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MGT 8803 > Financial Accounting > Flashcards

Financial Accounting Flashcards

1
Q

Purpose of financial Accounting

A

provide meaningfulquantitative financial information regarding a firms activites to decision makers; gives info to external people about the state of a business so they can make decisions

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2
Q

What is financial accounting not?

A

taxes, managerial accounting

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3
Q

Who are the decision makers in financial accounting?

A

Shareholders (Owners)
Debt Holders (Creditors)
also..
Managers
Investment analysts and info. intermediaries
Customers and strategic partners

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4
Q

What makes information useful?

A

Relevance - it’s capable of making a difference to a decision maker
Faithful Representation - Dependable and reliable

nice to have… timely comparable

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5
Q

Where to financial accounting standards come from?

A

congress -> sec -> fasb -> gaap

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6
Q

Is financial accounting an exact science

A

no,
-gaap gives companies choices when preparing financial statements
-financial statements depend on estimates
-earning management/manipulation can happen

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7
Q

Oversight of financial accounting

A

-SEC - publicly traded companies
-External audits American institute of certified public accountants (AICPA) – give reasonable assurance your statements are accurate (not guarantee)
-securities law

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8
Q

3 reasons why accounting is important for good capital allocation

A

-good capital allocation is required for healthy economy
-better information leads to better capital allocation
-accounting primary source of info for decision makers

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9
Q

capital allocation

A

the process of determining the most efficient investment strategies for an orgs. financial resources, with the goal of maximizing shareholder equity

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10
Q

Required financial statements

A

Balance Sheet-important
Income Statement - important
Statement of shareholders equity
Statement of cashflows
statement of comprehensive income

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11
Q

Information beyond financial statements

A

-financial statement footnotes
-independent auditor report
-management discussion and analysis
-press releases

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12
Q

What does the Balance Sheet describe?

A

describes the uses and sources of funds

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13
Q

What is the balance sheet useful for?

A

-Evaluating capital structure
-assessing risk and future cash flows

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14
Q

what is Capital structure

A

it is the combination of debt and equity a company uses to finance its operations and growth

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15
Q

assets

A

economic resources that are owned or controlled by a company AND have future economic benefits

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16
Q

examples of assets

A

cash, accounts receivables, inventory, land, building, equipment, copyrights, investments

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17
Q

To be reported on the balance sheet an asset must….

A

-be owned or controlled by a company
-posess expected future economic benefits

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18
Q

Historical cost vs market value

A

assets value can be reported at…
historical cost - objective, faithful representation
market value - useful, relevant

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19
Q

Do assets need to be reliably measured?

A

Yes, management team, well designed supply chain, better technology can’t be measured and are not documented on balance sheet

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20
Q

Describe Liabilities

A

Future obligations to pay cash or transfer assets or provide services to another party

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21
Q

Examples of Liabilities

A

-accounts payable
-notes payable
-wages payable

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22
Q

What is Owners Equity?

A

ownership interest in net assets of an entity

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23
Q

examples of owners equity

A

capital stock
preferred stock
retained earnings

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24
Q

Accounting equation

A

assets = liabilities + OWNERS EQUITY

uses of funds = sources of funds

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25
Q

Balance Sheet format

A

Assets listed in order of liquidity
Liabilities listed in order of maturity
shareholders equity - no order

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26
Q

Retained earnings formula

A

beginning retained earnings + Net income - dividend = End retained earnings

27
Q

Income statement practice problem

A

question from notes

28
Q

B.S. practice problem

A

question from notes

29
Q

What does Income statement show?

A

shows how much a company earned (not cash) over a period of time

30
Q

What is the income statement useful for?

A

-helps us evaluate past performance
-useful in predicting a firms future performance
-helps asses the risk of achieving future cashflows

31
Q

Describe Revenues

A

increase in a companies resources from the sale of goods or services

-revenue is the increase in an asset or decrease in liability

32
Q

What are expenses?

A

costs incurred in the normal course of business to generate revenues

-creates liabilities, destroys assets

33
Q

examples of expenses

A

cost of good sold (cogs)
utilities expense
wages expense
depreciation expense

34
Q

Gains/Losses

A

money made or lost outside the normal firm operations

35
Q

gains/losses examples

A

-gain on sale of operating equipmnent
-losee on sale of land

36
Q

net income/loss

A

overall measure of the performance of a company

-arguably most important accounting number
-doesn’t nescessarily correspond to good cashflow

a company could have good income but poor cashflow

37
Q

earnings per share (EPS)

A

net income/ #shares

38
Q

What type of account is….? question from notes

A

question from notes

39
Q

What is shown on the Statement of shareholders equity?

A

beginning and ending balances of shareholders equity accounts

40
Q

statement of shareholders equity categories

A

capital stock
retained earnings
treasury stock
other comprehensive income

41
Q

What is the Statement of cashflows?When was it required? How is cash defined?

A

describes an entities cash inflows and outflos DURING A PERIOD
-required since 1983
-cash is defined as cash and cash equivalents

42
Q

Purpose of statement of cashflows

A

shows change in cash balance from first balance sheet to second balance sheet

43
Q

sections of statement of cashflows

A

operating activites (indirect or direct)

investing activities

financing activities

44
Q

direct vs indirect statement of cashflows

A

-only changes operations section
-indirect start with ni and gets to total operations
-direct - cash based income statement

45
Q

relationships among financial statements

A

-financial statement are linked within and across time
-b.s. and i.s. are lined via retained earnings
-b.s. and statement of cashflow are linked by changes in cash
-operating statement of cash flows is a cash basis income statement

46
Q

relationship between statements picture (draw)

A
47
Q

What is the accounting cycle?

A

procedure for analyzing recording summmarizing and reporting transactions of a business

48
Q

3 accounting cycle steps

A
  1. analyze transactions
  2. record effects of transactions
  3. summarize effects of transactions by account
    4 prepare reports
49
Q

transactions

A

event that causes a change in balance sheet values

50
Q

Account

A

an accounting record in which the results of a transaction are recorded

51
Q

double entry accounting

A

a method of accounting that includes debits and credits

debit = left
credit = right
account determines whether a debit is increase or decrease
alsway one debit and one credit per transactions
debits = credits

52
Q

journal entries

A

a recording of a transaction or other entry

53
Q

t-accounts

A

a place to accumulate the effect of journal entries on each account

54
Q

Accrual Accounting

A

a system of accounting in which revenues and expenses are recorded as they are earned or incurred, not nescessarily when cash changes hands

55
Q

what does accrual accounting do?

A

-splits business into time-periods
-makes net income a better measure of a firms profitability

56
Q

Revenue recognition

A

companies recognize revenue when goods or services are transferred to customers for the amount the company expect to be enttled to recieve in exchange for those goods or services

57
Q

When can revenue be recognized

A

when a service is provided and you are likely to be paid

58
Q

Matching principle

A

all costs and expenses incurred in generating revenues must be recognized in the same period as the revenue. if you cant match with revenue then recognize it immediately

59
Q

matching principle excercise (in lecture notes)

A
60
Q

statement of cashflows operating activites

A

cash transactions that enter into determination of net income (direct/indirect)

61
Q

statement of cashflows-investing activities

A

cash transactions involved in the purchse and sale of ppe (property, plant, and equipment)

62
Q

statement of cashflows
financing activities

A

cash transactions where resources are obtained or repaid to owners and creditors

63
Q

current assets

A

convert to cash < 1 year
long term assets can’t be converted to cash in 1 year

64
Q

current vs long term liabilities

A

current -maturities less than one year
long term liablilities- maturities longer than one year

MGT 8803 (4 decks)

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