial Accounting Concepts (SFAC) | FASB series of statements to provide a framework for the development of financial accounting standards |
| American Institute of Certified Public Accountants (AICPA) | the national organization of practicing certified public accountants (CPAs) |
| International Accounting Standards Board (IASB) | sets the International Financial Reporting Standards (IFRS) used in over 120 countries. |
| IFRS | International Financial Reporting Standards |
| Financial Accounting Standards Board Accounting Standards Codification | FASB developed the standards of codification |
| Financial Accounting Standards Board Codification Research System (CRS) | FASB developed this system to provide easy access to this Codification |
| conceptual framework | establishes the concepts that underlie financial reporting. It is a coherent system of concepts that are derived from the primary objective of financial reporting. |
| objective of financial reporting | the foundation of the conceptual framework. |
| general-purpose financial statements | provide information to decision makers to help users who lack the ability to demand all the financial information they need from a company and therefore must rely, at least partly, on the information provided in financial statements |
| qualitative characteristics | accounting information that distinguish better (more useful) information from inferior (less useful) information for meeting the objective of financial reporting |
| relevance | pertains to the decision at hand; one of the two fundamental qualities that make accounting information useful for decision-making; has predictive value, confirmatory value, or both |
| predictive value | information helps users make predictions about future events and/or transactions |
| confirmatory value | helps users confirm or correct prior expectations |
| materiality | the threshold for recognition/disclosure; relates to the importance or significance of an amount. |
| faithful representation | information can be relied upon to reflect what really happened or existed |
| completeness | information is complete and includes all necessary facts |
| neutrality | information is free from bias |
| free from error | information is accurate |
| comparability | accounting methods/measurements are similar from company to company and from period to period within a company (i.e., consistent). |
| consistency | another type of comparability when a company applies the same accounting treatment to similar events, from period to period |
| verifiability | others can reach the same conclusions or observe the same results; role of the external auditors |
| timeliness | information must be timely to be relevant |
| understandability | information is classified, characterized, and presented clearly/concisely such that a reasonably informed user can see its significance |
| elements of financial statements | definitions of accounting terms |
| assets | probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events |
| liabilities | probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events |
| equity | residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest |
| investments by owners | increase in net assets (E) resulting from a transfer to the company by an owner. |
| distributions to owners | decrease in net assets (E) resulting from a transfer back to an owner |
| comprehensive income | current period changes in net assets from non-owner sources that have not yet passed through Net Income (i.e., not been “realized”). |
| revenues | accrual-based inflows from primary business operations; often not equal to changes in cash flow |
| expenses | accrual-based outflows from primary business operations; often not equal to changes in cash flow |
| gains | accrual-based inflows from incidental/peripheral transactions |
| losses | accrual-based outflows from incidental/peripheral transactions |
| articulation | assets, liabilities, and equity provide at any time the cumulative result of all changes |
| economic entity | all business transactions can be associated with one or more economic unit for financial reporting |
| going concern assumption | all businesses will continue to operate indefinitely |
| liquidation accounting | accounting when a company is going out of business or liquidating |
| monetary unit assumption | all financial information is reported in US dollars and not adjusted for inflation |
| periodicity assumption | business activity can be divided into artificial time periods for financial reporting purposes; the SEC requires annual and quarterly reports. |
| measurement principle | a “mixed-attribute” system that permits the use of various measurement bases. the most commonly used measurements are based on historical cost and fair value. |
| historical cost principle | purchase price; considered the most reliable measurement value; verifiable benchmark for measuring historical trends |
| fair value | 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; market-based measure; more subjective, but relevant |
| revenue recognition principle | companies should recognize revenue in the accounting period in which its performance obligation(s) have been satisfied |
| performance obligation | when a company agrees to perform a service or sell a product to a customer |
| expense recognition principle | companies should recognize expenses in the same period as the revenue they helped generate. practical rules for expense matching |
| rational and systematic allocation policy | a policy that will approximate the expense recognition principle. |
| product costs | such as material, labor, and overhead, attach to the product. companies carry these costs into future periods if they recognize the revenue from the product in subsequent periods |
| period costs | such as officers’ salaries and other administrative expenses, attach to the period. |
| direct association | direct link between expense and revenue; expense in period of sale |
| rational and systematic allocation | some link between expense and revenue; expense when incurred. |
| Expense immediately | no determinable link between expense and revenue; expense immediately |
| full-disclosure principle | ties to the primary objective of financial reporting, which is to provide useful information to those making decisions about providing resources to an entity |
| recognition in the main body of financial statements | an item should meet the definition of an element, be measurable with sufficient certainty, and be relevant and reliable |
| notes to financial statements | an item should meet the definition of an element, be measurable with sufficient certainty, and be relevant and reliable |
| supplementary information | include details or amounts that present a different perspective from that adopted in the financial statements |
| cost constraint or cost-benefit relationship | companies must weigh the costs of providing the information against the benefits that can be derived from using it |
| Sarbanes-Oxley Act | increased the resources for the SEC to combat fraud and curb poor reporting practices |
| Public Company Accounting Oversight Board (PCAOB) | established the Public Company Accounting Oversight Board (PCAOB). |
| data analytics | involves analyzing data, often employing both software and statistics, to draw inferences |
| environmental, social and governance | ESG |
Created by:
ryanriggs18
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