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ACC 305 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

What are the 4 financial statements?

A

1) Balance Sheet
2) Income Statement/Statement of Comprehensive Income
3) Statement of Cash Flows
4) Statement of Shareholders Equity

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2
Q

Capital Markets:

A

Provide a mechanism to help the economy allocate resources effectively

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3
Q

What are the 2 key variables in investment decisions?

A

1) Rate of Return
2) Uncertainty of Risk

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4
Q

Rate of Return Formula =

A

(Dividend + Share Price Appreciation) / Initial Investment

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5
Q

Cash basis accounting:

A

Measurement of cash receipts/payments from transactions related to providing good/service

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6
Q

Net Operating Cash Flow Formula =

A

Cash Receipts - Cash Payments

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7
Q

Accrual basis accounting:

A

Measurement of revenue and expenses, regardless of when cash is received/paid

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8
Q

Net Income/Loss Formula =

A

Cash Received - Cash Paid

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9
Q

GAAP:

A

Generally Accepted Accounting Principles
-Set of both broad and specific guidelines that companies should follow when measuring/reporting the information in the financial statements.

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10
Q

FASB:

A

Established to set U.S accounting standards

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11
Q

Conceptual Framework/ Accounting Constitution:

A

Provides an underlying foundation for U.S accounting standards
-Guides the selection of events to be accounted for
-Provides structure and direction to financial accounting and reporting

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12
Q

What are the 2 Fundamental Qualitative Characteristics of Financial Information?

A

1) Relevance
2) Faithful Representation

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13
Q

Relevance definition and key terms:

A

Must possess predictive/confirmatory values and materiality

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14
Q

Predictive Value:

A

Confirmation of investor expectation to future cash-generating ability

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15
Q

Confirmatory Value:

A

Validate the previous investor expectation of future cash-generating ability

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16
Q

Materiality:

A

All items that could affect investors’ decision making must be recorded in the footnotes or disclosure

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17
Q

Faithful representation definition and key terms:

A

Agreement between measure/description and the real world phenomenon the item represents
-Complete
-Neutral
-Free from error

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18
Q

Cost Effectiveness:

A

Benefit to get information exceeds the cost to get it

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19
Q

Enhancing qualitative characteristics:

A

1) Comparability
2) Consistency
3) Verifiability
4) Timeliness
5) Understandability

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20
Q

Comparability:

A

Helps users see similar/differences between events and conditions

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21
Q

Consistency:

A

Permits valid comparison between periods

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22
Q

Verifiability:

A

Measure that would reach consensus regarding whether the information is a faithful representation

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23
Q

Timeliness:

A

Available to users early enough for them to use it in their decisions

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24
Q

Understandability:

A

Users must be able to understand the information with the context of the decision being made.

