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CHAPTER 2 INTERMEDIATE ACCOUNTING 1
Relevant or Faithful: Information that is neutral - Faithful Relevant or Faithful: Information that has decision making implications because of its predictive value - Relevant Relevant or Faithful: Information that is complete - Faithful accounting Relevant or Faithful: Information that is free from error - Faithful accounting Relevant or Faithful: Information that has decision-making implications because of its confirmatory value. - Relevant Fundamental Characteristics - -Relevant -Faithful representation
Enhancing Characteristics - -Comparable -Timely -Understandable -Verifiable -Consistency Define Neutral - Information is free from bias in both selection and presentation of financial data. Define Complete - Includes all information that is necessary for the user to understand the underlying economic event being depicted Define: Free From Error - Information should not contain errors or omissions in the description of the economic event and there are no errors in the process used to produce the financial information Define Verifiability - Different knowledgeable parties could reach a consensus that a particular depiction is a faithful representation
Attribute: Confirmatory Value Fundamental Characteristic and Attribute? Potential creditors review a company's long-term liabilities footnote to determine that entity's ability to assume additional debt. - Fundamental characteristics: Faithful representation Attribute: Complete Fundamental Characteristic and Attribute? A corporation discloses both favorable and unfavorable tax settlements. - Fundamental Characteristic: Faithful representation Attribute: Neutral Fundamental Characteristic and Attribute? A company discloses the write-off of an
accounts receivable. The receivable due from a major customer accounts for 35% of the company's current assets. - Fundamental Characteristics: Relevance Attribute: Materiality Fundamental Characteristic and Attribute? A financial analyst computes a company's five-year average cost of goods sold in order to forecast next year's profit margin - Fundamental Characteristic: Relevance Attribute: Predictive Value Enhancing Characteristic and Satisfied/Unsatisfied? Auditors from two offices of a large public accounting firm agree on the measurement used for a client's plant assets - EC: Verifiability Satisfied Enhancing Characteristic and Satisfied/Unsatisfied?
Define Predictive Value - if decision makers can use it as an input into processes that help forecast future outcomes. Define Faithful representation - indicates whether financial information depicts the substance of an economic event in a manner that is complete, neutral, and free from error. Define Comparability - allows financial statements users to identify and understand similarities and differences among several entities. Define Variability - means that a group of reasonably informed financial statement users are able to reach a consensus decision that reported information is a faithful representation of an underlying economic event Define Point-in-time Elements - represent resources, claims to resources, or interests in resources as of a specific point in time and appear on the balance sheet (statement of financial position)
arm-length transaction - involves a buyer and seller who are independent and unrelated parties, each bargaining to maximize his or her own wealth. Define Going concern concept - indicates that accountants will record transactions and prepare financial statements as if the entity will continue to operate for an indefinite period of time unless there is evidence to the contrary Define Periodicity assumptions - specifies that an economic entity can divide its life into artificial time periods for the purpose of providing periodic reports on its economic activities. Define Relevant - if it is capable of making a difference in decision making by exhibiting the following attributes: predictive value, confirmatory value and materiality. Going Concern Assumption - - the entity is assumed to continue indefinitely (We are going to stay in business forever)
-If there is substantial doubt of the entity's ability to continue, management must disclose whether it has plans to alleviate the doubt -If Management's plans do not alleviate substancial doubt, it is required to include a statement in the footnotes indicating that there is substancial doubt of its ability to continue as a going concern ASU2014-15 (205-40) What must the entity disclose? - - pg 79 Economic Entity Assumption - -the economic entity can be identified with a particular unit of accountability -the business is separate and distinct from its owners -Entity's assets and other financial elements are not commingled with those of the owners -The economic entity assumption is an accounting concept, and not a legal construct -Departments or divisions of an entity may be considered separate entities. Proprietorship - The bank can take everything you own - Unlimited Liability
Partnership - - Unlimited Liability -Joint and several (individual) liability... if one partner cannot pay then
- Business can be identified but not a separate legal entity Corporation - - legal entities are separate from personal assets
- limited Liability ( corporate shield )
- it is critical that you set this up right. Monetary Unit Assumption - - money is the unit of measure of economic transactions
- the dollar is assumed to remain relatively stable in value
- assume that there is no inflation Periodicity Assumption - - the economic activity of an entity may be divided into artificial time periods for reporting purposes.
- The standard time period is the operating cycle of year whichever is longer.
- Requires the use of accrual accounting.
Conservatism - when alternative accounting treatments exist, choose the one least likely to overstate assets and understates liabilities. What is the concept? Katia Clothing, a U.S. GAAP reporter, purchased land five years ago and recently had it appraised for $65,000. The company reported this amount on its most recent balance sheet - Historical Cost concept What is the concept? Edward McCormick owns two separate businesses: EMC Enterprises and Edward Associates. McCormick regularly pays the property taxes for EMC from the checking account of Edward Associates - Business entity concept COncept? US Motors Inc. recently decided to recall 400,000 vehicles for a safety concern. US Motors did not report this information in its annual report - Full disclosure, materiality, completeness Concept?
Abare Company purchased new equipment for $2,500, and charged it to operating expenses on its most recent income statement. - Expense recognition concept Concept? Beeke Brothers Incorporated decided not to report its quarterly results to its shareholders. - Timeliness Accrual Accounting - -Revenue is recognized when realized or realizable and earned (revenue recognition principle) -Expenses are recognized when incurred to match revenues (the matching principle) Cash Basis - - revenue is recognized when the cash is received -expenses are recognized when cash is paid
