FAR - Framework Flashcards
What are the 7 components of the general purpose external financial report?
- Income statement
- Balance sheet
- Statement of cash flows
- Statement of retained earnings
- Statement of comprehensive income
- Footnote disclosure
- Auditors opinion.
What does GAAP address?
Recognition, measurement, and disclosure.
What are the five financial statements?
- Income statement
- Statement of comprehensive income
- Balance sheet
- Statement of changes of shareholders equity
- Statement of cash flows
What is neutrality?
Free of bias
What are the ingredients of relevance?
Predictive value, confirmatory value, and materiality.
What is completeness?
Includes all data necessary to be faithfully representative.
What are the ingredients of faithful representation?
Completeness, free from material error, neutrality.
What is verifiability?
Different knowledgable and independent observers can reach similar conclusions
What is predictive value?
To be relevant, accounting information should assist financial statement users in making predictions about future events
What are objectives of financial reporting?
To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions
List the enhancing qualitative characteristics of financial information.
- Comparability
- Verifiability
- Timeliness
- Understandability
What are the primary qualitative characteristics of financial information?
Faithful Representation and Relevance.
The four assumptions are
- Entity
- Going concern
- Unit of measurement
- Time period assumption.
The four principles are
Revenue recognition
Expense recognition
Measurement
Full disclosure.
When should a company recognize revenue?
When they are earned and collectibility is reasonably assured
What is conservatism
The reporting of less optimistic amounts under conditions of uncertainty
What does a fresh start measurement do?
Establishes a new carrying value after an initial recognition and is unrelated to previous amounts
Define cost effectiveness
This constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit
What is the purpose of the SEC?
Enforces GAAP
Describe the formula for quick or acid test ratio
(Cash + long term investment + A/R) / current liabilities
How are assets recorded on the balance sheet
Declining order of liquidity
Define net realizable value
The amount the firm expects to receive from the sale or collection of an item
What is a valuation account used for
Used to increase or decrease the book value of an item to a measure of current value
Define gains
Increases in equity or net assets from peripheral or incidental transactions
What is the main purpose of disclosing comprehensive income?
To report the net change in equity in a single amount
What is the equation to get comprehensive income?
CI = Net income + other comprehensive income
What is the indirect method on the statement of cash flows
Reconciles net income to cash flows from operating activity
What is the direct method on the statement of cash flows
Actual inflows and outflows from cash operations. Must also disclose the indirect method as a supporting schedule.
What is the cash flow category for interest paid and received?
Operating activities.
What items are in the operating activities category on the statement of cash flows?
- From customers
- Interest income or dividend income
- Sale of trading investments
- Suppliers and employees
- Government
What items are in the investing activities category on the statement of cash flows?
- Sale/ purchase of PPE
- Sale/ purchase of debt or equity securities of other entities
- Collection of loan principles
What items are in the financing activities category on the statement of cash flows?
- Sale of entity’s own equity securities
- From issuance of debt
- Dividends
- Redeem long term debt
- Reacquire capital stock
Ratio
Working capital =
Current assets - current liabilities
Ratio
Current ratio =
Current assets / current liabilities
Ratio
AR turnover =
Net credit sales / average AR
Ratio
Inventory turnover =
COGS / avg inventory
Ratio
Acid ratio AKA quick ratio =
(Cash + net AR + marketable securities) / current liabilities
Ratio
Times interest earned =
(Net income + interest expense + income tax) / interest expense
Ratio
Average days to collect AR =
365 / AR turnover
Ratio
AR turnover =
Credit sales / average AR
Ratio
Profit margin =
Net income / sales
Ratio
Return on assets =
Net income / average total assets
Ratio
Return on Equity =
Net income / average common shareholders equity
Ratio
EPS =
(Net income - preferred dividends) / weighted avg common shares outstanding
