Financial
Accounting
Theory
summary
Terms in this set (149)
-Rely on managers for the future of the company
According to Ramanna, what drives
-Having the right controls in place, and projections are conservative
shareholders' demand for accounting
-Shareholder vs. manager, manager taking care of assets (not risk taking),
information. That is, what are the
investors want accrual info as well.
shareholders' problems that accounting
-Shirking and risk could potentially harm future profit/growth of company,
helps solve?
information asymmetry-managers can skew that information
,Questions for 9/6 - 9/7
Ramanna notes that managers have an -Down playing bad news, overemphasizing good news
information advantage over shareholders -Mislead investors because of lack of verifiability and conservatism
and can use that information advantage
to their benefit. Explain.
-Use of BS helps prevent managers investing in risky projects , mangers will be
Ramanna says that accounting practices held accountable
and principles arose organically to meet -IS prevents shirking (can see if managers are shirking)
the demands of the firms' stakeholders. -Stakeholders demand information about future prospects, shirking and risk.
Explain. Auditing existed before SEC said public companies needed FS to be audited:
audit will prevent information asymmetry and add credibility
Ramanna identifies 3 broad purposes for -Managers have conference calls with analysts who can predict forecasts
accounting: helping stakeholders -Knowledge of hard number benchmark, disciplines managers to give a number
understand a firm's future prospects, -Harder accounting number means more discipline for forecast
helping stakeholders by controlling -Needs to be more verifiable and conservative
agency costs, and "disciplining" future- *3 characteristics-matching, verifiability, and conservatism
looking forecasts issued outside of the
financial statements (e.g., management
earnings forecasts, analysts earnings
forecasts, etc.). Explain how accounting
performs each of these 3 roles.
-Economic Theory: accrual properties (verifiability/relevance/conservatism), main
Ramanna contrasts the Economic Theory users are shareholders, matching principal
of Financial Reporting with the FASB -FASB: FV accounting (comparability/understandability/timeliness/ verifiability),
Theory of Financial Reporting. Describe main users are potential shareholders
the biggest differences between these -Managers misuse information to their advantage, FASB assumes not a problem
two theories of financial reporting. for shareholders (verifiability not necessary, info should be neutral/ no matching)
and looks if transaction gives rise to asset or liability
Storey and Storey describe the history -Initiated a conceptual framework project to reason the underlying procedures
behind the FASB's Conceptual and a standard by which procedures would be judged
Framework. Discuss the reasons why the -Will lead to increased public confidence in financial statements and aid in
FASB embarked on the Conceptual preventing proliferation of accounting methods
Framework project. Why did the FASB -The board uses it as a coherent system of interrelated objectives and
believe a Conceptual Framework was fundamentals that is expected to lead to consistent standards and that prescribes
needed. What is the purpose of the the nature, function and limits of financial accounting and reporting. Expected to
Conceptual Framework. Who uses it, and serve the public interest by providing structure and direction to financial
how? accounting
What are the fundamental elements of -Assets are the most fundamental
financial statements? Is there one element -Defines what assets, liabilities, revenue and expenses are but to figure out
that is "more fundamental" than the other liabilities, revenue and expenses must go through assets first
elements? Explain.
The FASB started in 1973. At that time, the Problem- defined assets as whatever GAAP said it was, "expected benefits"
definitions of assets and liabilities found in - cannot define liabilities without the definition of assets, and vice versa
the professional literature were circular.
Explain.
1) Asset-Liability View
Storey and Storey talk about two views of -Definitions of income should depend on assets and liabilities
income. Explain. 2) Revenue-Expense View
- Matching principal, assets and liabilities are the product of the matching process
Questions for 9/13 - 9/14
, Outlines what the objective of financial reporting is.
-provide useful information to those with limited access to financial data (external
SFAC 1 (1978)
users, investors, creditors)
-emphasizes cash flows vs accrual bases (CF is more important)
Desirable qualitative characteristics of accounting information, that are used to
SFAC 2 (1980) judge the usefulness of info
- Hierarchy of Qualities (relevance vs reliability)
SFAC 3 REPLACED by SFAC 6
Recognition and measurement in financial statements
-identifies basic 5 financial statements and their recognition criteria (when/where
SFAC 5 (1984)
to include items)
-addresses measurement criteria and what dollar amount items are recorded at
Balance Sheet
Income Statement
5 Statements Comp. Income
Cash Flows
Retained Earnings
Element
Measurable
4 Recognition criteria
Relevant
Reliable
Historical Cost
Current Cost
5 Measurement Values Present Value
Net Realizable Value
Current Market Value
Elements of the financial statements
-Identifies building blocks of financial statements
SFAC 6 (1985)
-Uses asset liability approach vs revenue expense approach
-inclusion of non-profits
Assets
Liabilities
Stockholders Equity
Comprehensive Income
Revenue
10 Basic Building Blocks
Expenses
Gains
Losses
Investment by owners
Distribution to owners
Uses cash flow information and present value in accounting measurement
-Framework using future CF and PV as basis for measurements
SFAC 7 (2000)
-Governs the use of PV, especially when uncertainty is present
*first statement to address specific measurement issues
Conceptual framework for financial reporting
8.1 Redefines objective of accounting (SFAC 1)
SFAC 8 (2010)
8.2 Redefines the characteristics of the information regarding qualitative
characteristics (SFAC 2)
Accounting
Theory
summary
Terms in this set (149)
-Rely on managers for the future of the company
According to Ramanna, what drives
-Having the right controls in place, and projections are conservative
shareholders' demand for accounting
-Shareholder vs. manager, manager taking care of assets (not risk taking),
information. That is, what are the
investors want accrual info as well.
shareholders' problems that accounting
-Shirking and risk could potentially harm future profit/growth of company,
helps solve?
information asymmetry-managers can skew that information
,Questions for 9/6 - 9/7
Ramanna notes that managers have an -Down playing bad news, overemphasizing good news
information advantage over shareholders -Mislead investors because of lack of verifiability and conservatism
and can use that information advantage
to their benefit. Explain.
