INTERMEDIATE ACCT I
INTERMEDIATE ACCT I ACCT 3001
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f 139 CHAPTEP1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS Intermediate Accounting 13th Edition Kieso Weygandt and Warfield Chapter 12 Learning Objectives 1 N 9015quot 8 9 Chapter 13 IdenTify The major financial sTaTemenTs and oTher means of financial reporTing Explain how accounTing assisTs in The efficienT use of scarce resources Describe some of The challenges facing accounTing LisT The objecTives of financial reporTing Explain The need for accounTing sTandards IdenTify The major policyseTTing bodies and Their role in The sTandardseTTing process Explain The meaning of generally accepTed accounTing principles GAAP and The role of The CodificaTion for GAAP Describe The impacT of user groups on The rulemaking process UndersTand issues relaTed To eThics and financial accounTing Financial Accounfing and Accoun ng Sfana ards39 0 Accounting and o Securitiesand o FASB Codification 0 Political environment capital allocation Exchange 0 Expectations gap 39 Challenges commlss lon 0 International 0 Objectives 39 Amer39canlnsntmerof accounting standards CPAs 39 0 Need to develop 39 0 Ethics Standards 0 FInanctalAccountIng Standards Board 0 Changing role ofthe AICPA Chapter Financial Statements and Financial Reporting Essential characteristics of accounting are 1 the identification measurement and communication of financial information about 2 economic entities to 3 interested parties Ch t 13 er L0 1 Idenfi ve major financial slufemenfs and other means of financial reporting Financial Sfafemenfs and Financial Reparfing I Economic Entity I I Financial Statements Additional Information I Financml Balance Sheet Presiden r39s Ie Her39 Information Prospectuses SEC Repor ring Income Statement Statement of Cash Accounting Identifies Flows I I News releases and Statement of Forecasfs Measures Owner39s39 or39 d Sfockholder39s39 Equi39fy Environmental an Repor rs No re DIsclosur39es Communlca39l39es ETC Chapter 16 L0 1 Identify the major nancial statements and afher means of nancial reporting Financial Sfaremem s and nancial Repor ng Review WhaT is The purpose of informaTion presenTed in noTes To The financial sTaTemenTs To provide disclosure required by generally accepTed accounTing principles b To correcT improper presenTaTion in The financial sTaTemenTs c To provide recogniTion of amounTs noT included in The ToTals of The financial sTaTemenTs d To presenT managemenT39s responses To audiTor commenTs Ch t 13 er L0 1 Idenf ve major nancial sinfemenfs and af er means of nancial reporting Accoun ng and Capifa Allacafian Resources are limited Efficient we of resources of39l39en determines whether a business thrives Illustration 1 1 Capital Allocation Process Fin an cial V Users CapitalAllocatIon Reporting 7 Information to help Investors creditors The process of users with capital and other users allocation decisions determining how and at what cost money is allocated among competing interests Chapter L0 2 Explain how accounfing 05539st in five ef c39lenf use of scare resources Accounting and Capital Allocation Review An effecfive process of capiTal allocaTion is cr39i rical To a healThy economy which a pr omol39es producfivi ry b encourages innovaTion c provides an efficien r and liquid marker for39 buying and selling securi l39ies All of The above Chapter 39 39 19 L0 2 Expam haw accounting asstsfs In le effclemL use of scare resources Challenges Facing nancial Accoun ng I Nonfinancial Measurements I Forwardlooking Information I Sof r Asse rs I Timeliness Ch t 1211poer L0 3 Describe some of le challenges facing accoun ng Objectives of Financial Accounting Financial reporting should provide information that a is u3efu To preSenT and poTenTial invesTors and crediTors and oTher USers in making raTional invesTmenT crediT and similar decisions b helps preSenT and poTenTiaI invesTors and crediTors and oTher USers in aSSessing The amounTs Timing and uncerTainTy of prospective cash receist c clearly porTrays The economic resources of an enTerpriSe The claims To ThOSe resources and The effecTs of TransacTions evenTs and circumsTances ThaT change iTs resources and claims To ThOSe resources Chapter M1 L0 4 LIST the abjec ves of financial