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33:010:325- Final Exam Guide - Comprehensive Notes for the exam ( 27 pages long!)


Department
Accounting
Course Code
33:010:325
Professor
M Sanders
Study Guide
Final

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Rutgers
33:010:325
FINAL EXAM
STUDY GUIDE

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Tuesday, September 5, 2017
Ch. 1: Financial Reporting Environment
Subject
-Financial accounting: identifying, recording & communicating economic info. (info.
that should be disclosed & made public to the marketplace)
-4 basic financial statements: balance sheet, statement of comprehensive income,
statement of cash flows, statement of shareholders’ equity
-U.S. uses GAAP; rest of world uses IFRS
SEC = major public accounting board
FASB = major private accounting board
-Financial information also includes:
Letter to shareholders
Discussion & analysis of firm by mgmt of firm (MD&A) — anything that went on
during the year is disclosed by mgmt
Mgmt report
Auditors’ report
Financial summary
-Mgmt takes ownership of financial statements; they are responsible for putting them
together (not the role of auditors & external accountants)
-There’s always pressure on businesses to do something:
Accounting has reactive factors & proactive factors
-Financial info. should never be used for incentives (ie: higher profit = higher
bonus) b/c it encourages unethical behavior
-Currently, GAAP and IFRS are trying to converge
Important to know IFRS b/c some U.S. companies operate outside of US
-The FASB issues Accounting Standards Updates (ASUs) as part of Accounting
Standards Codification (main literature for GAAP standards)
-FASB follows 7-step process to issue final standard:
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Tuesday, September 5, 2017
An exposure draft is used to extend the final issuance of a standard b/c companies
need to study the effect of that standard on their businesses
-FASB tries to get the most clarity out of financial statements (disclose everything);
makes standards that will make financial information more transparent, fair and better
for public users
-Trends in standard setting:
Move towards less rules-based system (GAAP is considered very rules-based;
IFRS is considered more principles-based— mgmt has more discretion)
-GAAP has a lot of “bright lines” (a lot of percentages & consequences to actions;
can’t do this and can’t do that); so many rules
-However, principles-based standards can provide insufficient guidance (mgmt
has to make decisions on its own; more interpretation)
Move toward standards that are focused on the asset/liability approach
-Earlier, it was more focused on income statement approach (how much are you
making)
However, SEC got concerned with solvency (ability to survive in long run);
therefore shifted focus on BS so that companies can survive, rather than focus
on make a whole lot of $
Move toward measuring balance sheet items at fair value rather than at historical
cost (how much you initially paid doesn’t change on your BS) —esp on stocks,
investments, etc.
-There’s more volatility on assets today (because of econ. booms & busts)
-Historical cost artificially distorts value on financial statements
-There are pros & cons to rules-based and principles-based systems
Objectives-oriented standards = middle ground with enough rules so it’s not so
complicated
!2
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