Financial Accounting Flashcards
1
Q
Accounting
A
-is the information system that identifies, records, and communicates the economic events of an organization to interested users.
2
Q
Internal Users
A
- are managers who plan, organize and run a business.
ex: marketing managers, production supervisors, finance directors.
3
Q
External Users
A
- for investment, credit decision and reporting purposes.
- are investors, creditors, tax authorities, labor unions, regulatory agencies, stockholders, donors.
4
Q
Sole Proprietorship
A
- easy to establish
- owner controlled
- tax advantage: profit of the business is taxed on owner’s personal tax return.
- disadvantage: personally liable for all debts and legal obligations of the business.
5
Q
Partnership
A
- simple to establish
- shared control
- broader skills and resources
- tax advantage: individual partners pay taxes on their proportionate shares of the profit.
- disadvantage: personally liable for all debts and legal obligations of the business.
6
Q
Corporation
A
- easier to transfer ownership
- easier to raise funds
- no personal liabilities
- disadvantage: double taxation (pay higher taxes)
7
Q
Investors
A
-use accounting information to make decisions to buy, hold, or sell stock.
8
Q
Creditors
A
- ex: suppliers and bankers
- use accounting information to evaluate the risks of selling on credit or lending money.
9
Q
Tax Authorities
A
- ex: IRS
- want to know whether the company complies with the tax laws.
10
Q
Labor Unions
A
-want to know whether the owners have the ability to pay wages and benefits.
11
Q
Regulatory Agencies
A
- ex: SEC
- want to know whether the company is operating with the prescribed rule.
12
Q
Income Statement
A
Revenues
- Expenses
= Net Income/Loss
- “specific period of time”–> “For the month/year ended”
- amount received from issuing stocks are NOT revenue.
- amount paid out as dividends are NOT expenses.
13
Q
Retained Earnings Statement
A
Retained Earnings Jan 1
+ Net Income/Loss
- Dividends
= Retained Earnings Dec 31
-the amounts and causes of change in retained earnings.
-“specific period of time”–> “For the month/year ended”
-high growth companies (like google & facebook) often pay no dividends.
-
14
Q
Balance Sheet
A
Assets = Liabities + Stockholder’s Equity
- “specific date”–> “Oct 31. 2017”
- claims of creditors are called liabilities/debt.
- claims of owners are called stockholder’s equity.
15
Q
Statement of Cash Flows
A
Cash flows from operating activities \+ Cash flows from investing activities \+ Cash flows from financing activities = Net Increased/Decreased in cash \+ Cash at beginning of year = Cash at end of year
- provide financial information about the cash receipts and cash payments of a business.
- “specific period of time”–> “For the month/year ended”
16
Q
Accounting Information System
A
- collecting and processing transaction data and communicating financial information to decision makers.
- keeps track of the result of each of the various business activities (operating, investing, financing).
17
Q
Operating Activities accounts
A
- Revenue: Sales Revenue, Service Revenue, Interest Revenue.
- Expense: COGS, Selling Expenses, Marketing Expenses, Administrative Expenses, Interest Expenses, Income Taxes.
- Payable: Account Payable, Interest Payable, Wages Payable, Sales Taxes Payable, Property Taxes Payable, Income Taxes Payable.
- activities that affects the status of current asset.
ex: sell products & services, make inventory purchases, pay taxes, incur employee salaries, incur utility and other operating expenses.
18
Q
Investing Activities
A
- involves the purchase of the sources a company needs in order to operate.
- ex: assets, PPE, cash, investments.
- activities that affect the status of non current asset.
ex: buy/sell PPE, long term investment, intangible asses.
19
Q
Financing Activities
A
- debt financing and issuing of stock are two primary sources of outside funds for corporations.
- activities that affect the status of non current liabilities and stockholder’s equity.
ex: sell/repurchase own stock, borrow money/repay loans, sell/retire bonds, pay dividends.
20
Q
Debt Securities
A
-company issues bonds (a type of debt securities) to its creditors.
21
Q
Bonds Payable
A
-debt securities sold to investors that must be repaid at a particular date in the future.
22
Q
Common Stock
A
-the total amount paid in by stockholders for the shares they purchased.
23
Q
Management Discussion and Analysis (MD&A)
A
-management’s view on the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.