reporting Objectives of Financial Accounting Review All of The following are objecTives of financial reporTing excepT To provide informaTion a AbouT enTerprise resources claims To Those resources and changes in Them b ThaT is useful in invesTmenT and crediT decisions AbouT The managemenT and major shareholders of an enTerprise d ThaT is useful in assessing cash flow prospecTs Ch t 12113932er L0 4 LisfL The abjec ves of nancial reportby Need fa Develop Standards Various users Financial Statements need financial Balance Sheet II Income Statement Informatlon Statement of Stockholders39 Equity Statement of Cash Flows Note Disclosure I The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced Ch t loser L0 5 Explain the need for accoun ng sfana ara s Parfies I nvavea in 5 fana ara Se ing Three organizations gt Securi ries and Exchange Commission SEC gt American Ins ri ru re of Cer rified Public Accoun ran rs AICPA gt Financial Accoun ring Standards Board FASB Chapter 0 6 Idem ify the major policy sef ng bodies and 13914 fhei r39 role in le sfandard setting process Securifies and Exchange Commission Chapter 115 EsTainshed by federal governmem Accoun ng and repor ng for public companies Securities Afcf of 1934 Encouraged privaTe sTandard seTTing body SEC requires public companies To adhere To GAAP SEC OversighT Enforcemem AuThoriTy L0 6 Idenfify Me major policy se ng bodies and ler role in the sfandard sef ng process American Ins fufe of CPAs I National professional organization I Established the following AccOun ring J 3 PrInCIples Board o 1939 to 1959 o 1959 to 1973 0 Issued 51 Accounting 0 Issued 31 Accounting Research Bulletins Principle Board ARBs Opinions APBOs o Problembyproblem 0 Wheat Committee approach failed recommendations adopted in 1973 if AIC PA httpwwwoicpaor39g L0 5 Financial Accounfing Sfandards Board WheaT CommiTTee39s recommendaTions resulTed in The creaTion of a The Financial AccounTing STandards Board in 1973 Finandk j Accouh ng FoiundaTion V Financial AccounTing STandards Board V Council Financialgh AccounTing STan dards Advisory Chapter 117 gt gt SelecTs members of The FASB Funds Their acTiviTies Exercises general oversighT Mission To esTablish and improve sTandards of financial accounTing and reporTing ConsulT on major policy issues 0 6 Idem ify The major paicy seffing bodies and Their role in le sfandard setting process Financial Accounfing 5fandar39ds39 Board Missions is To esTablish and improve sTandards of financial accounfing and reporfing Differences between FASB and APB include I Smaller Membership 0 FullTime Remunera39led Membership 0 Grea l39er Au lonomy 0 Increased Independence I Broader RepreSen39l39a lion h i r wwwfasbor Chapter 0 6 Idem ify the major poicy sef ng bodies and 13918 fheir39 role in le sfandard setting process Financial Accounting Standards Board Review The firsT sTep Taken in The esTablishmenT of a Typical FASB sTaTemenT is a The board conducTs research and analysis and a discussion memorandum is issued b A public hearing on The proposed sTandard is held c The board evaluaTes The research and public response and issues an exposure drafT Topics are idenTified and placed on The board39s agenda Chapter L0 6 Idem ify The major policy se ng bodies and 13919 ler role in the sfandard sef ng process Due Process FASB relies on two basic premises 1 Responsive to entire economic community 2 Operate in full view of the public Step 1 Topic placed on agenda Step 2 Research conducted and Discussion Memorandum issued Step 3 Public hearing ancial Step 4 Board evaluates research public response and Accountin39gquotSeries i55ues Exposure Draft Statement Financial Accounting 8 dams N Step 5 Board evaluates responses and issues final Statement of Financial Accounting Standard Chapter L0 6 Identify the major policy setting bodies and 13920 their role in the standard setting process Types of Pranauncemenfs Issued by The FASB I S39randar39ds Inferpr e39ra39rions and Staff Positions 0 Financial Accounting Concep39rs I Emerging 135ues Task Force Sfa39remen39rs Financial Accounting Series FASB Interpretation No40 WHENquot nl Emully mauled Mcmnl n Prlnclplls lo Mumal m lnnnalla 21nd nnm Enmllsas ilinuwmlmm ksa Milmun 39 an a and in Chapter 121 on mummme F a n c al in Accounting Series