Question

1. Why is it acceptable for financial accounting to be imprecise?

2. What is materiality?

3. How is materiality determined?

4. What is a misstatement?

5. When is a misstatement considered fraud?

6. Give three examples of uncertainties faced by businesses.

7. Define “U.S. GAAP.”

8. Why is GAAP so important to the capital market system in the United States?

9. Who creates U.S. GAAP?

10. Define “asset” and give an example of one.

11. Define “liability” and give an example of one.

12. Define “revenue.”

13. Define “expense.”

Answer 1

1 - Imprecise Accounting. "Imprecise accounting" sounds like an oxymoron. The reality is that accounting as an economic measurement system is anything but precise. ... Unfortunately, financial statements rarely are able to give completely definitive and precise answers to what seem to be simple economic questions.

2 -

Materiality can have various definitions under different accounting standards, such as the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). Other more specific accounting standards may apply in different circumstances.

Under U.S. GAAP, there is no concrete definition for materiality. On the other hand, under IFRS, a transaction is considered material if omitting or misstating it can influence decisions that users make based on financial information about the reporting entity.

3 -

To establish a level of materiality, auditors rely on rules of thumb and professional judgment. They also consider the amount and type of misstatement.

The materiality threshold is typically stated as a general percentage of a specific financial statement line item.

4 - A misstatement is the difference between the required amount, classification, presentation, or disclosure of a financial statement line item and what is actually reported in order to achieve a fair presentation, as per the applicable accounting framework

5 -. When misstatements are done by intention then it is considered as Fraud

6 -. (1) the economy is going bad and causing everyone to worry about what will happen next,

(2) technological possibilities

(3) customer needs,

7 -.  Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements.

8 -. GAAP allows investors to easily evaluate companies simply by reviewing their financial statements. ... When applied to government entities, GAAP helps taxpayers understand how their tax dollars are being spent. GAAP also helps companies gain key insights into their own practices and performance.

9 -. Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics.

10 -. An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit

Ex. Plant

11 -. A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits

Ex- Debt

12 -. revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers

13 -

An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the activities that result in (hopefully) a profit.