24
Q
Notes To The Financial Statement
A
-help to clarify the financial statements and provide additional detail. These notes are essential to understanding a company’s operating performance and financial position.
25
Auditor's Report
-prepared by an independent outside auditor. It states the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with GAAP.
26
Auditors
-an accounting professional who conducts an independent examination of a company's financial statements.
27
Unqualified Opinion
-the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operations in accordance with GAAP.
28
Classified Balance Sheet
-groups together similar assets and liabilities, using a number of standard classifications and sections.
Assets: Current~, Noncurrent~, LT Investments, PPE, Intangible~
Liabilities: Current~, LT~
Stockholder's Equity: Contributed Capital, Retained Earnings
29
Current Assets
-assets that company expects to convert to cash or use up within one year or its operating cycle, whichever is longer.
30
Operating Cycle
-the time it takes to go from cash back to cash.
31
Long-Term Investment
- investments in stock and bonds of other corporations that are held for more than 1 year.
- LT assets (ex: land and building) that the company is not currently using in its operating activities.
- LT note receivables.
32
PPE
- Plant Property Equipment.
| - tangible LT assets used in a business's day to day operations.
33
Depreciation
-the allocation of the cost of an asset to a number of years.
34
Accumulated Depreciation
-the total amount of depreciation that company has expensed thus far in the asset's life.
35
Intangible Assets
-assets that do not physical substances.
36
Current Liabilities
- are obligations that the company is to pay within the next year or operating cycle, whichever is longer.
ex: note payable, account payable, current portion of LT debt.
37
Long-Term Liabilities
- are obligations that a company expects to pay after 1 year.
ex: LT notes, mortgage payable, employee pension obligations
38
Contributed Capital
- par value of issue stock.
| - additional paid-in-capital.
39
(2) Qualities of Useful Information
-according to FASB, useful information should pass relevance and faithful representation.
40
Relevance
- accounting information had relevance if it would make a difference in a business decision.
- must have predictive and confirmatory` value.
41
Predictive Value
-helps provide accurate expectations about the future.
42
Confirmatory Value
-confirms or corrects prior expectations.
43
Faithful Representation
- the information accurately depicts what really happened.
1) information must be complete, nothing important has been omitted.
2) information must be neutral, not biased.
3) information must be free from error.
44
(5) Enhancing Qualities of Useful Information
- FASB and IASB had 5 enhancing qualities of useful information.
- comparability.
- consistency.
- verifiability.
- timely.
- understandability.
45
Comparability
- different companies use the same accounting principles.
| - disclosure of accounting policies will be very helpful for us to improve comparability.
46
Consistency
- a company uses the same accounting principles and methods from year to year.
- when a company makes an accounting changes, GAAP requires disclosures to help readers to evaluate the impact of changes. Thus, improve consistency.
47
Verifiability
-the quality of information that occurs when independent observes, using the same method, obtain similar results.
Are we able to prove it is free from error?
48
Timely
- it must be available to decision-makers before it loses its capacity to influence decisions.
- SEC requires that public companies provide their annual reports to investors within 60 days of their year-end.
49
Understandability
-information is presented in a clear and concise (brief) fashion, so the users can interpret it and comprehend its meaning.
50
(4) Assumptions in Financial Reporting
- Monetary Unit Assumption
- Economic Entity Assumption
- Periodicity Assumption
- Going Concern Assumption
51
Monetary Unit Assumption
-require that only things that can be expressed in money are included in the accounting records.
52
Economic Entity Assumption
-states that every economic entity can be separately identified and accounted for.
53
Periodicity Assumption
-states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.
54
Going Concern Assumption
-states that the business will remain in operation for the foreseeable future.
55
(2) Principles in Financial Reporting
- (2) Measurement Principles
| - Full Disclosure Principle
56
Measurement Principles
- GAAP generally uses one of the two measurement principles:
1) Historical Cost Principle (also called Cost Principle)
2) Fair Value Principle
57
Historical Cost Principle/Cost Principle
- dictates 命令 that assets be recorded at their cost.
- FASB indicates that most assets must follow the historical cost principles because market value may not be representationally faithful.
58
Fair Value Principle
- indicates that assets and liabilities should be reported at fair value.
- applied only in situations where assets are actively traded. (ex: investment securities)
59
Full Disclosure Principle
-requires that companies disclose all circumstances and events that would make a difference to financial statement users.