Statement of Financial Accounting Concepts No 6 EITF ABSTRACTS uf Seplemb L0 6 Iden fy Me major policy se ng bodies and ler role in the sfandard sef ng process Types of Pranauncemenfs CAI11 Accounting Pronouncements Standard setting bodies have issued a number of authoritative pronouncements A list is provided on the left below with a description of these pronouncements on the right Instructions Match the description to the pronomicements 1 Q Staff Positions 2 Interpretations of the Financial Account ing Standards Board 3 Statement of Financial Accounting 1 Standards EITF Statements 5 0 Opinions 5quot Chapter 122 h Statement of Financial Accounting Concepts d e m v a b WV v Official pronouncements of the APB Sets forth fundamental objectives and concepts that will be used in develop ing future standards Primary document of the FASB that esr tabh39shes GAAP Provides additional guidance on imple menting or applying FASB Standards or Interpretations Provides guidance on how to account for new and unusual financial transac tions that have the potential for creating diversity in financial reporting practices Represent extensions or modifications of existing standards L0 6 Iden fy Me major policy se ng bodies and ler role in the sfandard sef ng process Changing Role of AICPA The AICPA established the Accounting Standards Executive Committee AcSEC gt Audit and Accounting Guides gt Statements of Position SOP gt Practice Bulletins I AICPA and AcSEC no longer issues authoritative accounting guidance for public companies I PCAOB oversees the development of auditing standards I AICPA continues to develop and grade the CPA examination Chapter L0 6 Identify the major policy setting bodies and 13923 their role in the standard setting process Generally Accepted Accounting Principles Those principles that have substantial authoritative support Major sources of GAAP are I FASB Standards Interpretations and Staff Positions I APB Opinions 0 AICPA Accounting ReSearch Bulletins Chapter L0 7 Explain the meaning of generally accepted accounting principles quot24 GA1P and the role of the Codi catbn for 5MP Generaly Accepfed Accaum ing PrinCIpes Illustration 1 4 6AAP Documents l AICPA Accounting Interpretations l FASB Implementation Guides Q and A l Widely recognized and prevalent FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins industry practices l FASB Technical Bulletins l AICPA Industry Audit and AICPA Statements of Position u5 G 39d s Ule FASB Standards Interpretations l APB Opinions and Staff Positions l AICPA Accounting Research Bulletins I Chapter L0 7 Explain le meaning of generally accepfed accoun ng prim les 13925 GAIF and Me role of re Codificafbn far 6AA Generaly Accepfed Accounting Principles Review Which of The following accounTing pronouncemen rs is The mosT auThor39iTaTive a FASB STaTemenT of Financial Accounting Concepts b FASB Technical Bulle l39ins AICPA Accounting Principles Board Opinion d AICPA STaTemenT of PosiTion Chapter L0 7 Explain the meaning of generally accepfed accoun ng principles 13926 6AAP and fire role of fhe Codificafion for 6AAP Issues in Financial Reporting Standard Setting in a Political Environment Accounting standards are as much a product of political action as they are of careful logic or empirical findings Ch t 12127er L0 8 Describe the impacf of user groups on the rue making process Standard Seffing Illustration 1 6 Business Entities User Groups that Influence Accounting Standards Financial Community CPAs and Accounting Firms AICPA AcSEC Preparers eg FEI I Government SEC IRS other agencies Academicians Industry Investing Public 7 I Associations Accounting standards interpretations and bulletins Ch t 1212er L0 8 Describe ve impacf of user groups on the rule making process Issues in Financial Reporting Review All Those who serve on The FASB mus r be Cer39Tified Public AccounTanTs False Ch t 1212er L0 3 Describe five impact af user groups on the rule making process Issues in Financial Reparfing Expectation Gap WhaT The public Thinks accounTonTs should do vs whcn accounTonTs Think They can do 0 Difficul39l39 To closo O Sor bonesOxley AC1quot 2002 0 Public Company Accounting Oversight Board PCAOB Ch t 12150er L0 8 Describe fhe impacf of user groups on file rue making process Issues in