Chapter 1: Financial Accounting and Accounting Standards

Question 1

Who are general purpose financial statements prepared for?

Answer 1

External users

Question 2

What does the objective of financial reporting places most emphasize ?

Answer 2

Reporting to capital providers.

Question 3

What did the 1933 Securities Act do?

Answer 3

Make accounting and disclosure requirements for IPO’s.

Question 4

What did the 1934 Securities Exchange Act do?

Answer 4

• Make accounting and disclosure requirements for secondary market transactions
• Created the SEC
• Authorized SEC to set standards for publicly-traded firms

Question 5

What was the Committee on Accounting Procedure?

What were the main issues with this body?

Answer 5

• Active 1939 - 1959
• Created 51 Accounting Research Bulletins
• Created Committee of the American Institute of Accountants (now AICPA)

Main Issues

• Lack of independence
• No theoretical framework
• Part-time members

Question 6

What was the Accounting Principles Board (APB)?

What were its main issues?

Answer 6

• Active between 1959 - 1973
• Created 31 APB opinions
• ABP members belong to the AICPA

Main Issues

• Lack of independence
• No theoretical framework
• Part-time members

Question 7

What was the Financial Accounting Standards Board?

Answer 7

• Active between 1973 - Present
• Representatives of various constituencies
• Sever ties with prior firms
• Not a committee of the AICPA
• FAF funding replaced AICPA funding
• 7 full time members
• Conceptual framework

Question 8

What is the structure of US standard setting?

Answer 8

• Financial Accounting Foundation - appoint and oversee the Council & Board
• Financial Accounting Standards Advisory Council - Advise the Board
• Financial Accounting Standards Board - Apoint the Forces
• Task Forces - Consult the Board & Staff
• Administrative Staff - Support the Board
• Research and Technical Staff - Suppport the Board

Question 9

What are the types of FASB pronouncements?

Answer 9

• Accounting Standard Updates
• Financial Accounting Concepts

Question 10

What are Accounting Standard Updates?

Answer 10

• Standards that address broad area of issues
• Interpretations that modify or extend existing standards
• Implementation guidance through Emerging Issues Task Force

Question 11

What is the FASB Codification?

Answer 11

Only source of US GAAP, and is a living, changing database.

Question 12

What is GAAP comprised of?

Answer 12

FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations.

Question 13

What are the steps in due process?

Answer 13

1. Id topic and put on agenda
2. Research & analysis
3. Public hearing
4. Exposure draft
5. Changes to exposure draft and final standard is issued

Question 14

What are the major challenges facing standard setting?

Answer 14

• Diverse political interests
• Expectation gap
• Financial information issues

Question 15

What are some financial information issue that make standard setting challenging?

Answer 15

• Non-financial measures are not used
• Forward-looking information is not the standard
• Intangibles are hard to value
• Timeliness
• Understandability

Question 16

What is the expectations gap?

Answer 16

What the public thinks accountants should do and what accountants think they can do.

Question 17

What is the International Accounting Standards Committee?

Answer 17

• Active between 1973 - 2001
• 9-14 members
• Issued 41 International Accounting Standards
• Funded by memberships, donations, and publications

Question 18

What is the International Accounting Standards Board?

Answer 18

• 14 members
• Funded by IASC Foundation
• Operates similar to FASB
• Issues International Financial Reporting Standards

Question 19

What is the IFRS comprised of?

Answer 19

International Financial Reporting Standards, International Accounting Standards, and International Accounting Interpretations.