Winston-Salem/Forsyth County Schools



UNIT 1.01 STUDY GUIDEIn a routine financial day, accountants are required to make judgments regarding the way to record business financial transactions. The financial goals of the company for which they work often direct their decisions. There is a framework of standard rules known as generally accepted accounting principles (GAAP) to guide their judgments.Generally Accepted Accounting Principles (GAAP)Organizations that develop/format GAAPPrimary qualities of GAAPSecondary qualities of GAAPEssential Accounting Constraints, Concepts, Assumptions, and Principles for GAAP (13)ConstraintsCost effectiveness constraintMateriality constraintConservatism constraintConceptsRecognition conceptMeasurement conceptAssumptionsEconomic entity assumptionGoing concern assumptionMonetary unit assumptionTime period assumptionPrinciplesCost principleFull disclosure principleRevenue recognition principleMatching principleRequired Financial Statements for GAAPISRF and its Effect on GAAPGenerally Accepted Accounting Principles (GAAP) is defined as the set of accepted industry rules, practices, and guidelines for financial accounting. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions and in the preparation of financial erning organizations behind Generally Accepted Accounting PrinciplesAmerican Institute of Certified Public Accountants (AICPA)The Financial Accounting Standards Board (FASB)The Securities and Exchange Commission (SEC) Two laws, the Securities Act of 1933 and the Securities Exchange Act of 1934, give the SEC authority to establish reporting and disclosure requirements. Holds primary responsibility for:Enforcing federal securities lawsRegulating the securities industryRegulating the stock marketPreventing corporate abuse of investorsGiven enforcement authority by Congress to:Bring civil enforcement actions against individuals and companies who:(a)Commit accounting fraud(b)Provide false information(c)Engage in insider trading(d)Violate securities laws(2)Bring criminal enforcement actions against individuals and companies for criminal offenses.4.The SEC usually operates in an oversight capacity, allowing the FASB and the Governmental Accounting Standards Board (GASB) to establish these requirements.Primary qualities that make accounting information useful for decision makingRelevance – The information is capable of making a difference in a decision. Information should have predictive or feedback value, and it must be presented on a timely basis.Reliability - Information must be verifiable, a faithful representation, and reasonably free of error and bias (neutral). Secondary qualities that make accounting information useful for decision makingComparability - Information has been measured and reported in a similar manner for different enterprises.Consistency - Information is created and reported using the same accounting treatment to similar events from period to period.There are thirteen basic accounting constraints, concepts, assumptions, and principles that GAAP is founded upon.Constraints:Cost Effectiveness Constraint: The cost of providing accounting information should not exceed the benefit of the information it is reporting.Materiality Constraint: The requirements of any accounting principle may be ignored when there is no effect on the decisions of users of financial information (immaterial). Conservatism Constraint: Accountants must use their judgment to record transactions that require estimation. This concept helps accountants choose between 2 equally likely alternatives. Therefore, the less optimistic estimate will be chosen when two estimates are judged to be equally likely.Concepts:Recognition Concept: 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.Measurement ConceptEvery transaction is measured by the stated unit of measurement, such as the dollarThe stated procedure of valuing assets, liabilities, equity, revenue and expenses as defined by GAAPAssumptions: Economic Business Entity Assumption: All of the business transactions are separate from the business owner’s personal transactions.Going Concern Assumption: Financial statements are prepared under the assumption that the company will remain in business indefinitely unless there is sufficient evidence otherwise. Monetary Unit Assumption: The accountant assumes a stable currency is going to be the unit of record. The FASB accepts the nominal value of the U.S. dollar unadjusted for inflation as the monetary unit of record.Time Period Assumption: The entity's activities are separated into periods of time, i.e.: months, quarters or years.Principles: Cost Principle: Assets are recorded at historical cost, which equals the value exchanged at the time of their acquisition, not at Fair Market Value. Full Disclosure Principle: All information pertaining to the operations and financial position of the entity must be reported within the period of time in question. Revenue Recognition Principle: Revenue is earned and recognized upon product delivery or service completion, without regard to the timing of cash flow. This is also called accrual basis accounting.Matching Principle: The costs of doing business are recorded in the same period as the revenue they help to generate. Statements Required by GAAPBalance Sheet: shows information about the organization’s resources at one given time. Shows Assets, Liabilities, and EquityDetails about cash including cash in the bank, amount owed to creditors, and the value of the company’s assets. Income Statement: Shows the flow of revenues over a given period of time, typically a month, quarter, or year. Shows revenue and expensesShows profit or loss of a companyStatement of Cash Flow: shows the movement of cash in and out of the business over a specified period. Details cash flows from operating activities, investing activities, and financing activitiesShows how changes in the balance sheet and income statement affect cash and cash equivalentsStatement of Stockholders Equity: shows the changes in the company’s equity throughout the reporting period.Reports profit or loss from the companyReports dividends paidReports other items that are debited/credited to retained earningsInternational Financial Reporting Standards (IFRS)Principles-based standards, interpretations, and the framework adopted by the International Accounting Standards Board (IASB)Due to numerous companies operating globally, standards that are applicable