Financial Reporting International Accounting Standards Two sets of standards accepted for international use 0 US GAAP i33ued by the FASB 0 International Financial Reporting Standards IFRS i33ued by the IASB INTERNATIONAL FASB and IASB recognize that INSIGHT global markets will best be The adoption or raw by US companies would make it easier to served If only one 561 of GAAP compare US and foreign companies is used as well as for US companies to raise capital in foreign markets Ch t 12151er L0 8 Describe the impact of user groups on the rue making process Issues in Financial Reparfing CAI9 GAAP Terminology Wi rh accounting and finance i r ofTen helps To be fluent in abbreviations and acronyms Instructions Pr39eSen39red below is a lisT of common accoun39ring acronyms Iden39rify The Ter39m for39 which each acr39onym stands and provide a brief defini39rion of each Ter39m a AICPA e FAF i CPA b CAP f FASAC j FASB c ARB g SOP k sec d APB h GAAP I IASB Ch t 12152er L0 9 Undersfand issues related f0 efhics and financial accounf ng Issues in Financial Reparfing Ethics in The Environment of Financial Accounting In accounTing we frequenle encoum er39 e rhical dilemmas 0 GAAP does noT always provide an answer 0 Doing The right Thing is noT always easy or39 obvious Ch t 12153er L0 9 Undersfarld issues reafed39 f0 efIics and financial accounf ng CONVERGENCE CORNER Means gt iGAAP includes The sTandards referred To as InTernaTional Financial ReporTing STandards IFRS developed by The IASB gt Differences beTween US GAAP and iGAAP exisT because of differenT user needs iGAAP Tends To be simpler and less sTringenT Than US GAAP RegulaTors have recenle eliminaTed The need for foreign companies ThaT Trade shares in US markeTs To reconcile Their accounTing wiTh US GAAP Chapter 134 Copyvth Chapter 135 CopyrighT 2009 John Wiley amp Sons Inc All righTs reserved Reproduction or TranslaTion of This work beyond ThaT permiTTed in SecTion 117 of The 1976 UniTed STaTes CopyrighT AcT wiThouT The express wriTTen permission of The copyrighT owner is unlawful RequesT for furTher informaTion should be addressed To The Permissions DeparTmenT John Wiley amp Sons Inc The purchaser may make backup copies for hisher own use only and noT for disTribuTion or resale The Publisher assumes no responsibiliTy for errors omissions or damages caused by The use of These programs or from The use of The informaTion conTained herein CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING Intermediate Accounting 13th Edition Kieso Weygandt and Warfield Chapter 21 Learning Objec fives Chapter 22 De5cribe The u3efulness of a concepTual framework DeSCribe The FASB39s efforTs To consTrucT a concepTual framework UndersTand The objectives of financial reporTing IdenTify The qualiTaTive characTerisTics of accounTing informaTion Define The basic elemenTs of financial sTaTemenTs De5cribe The basic a35umpTions of accounTing Explain The applicaTion of The basic principles of accounTing De5cribe The impacT ThaT consTrainTs have on reporTing accounTing informaTion Financial Accounting and Accounting Standards allege mm aging mid 39 1 13 in Win7amp1 v quot 39 mesqjumn 0 Need 0 Decision 0 Qualitative 0 Basic assumptions 0 Development usefu39ness CharaCter39St39cs 0 Basic principles 0 information about 0 Basic elements Constraints economic resources Chapter 23 CanoeJ fua Framework The Need for 0 Conceptual Framework I To develop a coheren r se r of s randards and rules I To solve new and emerging practical problems Ch t 31 0 1 Describe fhe usefulness of a concepfua framework Cancepfua Framework Review A concepfual framework underlying financial accounfing is imporfanf because if can lead To consisfenf sfandards and if prescribes The nafure funcfion and limifs of financial accounfing and financial sfafemenfs True on t 35 er L0 1 Describe the usefulness of a cancepfua framework Cbnaq uFhmnewvnk Re ew A concepfual framework underlying financial accounfing is necessary because fufure accounfing pracfice problems can be solved by reference To The concepfual framework and a formal sfandardseffing body will nof be necessary Fake Ch t 3 er L0 1 Describe the usefulness of a cancepfua framework Development of Conceptual Framework The FASB has issued six Statements of Financial Accounting Concepts