Generally Accepted Auditing Standards are the rules that govern auditing practices in the United States. The Auditing Standards Board, a part of the American Institute of Certified Public Accountants, creates GAAS to establish auditing practice standards and rules.
Explanation :
The Auditing Standards Board created a framework of auditing standards that was divided into three main sections:
Auditing standards :
- General Standards
- Standards of Fieldwork
- Standards of Reporting
GAAS are the auditing standards that help measure the quality of audits. Auditors review and report on the financial records of companies according to the generally accepted auditing standards. Auditors are tasked with determining whether the financial statements of public companies follow generally accepted accounting principles (GAAP). GAAP is a set of accounting standards that companies must follow when reporting their financial statements. Auditors review a company’s financial numbers and accounting practices to ensure they’re consistent and comply with GAAP. The Securities and Exchange Commission (SEC) requires that the financial statements of public companies are examined by external, independent auditors.
In a nutshell :
- Generally accepted auditing standards (GAAS) are a set of principles that auditors follow when reviewing a company’s financial records.
- GAAS helps to ensure the accuracy, consistency, and verifiability of an auditors’ actions and reports.
- The generally accepted auditing standards (GAAS) are contained within three sections that cover general standards, fieldwork, and reporting.
The term gain, for financial and accounting purposes, refers to the appreciation in the market price of any property or asset. The concept can also be easily explained as the increase in value of a given asset or simply selling something for more than you paid for it.
Explanation :
It is important to state the difference between revenues, profits, and gains when talking about this concept. Revenue refers to the amount of money received by the regular business activities of the company, i.e. selling goods or services. Profits are the excess revenues after costs and expenses have been paid for a period. Gains, on the other hand, come from an increase in the value of a given asset. To calculate a gain or loss in the value of an asset, we must identify what is the current market value of the asset and then subtract the acquisition cost of that asset. Gains can be either realized or unrealized. Realized gains take place when the transaction is completed and the asset is sold, the buyer takes ownership and the seller takes the payment, including the gain. Unrealized gains occur when the market value of the asset rises, but the asset hasn’t been sold yet. Thus, it remains in the hands of the current owner. There is a gain but it hasn’t been realized yet.
In a nutshell :
- A gain arises if the current price of something currently owed is higher than the original purchase price.
- Investors may talk about gains whenever the market price of an asset exceeds the purchase price they paid, but unrealized gains may come and go many times before an asset is sold.
- Once an asset that has seen a gain in value is sold, an investor is said to have realized the gain—or, put more simply, made a profit.
Managerial or cost accountants keep track of and evaluate business costs to help manage and budget a company’s operations. One way of keeping track of costs is to divide them up into cost pools or groups. For example, a manufacturer might group all machining costs together into one cost pool.
Explanation :
Homogeneous cost pool is a managerial accounting term for a group of costs that have the same cause and effect or benefits received relationship with the cost allocation base. The more homogeneous or similar the cost pools are the more costs can be attributed to the cost object.
In a nutshell :
- An Homogeneous cost pool is an aggregate of all the costs associated with performing a particular business task.
- A temporary account, an Homogeneous cost pool, includes fixed costs and variable costs and allows a business to estimate the cost of a specific task accurately.
- Homogeneous cost pools are used in activity-based costing, an accounting method that is commonly used in production and manufacturing.
- Homogeneous cost pools help to accurately assign costs, which is important in determining the profitability of products and making production decisions to improve profit margins.
Human capital is an economic concept that analyzes human resources as a resource that produces income. It is a notion that categorizes talent and skills as assets that can be developed and enhanced to get more value from them.
Explanation :
The term human capital was invented by Theodore Schultz, a University of Chicago economist that defined the workforce of any given company as a precious resource that had to be built up and nurtured in order to increase its profitability and productivity. By developing training and educational programs within personnel, the company can further develop their skills or equip teach them new abilities that will allow them to do their job more effectively. These programs are classified as an investment, even if they are not reflected as such in the balance sheet. Since it is impossible to establish a value for the human capital, it is considered to be an intangible asset that all companies possess. Nevertheless, investing in education and training is not always profitable. The employee’s loyalty and commitment with the company will determine if the investment is worthwhile, since some staff members can depart from the company after the educational programs are concluded, therefore reducing the company’s return on investment.
In a nutshell :
- Human capital is an intangible asset not listed on a company’s balance sheet.
- Human capital is said to include qualities like an employee’s experience and skills.
- Since all labor is not considered equal, employers can improve human capital by investing in the training, education, and benefits of their employees.
- Human capital is perceived to have a relationship with economic growth, productivity, and profitability.
- Like any other asset, human capital has the ability to depreciate through long periods of unemployment, and the inability to keep up with technology and innovation.
A homemade dividend is the amount of dividend per share that individual investors determine to match their own cash-flow objectives. The homemade dividend is generated from the sale of a percentage of shares owned by an investor.
Explanation :
The home made dividend theory is completely different from the dividend policy that a firm applies. If a firm has accumulated cash flows, it will return the value to shareholders in the form of a dividend, or it will repurchase its shares. In both cases, investors seek to maximize their stream of income.
If the firm’s dividend policy does not create significant cash flows for the investor, he is reinvesting the amount in the firm’s stock or he sells off a portion of the stocks he owns to generate the cash flow he needs. In fact, the homemade dividend theory suggests that investors are indifferent to the firm’s dividend policy because by selling off a part of their shares, they can generate the required stream of income.
