ACG 4101 Ch. 1 2026
Describe the function and primary focus of financial accounting. - answer Financial
accounting is concerned with providing relevant financial information to various external
users. However, the primary focus is on financial information provided by profit-oriented
companies to their present and potential investors and creditors
Explain the difference between accrual and cash accounting. - answer Cash basis
provides a measure of periodic performance called net operating cash flow, which is the
difference between cash receipts and cash disbursements.
Accrual accounting provides a measure of performance called net income. Periodic net
income is a better indicator of future operating cash flows than is current net operating
cash flows.
Define GAAP & the historical developments of accounting standards, including the
convergence between US and international standards. - answerGAAP comprises a
dynamic set of both broad and specific guidelines that companies follow when
measuring and reporting the financial statements & related notes.
The SEC has the authority to set accounting standards in the US. However, the SEC
has always delegated the task to a private sector body, at this time the FASB.
The IASB sets global accounting standards and works with national accounting setters
to achieve convergence in accounting standards around the world.
Explain why establishing accounting standards is characterized as a political process. -
answerAccounting standards can have significant different effects on companies,
investors, creditors, and other interest groups. Various interested parties sometimes
lobby standard setters for their preferred outcomes; therefore, the setting of accounting
standards often has been characterized as a political process.
Explain factors that encourage high quality financial reporting. - answerConceptually
based financial accounting standards, external auditors, financial reporting reforms
(SOX Act), ethical management, and professional accounting organizations that
prescribe ethical conduct and license practitioners.
Explain the purpose of the conceptual framework. - answerThe FASB's conceptual
framework is a set of cohesive objectives and fundamental concepts on which financial
accounting reporting standards can be based
Identify the objective and qualitative characteristics of financial reporting information and
the elements of financial statements. - answerThe objective of financial reporting is to
provide useful financial information to capital providers. The primary decision-specific
qualities that make financial information useful are relevance and faithful representation.
,To be relevant, information must be possess predictive value and or confirmatory value.
All material should be included.
Completeness, neutrality, and freedom from error all enhance faithful representation.
10 elements of financial statements are: assets, liabilities, equity, investments by
owners, distributions by owners, revenues, expenses, gains, losses, and
comprehensive income.
Four basic assumptions underlying GAAP. - answerEconomic entity assumption, going
concern assumption, periodicity, and monetary unit assumption
Describe the recognition, measurement, and disclosure concepts that guide accounting
principles. - answerRecognition determines whether an item is reflected in the financial
statements
Measurement determines the amount of the item (historical cost, net realizable value,
present value, fair value, current cost)
Discuss the primary differences in GAAP and IFRS. - answerIFRS provides guidance to
preparers and standard setters, while GAAP only provides guidance to standard setters
What is the objective of financial accounting? - answerProvide investors and creditors
with useful information for decision making
The information should help external users evaluate the amounts, timing, and
uncertainty of the enterprise's future cash receipts
List the financial statements most frequently provided. - answerBalance sheet
(statement of financial position)
Income Statement (Statement of operations)
Statement of cash flows
Statement of Shareholder's Equity
Describe the Balance Sheet. - answerAssets, liabilities, equity
Assets are the resources we own
Liabilities are the obligations we ow
Equity is the owner's claim
Describe the Income Statement. - answerRevenue, expenses, gains, loss
Describe the Statement of Cash Flows. - answerOperations, investments, financing
Define the capital market. - answerthe mechanism that fosters the efficient allocation of
resources to private enterprises that will use them the best and not to enterprises that
will waste them
List the forms of businesses. - answerSole proprietorship
Partnership
, Corporation - investors provide resources (cash) to a corporation in exchange for
ownership interest (stock); creditors lend cash by making either individual loans or by
purchasing publicly traded debt (bonds)
What are key variables in the investment decision? - answerExpected rate of return and
the uncertainty of that return
Positive return to investors if the company can generate a profit
Investors and creditors liked to invest in stocks or bonds that would provide the highest
rate of return
Define Cash Basis Accounting. - answermeasures income as the difference between
cash receipts and cash disbursements during a reporting period from transactions
related to providing goods and services to customers
Cash basis accounting produces net operating cash flow, which may not be accurate
predictor of future operating cash flow
Define Accrual Accounting. - answerMeasures income according to entity's
accomplishments and resource sacrifices during the period from transactions related to
providing goods and services to customers, regardless of whether cash is received or
paid
Higher predictive value, as it is a more accurate prediction of future operating cash
flows
This produces net income, difference between revenues and expenses
Captures underlying economic activity more timely
Define GAAP - answerset of broad and specific guidelines that companies follow when
measuring and reporting the information in their financial statements and related notes
Describe the historical developments of accounting standards - answer-Pressures to
create uniform accounting standards began after the stock market crash of 1929
-1933 Securities Act - accounting and disclosure requirements for offerings of securities
-1934 Securities Exchange Act - mandates reporting standards for companies whose
securities are publicly traded; Congress creates the SEC (legal authority to set
accounting standards)
-SEC relies on private sector to set accounting standards; however power still lies in the
SEC and it can force a change in the standard set by private sector
-CAP was first body to assume the task of setting accounting standards, then APB, then
FASB
What issues did APB face? - answer-Never able to establish a conceptual framework
for financial accounting and reporting that was broadly accepted
-APB members served on voluntary, part-time basis
-Perceived lack of independence, made up of CPA's and backed by the AICPA
Describe the creation of the FASB - answer-7 full time members elected by the
Financial Accounting Foundation (FAF)
Describe the function and primary focus of financial accounting. - answer Financial
accounting is concerned with providing relevant financial information to various external
users. However, the primary focus is on financial information provided by profit-oriented
companies to their present and potential investors and creditors
Explain the difference between accrual and cash accounting. - answer Cash basis
provides a measure of periodic performance called net operating cash flow, which is the
difference between cash receipts and cash disbursements.