SFAC for business enterprises SFAC No1 Objectives of Financial Reporting SFAC No2 Qualitative Characteristics of Accounting Information SFAC No3 Elements of Financial Statements superceded by SFAC No 6 SFAC No5 Recognition and Measurement in Financial Statements SFAC No6 Elements of Financial Statements replaces SFAC No 3 SFAC No7 Using Cash Flow Information and Present Value in Accounting Measurements on t 3 er L0 2 Describe the FASB S efforts to construct a conceptual framework Concep tua Framework The Framework is comprised of three levels First Level Basic Objectives Second Level Qualitative Characteristics and Basic Elements I Third Level Recognition and Measurement Concepts NTERNATIONAL The FASB and the IASB have agreed on a joint project to INSIGHT develop a common and improved conceptual framework Ch t 3 er L0 2 Describe the FASB efforts to construct a conceptual framework ASSUMPTIONS 1 EconomiCentity 2 Going concern 3 Monetary unit PRINCIPLES 1 Measurement 2 Revenue recognition 3 Expense recognition CONSTRAINTS 1 Cost benefit 2 Materiality Third 3 Industiy practice level 4 Periodicity 4 Full disclosure 4 Conservatism QUALITATIVE CHARACTERISTICS w Relevance Assets Liabilities and Equity investments by owners Reliability Distribution to owners Illustration 27 Conceptual Framework for Financial Reporting Chapter 29 Comparability Consistency Second level Comprehensive income Revenues and Expenses Gains and Losses First level L0 2 Describe the FASB S efforts to construct a conceptual framework Cancepfua Framework Review Whaf are The Sfafemenfs of Financial Accounfing Concepfs infended To esfablish a Generally accepfed accounfing principles in financial reporfing by business enterprises b The meaning of Presenf fairly in accordance wifh generally accepfed accounfing principles The objecfives and concepfs for use in developing sfandards of financial accounfing and reporfing d The hierarchy of sources of generally accepfed accounflng prInCIples CPA adapfed Ch t 2211p oer L0 2 Describe le FASB S effarfs fa cansfrucf a cancepfua framework H39r39sf Level Basic Objecfives Financial reporTing should provide informaTion ThaT a is USeful To preSenT and poTenTial invesTors and crediTors and oTher USers in making raTional invesTmenT crediT and similar decisions b helps preSenT and poTenTial invesTors and crediTors and oTher USers in aSSessing The amounTs Timing and uncerTainTy of prospecTive cash receist c porTrays The economic resources of an enTerpriSe The claims To ThOSe resources and The effecTs of TransacTions evenTs and circumsTances ThaT change iTs resources and claims To ThOSe resources Ch t 221p1er L0 3 Undersfand The objectives of fhancia reportkg H39r39sf Level Basic Objecfives Review According To The FASB concepTual framework The objecTives of financial reporTing for business enTerprises are based on a Generally accepTed accounTing principles b ReporTing on managemenT39s sTewardship c The need for conservaTism The needs of The users of The informaTion INTERNATIONAL The current proposed converged framework adopts the INSIGHT FASB s focus on investors and creditors Chapter 212 L0 3 Second Level Fundamen fa Concep 2 s QuesTion How does a company choose an accepTabIe accounTing meThod The omounT and Types of i nfor39maTion To disclose and The formaT in which To pr39esenT iT Answer By deTer39mining which aITer39naTive provides The mosT useful i nformaTion for decisionmaking purposes decision usefulness Chapter 213 L0 4 Identify fhe quaifa ve characfer39is39 cs of accounting informa on Second Level Fundamental Concepts Qualitative Characteristics The FASB identified the Qualitative Characteristics of accounting information that distinguish better more useful information from inferior less useful information for decisionmaking purposesquot Chapter I I I I I 214 L0 4 Identify the qualitative characteristics of accountn9 Informaton Second Level QuaI39fafive Charade 125713 DECISION MAKERS Users of AND THEIR CHARACTERISTICS accounting information Constraints COST lt BENEFITS MATERIALITY Pervasive constraint Threshold for recognition Illustration 2 2 Hierarchy of Accounting Qualifies Userspeci c qualities UNDERSTANDABILITY Pervasive criterion RELIABILITY Primary qualities I RELEVANCE Ingredients 39 I of primary