Accounting Principles

chap 7

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Chapter

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1 Explain the meaning of GAAP and identify the key items of the conceptual framework.

2 Describe the basic objectives of financial reporting

3 Discuss the qualitative characteristics of accounting

information and elements of financial statements

4 Identify the basic assumptions used by accountants

5 Identify the basic principles of accounting

6 Identify the two constraints in accounting

7 Understand and analyze classified financial statements

8 Explain the accounting principles used in international

operations.

Study Objectives

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Time periodGoing

Constraints

in Accounting

Statement Presentation and Analysis

disclosureCost

MaterialityConservatismSummary of conceptual framework

Classified balance sheetClassified income statement Analyzing financial statements

An international perspective

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Chapter

7-4

Various users need financial information

The accounting profession

has attempted to develop

a set of standards that

are generally accepted

and universally practiced.

Financial Statements

Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows

Note Disclosure

Financial Statements

Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows

Note Disclosure

Generally Accepted

Accounting Principles (GAAP)

Generally Accepted

Accounting Principles (GAAP)

The Conceptual Framework of Accounting

SO 1 Explain the meaning of GAAP and identify the

key items of the conceptual framework.

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Organizations Involved in Standard Setting:

Financial Accounting Standards Board (FASB)

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Chapter

7-6

Conceptual Framework - “…a constitution, a coherent system of interrelated objectives and fundamentals.” FASB’s conceptual framework consists of the following:

1 Objectives of financial reporting.

2 Qualitative characteristics of accounting

information.

3 Elements of financial statements.

4 Operating guidelines (assumptions, principles, and

constraints).

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Chapter

7-7

a) To provide information that is useful to those making

investment and credit decisions.

a) To provide information that is useful to those making

investment and credit decisions.

b) Helpful in assessing future cash flows.

c) Identify the economic resources (assets), the claims to

those resources (liabilities), and the changes in those

resources and claims.

c) Identify the economic resources (assets), the claims to

those resources (liabilities), and the changes in those

resources and claims.

Conceptual Framework

Objectives of Financial Reporting

SO 2 Describe the basic objectives of financial reporting.

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Chapter

7-8

According to the FASB conceptual framework, the

objectives of financial reporting for business

enterprises are based on?

a Generally accepted accounting principles

b Reporting on management’s stewardship.

c The need for conservatism.

d The needs of the users of the information.

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disclose, and the format in which to present it?

SO 3 Discuss the qualitative characteristics of accounting

information and elements of financial statements.

Answer:

By determining which alternative provides the most

useful information for decision-making purposes

( decision usefulness ).

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Chapter

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Relevance – making a difference in a decision.

Predictive value Feedback value Timeliness

Reliability

Verifiable Representational faithfulness Neutral - free of error and bias

Qualitative Characteristics

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Chapter

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Comparability – Information that is measured and reported in a similar manner for different

companies is considered comparable

Consistency - When a company applies the same

accounting treatment to similar events from period

to period.

Qualitative Characteristics

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Chapter

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Revenue Expenses Gains

Losses

Assets Liabilities Equity

“Moment in Time” “Period of Time”

Elements of Financial Statements

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Chapter

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Illustration: Identify the element or elements associated with items below.

(a) Obligation to transfer

resources arising from a past transaction.

(b) Items characterized by

future economic benefit.

(c) Arises from income

statement activities that constitute the entity’s ongoing major or central operations.

Elements

(a) Assets Liabilities

Equity Revenue Expenses

(b)

(c) (c)

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Chapter

7-14

Assets Liabilities Equity Revenue Expenses

(d) Residual interest in the net

assets of the enterprise.

(e) Increases assets through

sale of product.

Elements

(a) (b)

(c) (c)

(d) (e)

Illustration: Identify the element or elements associated with items below.

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Going Concern

SO 4 Identify the basic assumptions used by accountants.

Assumptions

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Chapter

7-17

Only transaction data capable of being expressed in terms of

money should be included in the accounting records of the

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The enterprise will continue in operation long enough

to carry out its existing objectives.

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SO 5 Identify the basic principles of accounting.

Principles

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Chapter

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recognize revenue in the accounting period in which it is earned.

Principles

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Chapter

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Matching - efforts (expenses) should be matched

with accomplishment (revenues) whenever it is

reasonable and practicable to do so “Let the expense

follow the revenues.”

Illustration 7-4 Expense Recognition

Principles

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Chapter

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statements, notes to the financial statements, and

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Chapter

7-26

exchange transaction, is the “cost”

Principles

Illustration 7-5 Basic Principles

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Chapter

7-27

Illustration: Identify which basic principle of

accounting is best described in each item below.

(a) Norfolk Southern Corporation reports revenue

in its income statement when it is earned instead of

when the cash is collected.