to all countries need to be developed.Framework of IFRSStates the basic principles of IFRSCurrently being updated and converged with the IASB and FASBThe objective is to create a sound foundation for future accounting standards.US GAAP becoming IFRSIn February 2010, the SEC voted unanimously to publish a statement to reaffirm its longstanding commitment to the goal of a single set of high-quality global accounting standards. Additionally, the SEC expressed its continued support for the convergence of US GAAP and IFRS.Beginning in October 2010, the SEC will begin to work on a plan to combine GAAP and IFRS.U.S. companies may move to IFRS in approximately 2015 or 2016UNIT 1.02 STUDY GUIDEThe AICPA Code of Professional ConductPrinciples – provide ideal standards of professional conduct; not enforceable against AICPA membersEthical PrinciplesResponsibilities – exercise sensitive and professional moral judgmentsPublic Interest – serve the public interest, honor public trust, and demonstrate commitment to the professionIntegrity – perform professional responsibilities with the highest sense of integrityObjectivity and Independence – be independent in fact and appearance in providing auditing or other attestation servicesDue Care – observe technical and ethical standards, improve competence, and perform to the best of your abilityScope and Nature of Services – follow Code of Professional Conduct in determining scope and nature of servicesRules – represent minimum standards of ethical conduct; enforceable against AICPA membersInterpretations of Rules of ConductPublished by AICPA’s Division of Professional EthicsUsed when practitioners have frequent questionsMay be used by a practitioner to justify a departureEthical RulingsPublished explanations and answers to questions about rules of conductSubmitted to the AICPA by practitioners and others interested in ethical requirementsSpecific Rules of ConductIndependence – a member in public practice shall be independent in the performance of professional services as required by the standardsFinancial interest in clientImmediate familyFormer practitionersNormal lending proceduresJoint relationship with client investorJoint relationship with client investeeDirector, officer, manager, or employeeLitigation between CPA firm and clientBookkeeping servicesConsulting and other nonaudit servicesUnpaid feesIntegrity and Objectivity – member shall be free of conflicts of interest, shall not knowingly misrepresent facts or subordinate his or her judgment to othersGeneral Standards – member shall comply with the following standards:Professional competence – undertake only those professional services that can be completed with professional competenceDue professional care – exercise due professional care in the performance of professional servicesPlanning and supervision – adequately plan and supervise the performance of professional servicesSufficient relevant data – obtain sufficient, relevant data to provide a reasonable basis for conclusions and recommendationsCompliance with Standards – must comply with the following standards:Auditing Standards and PCAOB StandardsStatements on Accounting and Review ServicesStatements on Standards for Attestation EngagementsManagement Consulting Services StandardsAccounting PrinciplesGAAP is considered to be any statement proclaimed by an authoritative body designated by the AICPACPAs must justify any departure from GAAPDeparture from GAAP is permitted IF following GAAP would make statements misleadingConfidential Client Information – may not disclose any confidential client information without the specific consent of the client. Exceptions are:Subpoenas or summons enforceable by a court orderReview of papers related to an ethics division inquiryReview of papers related to a peer reviewObligations related to technical standardsContingent FeesFees to be determined upon a particular resultCPAs are forbidden to accept contingent fees for attestation services and tax return preparation Acts DiscreditableRetaining client records after they have been requestedDiscrimination or harassment in employment practicesNoncompliance with standardsNegligence in the preparation of financial statements or reportsSolicitation or disclosure of CPA exam questions and answersFailure to file a tax return or pay tax liabilityAdvertising and other forms of solicitation – false, misleading, or deceptive advertising is prohibited. Examples of unacceptable advertising are:Creates false or unjustified expectation of favorable resultsImplies the ability to influence any court or similar body or officialClient is unaware that there is a likely chance that a stated fee will be substantially increasedOther representations that are likely to cause a reasonable person to misunderstand or be missions and Referral Fees – compensation paid for recommending a third party’s product or service to a client or recommending a client’s product or service to a third party. Prohibited if the firm also performs:Audit or review of financial statement for the clientCompilation of financials in which lack of independence is not disclosed and the financials may be used by a third partyExamination of prospective financial informationForm of Organization and NameMember may practice public accounting only in a form of organization permitted by state law CPA shall not practice public accounting under a firm name that is misleadingOwnership of CPA firms by non-CPAs is allowed under certain conditionsFirm may not designate itself as a member of the AICPA unless all CPA owners are members of the AICPAEnforcement of Policies – principally involves the following groups:State Boards of Accountancy – can revoke CPA certificate of license to practiceAICPA Joint Trial Board – can suspend or expel members from the AICPA; less serious and unintentional violations will normally require only corrective and remedial actionUNPACKED CONTENTEthical Principles in the AICPA Code of Professional ConductResponsibilitiesPublic InterestIntegrityObjectivity and IndependenceDue CareScope and Nature of ServicesSpecific Rules of ConductIndependenceIntegrity and ObjectivityGeneral StandardsCompliance with StandardsAccounting PrinciplesConfidential Client InformationContingent FeesActs DiscreditableAdvertising and Other Forms of SolicitationCommissions and Referral FeesForm of Organization and Name ................
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