Basic & Intermediate Concepts of Financial Accounting Flashcards
The objective of general-purpose financial reporting is to
Report financial information that is useful in making decisions about providing resources to the reporting entity.
The primary users of financial information are
Current or prospective investors and creditors who cannot obtain it directly.
Certain assumptions about the environment in which the reporting entity operates are used in the preparation of the financial statements.
What are those assumptions?
1) Going-concern assumption
2) Economic-entity assumptions
3) Monetary-unit assumptions
4) Periodicity assumption
It is assumed that the entity will operate indefinitely and will not be liquidated.
Going-concern assumption
The reporting entity is separately identified for the purpose of economic and financial accountability. Thus, the economic affairs of owners and managers are kept separate from those of the reporting entity.
Economic-entity assumption
Accounting records are kept in terms of money.
Monetary-unity assumption
Financial statements are prepared periodically throughout the life of an entity to ensure the timeliness of information.
Periodicity assumption
For financial information to be useful in decision making, it must have the following qualitative characteristics:
1) Relevance,
2) Faithful representation,
3) Comparability,
4) Verifiability,
5) Timeliness, and
6) Understandability
Provide guidelines for recording financial information.
Accounting principles
The accounting principles are:
1) Historical cost principle
2) Full-disclosure principle
3) Revenue recognition principle
4) Matching principle
Transactions are recorded initially at cost because that is the most objective determination of fair value.
Historical cost principle
Financial statement users should be able to assume that financial information that could influence users’ judgment is reported in the financial statements.
Full-disclosure principle
Revenues and gains should be recognized when realized or realizable and earned.
Revenue recognition principle
Expenses should be recognized in the same period as directly related revenues.
Matching principle
Are the primary of communicating financial information to external parties.
Financial statements
A full set of financial statements includes:
1) Statement of financial position,
2) Income statement,
3) Statement of comprehensive income,
4) Statement of changes in equity,
5) Statement of cash flows.
Reports the amounts in the accounting equation at a moment in time, such as at the end of fiscal year. The basic accounting states the following:
Assets = Liabilities + Equity
The statement of financial position, also called the balance sheet
Reports the results of an entity’s operations over a period of time, such as a year.
Income (loss) = Revenue + Gains - Expenses - Losses
The income statement
Revenue ordinarily is recognized upon the
Delivery of goods or services when the earning process is completed.
If one exists, is presented net of tax in separate section of the income statement after income from continuing operations.
Discontinued operation
Consists of
1) Net income or loss and
2) Other comprehensive income (OCI)
Statement of comprehensive income
Reconciles the beginning balance for each component of equity to the ending balance
Statement of changes in equity
The primary purpose of the statement of cash flows is to
Provide relevant information about the cash receipts and cash payments of an entity during the period.
Statement of cash flows provides information about cash inflows and outflows from:
1) The operating,
2) Investing, and
3) Financing activities of the entity.
Financial statements are prepared under the
Accrual basis of accounting
Records the financial effects of transactions and other events and circumstances when they occur rather than when their associated cash is paid or received.
Accrual accounting records
Is the accrual-accounting process of distributing an amount according to a plan or formula.
Allocation
Assigning a total cost to the accounting periods expected to be benefited is a
Common allocation
An accounting system consists of:
1) A set of accounts,
2) Recorded in a journal and
3) Posted to a ledger
It records the effects of the transactions and other events and circumstances that must be recognized by the entity.
An accounting system
The accounting system:
1) Classifies the items,
2) Summarizes their effects, and
3) Reports the results in the form of financial statements.
The accounting system is based on the:
1) Debit-credit and
2) Double-entry convention
In accordance with the convention,
1) A debit is an increase (decrease) in a given account, and
2) A credit is a decrease (increase) in the same account.
Record the financial effects of transactions, events, and other circumstances in the accounting system.
Journal entries
Is a schedule comparing the cash balance per books with the balance per bank statement (usually received monthly).
Bank reconciliation
Items know to the entity but not to the bank are:
1) Outstanding checks,
2) Deposits in transit, and
3) Errors made by the bank
Items known to the bank but not to the entity are:
1) Amounts added (collections and interest) or
2) Subtracted (or not added) by the bank (insufficient funds checks and service charges).
Accounts receivable are reported at:
Net Realizable Value (NRV)
NPV of accounts receivable equals
Gross accounts - allowance for uncollectible accounts.
The two common methods of measuring bad debt expense and the allowance for uncollectible accounts are:
1) The percentage-of-sales method and
2) The percentage-of-receivables method
The cost of inventory includes:
1) The purchase price (net of allowances and returns),
2) Shipping charges, and
3) Any other costs necessary to bring the inventory to a location and condition ready for use.
Tracks every item purchased and sold. This system is generally more suitable for entities that sell relatively expensive and heterogeneous items and require continuous monitoring of inventory and cost of goods sold accounts.
Perpetual inventory system
In the periodic inventory system,
Inventory and cost of goods sold are updated at specific intervals, such as quarterly or annually, based on the results of a physical count.
Requires determining which specific items are sold and thus reflects the actual physical flow of goods.
Specific identification method
When the inventory items purchased/produced are identical and ordinarily interchangeable, the use of:
1) Average method,
2) FIFO, or
3) LIFO is more appropriate.
Consists of tangible property expected to benefit the entity for more than 1 year that is held for the production or supply of goods or services, rental to others, or administrative purposes
Property, plant, and equipment (PPE), also called fixed assets
Includes the net purchase price and the directly attributable costs of bringing the asset to the location and condition needed for its intended operation.
Historical/initial cost of PPE
Is the process of systematically and rationally allocating the depreciable base of a tangible capital asset over its expected useful life.
Depreciation
The periodic depreciation expense is recognized in:
The income statement
Depreciation methods include:
1) Straight-line depreciation
2) Units-of-production method, and
3) Accelerated depreciation methods, such as declining balance and sum-of-the-years’-digits methods
Allocates the depreciable base evenly over the estimated useful life of the asset.
Straight-line depreciation
Straight-line depreciation
Depreciation expense = Depreciable base divided by Estimated useful life
Allocates a proportional amount of the asset’s cost based on its level of output.
Units-of-production method
Units-of-production Method
Depreciation expense = Depreciable base x (Units produced during current period divided by Estimated total lifetime units)
Result in decreasing depreciation charges over the life of the assets.
Accelerated depreciation methods
Is an identifiable, nonmonetary asset that lacks physical substance.
Intangible asset
An intangible asset with finite useful life is
Amortized.
An intangible asset with an indefinite useful life is
Not amortized but tested for impairment at least annually.
Is the value today of some future payment.
Present value (PV) of an amount
Present value (PV) equals
The future payment x the present value of 1 (a factor found in a standard table) for the given number of periods and interest rate.
Is a series of equal payments at equal intervals of time.
An annuity
Is a series of payments occurring at the end of each period.
An ordinary annuity (annuity of arrears)
Is a series of payments occurring at the beginning of each period.
An annuity due (annuity in advance)
Is the amount available at a specified time in the future based on a single investment (deposit) today.
Future value (FV) of an amount
Is a formal contract to pay an amount of money (face amount) at the maturity date plus interest at the stated rate at specific intervals.
A bond
The proceeds received from the investors on the day the bonds are sold equals
The present value of the sum of the future cash flows expected to be received from the bonds.
Bond premium or discount must be amortized over the life of the bonds using the
Effective-interest method
Effective-interest method equals
Carrying amount of the bond at the beginning of the period x Effective interest rate