Predctelve Feefl zck Timeliness Veri ability Refrizinltatlonal Neutrality qualities aI uness W 39 Qualities ILf Chapter i I I I I 39 215 10 4 Identify fhe quaIfaflve characferlstlcs af accounfmg Information Second Level Fundamen fa Concep 2 s Undersfondobilify A company may present highly r39elevan r and reliable i nfor39ma rion however39 if was useless ro Those who do no r understand if Ch t 215 s L0 4 I dentfy fhe quaifa ve characteris cs of accounting informafon ASSUMPTIONS PRINCIPLES CONSTRAINTS 1 Economic entity 1 Measurement 1 Costbenefit Third Ree vance and Relability level QUALITATIVE CHARACTERISTICS w Relevance Assets Liabilities and Equity investments by owners Reliability Distribution to owners second level Comparability Comprehensive income Revenues and Expenses Cions iSienCy Gains and Losses Illustration 27 Conceptual Framework for Financial Reporting OBJECTIVES i Useful in investment and credit decisions Useful in assessing future Cash flows 3 About enterprise resources Claims to resources and changes in them First level L0 4 Identify the qualitative characteristics of accounting information Chapter 217 Second Level Qualitative Charactershes Primary Qualities Relevance making a difference in a decision I Predictive value 0 Feedback value c Timeliness Reliability 0 Ver ifiable I Representational faithfulness 0 Neutral free of error and bias INTERNATIONM In the proposed converged conceptual framework reliability will be INSIGHT replaced with faithful representationquot as one of the primary qualitative Chapter 39 quot characteristics that must be present for information to be useful L04 Second Level Quaifafive CharacterEwes Review Relevance and reliability are The Two primary quali ries Tha r make accoun ring information useful for39 decision making True To be reliable accoun ring infor ma rion mus r be capable of making a difference in a decision False Ch t 2211pger L0 4 Iden fy le quaifa ve characfer s ts of accounfing informa an ASSUMPTIONS PRINCIPLES CONSTRAINTS 1 Economic entity 1 Measurement 1 Costbenefit 39 12 quot quot Third Comparability and Canestencil level QUALITATIVE W m Relevance Assets Liabilities and Equity investments by owners Reliability Distribution to owners Second level Comparability Comprehensive income Revenues and Expenses C on398istency Gains and Losses Illustration 27 Conceptual Framework for Financial Reporting OBJECTIVES l Useful in investment and credit decisions Useful in asSessing future cash flows 3 About enterprise resources claims to resources and changes in them First level L0 4 Identify the qualitative characteristics of accounting information Chapter 220 Second Level Quaifafive Characteristics Secondary Qualities Comparability Information That is measured and reported in a similar manner for different companies is considered comparable Consistency When a company applies The same accounTing Trea rmenT To similar evenTs from period To period Ch t 2251er L0 4 Iden fy le quaifa ve characfer s cs of accounfing informa an Second Level Quaifafive Characteristics Review Adherence To The concep r of consis rency requires Tha r The same accoun ring principles be applied ro similar Transac rions for a minimum of five years before any change in principle is adopTed False Ch t 2222er L0 4 Iden fy le quaifa ve characfer s cs of accounfing informa tm ASSUMPTIONS PRINCIPLES CONSTRAINTS 1 Economic entity 1 Measurement 1 Costbenefit Third Basic Elements level QUALITATIVE CHARACTERISTICS w Relevance Assets Liabilities and Equity investments by owners Reliability Distribution to owners second level Comparability Comprehensive income L Revenues and Expenses Cion SIStenCy Gains and Losses Illustration 27 Conceptual Framework for Financial Reporting OBJECTIVES 1 Useful in investment and credit decisions Useful in assessing future Cash flows 3 About enterprise resources Claims to resources and changes in them First level L0 5 Define the basic elements of financa statements Chapter 223 Second Level Basic Elements Concepts Statement No 6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise Moment in Timequot Period of Timequot a Assets 0 Investment by owners I Liabilities 0 Distribution to owners I Equity 0 Comprehensive income 0 Revenue 0 Expenses o Gains o Losses Ch t 22124er L0 5 