GAAP
1.
(S.O. 1) Generally accepted
accounting principles (GAAP) are a set of rules and practices that are
recognized as a general guide for financial reporting purposes. These principles must have "substantial authoritative
support."
2.
The Financial Accounting Standards Board (FASB) has developed a conceptual
framework to serve as a basis for resolving accounting and reporting
problems. This framework consists
of the following:
a. Objectives of financial
reporting.
b. Qualitative characteristics
of accounting information.
c. Elements of financial
statements.
d. Operating guidelines
(assumptions, principles, and constraints).
Objectives of Financial Reporting
3.
(S.O. 2) The objectives
of financial reporting are to provide information that is useful in (a) making
investment and credit decisions; (b) assessing future cash flows; and (c)
identifying the economic resources (assets), the claims to those resources
(liabilities), and the changes in those resources and claims.
Qualitative Characteristics
4. (S.O. 3)
The accounting alternative selected or policy adopted should be one that
generates the most useful financial information for decision making. To be useful, information should possess the following
qualitative characteristics:
a..
Relevance. The information must be capable of making a difference in a
decision. Relevant information has
either predictive or feedback value; and is also timely.
b.
Reliability. The information should be free of error and bias and be
dependable.
c...
Comparability.
The information should be comparable with accounting information about
other enterprises.
d.
Consistency. The same accounting principles and methods should be used
from year to year within a company.
Elements of Financial Statements
5. The
elements of financial statements are a set of definitions of the basic terms
used in accounting. These elements
include such terms as assets, liabilities, equity, revenues, and expenses.
6. The operating
guidelines used by accountants to solve practical problems include
assumptions, principles, and constraints.
Accounting Assumptions
7. (S.O. 4)
The accounting assumptions are:
a..
Monetary unit assumption
states that only
transaction data that can be expressed in terms of money should be included in
the accounting. An important corollary is the added assumption that the unit of
measure remains relatively constant over time.
b.
Economic entity assumption
states that the
activities of the entity be kept separate and distinct from the activities of
the owner and of all other economic entities.
c.
Time period assumption
states that the
economic life of a business can be divided into artificial time periods.
d..
Going concern assumption
assumes that the
enterprise will continue in operation long enough to carry out its existing
objectives.
Principles
8. (S.O. 5)
On the basis of these assumptions, the accounting profession has
developed principles that dictate how transactions and other economic events
should be recorded and reported.
9. The 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.
10. In long-term construction contracts, revenue
and income are recognized in proportion to the contract work performed each year
using the percentage-of-completion
method.
a.....
A project's progress toward completion is measured by comparing the costs
incurred in a year to total estimated costs of the entire project.
b.....
The formulas for this method are:
(1) Costs Incurred During the
Period
Total Estimated Cost X Total Revenue = Revenues Recognized for the
Period.
(2) Revenue Recognized (Current
Period) - Cost Incurred (Current Period) = Gross Profit (Current Period).
11. If collection of a sale is very uncertain,
revenue and income are recorded over time in proportion to the cash collected
using the installment method.
a.....
Each cash collection is considered to be revenue and to consist of (1)
partial recovery of the cost of goods sold and (2) partial gross profit from the
sale.
b.....
The formula to recognize gross profit is:
....... Cash Collections from
Customers X Gross Profit Percentage = Gross Profit Recognized (Current Period).
12..... The matching
principle requires that expenses be matched with revenues in the period in
which efforts are expended to generate revenues. Expenses are not recognized when cash is paid, or the work
performed; they are recognized when the labor (service) or product actually
makes its contributions to revenue.
a.
Incurred costs that will only generate revenues in the current period are
expensed immediately. These cost
are expired costs.
b.
Incurred costs that will generate revenues in current and future periods
are recognized as assets when
incurred; these costs are unexpired costs.
c.
Unexpired costs become expenses either as cost of goods sold or operating
expenses.
13..... The full disclosure
principle requires that circumstances and events that make a difference to
financial statement users be disclosed. Compliance
with this principle occurs through the data contained in the financial
statements and the information in the notes that accompany the statements.
The first note in most cases is a summary
of significant accounting policies.
14. The most basic principle of accounting is the
cost principle.
a.....
Cost is relevant because it represents the price paid, the assets
sacrificed, or the commitment made at the date of acquisition.
b.....
Cost is reliable because it is objectively measurable, factual and
verifiable.
Price-Level Adjusted Data
15. While admitting that some changes in prices
do occur, the accounting profession believes the unit of measure (e.g., the
dollar) has remained sufficiently constant over time to produce meaningful
financial information. If
presented, the disclosure of price-level adjusted data is in the form of
supplemental information presented with financial statements.
Constraints
16. (S.O. 6)
There are two constraints in
applying the operating guidelines.
a.
Materiality means that an item
is likely to influence the decision of a reasonably prudent investor.
b.
Conservatism means that when
in doubt choose the method that will be least likely to overstate assets and
income.
International Accounting Standards
17. (S.O. 7)
World markets are becoming increasingly intertwined.
Firms that conduct their operations in more than one country through
subsidiaries, or branches in foreign countries are referred to as multinational
corporations.
18. The International Accounting Standard Committee (IASC) exists to obtain uniformity in international accounting practices. To date, numerous International Accounting Standards have been issued for IASC members to introduce to their respective countries.