Accrual accounting provides a measure of performance called net income. Periodic net
income is a better indicator of future operating cash flows than is current net operating
cash flows.
Define GAAP & the historical developments of accounting standards, including the
convergence between US and international standards. - answerGAAP comprises a
dynamic set of both broad and specific guidelines that companies follow when
measuring and reporting the financial statements & related notes.
The SEC has the authority to set accounting standards in the US. However, the SEC
has always delegated the task to a private sector body, at this time the FASB.
The IASB sets global accounting standards and works with national accounting setters
to achieve convergence in accounting standards around the world.
Explain why establishing accounting standards is characterized as a political process. -
answerAccounting standards can have significant different effects on companies,
investors, creditors, and other interest groups. Various interested parties sometimes
lobby standard setters for their preferred outcomes; therefore, the setting of accounting
standards often has been characterized as a political process.
Explain factors that encourage high quality financial reporting. - answerConceptually
based financial accounting standards, external auditors, financial reporting reforms
(SOX Act), ethical management, and professional accounting organizations that
prescribe ethical conduct and license practitioners.
Explain the purpose of the conceptual framework. - answerThe FASB's conceptual
framework is a set of cohesive objectives and fundamental concepts on which financial
accounting reporting standards can be based
Identify the objective and qualitative characteristics of financial reporting information and
the elements of financial statements. - answerThe objective of financial reporting is to
provide useful financial information to capital providers. The primary decision-specific
qualities that make financial information useful are relevance and faithful representation.
,To be relevant, information must be possess predictive value and or confirmatory value.
All material should be included.
Completeness, neutrality, and freedom from error all enhance faithful representation.
10 elements of financial statements are: assets, liabilities, equity, investments by
owners, distributions by owners, revenues, expenses, gains, losses, and
comprehensive income.
Four basic assumptions underlying GAAP. - answerEconomic entity assumption, going
concern assumption, periodicity, and monetary unit assumption
Describe the recognition, measurement, and disclosure concepts that guide accounting
principles. - answerRecognition determines whether an item is reflected in the financial
statements
Measurement determines the amount of the item (historical cost, net realizable value,
present value, fair value, current cost)
Discuss the primary differences in GAAP and IFRS. - answerIFRS provides guidance to
preparers and standard setters, while GAAP only provides guidance to standard setters
What is the objective of financial accounting? - answerProvide investors and creditors
with useful information for decision making
The information should help external users evaluate the amounts, timing, and
uncertainty of the enterprise's future cash receipts
List the financial statements most frequently provided. - answerBalance sheet
(statement of financial position)
Income Statement (Statement of operations)
Statement of cash flows
Statement of Shareholder's Equity
Describe the Balance Sheet. - answerAssets, liabilities, equity
Assets are the resources we own
Liabilities are the obligations we ow
Equity is the owner's claim
Describe the Income Statement. - answerRevenue, expenses, gains, loss
Describe the Statement of Cash Flows. - answerOperations, investments, financing
Define the capital market. - answerthe mechanism that fosters the efficient allocation of
resources to private enterprises that will use them the best and not to enterprises that
will waste them
List the forms of businesses. - answerSole proprietorship
Partnership
, Corporation - investors provide resources (cash) to a corporation in exchange for
ownership interest (stock); creditors lend cash by making either individual loans or by
purchasing publicly traded debt (bonds)
What are key variables in the investment decision? - answerExpected rate of return and
the uncertainty of that return
Positive return to investors if the company can generate a profit
Investors and creditors liked to invest in stocks or bonds that would provide the highest
rate of return
Define Cash Basis Accounting. - answermeasures income as the difference between
cash receipts and cash disbursements during a reporting period from transactions
related to providing goods and services to customers
Cash basis accounting produces net operating cash flow, which may not be accurate
predictor of future operating cash flow
Define Accrual Accounting. - answerMeasures income according to entity's
accomplishments and resource sacrifices during the period from transactions related to
providing goods and services to customers, regardless of whether cash is received or
paid
Higher predictive value, as it is a more accurate prediction of future operating cash
flows
This produces net income, difference between revenues and expenses
Captures underlying economic activity more timely
Define GAAP - answerset of broad and specific guidelines that companies follow when
measuring and reporting the information in their financial statements and related notes
Describe the historical developments of accounting standards - answer-Pressures to
create uniform accounting standards began after the stock market crash of 1929
-1933 Securities Act - accounting and disclosure requirements for offerings of securities
-1934 Securities Exchange Act - mandates reporting standards for companies whose
securities are publicly traded; Congress creates the SEC (legal authority to set
accounting standards)
-SEC relies on private sector to set accounting standards; however power still lies in the
SEC and it can force a change in the standard set by private sector
-CAP was first body to assume the task of setting accounting standards, then APB, then
FASB
What issues did APB face? - answer-Never able to establish a conceptual framework
for financial accounting and reporting that was broadly accepted
-APB members served on voluntary, part-time basis
-Perceived lack of independence, made up of CPA's and backed by the AICPA
Describe the creation of the FASB - answer-7 full time members elected by the
Financial Accounting Foundation (FAF)
