Accounting and Financial Statements Refresher Flashcards
Unaudited Statements
- May be prepared by the company or by a CPA
- No assurance they are prepared in accordance to GAAP even if prepared by a CPA
- No obligation to document, consider, or search for fraud or illegal act that comes to its condition
- CPA is required to inform management of material errors, fraud or illegal act that comes to its condition
- CPAs offer two types of unaudited financial statemetns Reviewed and Comilation
Unqualified Opinion
- Most reliable
- Financial statement prepared according to CAAP
- Explanatory paragraph may be added:
When an aspect of the financial condition is uncertain
When there has been a material change
It may mention uncertainty about the outcome of a lawsuit, or going concern doubt
Audit Procedures
Test of Underlying Documentation
Observation of Physical Inventory
Outside Confirmation of AR Balances
Assessment of Risk Fraud
Qualified Opinion Letter
Present the financial statements, but with one or two exceptions.
Described a departure from GAAP
Or explain how the scope of the audit was limited
Examples:
Cash flow not presented
AR not verified
Modified Cash Basis Accounting
Starts with cash basis accounting
Attempts to overcome some profit measurement distortions
No specific rules for modified cash basis
True cash basis balance sheet would show cash and equity as its only accounts
The Purpose of Sarbanes Oxley Act
Applies to only public companies
Add transparency
Disclose all off-balance sheet transactions
Other relationship with unconsolidated entities
Enhances Requirements for internal Controls over financial report
Maintenance of accounting records
Authorization of receipts and disbursements
Audited statement are the only way to assure review of internal controls on a private company
Cash Basis Accounting
Measures and records dollar impact of transactions when they are paid for
Revenues are recorded when they are collected, expenses recorded when they are paid for
Income is what’s left
Understates revenue if the company sells on credit
Overstate income if company buy on credit
Not accurate profit unless very simple business
Distorts expenses if company uses long-lived assets
Steps In Accounting Cycle
- Transaction
- Journal Entry
- Ledger
- Trial Balance
- Adjusting Entries
- Adjusted Trial Balance
- Prepare Financial Statements
- Closing Entries
- Post Closing Entries
Disclaimer Audit Opinion Letter
- Audit is unable to form an opinion about financial statement
- Auditor is not independent
- Material scope limitation exists
- Significant uncertainty about financial statement is present
Adverse Opinion Letter
Describes where financial statements:
Do not present the entities financial positions, results of operations and cash in accordance with GAAP
Contain material departures from GAAP
Significant Red Flag
Audited Statements
Provide the highest level of assurance that the statements were prepared according to GAAP, because they were examined by a CPA who uses prescribed rules and procedures to verify the statement accuracy and validity.
Company-Prepared
Prepared internally without a CPA May appear detailed and useful lack independent verification Provide least assurance of objectivity Nay use cash or another non-GAAP accounting method.
FASB
Since 1973 Financial Accounting Standards Board
Establishes Standard for accounting and reporting
Not a government agency
Governed by the Financial Accounting Foundation
Reviewed Statements
- Satisfies all of the obligations of a compilation
- The CPA interviews management
- Compares current period financial statements with prior statements
- Reviews adjustments to prior period statements
T
CPA Review Report States
Less in scope than an audit
No opinion can be expressed
The accountant is not aware of any material modification that should be made to the financial statements in order them to confirm to GAAP
Reliability of Financial Statement
The degree of assurance that the statement were prepared in accordance with GAAP
Four GAAP Financial Statements
Statement of Financial Position
Income Statement
Statement of Retained earnings
Statement of Cash Flow
Footnotes Disclose information necessary for an informed user’s understanding of the four basic statements
Identify accounting methods
Disclose information not recognized or recorded in the financial statemtns
Limitations of GAAP
Assets are valued at historical costs
Accounting Alternatives are permitted by GAAP need t be used consistently
Industry Specific Accounting
Negotiating the Terms and Scope of an Audit
You can specify Audit Level Procedures on target accounts
Specify Audit Procedures on individual financial statments
Audited Statement Versus Unaudited Statemetns
Consider the Degree of Risk including size relative to the size of the bank portfolio and size and strength of the borrower
The length of Time the loan will be outstanding
Margins of protection
Collateral
Guarantees
Track record of financial performance
Tax Basis Accounting
Measure the impact of transaction accoding to allowable income and expense recognition under tax laws
No authoritative guidelines
Difficult to asses the true profitability and financial condition of a company without explanations
Deferred Taxes
This account reports a tax liability resulting from income that has been earned for accounting purposes but not yet recognized for income tax purposes
Treasury Stock
Stock of a company that has been issued, but reacquired by the firm and not reissued or cancelled
Treasury stock reduces the number of shares outstanding and the total amount of owner equity
Does not reduce the amount of shares issued
Ma not receive dividends
Deferred Charges
Similar to prepaid account, but on a longer term
An Asset that will be used up as time passes, but longer than a prepaid expense
Example: legal and other start-up expenses when a company first organizes
Comprehensive Income
Is a mesure that applies to companies with holding gains or losses on certain assets and liabilities
Measures the profit on operations, plus any special holding gains or losses on certain assets.
Not recognized in the income statement because they may be temporary or may reverse themselves.
They are recognized in companies equity
Owner’s Equity
Reflects the contribution of assets, usually to the company by the owners
Represents the par value of the company’s stock, an arbitrary figure such a $1 per share times the number of shares outstanding
Can be divided in to one or more class of stock
Additional Paid-In Capital
Represents all capital contributed other than the that defined as par
Arises from proceeds from sale of common stock
Sale of treasury stock
Consolidated Statements
Entity comprising two or more entities
Lending to Consolidated Statement
We need to obtain consolidated statements and the legal entity that we are lending to.
Consolidating Statements
Show the individual enttities and indivudial entities showing entries that were eliminated.
