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This outline is intended to provide the reader with a quick reference to the conceptual basis underlying financial accounting and reporting.

I. EXTERNAL USERS AND USES OF FINANCIAL ACCOUNTING INFORMATION A. External Users: Actual or potential investors (stockholders and bondholders), creditors (e.g., suppliers and lending institutions), and other users (e.g., employees, stock exchanges). B. Primary Decisions: To (1) buy, (2) hold, or (3) sell a particular security; or to (1) extend credit, (2) maintain a credit relationship, or (3) not extend credit.

II. OBJECTIVES OF FINANCIAL REPORTING A. General Objective: Provide information useful in making rational investment, credit, and similar decisions. B. External User Objective: Provide information useful in assessing amounts, timing, and uncertainty of prospective cash receipts from dividends and interest, and the proceeds from the sale, redemption, or maturity of securities and loans. C. Company Objective: Provide information useful in assessing amounts, timing, and uncertainty of prospective net cash flows to the related company. D. Specific Objectives: Provide information about a company's: (1) economic resources, obligations, and owners' equity; (2) comprehensive income and its components; and (3) cash flows. E. Other Objectives: Provide (1) information about how the management of a company has discharged its stewardship responsibility to owners and (2) explanations and interpretations by management to help external users understand the financial information presented.

III. TYPES OF USEFUL ACCOUNTING INFORMATION A. Return on Investment: Amount of return on capital that may be distributed to investors or reinvested. Measure of overall company performance. B. Risk: Uncertainty or unpredictability of the future results. C. Financial Flexibility: Ability to adapt to change. D. Liquidity: How quickly assets can be converted into cash to pay bills. E. Operating Capability: Ability to maintain a given physical level of operations.

IV. QUALITATIVE CHARACTERISTICS OF USEFUL ACCOUNTING INFORMATION A. Understandability: Information should be understandable to external users who have a reasonable knowledge of business and economic activities. B. Decision Usefulness: Information should be useful in external users' decision making. Overall qualitative characteristic. C. Relevance: Capacity to make a difference in a decision. Includes (1) Predictive Value: Enables more accurate forecast of outcome of past or present events, (2) Feedback Value: Enables decision makers to confirm or correct prior expectations, and (3) Timeliness: Availability of information before it loses its capacity to influence decisions. D. Reliability: Reasonably free from error or bias, and faithfully represents what it is intended to represent. Includes (1) Verifiability (Objectivity): Ability of measurers (accountants) to agree that measurement results can be duplicated, (2) Representational Faithfulness (Validity): Degree of correspondence between reported measurements or descriptions and economic resources, obligations, and transactions and events causing changes in these items, and (3) Neutrality: Absence of bias and completeness of information.

E. Comparability: Enables users to identify and explain similarities and differences between two (or more) items of information. Includes Consistency: Conformity of information from period to period. F. Constraints: Limits to help identify useful accounting information. Includes (1) Benefits Greater Than Costs: Benefits obtained by users of information must be greater than costs of providing information, and (2) Materiality: Monetary impact of the information must be large enough to make a difference in decision making (quantitative constraint).


ACCOUNTING ASSUMPTIONS AND PRINCIPLES A. Entity: Information is recorded and reported about each separate economic entity (company). B. Continuity (Going Concern): Company is assumed to continue future operations, unless substantial contrary evidence exists. C. Period of Time: Information is reported in a company's financial statements at least on an annual basis. D. Monetary Unit: National currency of company is used as stable unit of measure in preparing financial reports. E. Historical Cost: Generally, exchange price is retained in the accounting records as the value of an item until it is consumed, sold, or liquidated and removed from records. F. Recognition: Process of formally recording and reporting an item in a company's financial statements. G. Realization: Process of converting noncash resources into cash or rights to cash. H. Accrual Accounting: Process (matching) of relating financial effects of transactions, events, and circumstances having cash consequences to the period in which they occur rather than when the cash receipt or payment occurs. I. Prudence (Conservatism): Process of ensuring, to extent possible, that uncertainties and risks related to a company are reflected in its accounting information.


GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) A. Definition: Guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting information in its audited financial statements. B. Sources: (in descending order of importance) 1. Category A: FASB Statements of Financial Accounting Standards and Interpretations, FASB Staff Positions, FASB Statement 133 Implementation Issues, APB Opinions, and CAP (AICPA) Accounting Research Bulletins (as well as SEC releases such as Regulation S-X, Financial Reporting Releases, and Staff Accounting Bulletins for companies that file with the SEC). 2. Category B: FASB Technical Bulletins and AICPA Industry Audit and Accounting Guides, and AICPA Statements of Position, (if cleared by the FASB). 3. Category C: FASB Emerging Issues Task Force Consensus Positions and AICPA Practice Bulletins (if cleared by the FASB). 4. Category D: FASB Q's and A's (Implementation Guides), AICPA Accounting Interpretations, and practices that are widely recognized and prevalent either generally or in the industry (e.g., AICPA Accounting Trends and Techniques). 5. When none of the pronouncements in Categories A through D apply, then the company may consider other accounting literature such as FASB Statements of Concepts, AICPA Issues Papers, IASB International Financial Reporting Standards, AICPA Technical Practice Aids, and accounting textbooks, handbooks, and articles for GAAP guidance. (Continued on inside back cover)