-Use of BS helps prevent managers investing in risky projects , mangers will be
Ramanna says that accounting practices held accountable
and principles arose organically to meet -IS prevents shirking (can see if managers are shirking)
the demands of the firms' stakeholders. -Stakeholders demand information about future prospects, shirking and risk.
Explain. Auditing existed before SEC said public companies needed FS to be audited:
audit will prevent information asymmetry and add credibility
Ramanna identifies 3 broad purposes for -Managers have conference calls with analysts who can predict forecasts
accounting: helping stakeholders -Knowledge of hard number benchmark, disciplines managers to give a number
understand a firm's future prospects, -Harder accounting number means more discipline for forecast
helping stakeholders by controlling -Needs to be more verifiable and conservative
agency costs, and "disciplining" future- *3 characteristics-matching, verifiability, and conservatism
looking forecasts issued outside of the
financial statements (e.g., management
earnings forecasts, analysts earnings
forecasts, etc.). Explain how accounting
performs each of these 3 roles.
-Economic Theory: accrual properties (verifiability/relevance/conservatism), main
Ramanna contrasts the Economic Theory users are shareholders, matching principal
of Financial Reporting with the FASB -FASB: FV accounting (comparability/understandability/timeliness/ verifiability),
Theory of Financial Reporting. Describe main users are potential shareholders
the biggest differences between these -Managers misuse information to their advantage, FASB assumes not a problem
two theories of financial reporting. for shareholders (verifiability not necessary, info should be neutral/ no matching)
and looks if transaction gives rise to asset or liability
Storey and Storey describe the history -Initiated a conceptual framework project to reason the underlying procedures
behind the FASB's Conceptual and a standard by which procedures would be judged
Framework. Discuss the reasons why the -Will lead to increased public confidence in financial statements and aid in
FASB embarked on the Conceptual preventing proliferation of accounting methods
Framework project. Why did the FASB -The board uses it as a coherent system of interrelated objectives and
believe a Conceptual Framework was fundamentals that is expected to lead to consistent standards and that prescribes
needed. What is the purpose of the the nature, function and limits of financial accounting and reporting. Expected to
Conceptual Framework. Who uses it, and serve the public interest by providing structure and direction to financial
how? accounting
What are the fundamental elements of -Assets are the most fundamental
financial statements? Is there one element -Defines what assets, liabilities, revenue and expenses are but to figure out
that is "more fundamental" than the other liabilities, revenue and expenses must go through assets first
elements? Explain.
The FASB started in 1973. At that time, the Problem- defined assets as whatever GAAP said it was, "expected benefits"
definitions of assets and liabilities found in - cannot define liabilities without the definition of assets, and vice versa
the professional literature were circular.
Explain.
1) Asset-Liability View
Storey and Storey talk about two views of -Definitions of income should depend on assets and liabilities
income. Explain. 2) Revenue-Expense View
- Matching principal, assets and liabilities are the product of the matching process
Questions for 9/13 - 9/14
, Outlines what the objective of financial reporting is.
-provide useful information to those with limited access to financial data (external
SFAC 1 (1978)
users, investors, creditors)
-emphasizes cash flows vs accrual bases (CF is more important)
Desirable qualitative characteristics of accounting information, that are used to
SFAC 2 (1980) judge the usefulness of info
- Hierarchy of Qualities (relevance vs reliability)
SFAC 3 REPLACED by SFAC 6
Recognition and measurement in financial statements
-identifies basic 5 financial statements and their recognition criteria (when/where
SFAC 5 (1984)
to include items)
-addresses measurement criteria and what dollar amount items are recorded at
Balance Sheet
Income Statement
5 Statements Comp. Income
Cash Flows
Retained Earnings
Element
Measurable
4 Recognition criteria
Relevant
Reliable
Historical Cost
Current Cost
5 Measurement Values Present Value
Net Realizable Value
Current Market Value
Elements of the financial statements
-Identifies building blocks of financial statements
SFAC 6 (1985)
-Uses asset liability approach vs revenue expense approach
-inclusion of non-profits
Assets
Liabilities
Stockholders Equity
Comprehensive Income
Revenue
10 Basic Building Blocks
Expenses
Gains
Losses
Investment by owners
Distribution to owners
Uses cash flow information and present value in accounting measurement
-Framework using future CF and PV as basis for measurements
SFAC 7 (2000)
-Governs the use of PV, especially when uncertainty is present
*first statement to address specific measurement issues
Conceptual framework for financial reporting
8.1 Redefines objective of accounting (SFAC 1)
SFAC 8 (2010)
8.2 Redefines the characteristics of the information regarding qualitative
characteristics (SFAC 2)
