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1、Prepared byKurt M. Hull, MBA CPACalifornia State University, Los Angeles,Financial Accounting, 5e,John Wiley & Sons, Inc.,Weygandt, Kieso, & Kimmel,CHAPTER 7ACCOUNTING PRINCIPLES,STUDY OBJECTIVESAfter studying this chapter, you should understand:,STUDY OBJECTIVE 1GAAP & CONCEPTUAL FRAMEWORK,GAAP is
2、a set of standards and rules recognized as a general guide for financial reporting supported by:,FASBDevelops GAAP,SECMandates GAAP,Collaborate,GAAP & CONCEPTUAL FRAMEWORK,The FASB developed a CONCEPTUAL FRAMEWORK to resolve accounting and reporting problems.,ConceptualFramework,Financial ReportingO
3、bjectives,Qualitative Characteristics,Financial StatementElements,AssumptionsPrinciplesConstraints,STUDY OBJECTIVE 2FINANCIAL REPORTING OBJECTIVES,To provide information:,Assets Liabilities = Stockholders Equity,STUDY OBJECTIVE 3QUALITATIVE CHARACTERISTICS,Useful information is:RELEVANTRELIABLECOMPA
4、RABLECONSISTENT,Makes a difference in a decision.Has predictive value and feedback value.Is timely.,RELEVANCE,RELEVANT INFORMATION:,RELIABILITY,RELIABLE INFORMATION,Is dependable and verifiable. Is free of error and bias. Is a faithful representation. Is factual.,COMPARABILITY,Accounting information
5、 from two similar companies should be comparable. Different companies in similar industries should use the same accounting principles.,GM,FORD,COMPARABLE INFORMATION,CONSISTENCY,2000,2001,2002,Companies should use the same accounting principles from year to year. Changes in accounting principles mus
6、t be justifiable.,CONSISTENT INFORMATION,STUDY OBJECTIVE 4BASIC ACCOUNTING ASSUMPTIONS,Monetary unit,Economic entity,Time period,Going concern,Only transaction data that can be expressed in terms of money be included in the accounting records.,MONETARY UNIT ASSUMPTION,Hiringan employee,Payingan empl
7、oyee,Do not record,Record,The activities of the entity are to be kept separate and distinct from the activities of the owner and allother economic entities.,ECONOMIC ENTITYASSUMPTION,Economic events can be identified with a particular unit of accountability,BMW,Benz,The economic life of a business c
8、an be divided into artificial time periods,QTR 1QTR 2QTR 3QTR 4,JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC,TIME PERIOD ASSUMPTION,The enterprise will continue in operation long enough to carry out its existing objectives.,GOING CONCERN ASSUMPTION,NOW,FUTURE,STUDY OBJECTIVE 5BASIC ACCOUNTING PR
9、INCIPLES,REVENUE RECOGNITIONMATCHINGFULL DISCLOSURECOST,Assets Liabilities = Stockholders Equity,REVENUE RECOGNITION PRINCIPLE,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.,Expenses are matched with re
10、venues in the period in which efforts are made to generate revenues.,MATCHING PRINCIPLE,Types of costs,Expired CostsGenerate revenuesonly in the currentaccounting period.,Unexpired CostsGenerate revenuesin future accountingperiods.,CostIncurred,Asset,Expense,Operating expenses contribute to the reve
11、nues of the period but their association with revenues is less direct than for cost of goods sold.,Benefits Decrease,Provides FutureBenefit,Provides No Apparent FutureBenefits,EXPENSE RECOGNITION PATTERN,FULL DISCLOSURE PRINCIPLE,Body/Data,Notes,SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USUALLY THE
12、 FIRST FOOTNOTE,Requires that circumstances and events that make a differenceto financial statement users are to be disclosed in one of two places.,COST PRINCIPLE,COST is relevant because it represents: PRICE PAIDorASSETS SACRIFICEDorCOMMITMENT MADE,COST is reliable because it is: OBJECTIVELYMEASURA
13、BLEand FACTUALandVERIFIABLE,Requires assets to be recorded at cost.,Revenue Recognition,Duringproduction,At endof production,At point of sale,At timecash received,Revenue should be recognized in the accounting period in which it is earned (generally at point of sale).,Matching,Costs Matching Sales R
14、evenue,Expenses should be matched with revenues,CEMENT,Cost,Assets should be recorded at cost.,Full Disclosure,Circumstances and events that make a difference to financial statement users should be disclosed.,* Financial Statements* Balance Sheet* Income Statement* Retained Earnings Statement* Cash Flow Statement,BASIC ACCOUNTING PRINCIPLES,For small amounts, GAAP does not have to be followed.,Conservatism,When in doubt, choose the solution that will be least likely to overstate assets and income.,