(Continued from inside front cover) VII. FINANCIAL STATEMENTS A. Balance Sheet: 1. Definition: Summarizes a company's economic resources, economic obligations, and equity and their relationships on a particular date. 2. Assets: Probable future economic benefits obtained or controlled as a result of past transactions or events. 3. Liabilities: Probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services in the future as a result of past transactions or events. 4. Equity: Residual interest of owners in assets after deducting liabilities. 5. Measurement Methods: Alternative valuation methods of assets (and liabilities) include: (a) Historical Cost: Amount of cash (or equivalent) paid to acquire asset, (b) Current Cost: Amount of cash (or equivalent) that would be paid currently to acquire same asset, (c) Current Market Value: Amount of cash (or equivalent) that could be obtained currently by selling asset in orderly liquidation, (d) Net Realizable Value: Amount of cash (or equivalent) into which asset is expected to be converted in ordinary course of business, less direct conversion costs, and (e) Present Value: Present value of future net cash flows expected from conversion of asset in ordinary course of business. B. Income Statement: 1. Definition: Summarizes the results of a company's income-producing operations for an accounting period. 2. Revenues: Inflows of assets or settlement of liabilities during a period from delivering or producing goods, rendering services, or other activities involving ongoing major operations. 3. Expenses: Outflows of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities involving ongoing major operations. 4. Gains (Losses): Increases (decreases) in equity from peripheral or incidental transactions and from all other events and circumstances during a period except those resulting from revenues (expenses) or investments by (distributions to) owners. C. Statement of Cash Flows: 1. Definition: Summarizes a company's cash inflows, cash outflows, and net change in cash from its operating, investing, and financing activities during an accounting period, in a manner that reconciles the beginning and ending cash balances. 2. Operating Cash Flows: Inflows and outflows of cash from acquiring, producing, selling, and delivering goods for sale, as well as providing services. Reported under either indirect or direct method. 3. Investing Cash Flows: Inflows and outflows of cash from acquiring and selling investments, property, plant, and equipment, and intangibles, as well as from lending money and collecting on loans. 4. Financing Cash Flows: Inflows and outflows of cash from obtaining resources from owners and creditors, and providing a return on (and of) their investment, as well as repaying amounts borrowed on long-term credit. D. Supporting Statements, Schedules, and Notes: Supplement the primary financial statements. May include: (1) statement of retained earnings, which primarily reconciles retained earnings for the net income and the dividends of the accounting period, (2) statement of changes in stockholders' equity, which primarily itemizes the changes in the various components due to investments by and distributions to stockholders, (3) schedule of investing and financing activities not affecting cash, which summarizes the results of noncash investing and/or financing activities, and (4) notes describing a company's required disclosures. E. Elements: Items comprising a financial statement.

VIII. COMPREHENSIVE INCOME A. Definition: A company's net income plus its other comprehensive income. B. Other Comprehensive Income: Includes: (1) unrealized increase (decrease) in market (fair) value of investments in available-for-sale securities, (2) change in excess of additional pension liability over unrecognized prior service cost, (3) certain gains (losses) on "derivative" financial statements, and (4) translation adjustment from converting the financial statements of foreign operations into U.S. dollars. C. Reporting Alternatives: A company may report its comprehensive income: (1) on the face of its income statement, (2) in a separate statement of comprehensive income, or (3) in its statement of changes in stockholders' equity. The chosen statement must be displayed as a major financial statement. IX. REVENUE RECOGNITION CRITERIA A. Criteria: Revenue is recorded and reported when: (1) realization has taken place, and (2) earning process is complete or nearly complete. B. Realization: Process of converting noncash resources into cash or rights to cash. Includes (1) realized, the actual exchange of noncash resources into cash or near cash, or (2) realizable, the situation where noncash resources are readily convertible into known amounts of cash or claims to cash. C. Earning Process: Process of acquisition, production and/or distribution, sales, and collection of cash. Is complete or nearly complete when the company has accomplished what it must do to be entitled to the benefits. X. EXPENSE RECOGNITION CRITERIA A. Matching: Allocation of expenses incurred (efforts) against revenues (benefits) earned during period. B. Association of Cause and Effect: Costs recognized as expenses based on direct association with revenues. C. Systematic and Rational Allocation: Costs recognized as expenses based on systematic and rational allocation. D. Immediate Recognition: Costs recognized as expenses in current period because (1) there are no discernible future benefits, or (2) it is not useful to allocate to future periods. XI. REVENUE RECOGNITION ISSUES A. Economic Substance: Economic substance of event takes precedence over legal form of transaction. B. Risks and Benefits: Risks and benefits of ownership have been transferred to the buyer. C. Collectibility: Collectibility of receivable is reasonably certain. XII. ALTERNATIVE REVENUE RECOGNITION METHODS A. Accrual Method: Revenues are recognized at time of sale and expenses are matched against revenues in period of sale. Usual method of revenue and expense recognition. Primary alternatives are percentage-of-completion, proportional performance, installment, and cost recovery methods. B. Percentage-of-Completion Method: Construction revenues and expenses are recognized each period during life of long-term construction contract in proportion to amount of contract completed during period. C. Proportional Performance Method: Revenues on long-term service contract are recognized based on proportional performance of each service act. Service costs are categorized as (1) initial direct costs, (2) direct costs, or (3) indirect costs, and are recognized as expenses accordingly. D. Installment Method: Gross profit is deferred in period of sale. A portion of deferred gross profit is recognized as gross profit each period based on the gross profit percentage and the cash collected. E. Cost Recovery Method: Gross profit is deferred in period of sale. No gross profit is recognized until cost of product has been recovered; after the cost recovery, gross profit is recognized equivalent to cash receipts.



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