1.01 gaap powerpoint 3 copy

7/29/2019 1.01 GAAP PowerPoint 3 Copy

1/20

GAAP PowerPoint #3


2/20

Understandability

Decision Usefulness

Relevance

Predictive

Value

Feedback

Value

Timeliness

Reliability

Verifiability

Neutrality

Representational

Faithfulness

Comparability and Consistency

Cost/Benefit

Materialitywww.fasb.org

D

iscussed

in

P

PT

#2


3/20

A constraint is a limit, regulation, orconfinement within prescribed bounds.

This term refers to the accounting guidelinesthat border the Hierarchy of QualitativeInformation

They consist of:

Cost Effectiveness

Materiality Conservatism


4/20

Also called Cost Benefit Constraint The cost of providing accounting information

should not exceed the benefit of theinformation it is reporting.

Example: Your checkbook register and bankstatement differs by $0.10. Rather thanwaste time to find the $0.10, the accountant

should record the amount as miscellaneousexpense or income.


5/20

Material means big enough to make a differencein the users decision-making process.

States that the requirements of any accountingprinciple may be ignored when there is no effect

on the decisions of the user of financialinformation.

Example: A company purchases a Trashcan for$10. Per GAAP, this amount should be

capitalized as an asset and depreciated. Becausethe amount is immaterial, the $10 can berecorded as an expense.


6/20

Accountants use their judgment to recordtransactions that require estimation.

Conservatism helps the accountant choosebetween 2 equally likely alternatives.

Requires the accountant to record thetransaction using the less optimistic choice.

Example: There is the potential for acustomer to sue the company. Although, the

customer may choose not to sue, theaccountant will disclose this potential lawsuitto investors.


7/20

Concepts are the ground rules of accountingthat should be followed when preparingfinancial statements.

These are:

Recognition Concept

Measurement Concept


8/20

States that an item should be recognized(recorded) in the financial statements when: It can be defined by GAAP assumptions and

principles

It can be measured It is relevant to decision-making by users

It is reliable


9/20

States that every transaction is measured bythe stated unit of measurement, such as thedollar

The stated procedure of valuing assets,liabilities, equity, revenue, and expenses asdefined by GAAP


10/20

Assumptions are agreed upon rules ofaccounting, and are basic, understoodbeliefs. There are Four Basic Assumptions of

Accounting: Economic Business Entity

Going Concern

Monetary Unit

Time Period


11/20

All of the business transactions should beseparate from the business owners personaltransactions

There should be no co-mingling of personalfunds with business funds.


12/20

Financial statements are prepared under theassumption that the company will remain inbusiness indefinitely unless there is sufficientevidence otherwise.

If there is evidence that a company maypossibly have a going concern issue, thismust be disclosed in the financial statements.


13/20

Assumes a stable currency is going to be theunit of record.

FASB accepts the nominal value of the USDollar as the monetary unit of recordunadjusted for inflation.


14/20

The entitys activities are separated intoperiods of time such as months, quarters oryears.

Transactions must be accounted for withinthe time period they occur regardless of whencash is exchanged.


15/20

Principles are accounting rules used toprepare, present, and report financialstatements.

Principles dictate how events should berecorded and reported.


16/20

Assets are recorded at historical cost, not fairmarket value.

For example, if a company purchases abuilding for $500,000 it should be recordedas such, and should remain on the books forthat amount until disposed of.

If the building appreciates to $700,000 in the

next few years, no adjustment should bemade.


17/20

All information pertaining to the operationsand financial position of the entity must bereported within the period of time inquestion.

Circumstances and events that make adifference to financial statement users shouldbe disclosed.


18/20

Revenue is earned and recognized uponproduct delivery or service completion,without regard to when cash is actuallyreceived.

Also called accrual basis accounting

Example: A customer purchases inventoryfrom a company on credit. Even though no

cash has yet been received, the sale isrecorded.


19/20

The costs of doing business are recorded inthe same period as the revenue they helpgenerate, regardless of when the money isactually paid.

Also called accrual basis accounting

Example: A company orders merchandise oncredit and has 30 days in which to pay. This

purchase is recorded immediately, eventhough no cash has been paid.


20/20

Explain what is meant by The benefits ofaccounting information must exceed thecosts.

What is meant by the term materialityin

financial reporting? What is meant by the term conservatismin

financial reporting? Explain the Going Concern assumption.

Explain the Time Period assumption. Explain the accounting principles that guide

accounting practice.

1.01 gaap powerpoint 3 copy

Documents