PART ONE 60 Points Instructions: Below are eight of the ten elements of financial accounting and their definitions from Statement of Financial Accounting Concepts (SFAC) 6, Elements of Financial Statements. You can find more on these by looking at SFAC 6 at fasb.org, or clicking on the link to the Concepts Statements found on the homepage of the FASB ASC. Read the following carefully. Failure to follow instructions will negatively impact your grade. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. In a not-for-profit organization, which has no ownership interest in the same sense as a business enterprise, net assets is divided into three classes based on the presence or absence of donor-imposed restrictionspermanently restricted, temporarily restricted, and unrestricted net assets. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners. Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners. REQUIRED: Your assignment is to choose two of these eight terms (each one you choose is worth 30 points), search the FASB ASC for these terms, and discuss how they meet the substance of the above definitions. You should have two or more paragraphs for each of the terms. The first paragraph is the FASB ASC section (be sure to show the term you chose, and the ASC section number as shown below). Then cut and paste the ASC section as shown below. Your second (or more) paragraph is your explanation of how the definition is applied in the ASC. You should discuss how it meets the substance of the element that you chose. You can also discuss alternative accounting treatments if appropriate, and anything else related to the element that illustrates your knowledge of the item that you choose. I cant stress enough the importance of your supporting paragraph(s) this is where you will earn the majority of your points. Do not use the Glossary in the ASC as an answer, and do not use the terms if they are found in not-for-profit entity citations. Do not refer to IFRS. Below is an example of the term asset. You cannot use this example in any of your answers. ______________________________________________________________________________ ASSET 720-35-05-3 Other Expenses, Advertising Costs, Overview and Background (Instructors Note: This paragraph below is directly from the FASB ASC) The following are some of the reasons that costs incurred in anticipation of the probable future economic benefits of advertising generally are expensed: a. Financial statement preparers generally presumed that the benefit period is short. b. The periods during which the future economic benefits probably would be received and the amounts of such benefits could not be measured and determined easily and objectively. c. The advertising costs for some entities were not material. d. Advertising is undertaken to provide or increase future economic benefits. (Now you write your paragraph(s).) The above section of the FASB ASC deals with the expensing of advertising costs even if there is a probable future economic benefit. The probable future economic benefit would be generated by increased sales (revenues) which would generate the asset cash (or receivables). Note that the ASC states costs incurred which means that the past transaction or event has already occurred. Theoretically, advertising that has not yet been released (on television, radio, in print, etc.) is an asset because its future economic benefit has not yet been realized. But due to the difficulty of matching the advertising expense with the expected increase in sales (revenue) in the proper period, along with the materiality of the cost the ASC allows for immediately expensing the advertising costs when incurred. Expensing the advertising cost versus capitalizing (debiting a prepaid asset account, e.g., prepaid advertising) is assumed not to make a difference to the users of financial statements decision making. Decision usefulness is a qualitative characteristic of accounting information discussed in SFAC 8. In addition, consistently expensing the advertising costs each period will allow the users of financial statements to have better comparability between (among) periods. Comparability is an enhancing quality of relevance and faithful representation also discussed in SFAC 8. continued The accounting for advertising costs in this manner parallels accounting for other items that have theoretical justification for capitalization yet are treated as an expense. Examples include research and development costs, start-up costs of an organization, and initial net operating losses. Etc., etc., etc. Notice how I expanded the discussion outside the topic by introducing alternative treatment of advertising cost, similar items, and even discussed Statement of Financial Accounting Concept 8, The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (which replaced SFAC No. 1 and No. 2). But do not force other topics in your discussion unless they are relevant to your citation. I do not expect you to find the exact definition in the ASC. Remember that I am only looking for the ASC to imply the substance of the definition. There is really no one correct answer, but there are good answers and better answers. To have a better answer (1) your citation should have the essence of the definition of the element, and, (2) you must show in your second (or more) paragraph how you believe the ASC pertains to the definition of the element (term). As a graduate student your second paragraph is very important because it shows me your knowledge of financial accounting. Most points for the Assignment are earned (not earned) by what is written in the second paragraph. Your grade will also be based on your writing style. Question PART ONE 60 Points Instructions: Below are eight of the ten elements of financial accounting and their definitions from Statement of Financial Accounting Concepts (SFAC) 6, Elements of Financial Statements. You can find more on these by looking at SFAC 6 at fasb.org, or clicking on the link to the Concepts Statements found on the homepage of the FASB ASC. Read the following carefully. Failure to follow instructions will negatively impact your grade. