ACCT 2001 Test 1 Flashcards
decision-usefulness
financial accounting has the burden of providing useful information
three groups who use accounting information
owner/ manager, creditors, stockholders
principle means of assessing financial performance are
financial statements
set of accounting standards
Generally Accepted Accounting Principles
real-time online database that can be used to access the Codification, using a numerical index system
Codification Research System
what is the objective of financial reporting
provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity
relevant information
capable of making a difference in a decision
faithful representation
numbers and descriptions match what really happened
materiality
if omitting or misstating info would influence decisions of users
comparability
lets users identify the real similarities and differences in economic events between companies
verifiability
when independent measurers using the same methods, get similar results
timeliness
having information available to decision makers before it loses its capacity to influence decisions
understandability
quality of information that lets reasonably informed users see its significance
comparability
identifying similarities and differences in economic events between 2 companies
consistency
when the same company follows the same accounting treatment from period to period
4 assumptions in accounting
economic entity, going concern, monetary unit, periodicity
economic entity (acct assumption)
economic activity can be identified with a particular unit of accountability; company keeps activity separate and distinct from its owners and business units
going concern (acct assumption)
assume company will have a long life
monetary unity
money is the common denominator of economic activity and provided appropriate basis for accounting measurement and analysis
periodicity
implies that a company can divide its economic activities into artificial time periods (monthly, yearly, quarterly)
fair value
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
revenue recognition principle
companies recognize (record) revenue in the accounting period in which the performance obligation is satisfied
expense recognition principle
expenses are matched (recorded) with the revenues when possible
product costs
include material, labor, and overhead attached to a product and may be carried into future periods and recognized as expenses when revenue from product is recognized
period costs
such as officer’s salaries and other administrative costs are recognized immediately because there is no direct relation ship between period costs and revenue
full disclosure principle
dictates that companies should provide information that is of sufficient importance to influence the judgement and decisions of informed users
cost restraint ( cost benefit principle)
weighing the cost of providing information with the benefits of using it
major part of an annual report (10k)
management discussion and analysis; financial statements; auditors report; notes to the financial statement
Why did the FASB develop a conceptual framework for financial reporting?
to resolve financial reporting controversies
capital allocation
determining how and at what cost money is allocated among competing interests
The SEC believes that accounting standards should come from
the private sector
Who are general purpose financial statements primarily prepared for
users that lack the ability to demand the financial information they need
What happens when products get obsolete faster
it becomes harder to define a time period
accounting information system
collects and processes transaction data and communicates financial information to decision makers
general ledger accounting systems
software programs that integrate various accounting functions
basic accounting equation that will always be in balance is
assets= liabilities+ stockholder’s equity
transactions
business economic events recorded by accountants
external transactions
between an entity and its environment
internal transactions
event occurring within an entity
entire group of accounts maintained by a company
ledger
chart of accounts
lists all the accounts and the account numbers that identify their location
trial balance
a list of accounts and their balances at a given time; usually prepared at the end of an accounting period and proves the mathematical equality of debits and credits
Why do companies make adjusting entries?
For all revenues to be recorded in the period in which services are fulfilled and for expenses to be recorded in the period which they are incurred
When are adjusting entries made?
Anytime financial statements are needed
Types of adjusting entries
deferrals and accruals
prepaid expenses (deferrals)
expenses paid in cash before they are used or consumes
unearned revenue (deferrals)
cash received before services performed
accrued revenues (accrurals)
revenues for services performed but not yet received in cash or recorded
accrued expenses (accrurals)
expenses incurred but not yet paid in cash or recorded
depreciation
process of expensing (allocating) the cost of the asset over it’s useful life in a rational and systematic manner
book value
cost of an asset- accumulated depreciation
adjusted trial balance
basis for making financial statements; made after journalizing and posting αll adjusting entries
What is never used in an adjusting entry?
Cash
Closing entries
closing process reduces the balance of the nominal (temporary) accounts to zero in order to prepare the accounts for the next period’s transactions
To close accounts:
Revenues and expenses close into income summary; income summary closes into retained earnings; dividends close into retained earnings
What is reported on the balance sheet but not the adjusted trail balance?