Define le basic elements of financth sfafemenfs Second Level Basic Elements Exercise 23 Identify the element or elements associated with items below a AriSes from peripheral or incidental transactions b Obligation to Transfer resources arising from a past transaction c IncreaSes ownership interest d Declares and pays cash dividends to owners e IncreaSes in net aSSets in a period from nonowner Chapter SOUPCCS Elements Assets Liabilities Equity Investment by owners IL 7 Distribution to owners Comprehensive income Revenue Expenses Gains Losses L05 Second Level Basic Elements Exercise 23 Identify the element or elements associated with items below Elements 1 Items characterized by l A556 future economic benefit Liabii es g Equals increase in net EquiIy assets during the year after adding distributions Distribution to owners to owners and subtractin investments by owners Comprehenslve Income Investment by owners h Arises from income Revenue statement activities that Expenses constitute the entity s G ongoing major or central ams Chapter operations Losses 226 L0 5 Second Level Basic Elements Exercise 23 IdenTify The elemenT or elemenTs associaTed wiTh iTems below ElemenTs i Residual inTeresT in The neT ASSETS asseTs of The enTerprise Liabii es J Increases asseTs Through Equify sale of producT k Decreases asseTs by InveSTmem by Owner39s purchasing The company s l DiSTribUTion To owner39s own sTock I I Comprehensive income I Changes in equiTy during Revenue The period excepT Those Expenses from invesTmenTs by owners and disTribuTions To Gams Chapter owners Losses 227 L0 5 Second Level Basic Eemem s Review According to the FASB conceptual framework an entity39s revenue may result from a A decrease in an asset from primary operations b An increase in an asset from incidental Transactions c An increase in a liability from incidental transactions A decrease in a liability from primary operations CPA adapted Ch t Zip er L0 5 Define the basic elements of financial sfafemenfs Third Level Recognition and Measurement The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No 5 Recognition and Measurement in Financial Statements of Business Enterprises ASSUMPTIONS PRINCIPLES CONSTRAINTS 1 Economic entity 1 Measurement 1 Costbenefit 2 Going concern 2 Revenue recognition 2 Materiality 3 Monetary unit 3 Expense recognition 3 Industry practice 4 Periodicity 4 Fulldisclosure 4 Conservatism Ch t ap er L0 6 Describe five basic assump ans of accounfing Third Level Assump fians Economic En l39i l39y company keeps i rs ac rivi ry separa re from its owners and o rher businesses Going Concern company To las r long enough To fulfill objectives and commi rmen rs Mone l39or39y Uni139 money is The common denominator Per39iodici l39y company can divide i rs economic ac rivi ries in ro rime per39iods Chapter 39 I I 230 L0 6 De539crbe fhe basvc assumpfons of accountrig Third Level Assumptions Brief Exercise 24 Identify which basic aSSUmption of accounting is best de3cribed in each item below a The economic activities of KC Corporation are divided into 12month periods for the Periodicity purpose of issuing annual reports b Solectron Corporation Inc does not adjust amounts in its financial statements for the effects of inflation Monetary Unit c Walgreen Co reports current and noncurrent classifications in its balance sheet Gomg Concern d The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes Ent ty Economic Chapter 231 L0 6 Descrbe the bastc assumpfmns of accounting Third Level PrInCIpes MeasuremenT The mosT commonly used measuremenTs are based on historical cosT and fair value Issues I HisTorical cosT provides a reliable benchmark for measuring hisTorical Trends I Fair value informaTion may be more useful I Recenle The FASB has Taken The sTep of giving companies The opTion To use fair value as The basis for measuremenT of financial asseTs and financial liabiliTies I ReporTing of fair value informaTion is increasing Ch t 252 L0 7 Explain the appicafian of the basic principes of accounting Third Level PrInCIpes Revenue Recognition generally occurs 1 when realized or realizable and 2 when earned EXCBP OhS Illustration 24 Timing of Revenue Recogni rion We39ll ship the goods ths week End of production of sale During production I Time cash received