Liz' s Musings's

Liz's musings on life – mostly her kids though.

02/10/06 GAAP February 10, 2006

Filed under: Uncategorized — Liz @ 4:14 pm

The meaning of generally accepted accounting principles is defined by Statement on Auditing Standards (SAS) No. 69, “The Meaning of ‘Present Fairly in Conformity With Generally Accepted Accounting Principles’ in the Independent Auditor’s Report.” Under this standard, generally accepted accounting principles covered by Rule 203 are construed to be FASB Standards and Interpretations, APB Opinions, and AICPA Accounting Research Bulletins.

CONCEPTUAL FRAMEWORK

1. SFAC No. 1, “Objectives of Financial Reporting by Business Enterprises,” presents the goals and purposes of accounting.

2. SFAC No. 2, “Qualitative Characteristics of Accounting Information,” examines the characteristics that make accounting information useful.

3. SFAC No. 3, “Elements of Financial Statements of Business Enterprises,” provides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses.

4. SFAC No. 5, “Recognition and Measurement in Financial Statements of Business

Enterprises,” sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when.

5. SFAC No. 6, “Elements of Financial Statements,” replaces SFAC No. 3 and expands its scope to include not-for-profit organizations.

6. SFAC No. 7, “Using Cash Flow Information and Present Value in Accounting

Measurements,” provides a framework for using expected future cash flows and present values as a basis for measurement.

FIRST LEVEL: BASIC OBJECTIVES

The objectives of financial reporting are to provide information that is: (1) useful to those making investment and credit decisions who have a reasonable understanding of business and economic activities; (2) helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows; and (3) about economic resources, the claims to those resources, and the changes in them.

SECOND LEVEL: FUNDAMENTAL CONCEPTS

Relevance and reliability are the two primary qualities that make accounting information useful for decision making. As stated in FASB Concepts Statement No. 2, “the qualities that distinguish ‘better’ (more useful) information from ‘inferior’ (less useful) information are primarily the qualities of relevance and reliability, with some other characteristics that those qualities imply.”

Elements of Financial Statements

ASSETS. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

LIABILITIES. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

EQUITY. Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.

INVESTMENTS BY OWNERS. Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise.

DISTRIBUTIONS TO OWNERS. Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interests (or equity) in an enterprise.

COMPREHENSIVE INCOME. Change in equity (net assets) of an entity during a period

from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

REVENUES. Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

EXPENSES. Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

GAINS. Increases in equity (net assets) from peripheral or incidental transactions of an

entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

LOSSES. Decreases in equity (net assets) from peripheral or incidental transactions of an

entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

THIRD LEVEL: RECOGNITION AND MEASUREMENT CONCEPTS

The third level of the framework consists of concepts that implement the basic objectives of level one. These concepts explain which, when, and how financial elements and events should be recognized, measured, and reported by the accounting system. Most of them are set forth in FASB Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.” According to SFAC No. 5, to be recognized, an item (event or transaction) must meet the definition of an “element of financial statements” as defined in SFAC No. 6 and must be measurable. Most aspects of current practice are consistent with this recognition and measurement concept.

Four basic assumptions underlie the financial accounting structure: (1) economic entity, (2) going concern, (3) monetary unit, and (4) periodicity.

Four basic principles of accounting are used to record transactions: (1) historical cost, (2) revenue recognition, (3) matching, and (4) full disclosure.

In providing information with the qualitative characteristics that make it useful, two overriding constraints must be considered: (1) the cost-benefit relationship and (2) materiality. Two other less dominant yet important constraints that are part of the reporting environment are industry practices and conservatism.

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4 Responses to “02/10/06 GAAP”

  1. Rhonda H Says:

    Personally I think you should stick with art!

  2. Liz Says:

    Art doesn’t pay the bills, accounting does 🙂

  3. Rhonda H Says:

    yeah yeah lol

  4. Karen M Says:

    Liz, I used to have to deal with accountant speak as a lawyer. It is unhealthy I tell you. Totally unhealthy.


Comments are closed.