Financial Accounting Exam 3 Study GuideChapter 1 Concepts & Formulas:Accounting Functions:Accounting is an information and measurement system to identify, record,and communicate an organization’s business activities.Identify-Select Transactions and Events.Recording-Input, Measure, and Log.Communicate-Prepare, Analyze, and InterpretOpportunities in Accounting:Four Areas of Opportunity: Financial, Managerial, Taxation, and AccountingRelated.Ethics in Accounting:Ethical Decision Making: Identify Ethical Concerns, Analyze Options-Consider Consequences, and Make Ethical Decision.Fraud Triangle- Shows the Three Factors that push a person to commit fraud:oOpportunity- able to commit fraud with low risk of being caught.oPressure/Incentive- Feel pressure or have incentive to commit.oRationalize/Attitude- Justifies fraud or does not see its criminalnature.Sarbanes Oxley Act- helps stop financial abuse. Requires documentation andverification of internal controls and emphasizes effective internal controls.Management must issue report stating I.C. are effective. Auditors verifyeffectiveness of I.C.s. Ignoring SOX can lead to penalties and criminalprosecution of executives. Ignoring risks millions of dollar in fines and yearsin prison for CEOs and CFOs.DODD Frank- has two important provisions.oClawback Mandates recovery of excessive pay.oWhistleblowers SEC pays 10-30% of sanctions exceeding 1mill towhistleblowers.Generally Accepted Accounting Principals: (GAAP)Information must haverelevance and faithful representation.Financial Acct. Standards Board (FASB) given task of setting GAAP from SEC(Securities and Exchange Commission).
SEC is govt. agency that oversees proper use of GAAP.International Acct. Standards Board (IASB) issue International FinancialReporting Standards to identify preferred acct. principles.Conceptual Framework:Basic Concepts that underlie prep and presentation of Fin. Statements,consist of:oObjectives- provide info useful to investors, creditors, and others.oQualitative Characteristics- requires info that has relevance andfaithful representation.oElements- to define items in financial statements.oRecognition and Measurement- set criteria for an item to berecognized as an element, and how to measure it.General Acct. Principles:Measurement (Cost) Principle- acct info based on actual costRevenue Recognition Principle- Revenue is recognized (1) when goods orservices are provided and (2) at the amount expected to be received.Expense Recognition (Matching) Principle- Company records expensesincurred to generate the revenue reported.Full Disclosure Principle- company reports details behind financialstatements that would impact user decisions.Attributes of Business:Sole Prop- 1 Owner, Easy to set up, No additional business income tax,Unlimited Liability, Not separate legal entity.