ending retained earnings
Reversing entry
Debits all cash payments of expenses to the related. expense account (ex: Melanie made adjusting entries to several accounts at the beginning of an accounting period)
Usefulness: What do investors and creditors use the income statement to do? (3 items)
evaluate the past performance of the company, provide a basis for predicting future performance, helps assess the risk/ uncertainty of achieving future cash flows
Limitations of the income statement:
Company omit items they cannot measure reliably, income number’s affected by the accounting methods employed, income measurement involves judgment
Revenues
Inflows or other enhancements of assets of an entity or settlements of its liabilities
Expenses
Outflows or other using up assets or incurrences of liabilities
Gains
Increases in equity (net assets) from peripheral or incidental transactions
Multistep income statement
An income statement that shows several steps in determining net income that reports net sales, operating expenses, income from operations, income before income tax, and net income (distinguishes between operating and non-operating activities)
Operating Expenses
Selling and administrative expenses
Examples of non-operating items
Dividend revenue, gain on sale of equipment, interest expense on bonds and notes, loss on flood/ casualty
Net income is used to assess whether a company has been
successful
Earnings per share
measures the dollars earned by each share of common stock
Earnings per share formula
(NI- preferred dividend)/ weighted avg number of common shares outstanding
2 special items
discounted operations and other comprehensive income
Discontinued Operations occurs when 2 things happen:
company eliminates the results of operation of component of the business; elimination of a component that reps a strategic shift
When a company has discontinued operations (what are the 2 items to report on the income statement)
1) the gain or loss from the disposal of a component of business and 2) the results of the operations of a component that has been or will be disposed of (both shown net of tax)
income from continued operation
used only when a company has discontinued operations; will be the subtotal minus the discontinued operations section on the income statement
Other comprehensive income
small amounts of gain/ losses that should not be reported on the income statement (ex: gains and losses from available for sale, pension gain/ loss, foreign currency gain/ loss)
Comprehensive Income definitions
1) includes all changes in equity during a period except those resulting from investments by owners or distributions to owners 2) income statement plus the gains/ losses that bypass the income statement called other comprehensive income
Two ways to report comprehensive income
1 statement approach and 2 statement approach
Gross profit formula
Gross Profit= sales- COGS
Income from operations formula
Income from operations= gross profit- operating expenses
Net income formula
NI= income from operations+ other revenues
Comprehensive Income Formula
Comprehensive income=
Statement of Stockholder’s equity
This statement reports the changes in each stockholders’ equity account and in total stockholders’ equity are prepared in columnar form
Earnings Management
Planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings
Non GAAP Reporting
Reporting of information that has been computed by adjusting GAAP reported information, like EBITDA example
standalone selling price
price the company would sell a product or a service, separately to a customer
The statement of income or statement of earnings is most commonly referred to as the
income statement
Another name for the balance sheet
statement of financial position
Assets, liabilities and equity are reported at
a specific date
The balance sheet helps predict________ of future cash flows
amounts, timing and uncertainty
__________ provides information about how quickly a company can concert assets into cash
balance sheet
Why is liquidity important? Assess ability to pay ______ and _________ obligations
current; maturing
refers to the ability to pay debts as they mature
solvency
Solvency example: a company with ________ of long-term debt relative to assets has a ________ solvency than a similar company with a lower level of long term debt
high level; lower level
Companies with relatively high debt more risky because they will need more of their _______ to meet their ________________ which includes principal and interest payments
assets; fixed obligations
Financial Flexibility
liquidity and solvency affect this; it’s the ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs
Generally, the ________ an enterprise’s Financial Flexibility, the _________ its risk of failure
greater; lower
3 major limitations of the balance sheet
1) most assets and liability are reported at historical cost
2) use of judgements and estimates
3) many items of financial value are omitted if they cannot be recorded objectively
3 general classification on the balance sheet
assets, liabilities and equity
assets
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
liabilities
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
residual interest in the assets of an entity that remains after deducting its liabilities
cash and other assets a company expects to convert into cash, sell, or consume either in _________ or in the operating cycle, whichever is longer
1 year
what is an operating cycle
the average time between when a company acquires materials and supplies and when it receives cash for sales of the product
cash equivalents
short-term highly liquid investments that mature within 3 months or less
Required disclosures include:
cash posted as collateral for certain derivative instruments
short- term investments are when a company has invested in _______ and _______ of other companies
stocks; bonds
debt securities are investments in ______ or ________ of other companies or government entities
bonds; notes
Short term investments are generally held at
fair value
3 separate classifications of debt securities
held to maturity, trading, available for sale
held to maturity:
company has the positive intent and ability to hold maturity (reported at amortized cost)
trading:
Bought and held primarily for sale in the near term to generate income on short- term price differences (reported at fair value)
available for sale:
not classified as Held-to-Maturity or Trading (reported at fair value as current or noncurrent depending upon management’s intent
4 types of supplemental disclosures
1) accounting policies 2) contractual situations 3) contingencies 4) fair values
4 techniques to disclose pertinent information
1) parenthetical explanations 2) cross reference and contra items 3) supporting schedule 4) terminology
