Financial Reporting Midterm 1 Questions
and Answers Grade A+ 2023
Purpose of Financial Accounting - -Provide useful financial information to capital providers
(investors and creditors) in making decisions
-Cash Basis Accounting - -Difference between cash receipts and cash disbursements from
providing goods and services= Net Operating Cash Flow
-Short periods of time... - -Operating cash flows may not be an accurate predictor of future
operating cash flows, sometimes a company pays or receives cash in one period that relates to
performance in multiple periods
-Accrual Accounting - -Provides a measure of periodic performance called net income, the
difference between revenues and expenses
-Generally Accepted Accounting Principles (GAAP) - -A dynamic set of both broad and specific
guidelines that companies should follow when measuring and reporting the information in their
financial statements and notes
-1933 Securities Act and 1934 SEC Act - -Following the stock market crash, some felt
insufficient and misleading financial statement information led to inflated stock prices and the
crash
-1934 SEC Act - -Created the SEC that has the authority to set accounting standards for
companies, but has delegated the task to the private sector. If it does not agree with a particular
standard issued by the private sector, it can force a change in the standard
-Hierarchy of Standard-Setting Authority - -Congress
SEC
Private Sector
-Committee on Accounting Procedure (CAP) 1938-1959
-Accounting Principles Board (APB) 1959-1973
-Financial Accounting Standards Board (FASB) 1973-Present
-FASB - --7 Members
-Supported by parent organization the Financial Accounting Foundation (FAF)
-Conceptual Framework - --Provides an underlying structure for the development of accounting
standards
-"Accounting Constitution"
-FASB Accounting Standards Codification - -The only source of authoritative US GAAP as well
as SEC rules and interpretive releases
, -International Accounting Standards Board (IASB) - -Develop a single set of global accounting
standards
-International Financial Reporting Standards (IFRS) - -Most recent standards from the IASB
-Fundamental Quality Characteristics of Accounting Information - -Decision Usefulness
1. Relevance
2. Faithful Representation
-Relevance - -Predictive and Confirmatory Value
-Helps users predict a firm's future cash flows, and helps investors confirm or change their prior
assessments regarding a company's cash flow generating ability
-Material - -Information that has an affect on decision making, aspect of relevance that depends
on company's particular situation
-Faithful Representation - -Agreement between a measure and a real-world phenomenon that the
measure is supposed to represent
-Complete (Faithful Representation) - -A depiction of an economic phenomenon that includes all
information necessary for faithful representation
-Neutrality (Faithful Representation) - -Freedom from bias
-Free from Error (Faithful Representation) - -Enhances FR, no errors or omissions in the
description of the amount or process used to report the amount
-Conservatism - -When dealing with the potential for error, accountants require greater
verification before recognizing good news than bad news
-Result of Conservatism - -Losses are reflected in net income more quickly than are gains, and
net assets tend to be biased downwards
-Enhancing Qualitative Characteristics... - -Comparability
Consistency
Verifiability
Timeliness
Understandability
-Economic Entity Assumption - -Economic events can be identified specifically with an
economic entity
-Going Concern Assumption - -Business will continue to operate indefinitely
and Answers Grade A+ 2023
Purpose of Financial Accounting - -Provide useful financial information to capital providers
(investors and creditors) in making decisions
-Cash Basis Accounting - -Difference between cash receipts and cash disbursements from
providing goods and services= Net Operating Cash Flow
-Short periods of time... - -Operating cash flows may not be an accurate predictor of future
operating cash flows, sometimes a company pays or receives cash in one period that relates to
performance in multiple periods
-Accrual Accounting - -Provides a measure of periodic performance called net income, the
difference between revenues and expenses
-Generally Accepted Accounting Principles (GAAP) - -A dynamic set of both broad and specific
guidelines that companies should follow when measuring and reporting the information in their
financial statements and notes
-1933 Securities Act and 1934 SEC Act - -Following the stock market crash, some felt
insufficient and misleading financial statement information led to inflated stock prices and the
crash
-1934 SEC Act - -Created the SEC that has the authority to set accounting standards for
companies, but has delegated the task to the private sector. If it does not agree with a particular
standard issued by the private sector, it can force a change in the standard
-Hierarchy of Standard-Setting Authority - -Congress
SEC
Private Sector
-Committee on Accounting Procedure (CAP) 1938-1959
-Accounting Principles Board (APB) 1959-1973
-Financial Accounting Standards Board (FASB) 1973-Present
-FASB - --7 Members
-Supported by parent organization the Financial Accounting Foundation (FAF)
-Conceptual Framework - --Provides an underlying structure for the development of accounting
standards
-"Accounting Constitution"
-FASB Accounting Standards Codification - -The only source of authoritative US GAAP as well
as SEC rules and interpretive releases
, -International Accounting Standards Board (IASB) - -Develop a single set of global accounting
standards
-International Financial Reporting Standards (IFRS) - -Most recent standards from the IASB
-Fundamental Quality Characteristics of Accounting Information - -Decision Usefulness
1. Relevance
2. Faithful Representation
-Relevance - -Predictive and Confirmatory Value
-Helps users predict a firm's future cash flows, and helps investors confirm or change their prior
assessments regarding a company's cash flow generating ability
-Material - -Information that has an affect on decision making, aspect of relevance that depends
on company's particular situation
-Faithful Representation - -Agreement between a measure and a real-world phenomenon that the
measure is supposed to represent
-Complete (Faithful Representation) - -A depiction of an economic phenomenon that includes all
information necessary for faithful representation
-Neutrality (Faithful Representation) - -Freedom from bias
-Free from Error (Faithful Representation) - -Enhances FR, no errors or omissions in the
description of the amount or process used to report the amount
-Conservatism - -When dealing with the potential for error, accountants require greater
verification before recognizing good news than bad news
-Result of Conservatism - -Losses are reflected in net income more quickly than are gains, and
net assets tend to be biased downwards
-Enhancing Qualitative Characteristics... - -Comparability
Consistency
Verifiability
Timeliness
Understandability
-Economic Entity Assumption - -Economic events can be identified specifically with an
economic entity
-Going Concern Assumption - -Business will continue to operate indefinitely
