Exam 1 (Ch 1, 2, 6, 3)

Question 1

Relevance

Answer 1

Information must be relevant, but to be relevant the information must possess predictive and/or confirmatory value, as well as materiality

Question 2

Faithful Representation

Answer 2

For information to have faithful representation, it must have completeness, neutrality, and be free from error

Question 3

Financial Accounting Elements (10)

Answer 3

Assets, Liabilities, Equity, Investments by Owners, Distributions to Owners, Revenues, Expenses, Gains, Losses, Comprehensive Income

Question 4

What are the four basic assumptions underlying GAAP?

Answer 4

Economic entity, going concern, periodicity, monetary unit

Question 5

What are the four different approaches to implementing expense recognition?

Answer 5

(1) Based on an exact cause-and-effect relationship (COGS) (2) By associating an expense with the revenues recognized in a specific time period (salary paid) (3) By a systematic and rational allocation to specific time periods (straight-line depreciation) (4) In the period incurred, without regard to related revenues (adv. expense_

Question 6

Briefly describe the inputs that companies should use when determining fair value. (3)

Answer 6

Market Approaches - base valuation on market information
Income Approaches - estimate fair value by first estimating future amounts and then mathematically converting those amounts to a single present value
Cost Approaches - determine value by estimating the amount that would be required to buy or construct an asset of similar quality and condition

Question 7

Define net operating cash flows

Answer 7

Net operating cash flows is the difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period

Question 8

What is meant by GAAP? Why should all companies follow GAAP in reporting to external users?

Answer 8

GAAP is known as Generally Accepted Accounting Principles. All companies should follow GAAP because it allows investors and creditors to compare financial information

Question 9

Explain the roles of the SEC and the FASB in the setting of accounting standards

Answer 9

The SEC has the authority to set accounting and reporting standards for companies whose securities are publicly traded, however, the SEC has delegated the task of setting accounting standards to the private sector

Question 10

What is the purpose of the FASB’s conceptual framework?

Answer 10

It provides an underlying foundation for the development of accounting standards. The primary purpose of the conceptual framework is a process leading to cohesive objectives and fundamental concepts on which financial accounting and reporting can be based

Question 11

Explain the difference between external events and internal events. Give an example of each type of event

Answer 11

External events involve an exchange between the company and another entity (i.e. borrowing cash from a bank, purchasing merchandise inventory for cash). Internal transactions do not involve an exchange transaction but do affect financial position (i.e. depreciation of equipment and use of supplies).

Question 12

What is the purpose of a general journal?

Answer 12

General Journals provide a chronological record of the economic events for a company.

Question 13

What is the purpose of the general ledger?

Answer 13

The general ledger shows increases and decreases of transactions for each element of a company

Question 14

Nominal Accounts

Answer 14

Nominal accounts are temporary accounts that represent changes in the retained earnings component of shareholders’ equity for a corporation caused by revenue, expense, gain, and loss transactions.

Question 15

Real Accounts

Answer 15

Real accounts are permanent accounts that represent assets, liabilities, and shareholders’ equity at a point in time.

Question 16

Adjusting Entries

Answer 16

Adjusting entries are internal transactions recorded at the end of any period when financial statements are prepared

Question 17

Closing Entries

Answer 17

Closing entries are the temporary accounts that are reduced to zero balances, and these temporary account balances are closed to retained earnings to reflect the changes that have occurred in that account during the period

Question 18

Current Assets

Answer 18

Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed within the coming year, or within the normal operating cycle of the business. (i.e. Cash, Short term investments, Inventories, Deferred income taxes, prepaid expenses)

Question 19

Current Liabilities

Answer 19

Current liabilities are those obligations that are expected to be satisfied through the use of current assets or the creation of other current liabilities. (i.e. Accounts payable, notes payable, deferred revenues, accrued liabilities)

Question 20

Common characteristics of assets classified as property, plant and equipment

Answer 20

The common characteristics these assets share are that they are tangible, long-lived, and used in the operations of the business

Question 21

Intangible assets

Answer 21

Intangible assets generally represent exclusive rights that a company can use to generate future revenues

Question 22

Paid in capital

Answer 22

Amounts invested by shareholders in the corporation

Question 23

Retained Earnings

Answer 23

Amounts earned by the corporation (on behalf of its shareholders)

Question 24

What is an annuity

Answer 24

if the same amount is to be received or paid each period, the series of cash flows is referrred to as an annuity

Question 25

Explain the difference between an ordinary annuity and an annuity due

Answer 25

In an ordinary annuity cash flows or payments occur at the end of each period. In an annuity due cash flows or payments occur at the beginning of each period

Question 26

What is a deferred annuity?

Answer 26

As the inception of the annuity is deferred beyond a single period, this type of annuity is referred to as a deferred annuity.

Question 27

Explain the difference between monetary and non-monetary assets and liabilities

Answer 27

Monetary assets include money and claims to receive money, the amount of which is fixed or determinable. Monetary liabilities are obligations to pay amounts of cash the amount of which is fixed or determinable. Non-monetary assets and liabilities are where the right to receive a fixed or determinable amount of currency is absent.