CFE Flashcards
Assets = Liabilities + Owners Equity
What is the accounting equation?
The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results for an enterprises decision-makers and other interested parties.
What is accounting
A resource owned by an entity that has economic value and will provide a future benefit.
What is an asset
Cash, accounts receivable, inventory, property, equipment, intangible items (patents, licenses, and trade marks)
Typical asset accounts
The obligations of an entity or outsiders claims against a company’s assets
What are liabilities
Accounts payable
Notes payable
Interest payable
Long term debt
Typical liability accounts
The investment of a company’s owners plus accumulated profits
(Revenues minus expenses)
What is owners equity
What type of entry goes on the left side of an account?
Debits
What type of entry goes on the right side of an account?
Credits
What type of accounts are increased by debits and decreased by credits?
Assets
Expenses
What types of accounts are increased by credits and decreased by debits?
Revenue
Owners equity
Liabilities
An accounting record consisting of a debit side and a credit side that shows the detailed components of a particular transaction?
A journal entry
2 primary methods of accounting
Cash basis
Accrual basis
Presentations of financial data and accompanying notes prepared in conformity with generally accepted accounting principles?
What are financial statements
A financial statement that provides insight into a company’s financial position at a specific point in time
Balance sheet or statement of financial position
Assets
Owners equity
Liabilities
Are typically found on a?
Balance sheet
A _______ _______ shows how much profit or loss a company earned over a period of time
Income statement or
Statement of profit or loss and other comprehensive income
Net sales minus cost of goods sold?
What is gross profit/gross margin
Gross profit minus operating expenses
What is net profit?
Total sales during an accounting period before any deductions are made
What is gross revenue
Net sales revenue
Cost of goods sold
Gross profit
Operating expenses
Net profit/income or net loss
Items typically found on an income statement
A financial statement that acts as the connecting link between the income statement and balance sheet by detailing the change in owners equity over a period
What is the statement of changes in owners equity (or statement of retained earnings)
A ____ ____ ____ _____ reports a company’s sources and uses of cash during the accounting period
What is the statement of cash flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
3 categories on a statement of cash flows
Generally accepted accounting principles, which are the rules by which a company’s financial transactions are recorded into their appropriate account classifications.
What is GAAP
International financial reporting standards, which is one form of GAAP and is intended to be used as a uniform set of globally accepted accounting standards
What is IFRS
Any information that might affect a decision made by a user of the financial statements is considered relevant
What is the qualitative characteristic of relevance under IFRS
Expenses are recorded in the same accounting period as the revenues they helped generate
What is the matching principle
Comparability enables users to understand and base their decisions on comparisons between different entities and on similar information from a single entity for another reporting period
What is the qualitative characteristic of comparability under IFRS
Verifiability helps assure users that information is accurate and faithfully represents the entity’s financial position
What is the qualitative characteristic of verifiability under IFRS
Providing information to decision- makers in time to be capable of influencing their decisions
What is the qualitative characteristics of timeliness under IFRS
What is the qualitative characteristic of understandability under IFRS
Enough information should be provided about the organization’s economic events so that a reasonable financial statement user can understand what occurred
Every effort shall be made to ensure that the financial information presented is complete, neutral, and free from error
What is the qualitative characteristic of faithful representation under IFRS
When should an item that meets the definition of an element be recognized
There is probable future economic benefit that will flow to or from the entity
The item has a cost or value that can be measured with reliability
The underlying assumption that the life of the entity will be long enough to fulfill its financial and legal obligations; any evidence to the contrary must be reported in the entity’s financial statements
What is the going concern principle
When is departure from GAAP acceptable?
— There is concern that assets or income would be overstated and expenses or liabilities would be understated
— Common practice in the industry
— transaction is better reflected a different way
— following GAAP will produce misleading financial statements and the departure is properly disclosed
An expense recorded to reflect the expected decline of a company’s physical property from normal use; it is recorded on the income statement as an operating expense.
A depreciation expense
An expense taken for a decline in value of the intangible property; it is recorded on the income statement as an operating expense.
An amortization expense
An amount that represents the cumulative expense recorded to reflect the expected decline of a company’s physical property from normal use; it is recorded on the balance sheet as an offset to the company’s fixed assets.
Accumulated depreciation
An amount that represents the cumulative decline in value of the company’s intangible property; it is recorded on the balance sheet as an offset to the company’s intangible assets.
Accumulated amortization
The deliberate misrepresentation of the financial condition of an enterprise through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive users
Financial statement fraud
What is the typical effect of fraud on the financial statements
Overstated assets and revenues
Understated liabilities and expenses
Fictitious revenues
Timing difference
Improper asset valuations
Concealed liabilities and expenses
Improper disclosures
5 Classifications of financial statement fraud schemes
Recording revenue from the sale of goods or services that did not occur involving either fake customers or legitimate customers.
Fictitious revenue scheme
Recording of revenues or expenses in improper periods.
Timing difference scheme
Moving revenues or expenses between 1 period and the next to increase or decrease earnings as desired and give the illusion of a more stable enterprise.
Income smoothing
Inventory valuation
Accounts receivable
Business combinations
Fixed assets
4 classifications of improper asset valuation schemes
According to GAAP and IFRS how should inventory be valued
Lower of cost, market value, or net realized value
— Creating fictitious receivables
— Failing to properly account for uncollectible customer accounts
2 ways accounts receivable are commonly manipulated
The amount of accounts receivable that the entity does not expect to collect
Bad debt expense
What does it mean to improperly capitalize an expenditure
To add the cost of the expenditure to an asset account rather than properly recording it as an expense
An increase in assets (and therefore a stronger balance sheet) and a decrease in expenses (and therefore a higher net income) for the period
The effect of improperly capitalizing an expenditure
— Contingent liabilities
— Subsequent events
— Management fraud
— Related-party transactions
— Accounting changes
5 common types of improper financial statement disclosures
A potential obligation that will materialize only if certain events occur in the future
Contingent liability
— Changes in accounting principles
— Changes in accounting estimates
— Changes in reporting entities
3 types of accounting changes that must be disclosed
