Accounting Principles GAAP Flashcards

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Questions and Answers

What are Generally Accepted Accounting Principles (GAAP)?

Principles, rules, and standards to be followed in preparing and reporting financial statements.

Which of the following are GAAP assumptions? (Select all that apply)

Stable Monetary Unit (correct)

Going Concern (correct)

Separate Entity (correct)

Fixed Time Period (correct)

What does the Separate Entity Assumption state?

The financials of a business must be kept separate from the owner's personal finances.

What is the Stable Monetary Unit Assumption?

Items must be recorded in their monetary value and a stable currency. Signup and view all the answers

What does the Fixed Time Period Assumption refer to?

Financial statements can be prepared in different specific time periods. Signup and view all the answers

What is the Going Concern Assumption?

A business is assumed to operate for a long time unless liquidation is imminent. Signup and view all the answers

Which of the following are GAAP principles? (Select all that apply)

Full Disclosure Signup and view all the answers

What does the Full Disclosure Principle assert?

All relevant financial information must be disclosed. Signup and view all the answers

What is the Historical Cost Principle?

Assets and expenses are reported in their original or acquisition cost. Signup and view all the answers

When is revenue recognized according to GAAP?

Revenue is recognized when earned. Signup and view all the answers

What does the Matching Principle require?

Expenses incurred must be matched with the corresponding revenues earned. Signup and view all the answers

Which of the following are GAAP constraints? (Select all that apply)

Conservatism Signup and view all the answers

What does the Conservatism Constraint imply?

The more conservative method is applied when reporting financial information. Signup and view all the answers

What is the Cost-Benefit Constraint?

Costs incurred must not exceed the benefits derived from maintaining an accounting system. Signup and view all the answers

What does the Materiality Constraint state?

GAAP may be avoided if such avoidance has no material effect on the interpretation of financial data. Signup and view all the answers

What is meant by the Industry Practices Constraint?

Widely used industry practices may be applied in conjunction with GAAP. Signup and view all the answers

Public companies are required to have their financials audited by a public accounting firm.

True Signup and view all the answers

When does a public accounting firm prepare an auditor's report?

Following an audit, a review, or a compilation. Signup and view all the answers

What is an Audit?

A comprehensive examination of a company's financial statements. Signup and view all the answers

What is a Review?

A review provides a limited evaluation of a company's financial statements. Signup and view all the answers

What is a Compilation?

A compilation does not involve any level of assessment of a company's financial statements. Signup and view all the answers

Match the auditor's opinion types with their descriptions:

Unqualified Opinion = The auditor accepts maximum responsibility and finds financials in good order Qualified Opinion = The auditor accepts responsibility except for items explained in the qualification Signup and view all the answers

What can a qualified opinion be? (Select all that apply)

Disclaimer Signup and view all the answers

Which of the following are types of unaudited financial statements? (Select all that apply)

Review Signup and view all the answers

When is a Review usually conducted?

Following the end of a financial quarter. Signup and view all the answers

Study Notes

Generally Accepted Accounting Principles (GAAP)

GAAP consists of principles, rules, and standards for preparing and reporting financial statements, serving as crucial information for financial analysis.

GAAP Assumptions

Separate Entity: Financials of a business must remain distinct from the owner’s personal finances.
Stable Monetary Unit: All items are recorded in monetary values and a consistent currency.
Fixed Time Period: Financial statements can be produced for specific time intervals such as monthly, quarterly, or annually.
Going Concern: Assumes that a business will continue to operate indefinitely unless liquidation is imminent.

GAAP Principles

Full Disclosure Principle: Requires disclosure of all relevant financial information.
Historical Cost Principle: Assets and expenses should be reported at their acquisition cost.
Revenue/Expense Recognition Principle: Revenue is recorded when earned, while expenses are recognized when they contribute to revenue, with exceptions.
Matching Principle: Expenses must align with the revenues they generate.

GAAP Constraints

Conservatism: Use a conservative approach when multiple reporting methods exist, favoring less income or assets.
Cost-Benefit Constraint: The costs of maintaining an accounting system should not surpass the benefits gained from it.
Materiality Constraint: GAAP can be disregarded if it does not materially impact financial data interpretation.
Industry Practices Constraint: Widely accepted practices within an industry can be applied alongside GAAP if specific GAAP does not exist.

Auditing Requirements

Public companies must have their financial statements audited by a public accounting firm.
An auditor's report is prepared following an audit, review, or compilation.

Types of Audits

Audit: A thorough examination of a company's financial statements.
Review: Offers a limited evaluation, providing less assurance than an audit.
Compilation: Involves preparing financial statements without providing any assessment or assurance of accuracy.

Auditor's Opinions

Unqualified Opinion: Indicates that the auditor believes financial statements are in good order with no significant issues.
Qualified Opinion: The auditor finds financial statements satisfactory except for certain disclosed issues.
Types of Qualified Opinions include:
- Adverse Opinion: Financial statements do not comply with GAAP.
- Disclaimer: The auditor cannot express an opinion and assumes no responsibility.

Types of Unaudited Financial Statements

Review: Financial statements have undergone limited inquiry and analytical procedures.
Compilation: Financial statements compiled without any verification procedures, with no responsibility for accuracy assumed by the CPA.

Review Conduct Timing

Reviews typically occur at the end of financial quarters.

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Description

Test your knowledge of Generally Accepted Accounting Principles (GAAP) with these flashcards. These cards cover key principles, rules, and assumptions essential for financial statement preparation and analysis.