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25
What are the 4 Underlying Assumptions:
1) Economic entity 2) Going concern 3) Periodicity 4) Monetary unit
26
Economic entity:
Economic events can be identified specifically with an economic entity
27
Going concern:
Assumption that a business will operate indefinitely
28
Periodicity:
Life of a company to be divided into artificial time periods to provide timely info
29
Monetary Unit:
U.S dollar
30
Recognition:
Process of admitting information into financial statements
31
Measurement:
Process of associating numerical amounts with elements
32
Disclosure:
Process of including additional pertinent information in the financial statement and notes
33
Revenue Recognition:
Recognize revenue when good/service is transferred to the customer
34
Expense Recognition:
Matches revenue that arises from the same transaction or other events
35
Historical Cost:
Original transaction value adjusted for depreciation and amortization
36
Net realizable value:
Amount of cash into which an asset is expected to be converted in the ordinary course of business
37
Current Cost:
Cost to purchase or reproduce the item
38
Present Value:
Current value of the future cash flows
39
Fair value:
Price that would be received to sell assets
40
Full-disclosure principle:
Requires that the financial reports should include any information that could affect the decisions made by external users
41
Revenue/Expense Approach:
Recognizes revenue/expenses with assets and liabilities recognized as necessary to make balance sheet reconcile with the income statement
42
Asset/Liability Approach:
Recognize and measure the assets/liability that exist as of the balance sheet date
43
Balance Sheet:
Reports companies financial position at a point in time
44
Cash Operating Cycle:
1) Use cash to get inventory 2) Prepare inventory for sale to customer 3) Deliver inventory to customer 4) Collect cash from customer
45
Deferred Revenue:
Cash received from a customer for a good/service prior to the service being provided
46
Accrued Liability:
When expenses have been incurred but will not be paid until next reporting period
47
Shareholders Equity:
SE = Assets - Liabilities SE = Paid in Capital + Retained Earnings
48
Related party transactions:
Transaction between the company and owners, management and affiliated parties
49
Errors and fraud:
Misstatements that are unintentional(errors) or intentional(fraud)
50
Illegal Acts:
Bribes, kickbacks, illegal contribution to political candidates and other violations
51
Auditor Report:
Examine financial statements
52
4 types of conclusions to the auditors report:
1) Unqualified 2) Unqualified w/ explanatory paragraph 3) Qualified 4) Adverse/Disclaimer
53
Unqualified Report:
Clean, nothing was wrong with it
54
Unqualified with explanatory paragraph Report:
Information conforms with GAAP but more information is needed to be provided
55
Qualified Report:
Everything is good but 1 area
56
Adverse/Disclaimer Report:
Adverse = Whole thing is not good Disclaimer = I don't know what this is
56
Quick Ratio Formula =
Quick Assets/ Current Liabilities
57
Current Ratio Formula =
Current Assets / Current Liabilities
57
Working Capital Formula =
Current Assets - Current Liabilities
58
Debt to Equity Formula =
Total liabilities / shareholders equity
59
Time interest earned ratio formula =
(Net Income + Interest Expense + Income Tax) / Interest Expense
60
Income Statement:
Reports a company's profit during a particular reporting period
61
Comprehensive Income:
Includes gains and losses excluded from the income statement
62
Comprehensive Income Formula =
Net Income + Other Comprehensive Income
63
Statement of Cash Flows:
Provides information about cash receipts and payments
64
Income from continuing operations:
Reports the revenues, expenses, gains, losses that have occurred during the reporting period
65
Gains/Losses:
Can arise when a company sells investments or PP+E for an amount that differs from their recorded amount
66
Multiple Step Income Statement:
Separately classifies items by operating and non operating -More specific compared to simple step
67
Income Smoothing:
Creates smoother pattern in earnings overtime by altering assumptions and estimates -overestimate expenses in current year to reduce NI, and reverse those estimates the next year
68
What are the 3 Accounting Changes?
1) Accounting Principle 2) Accounting Estimate 3) Reporting Entity
69
Accounting Principle:
Change from one acceptable accounting method to another Ex: LIFO to FIFO
70
Accounting Estimate:
Changes due to modification of estimate as new information comes up -If change is material = disclosure note is needed Ex: future bad debts on existing AR
71
Correction of Accounting Errors
A transaction being recorded incorrectly or not at all
72
Discontinued Operations:
Happens when a business completely cuts off/sell of a part of their product line -Shows below the income tax line
73
Prior Period Adjustements:
Required when a material error is discovered in the statements -Record a JE that: *adjusts balance sheet accounts *accounts for income effects by adjusting beginning retained earnings
74
Earnings Per Share Formula =
(NI - Preferred Stock Dividend) / Weighted average # of common shares outstanding
75
Diluted EPS:
Incorporates the effect of all potential common shares in calculation of EPS
76
Comprehensive Income:
Total change in equity for a reporting period other than from transactions with owners
77
Other Comprehensive Income:
Few gains/losses from nonowner transaction *reported seperately
78
Comprehensive Income Formula =
Net Income + Other Comprehensive Income
79
Statement of Cash Flows:
Required for each period that balance sheet and income statement are present *Shows the inflow and outflow of cash -Operating -Investing -Financing
80
Operating Activities:
In and out of cash that results from activities reported in the income statement
81
Investing Activities:
Using your money to make more money Ex: Investments, bonds in other companies
82
Financing Activities:
Obtaining cash from investors/creditors Ex: Issuing stocks + bonds * you need money
83
Non Cash Investing and Financing Activities:
Activities that do not involve cash flows at all Ex: getting equipment by issuing a long term notes payable
84
Time Value of Money:
Money can be invested today to earn interest and grow to a larger amount in the future
85
Simple Interest Formula =
Initial Investment x Annual interest rate x Period of time
86
Compounded Interest Formula =
Includes interest on initial investment but also on the accumulated interest
87
Effective Rate:
Actual rate at which money grows per year
88
Future Value:
Amount of money that a dollar will grow to at some point in the future
89
Future Value Formula =
FV = I(1 + i)^n
90
Present Value =
Today's equivalent to a particular amount in the future
91
Present Value Formula =
FV / ((1 +i)^n)
92
Annuity:
Series of cash flows of the same amount received or paid each period
93
Ordinary Annuity:
Cash payments at the end of the period
94
Annuity Due:
Cash payment due @ beginning of the period
95
Revenue Recognition:
1)Identify the contract 2) Identify the performance obligation 3) Determine transaction price 4) Allocate the transaction price 5) Recognize revenue when (or as) each performance obligation is satisfied
96
Where does discontinued operations show on the income statement?
Below the income tax line

ACC 305 (1 decks)

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