Revenue should be recognized in the accounting period in which it is earned generally at point of sale Ch t za l3mr L0 7 Explain the appica an of the basic principles of accounting Third Level PrInCIpes Expense Recognition Let the expense follow the II revenues Illustration 25 Expense Recognition Type of Cost Relationship Recognition Product costs Direct relationship between Recognize in period of revenue 0 Material cost and revenue matching Labor Overhead Period costs No direct relationship Expense as incurred 0 Salaries between cost 0 Administrative costs and revenue Chapter 234 L0 7 Explain the appica an of the basic principles of accounting Third Level PrInCIpes Full Disclosure providing informaTion ThaT is of sufficienT imporTance To influence The judgmenT and decisions of an informed user Provided Through I Financial STaTemenTs I NoTes To The Financial STaTemenTs I SupplemenTaryinformaTion on t 233elr L0 7 Explain the appicafian of the basic principles of accounting Third Level PrI39IiCIpes Brief Exercise 25 IdenTify which basic principle of accounTing is besT de3cr39ibed in each iTem below a KC Cor39por39aTion r39epor39Ts revenue in iTs income Revenue sTaTemenT when iT is earned insTead of when The Recognition cash is collecTed b Yahoo Inc recognizes depr39eciaTion expense for39 a machine over39 The 2year period during which ThaT machine helps The company ear39n r39evenue Expense Recognition C Grade Cor39por39aTion r39epor39Ts infor39maTion abouT pending lawsuiTs in The noTes To iTs financial sTaTemenTs Full Disclosure d EasTman Kodak Company r39epor39Ts land on iTs balance sheeT aT The amounT paid To acquir39e iT even Measurement Though The esTimaTed fair39 mar39keT value is gr39eaTer39 Chapter L0 7 Explain fie appica ori of The basic principles of accoun ng Third Level Cansfrain 7 s COST BenefiT The cosT of providing The informaTion musT be weighed againsT The benefiTs ThaT can be derived from using iT MaTerialiTy an iTem is maTerial if iTs inclusion or omission would influence or change The judgmenT of a reasonable person IndusTry PracTice The peculiar naTure of some indusTries and business concerns someTimes requires deparTure from basic accounTing Theory ConservaTism when in doubT choose The soluTion ThaT will be leasT likely To oversTaTe asseTs and income Chapter L0 8 Desaribe The impacf fhaf consfrainfs have 23937 on reporting accounting informa on Third Level Cansfrain 7 s Brief Exercise 27 WhaT accounTing consTrainTs are illusTr39aTed by The iTems below a KC Inc reporTs agriculTural crops on iTs Industry balance sheeT aT markeT value Practice b Rafael CorporaTion does noT accrue a conTingenT lawsuiT gain of 650000 c Willis Company does noT disclose any informaTion in The noTes To The financial Cost sTaTemenTs unless The value of The Benefit informaTion To users exceeds The expense of gaThering iT d Favre CorporaTion expenses The cosT of Matenamy wasTebaskeTs in The year They are acquired Chapter 238 L0 8 CONVERGENCE CORNER W Chapter 239 The exisTing concepTual frameworks underlying US 6AAP and iGAAP are very similar The converged framework should be a single documenT unlike The Two concepTual frameworks ThaT presenle exisT The IASB framework makes Two assumpTions One assumpTion is ThaT financial sTaTemenTs are prepared on an accrual basis The oTher is ThaT The reporTing enTiTy is a going concern There is some agreemenT ThaT The role of financial reporTing is To assisT users in decision making However oThers noTe ThaT anoTher objecTive is To provide informaTion on managemenT39s performance ofTen referred To as sTewardship Copyright Chapter 240 CopyrighT 2009 John Wiley amp Sons Inc All righTs reserved Reproduction or TranslaTion of This work beyond ThaT permiTTed in SecTion 117 of The 1976 UniTed STaTes CopyrighT AcT wiThouT The express wriTTen permission of The copyrighT owner is unlawful RequesT for furTher informaTion should be addressed To The Permissions DeparTmenT John Wiley amp Sons Inc The purchaser may make backup copies for hisher own use only and noT for disTribuTion or resale The Publisher assumes no responsibiliTy for errors omissions or damages caused by The use of These programs or from The use of The informaTion conTained herein
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