Intermediate Accounting - Chapter 2 Exam

Relevance - ANS Accounting information must be capable of making a difference in a decision. Can be predictive, confirmatory, or both. Example: UPS changes past or present expectations based on previous evaluations. Faithful Representation - ANS The numbers and descriptions match what really happened. Info must be complete, neutral, and free of material error. Ex: Predictive Value - ANS (Relevance) Has value as an input to predictive processes used by investors to form their own expectations about the future. Ex: UPS analyzes current resources to claim the resources, dividend payments. Confirmatory Value - ANS (Relevance) Helps users confirm or correct prior expectations. Ex: UPS issues year-end financial statements, then confirms or changes past or present expectations based on previous evaluations. Materiality - ANS (Relevance) Omitting or misstating this info could influence decisions that users make on the basis of the reported financial information. Ex: Sunbeam allegedly made many immaterial adjustments that added up to a material misstatement that misled investors about the company's financial position. Completeness - ANS (Faithful Representation) All information that is necessary for faithful representation is provided. Ex: Citigroup fails to provide information needed to assess the value of its subprime loan receivables, info is not complete. Neutrality - ANS (Faithful Representation) A company cannot select info to favor one set of interested parties over another. Ex: R.J. Reynolds should not suppress info about lawsuits that have been filed related to tobacco-related health concerns, even though it may be damaging to the company. Free From Error - ANS (Faithful Representation) Allows the most accurate representation of a financial item. Ex: JPMorgan Chase misstates its loan losses, the f.s. are misleading and not a faithful representation. Ex: management must estimate the amount of uncollectible accounts to determine bad debt expense Comparability - ANS Info is measured and reported in a similar manner for different companies and is considered comparable. Ex: accounting for pensions in Japan differed from US, making it difficult to compare financial results Verifiability - ANS Occurs when independent measurers, using the the same methods, obtain similar results. Ex: two indepedent auditors count inventory and arrive at the same physical quantity. Timeliness - ANS Having info available to decision makers before it loses its capacity to influence decisions Ex: If Dell waited to report its interim results until nine months after the period, the info would be less useful for decision making purposes. Understandability - ANS The quality of info that lets reasonably informed users see its significance. Ex: If GE issues a report but it is not understood by investors, it's useless. Assets - ANS Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities - ANS Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity - ANS Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Investments by owners - ANS Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise. Distributions to Owners - ANS Decreases in net assets of a particular enterprise result- ing from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interests (or equity) in an enterprise. Comprehensive Income - ANS Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Revenues - ANS Inflows or other enhancements of assets of an entity or settlement of its liabili- ties (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Expenses - ANS Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Gains - ANS Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.