In a nutshell :
- Homemade dividends signify a category of investment income that results from the partial sale of an investor’s portfolio.
- Homemade dividends are unlike the traditional dividends that a company’s board of directors issues to shareholders.
- The ability of investors to mine homemade dividends has triggered a debate as to whether traditional dividends offer substantial value.
The historical cost principle is an accounting guideline which states that all assets must be recorded at cash value, on the date they were acquired. This also applies to equity and liabilities. This means that any asset the company purchases should be rerecorded on the actual date of the purchase at the price the company actually paid for it.
Explanation :
The cost principle is a standard guideline used by accountants around the world and is part of the GAAP conceptual Framework.. It ensures that all the information being displayed on a company’s financial statements regarding the value of any asset, equity, or liability reflects the reality of the underlying transactions. Also, this practice reduces the possibilities of miss valuing a given asset, since the price used to record the transaction will be the actual price paid. As for equity and liabilities, transactions must be recorded on the date they were received at the original acquisition cost.
In a nutshell :
- The historical cost principle is a basic accounting principle under U.S. GAAP.
- Under the historical cost principle, most assets are to be recorded on the balance sheet at their historical cost even if they have significantly increased in value over time.
- Not all assets are held at historical cost.
Historical cost or historical costing is the concept that assets should be valued based on their purchase price or the money actually paid for the assets. GAAP requires that assets be reported on the balance sheet at historical cost.
Explanation :
Historical cost is the preferred method of valuing assets because it can be proven. It is easy for a company to look at the title of a piece of property and see what was paid for it. Other valuation or costing methods like replacement cost or current cost fluctuate with the market and economy. If these methods were used, the company would report the same piece of property at different values every year based on the market. This fluctuation violates the accounting concept or consistency. Historical cost values don’t change from year to year, so the consistency concept is not violated. There are some problems with the historical costing method. For instance, it doesn’t take into consideration time value of money or inflation. The historical cost concept assumes that inflation is not relevant and only values assets based on the purchase price.
In a nutshell:
- Most long-term assets are recorded at their historical cost on a company’s balance sheet.
- Historical cost is one of the basic accounting principles laid out under generally accepted accounting principles (GAAP).
- Historical cost is in line with conservative accounting, as it prevents overstating the value of an asset.
- Highly liquid assets may be recorded at fair market value, and impaired assets may be written down to fair market value.
The high-low method is a technique managerial accountants use to estimate the mixed production costs at various levels of production by calculating the variable cost rate and total fixed costs. In other words, it’s a formula used by management to split the fixed and variable costs associated with producing a good and chart out these data points. A line is then drawn connecting the lowest and highest points to represent the average.
Explanation :
In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations. It is worth being cautious when using the High-Low Method, however, as it can yield more or less accurate results depending on the distribution of values between the highest and lowest dollar amounts or quantities.
In a nutshell :
- The high-low method is a simple way to segregate costs with minimal information.
- The simplicity of the approach assumes the variable and fixed costs as constant, which doesn’t replicate reality.
- Other cost-estimating methods, such as least-squares regression, might provide better results, although this method requires more complex calculations.
Held to maturity securities are investments that management intends to keep for the life of the investment and not sell before they mature or expire.
Explanation :
When a company buys stocks or debt securities as investments, there are several different ways to account for them depending on what type of security they are. Accountants don’t really differentiate between debt and equity securities for investment classifications with the exception of held to maturity securities. All securities are simply viewed as investments. Accountants differentiate between investments based on what management plans to do with the investments. There are three different categories of investments based on management’s abilities and intentions: trading, available for sale, and held to maturity. Notice that management can’t just intend to do something with security. They must actually have the ability to act on their intentions. In other words, if management claims they want to sell their stocks, they must actually have a market and ability to sell them in order to classify the stocks as trading.
In a nutshell :
- Held-to-maturity (HTM) securities are purchased to be owned until maturity.
- Bonds and other debt vehicles—such as certificates of deposit (CDs)—are the most common form of held-to-maturity (HTM) investments.
- Held-to-maturity (HTM) securities provide investors with a consistent stream of income; however, they are not ideal if an investor anticipates needing cash in the short-term.
A hedge fund analyst works closely with a fund manager, providing all the research and analytical tasks to identify investment opportunities for a fund’s investment portfolio.
Explanation :
A hedge fund analyst is responsible for following the financial news and assessing the trends of the market. Usually, HFAs spend a large amount of time on the Internet reading reliable sources of news and collecting information that can prove valuable for the fund’s portfolios. In addition, fund analysts suggest potential investments to the fund manager based on the analysis they perform, thereby recommending certain stocks or bonds . Once the investment is undertaken, and the fund manager chooses the suitable strategy, the analyst should monitor if the strategy is fruitful or if there is room for improvement.
In a nutshell :
- A hedge fund analyst is tasked with providing guidance to a portfolio manager on how to best structure the hedge fund’s investment portfolio.
- A hedge fund analyst works for a hedge fund, as opposed to another type of buy-side institution. With hedge funds, alternative asset classes, derivatives, and short or delta-neutral strategies may be used.
- Hedge fund analysts are tasked with finding investment opportunities based on research and due diligence, recommend them to portfolio managers, and then monitor risk and performance.
