Unit 1: Accounting Environment, Decision-Making, and Theory
1a. Demonstrate an understanding of the foundational principles and objectives of accounting
Decision-makers rely on financial information that adheres to guidelines set forth by authoritative bodies so that analysis and comparison of company data are reasonable.
- What are the main generally accepted accounting principles (U.S. GAAP) that have been developed by FASB, the AICPA, the SEC, and a number of other leading institutions?
- Name the modifying constraints that are customary in practice when a deviation from the strict application of the generally accepted accounting principles is necessary.
The concepts of generally accepted accounting principles and modifying constraints play an important role in the life of an accountant. Users of financial information rely on consistency and the application of both. Study the definitions in The Major Principles on pages 259-267 and Modifying Conventions (or Constraints) on pages 267-269.
1b. Apply the accounting equation to illustrate the impact of business transactions and to transform business transactions (data) into usable information
The accounting equation illustrates the relationship between a company's assets, liabilities, and owner's equity.
- What is the accounting equation? How do business transactions affect the accounting equation? Given two of the three numbers, could you solve for the third?
- In what order are the main four financial statements produced?
- From a company's chart of accounts, what types of accounts are includes in the income statement and balance sheet? Name some examples of each type of account.
You should be very familiar with the accounting equation and the effects of accounting transactions on the equation. Be sure you are able to identify assets, liability, equity, revenue, and expense accounts as well as their locations in financial statements. More information can be found in Financial Statements of Business Organizations on pages 34-39.
1c. Identify the foundational accounting concepts, assumptions, or principles through the analysis of specific business situations
When an accountant decides not to pursue the correction of an accounting error because the time and money involved to fix the error are greater than the error itself, the accountant's decision is supported by one of the modifying constraints of accounting.
The overall mistake must not be considered a material amount if an accountant opts to leave the error in the records. Accounting principles may be ignored when the amount involved is small enough that readers of the financial statements would not be misled. Can you name the modifying constraint upon which the accountant is relying?
Detailed information about the accounting principles and modifying constraints can be found Objectives of Financial Reporting on pages 270-276.
Unit 1 Vocabulary
Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.
- American Accounting Association (AAA)
- Balance sheet
- Business entity concept
- Earning principle
- Equity ratio
- Exchange price principle
- Feedback value
- Financial Accounting Standards Board (FASB)
- Full disclosure principle
- Gain and loss recognition principle
- Generally accepted accounting principles (GAAP)
- Going-concern assumption
- Governmental Accounting Standards Board (GASB)
- Income statement
- Matching principle
- Money measurement
- Net income (loss)
- Notes payable
- Predictive value
- Realization principle
- Representational faithfulness
- Retained earnings
- Revenue recognition principle
- Securities and Exchange Commission (SEC)
- Statement of cash flows
- Statement of retained earnings