(b) Yahoo, Inc recognizes depreciation expense for

a machine over the 2-year period during which that

machine helps the company earn revenue.

(c) Oracle Corporation reports information about

pending lawsuits in the notes to its financial

statements.

(d) Eastman Kodak Company reports land on its

balance sheet at the amount paid to acquire it, even

though the estimated fair market value is greater.

Revenue Recognition Matching

Full Disclosure

Cost

Principles

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Chapter

7-28

Constraints permit a company to modify

generally accepted accounting principles without reducing the usefulness of the reported information.

Materiality Conservatism

Constraints in Accounting

SO 6 Identify the two constraints in accounting.

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Chapter

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omission would influence or change the judgment of a

reasonable person.

Illustration 7-6 Constraints

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that will be least likely to overstate assets and income.

Illustration 7-6 Constraints

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Chapter

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Illustration What accounting constraints are

illustrated by the items below?

(a) Crimson Tide Corporation does not accrue a

contingent lawsuit gain of $650,000.

(b) Sun Devil Corporation expenses the cost of

wastebaskets in the year they are acquired.

Conservatism Materiality

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Chapter

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Summary of Conceptual Framework

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Chapter

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Classified Balance Sheet

SO 7 Understand and analyze classified financial statements.

Illustration 7-8 Standard classification

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Chapter

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Illustration 7-9 Proprietorship balance sheet

A proprietorship, the balance sheet uses the term

“Owner’s equity” instead of “Stockholders’ equity”

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Chapter

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Illustration 7-10 Partnership balance sheet

In a partnership, each partner has a separate capital

account.

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Chapter

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Classified Income Statement

A multiple-step income statement generally includes

the following.

Sales revenue Cost of goods Operating

Other revenues and gains Other expenses and losses

Two additional items are income tax expense and

earnings per share

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Chapter

7-37

Classified Income Statement

Illustration 7-11 Income taxes

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Indicates the net income earned by each share of

outstanding common stock.

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Chapter

7-39

Analyzing Financial Statements

Three major characteristics are generally used:

Liquidity, Profitability, and Solvency.

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Chapter

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Liquidity

This ratio means that current assets are more than two times greater than current liabilities.

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Chapter

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Working capital provides some indication of the company’s

ability to meet its existing current obligations.

Liquidity

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Chapter

7-42

Profitability

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Chapter

7-43

Profit Margin Percentage measures the percentage of each

dollar of sales that results in net income.

Profitability

Profitability ratios measure the income or operating success

of a company for a given period of time.

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Chapter

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Return on Assets is an overall measure of profitability

Profitability

Return on Common Equity shows the percentage of net income earned for each dollar of owners’ investment.

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Chapter

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Debt to Total Assets measures the percentage of total assets that creditors, as opposed to stockholders, provide.

Solvency

Solvency measures the ability of an enterprise to survive over

a long period of time.

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Chapter

7-46

SO 8 Explain the accounting principles used in international operations.

An International Perspective

There are few recognized worldwide accounting

standards The International Accounting Standards

Board (IASB), of which the United States is a member,

is working to obtain conformity in international

accounting practices.

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Chapter

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Scandals and bankruptcies at Enron, WorldCom, and

other companies brought many changes to the way

America does business.

Many companies have developed a code of ethics to:

deter wrongdoing promote honest and ethical conduct indicate that management takes ethics seriously.

Corporations Have Governance Structures—Do You? All About You

All About You

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Chapter

7-48

Some Facts:

Under Sarbanes-Oxley, a company must disclose whether

it has a code of ethics

Enron had a code of ethics Enron’s board of directors knowingly waived requirements of the code so that the CFO could set up and run special purpose entities

In a recent survey of 1,436 workers, 34% said that they have seen unethical activities at their workplace, but

only 47% said they are likely to report these activities

All About You

Corporations Have Governance Structures—Do You?

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Chapter

7-49

Stockholders often lose money as a result of unethical

behavior by management and they often file lawsuits against

the company in an effort to recoup these losses.

All About You

Source: Elaine Buckberg, Todd Foster, and Ronald I Miller, “Recent Trends in Shareholder

Class Action Litigation: Are WorldCom and Enron the New Standard?” NERA Economic Consulting, www.nera.com (accessed June 26, 2006).

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What Do You Think?

Many universities have become concerned about student cheating Many schools now have student ethics codes Do you think that these ethics codes serve a useful purpose?

All About You

YES: Anything that will reduce unethical behavior is a

good thing.

NO: The existence of an ethics code won’t affect

student behavior.

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Chapter

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Tiêu đề	Accounting Principles
Trường học	University of Financial Studies
Chuyên ngành	Accounting
Thể loại	Bài Luận
Năm xuất bản	2025
Thành phố	New York

Định dạng
Số trang	51
Dung lượng	1,75 MB