60
Cost Constraint
-the benefit gained from providing information should be greater than costs of providing that information.
61
Fiscal Year
-one-year long accounting period.
62
Accounting Transactions
- economic events that require recording in the financial statements.
- occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event.
63
Expanded Accounting Equation
Asset = Liabilities + Stockholder's Equity
64
Debit Credit
Debit: ↑ Assets, ↑ Dividends, ↑ Expenses
Credit: ↑ Liabilities, ↑ Owners' Equity, ↑ Revenues
65
Journal
-a chronological record of transactions entered into by a business.
66
Ledger
-the entire group of accounts maintained by a company/
67
Posting
-the procedure of transferring journal entry amounts to ledger accounts.
68
General Ledger
-simply the book that contains the accounts (assets, liabilities, stockholder's equity, revenue and expenses)
69
Trial Balance
- a list of each account and its balance at a specific point in time.
- a trial balance does not prove that all transactions have been recorded or the ledger is correct.
70
Revenue Recognition Principles
-requires that company recognize revenue in which the performance obligation is satisfied.
71
Expense Recognition Principles/Matching Principles
-expenses incurred when an asset has no future benefit or a liability has been incurred.
ex: insurance expense
depreciation expense
COGS
wage expense with wage payable
advertising expense with account payable
interest expense with interest payable
72
Accrual-Basis Accounting
- can be accepted by GAAP. Transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchange.
- records revenue when Revenue is Used.
- records expense when Expense is Incurred.
73
Cash-Basis Accounting
- not in accordance with GAAP. It is acceptable by the IRS for taxation purpose.
- records revenue when Revenue is Received.
- records expense when Expense is Paid.
74
Adjusting Entries
- are classified as either deferrals or accruals.
| - every adjusting entry will include one income statement account and one balance sheet account.
75
Deferrals
-cash received/paid first, revenue/expense recognized later.
76
Prepaid Expense
- expenses paid in cash before they are used.
| ex: supplies, postage, prepaid insurance coverage.
77
Unearned Revenue
- cash received before services are performed.
| ex: magazine subscription, season tickets.
78
Accruals
-revenue/expenses recognized first, cash received/paid later.
79
Accrued Expenses
- expenses incurred but not yet paid in cash.
| ex: wage and salaries expense.
80
Accrued Revenues
- revenues for services performed but not yet received in cash.
ex: sales on account, interest revenue.
81
Temporary Accounts
-relate only to a given accounting period.
Income Statement--> all revenue accounts, all expense accounts
Statement of Retained Earnings--> dividends
82
Permanent Accounts
-the balances are carried forward into future accounting periods.
Balance Sheet-->all asset accounts, all liabilities accounts, stockholder's equity accounts
83
Closing Entries
- transfer net income or net loss and dividends to retained earnings.
- produce a zero balance in temporary accounts.
- permanent accounts are not closed.
84
(9) Steps in Accounting Cycle
1) analyze business transactions
2) journalize the transactions
3) post to ledger accounts (t-accounts)
4) prepare a trial balance
5) journalize and post adjusting entries (deferrals/accruals)
6) prepare an adjusted trial balance
7) prepare financial statement
8) journaize and post-closing entries
9) prepare a post-closing trial balance
85
Post-Closing Trial Balance
-a lost of all permanent accounts and their balance after closing entries are journalized and posted. It will only contain permanent accounts.
86
Perpetual Inventory System
- inventory records are updated immediately after each purchase or sale. Also update the COGS immediately.
- typically used for low-volume, high-priced inventory items (ex: cars)
87
Periodic Inventory System
- do not update the COGS and inventory until the end of period.
- purchase of inventory are recorded in the Purchase account.
- COGS is only recorded at year end.
88
FOB Shipping Point (Free On Board)
-buyer pays freight costs.
entry on the buyer's book is:
Dr. Inventory $150
Cr. Cash $150
-ownership of the goods passes to the buyer when the public carrier accepts the goods from the sellers.
89
FOB Destination (Free On Board)
-seller pays freight costs.
entry on the seller's book is:
Dr. Freight-out $150
Cr. Cash $150
-ownership of the goods remains with the seller until the goods reach the buyer.
90
Purchase Allowance
-reduction in prince for spoiled or damaged merchandise.
91
Purchase Discount
-seller permit the buyer to claim a cash discount for prompt payment.