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. In a not-for-profit organization, which has no ownership interest in the same sense as a business enterprise, net assets is divided into three classes based on the presence or absence of donor-imposed restrictionspermanently restricted, temporarily restricted, and unrestricted net assets. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners. Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners. REQUIRED: Your assignment is to choose two of these eight terms (each one you choose is worth 30 points), search the FASB ASC for these terms, and discuss how they meet the substance of the above definitions. You should have two or more paragraphs for each of the terms. The first paragraph is the FASB ASC section (be sure to show the term you chose, and the ASC section number as shown below). Then cut and paste the ASC section as shown below. Your second (or more) paragraph is your explanation of how the definition is applied in the ASC. You should discuss how it meets the substance of the element that you chose. You can also discuss alternative accounting treatments if appropriate, and anything else related to the element that illustrates your knowledge of the item that you choose. I cant stress enough the importance of your supporting paragraph(s) this is where you will earn the majority of your points. Do not use the Glossary in the ASC as an answer, and do not use the terms if they are found in not-for-profit entity citations. Do not refer to IFRS. Below is an example of the term asset. You cannot use this example in any of your answers. ______________________________________________________________________________ ASSET 720-35-05-3 Other Expenses, Advertising Costs, Overview and Background (Instructors Note: This paragraph below is directly from the FASB ASC) The following are some of the reasons that costs incurred in anticipation of the probable future economic benefits of advertising generally are expensed: a. Financial statement preparers generally presumed that the benefit period is short. b. The periods during which the future economic benefits probably would be received and the amounts of such benefits could not be measured and determined easily and objectively. c. The advertising costs for some entities were not material. d. Advertising is undertaken to provide or increase future economic benefits. (Now you write your paragraph(s).) The above section of the FASB ASC deals with the expensing of advertising costs even if there is a probable future economic benefit. The probable future economic benefit would be generated by increased sales (revenues) which would generate the asset cash (or receivables). Note that the ASC states costs incurred which means that the past transaction or event has already occurred. Theoretically, advertising that has not yet been released (on television, radio, in print, etc.) is an asset because its future economic benefit has not yet been realized. But due to the difficulty of matching the advertising expense with the expected increase in sales (revenue) in the proper period, along with the materiality of the cost the ASC allows for immediately expensing the advertising costs when incurred. Expensing the advertising cost versus capitalizing (debiting a prepaid asset account, e.g., prepaid advertising) is assumed not to make a difference to the users of financial statements decision making. Decision usefulness is a qualitative characteristic of accounting information discussed in SFAC 8. In addition, consistently expensing the advertising costs each period will allow the users of financial statements to have better comparability between (among) periods. Comparability is an enhancing quality of relevance and faithful representation also discussed in SFAC 8. continued The accounting for advertising costs in this manner parallels accounting for other items that have theoretical justification for capitalization yet are treated as an expense. Examples include research and development costs, start-up costs of an organization, and initial net operating losses. Etc., etc., etc. Notice how I expanded the discussion outside the topic by introducing alternative treatment of advertising cost, similar items, and even discussed Statement of Financial Accounting Concept 8, The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (which replaced SFAC No. 1 and No. 2). But do not force other topics in your discussion unless they are relevant to your citation. I do not expect you to find the exact definition in the ASC. Remember that I am only looking for the ASC to imply the substance of the definition. There is really no one correct answer, but there are good answers and better answers. To have a better answer (1) your citation should have the essence of the definition of the element, and, (2) you must show in your second (or more) paragraph how you believe the ASC pertains to the definition of the element (term). As a graduate student your second paragraph is very important because it shows me your knowledge of financial accounting. Most points for the Assignment are earned (not earned) by what is written in the second paragraph. Your grade will also be based on your writing style. please use Liabilities 405-20-05-2 and for Assets, please use 50-10-50-3