Accounting and Financial Statements Refresher Flashcards
Retained Earnings Formula
Beg R/E
+Net Income
- Dividends
= End. R/E
Organization to establish the standards of financial accounting and reporting
Private sector - FASB
Public sector - SEC
What is GAAP
A body of specific rules and broad concepts that govern how accountants recognize, measure, record, display, and disclose information about a company’s financial transactions.
What is FASB?
1) Designated organization for establishing the standards of financial accounting and reporting for the private sector.
2) It is not a government agency
3) It is the primary source of GAAP
What is SEC?
1) Securities Exchange and Commission
2) Has the statutory authority to establish financial accounting and reporting standards for public companies under the Sec Exchange Act of 1934
3) Issues disclosure requirements that specifically require companies to adhere to GAAP
Adherence to GAAP generally means what?
1) Financial transactions will be reported only for the entity issuing the financial report
2) Transactions measured by historical cost
3) Revenues recognized when earned
4) Expenses matched with revenues they produce
5) F/S will be prepared conservatively, consistently, and in consideration of materiality of underlying transactions
What’s important in lending to an entity that reports in consolidated basis?
Receive both the consolidated statements and F/S that reflect the performance and condition of the borrowing entity
Request consolidating statements - shows F/S of the individual entities + consolidated entity and the eliminated inter-company items
What’s the matching principle?
Report revenues and expenses in the same accounting period without regard to when cash is received or used
GAAP principles that govern financial report?
Conservatism
Consistency
Materiality
What are four limitations of GAAP F/S
1) Historical cost- use of historical cost can cloud an analyst’s ability to recognize current values
2) The matching principle can obscure the receipt and payment of cash
3) GAAP permits several alternatives to account for certain transactions - difficult to compare F/S and increase importance of footnotes
4) GAAP permits use of special accounting for some industries (ie. percentage-of-completion method)
Asset accounts order in Balance Sheet?
Listed in order of liquidity
Current Assets are most liquid
Equity Accounts for Entities
1) Partnerships - partner’s capital or partner’s equity
2) LLC - members’ capital or members’ equity
3) Proprietorship - sole equity (ie. John Smith, capital)
4) Corporation - common stock
What is Working Capital?
Current Assets - Current Liabilities
What is Current Ratio?
Current Assets divided by Current Liabilities
What is leverage?
Relationship between creditors and owner’s equity
Most common is debt-to-worth ratio = total liabilities divided by owner’s equity
Why is prepaid expense an asset?
Because it is a prepayment made to secure the use of assets or the receipt of services at a future date
Two primary categories of operating expenses?
1) Selling expenses (sales salaries, commisions, advertising, delivery expenses, etc)
2) Administrative expenses (officer’s and staff salaries, office supplies, office equipment deprec, account and legal services, etc)
What is Comprehensive Income?
Net Income + gains/losses not reported on the income statement.
These gains/losses are not in the Income Statement because their results are not related to operations
Are revenue accounts permanent income statement accounts?
No, they are temporary and brought to zero and transferred to the Retained Earnings account at year end
Statement of Financial Accounting Standards (SFAS) No. 95
The statement of cash flows is required under SFAS 95
Breakdown of Statement of Cash Flows
1) Operating - CF from normal operations (ie. selling goods, paying salaries, collecting receivables)
2) Investing - Purchase and sale of noncurrent assets (ie. buildings and equipment)
3) Financing - Cash raised externally to fund any cash flow deficit created by Operating or Investing
Two formats of Statement of Cash Flow
1) Direct - starts with sales, closely resembles cash basis income statement
2) Indirect - Begins with Net Income then derives Operating, Investing and Financing cash flows
Retained Earnings Formula
Beg. R/E
Plus: Net Income
Minus: Dividends
End. R/E
Since Inception
Notes to F/S provides three kinds of disclosures
1) Additional detail about certain accounts and transactions (ie. schedule of fixed assets)
2) Information necessary for evaluating reliability and comparability of F/S (ie. whether the financials are consolidated or only one corp without subsidiaries or parent)
3) Include information not in F/S such as contingent liabilities (ie. guaranties, warranties, purchase commitments, lawsuits)
Types of Contingent Liabilities
Guaranties
Warranties
Purchase commitments
Lawsuits
Other Types of Financial Notes
1) Details about liabilities (ie. money borrowed and requirements such as collateral)
2) Amounts due annually (for both operating and capitalized leases)
3) Nature of intangibles
4) Composition of deferred taxes
5) Pension
6) Extraordinary items
A company’s retained earnings can be measured by change in cash account from one year to next?
False, R/E equals net income less dividends since inception. It is not represented by amount of cash on hand
Four possible Dual-Effect Combinations
1) Equal increases on both sides of the equation (Increase in Asset and Liab)
2) Equal decreases on both sides of the equation (Increase in Asset and Liab)
3) Increase in one asset and equal decrease in another asset
4) Increase in one liability and equal decrease in another liability account or equity account
Two methods of accounting
1) Accrual basis - must use this to be accordance to GAAP
2) Cash basis
What is a Journal?
It is the book of original entry
Record of financial transactions in order by date
