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Accounting Principles
Generally accepted
means that these principles must have substantial authoritative support
Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) The FASB has the responsibility for developing accounting principles in the United States.
FASB objectives of financial reporting are to provide information that is: 1 useful to those making investment and credit decisions 2 helps in assessing future cash flows 3 identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims
To be useful, information should possess the following qualitative characteristics: 1 relevance 2 reliability 3 comparability 4 consistency
RELEVANCE
Accounting information has relevance if it makes a difference in a decision. Relevant information helps users forecast future events (predictive value), or it confirms or corrects prior expectations (feedback value). Information must be available to decision makers before it loses its capacity to influence their decisions (timeliness).
RELIABILITY
Reliability of information means that the information is free of error and bias, in short, it can be depended on. To be reliable, accounting information must be verifiable.
2005
2006
2007
Relevance
1 Predictive value 2 Feedback value 3 Timeliness
Reliability
1 Verifiable 2 Faithful representation 3 Neutral
Comparability
Consistency
Principles
Revenue recognition Matching Full disclosure Cost
Constraints
Materiality Conservatism
ASSUMPTIONS
STUDY OBJECTIVE 4
Example: employee satisfaction and percent of international employees are not transactions that should be included in the financial records.
Salaries paid
2005
QTR 1 QTR 2 QTR 3 QTR 4 JAN APR JUL OCT
2006
FEB MAY AUG NOV MAR JUN SEPT DEC
2007
Revenue recognition principle dictates that revenue should be recognized in the accounting period in which it is earned. When a sale is involved, revenue is recognized at the point of sale.
MATCHING (EXPENSE RECOGNITION) Expense recognition is traditionally tied to revenue recognition. referred to as the matching principle dictates that expenses be matched with revenues in the period in which efforts are made to generate revenues.
1) Cost of goods
merchandise inventory becomes expensed when the inventory is sold
2) Operating expenses other unexpired costs through use or consumption or through the passage of time
Cost Incurred
Benefits Decrease
Asset
Expense
COST PRINCIPLE
The cost principle dictates that assets be recorded at their cost. Cost is used because it is both relevant and reliable. 1) Cost is relevant because it represents a) the price paid, b) the assets sacrificed, or c) the commitment made at the date of acquisition. 2) Cost is reliable because it is a) objectively measurable, b) factual, and c) verifiable.
CONSTRAINTS IN ACCOUNTING
STUDY OBJECTIVE 6
Two constraints
Materiality
relates to an items impact on a firms overall financial condition and operations.
Conservatism
dictates that when in doubt, choose the method that will be the least likely to overstate assets and income
CONSTRAINTS IN ACCOUNTING
CONCEPTUAL FRAMEWORK