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First Exam

What are the THREE PRIMARY ingredients for RELEVANCE? Predictive Value Feedback Value Timeliness
What are the THREE PRIMARY ingredients for RELIABILITY Verifiable Representational Faithfulness Neutrality
What are the TWO PRIMARY qualities that make accounting information useful for decision making? Relevance Reliability
What are the TWO SECONDARY qualities that make accounting information useful for decision making? Comparability Consistency
Information that is measured and reported in a similar matter for different companies is considered: Comparability
A company that applies the same accounting treatment to similar events, from period to period uses: Consistency
What are the basic elements of Financial Statements? Assets, Liabilities, Equity, Investment by Owners, Revenues/Expenses, Gains/Losses
Economic Entity Assumption Economic activity applies to a unit of accountability
Going Concern Assumption Expectation that a business lasts long enough to fulfill its objectives and commitments
Monetary Unit Assumption Only provide information of monetary value, NOT in units
Periodicity Assumption Activities can be divided into artificial time periods
Fair Value Principle The price that would be received to sell an asset or paid to transfer liability
Historical Cost Principle Reporting assets and liabilities based on the acquisition price
Revenue Recognition Principle Revenue is recognized when it is BOTH Recognized / Realizable AND Earned
What industries ignore the Revenue Recognition Principle? Construction, Farming, Real Estate
Expense Recognition Principle MATCH efforts (EXPENSE) with accomplishment (REVENUE)
Full Disclosure Principle Providing information that is of sufficient importance to influence judgement and decisions of an informed user
Cost-Benefit Relationship The cost of providing information compared to the benefits that can be derived from the information
Materiality Decision to report items that are significant (Material) in comparison to ones that are insignificant (Immaterial). Think of the waste basket example
Industry Practice Particular industries may depart from GAAP due to the nature of their industry. In example: Farmers or Utility Companies
Conservatism When in doubt, choose the solution that is least likely to overstate assets or income
What are the FOUR Accounting Assumptions? Economic Entity Going Concern Monetary Unit Periodicity
What are the FOUR Accounting Principles? Measurement Revenue Recognition Expense Recognition Full Disclosure
What are the FOUR Accounting Constraints? Cost-Benefit Materiality Industry Practice Conservatism
Fair Value changes are not recognized in the accounting records Historical Cost
Lower of cost or market is used to value inventories Conservatism
Financial information is presented so that investors will not be misled Full Disclosure Principle
Intangible assets are capitalized and amortized over periods benefited Expense Recognition Principle
Repair tools are expensed when purchased Materiality
Agricultural companies use fair value for purposes of valuing crops Industry Practices
Each enterprise is kept as a unit distinct from its owner or owners Economic Entity
All significant postbalance sheet events are reported Full Disclosure
Revenue is recorded at point of sale Revenue Recognition
The use of consolidated statements is justified Economic Entity
Reporting must be done at defined time intervals Periodicity
An allowance for doubtful accounts is established Expense Recognition
All payments out of petty cash are charged to Miscellaneous Expense Materiality
Goodwill is recorded only at time of purchase Cost-Principle
No Profits are anticipated and all possible losses are recognized Conservatism
A company charges its sales commission costs to expense Expense Recognition
Allocates expenses to revenues in the proper period Expense Recognition
Indicates fair value changes subsequent to purchase are not recorded in the accounts Historical Cost
Ensures that all relevant financial information is reported Full disclosure principle
Rationale why plant assets are not reported at liquidation value Going concern principle
Anticipates all losses, but reports no gains Conservatism
Indicates that personal and business record keeping should be separately maintained Economic Entity
Separates financial information into time periods for reporting purposes Periodicity
Permits the use of fair value valuation in certain industries Industrial practices
Requires information not significant enough to affect the decision of reasonably informed users should be disclosed Materiality
Assumes that the dollar is the measuring stick used to report financial performance Monetary Unit
Arises from peripheral or incidental transactions Gains or Losses
Obligation to transfer resources arising from a past transaction Liability
Increases ownership interest Investments by owners
Declares and pays cash dividends to owners Distributions to owners
Residual interest in the assets of the enterprise after deducting its liabilities Equity
Arises from income statement activities that constitute the entity's ongoing major or central operations Expenses / Revenues
Items characterized by service potential or future economic benefit Assets
Increases assets during a period through sale of product Revenues
Created by: spendo02
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