First Test Flashcards
What is the accounting equation?
A=L+E
Assets=Liabilities+Equity
Assets
Resources controlled by the company
Liabilites
Funding from creditors. Represent the obligations of the company
Equity
Total of contributed capital and retained earnings
Working Capital
difference between current assets and current liabilities
Share Capital
common stock and additional paid-in capital
What are the four financial statements?
Income statement
Balance Sheet
Shareholder’s Equity
Statement of Cash Flows
Statement of Cash Flows report…
…inflows and outflows separately for a company’s operating, investing, and financing activities over time
What SEC filing is an annual report? Quarterly report?
Annual report is a 10-K, Quarterly report is a 10-Q
What does GAAP stand for? What is it?
Generally Accepted Accounting Principles
It is the rules and regulations for financial accounting
What is the international accounting standard?
IFRS
What are the primary desirable qualities of accounting information?
Relevance (the capacity of information to affect a decision) and Reliability (must be verifiable [confirm-able], representationally faithful [reflect reality], and neutral [truthful and unbiased])
For something to be reliable, it must be…
….verifiable (can you confirm it?), representationally faithful (does it reflect reality?), and neutral (is it truthful and unbiased?)
What are the secondary desirable qualities of accounting information?
Comparability (information is measured in a similar way across companies) and consistency (same method used for similar actions across time)
What are the three major limitations of financial statement information?
Timeliness
Frequency
Forward-Looking
Accrual Basis
revenues are recognized when a company sells good or renders services, regardless of when cash is received
Strict Definition of Accruals
Sum of accounting adjustments that make net income different from net cash flow
What two limitations does Accrual Accounting overcome?
Timing and Matching
What two pieces are in the accrual process?
Revenue Recognition and Expense Matching
Revenue Recognition
revenues are recognized when both earned and either realized (Cash is acquired) or realizable (company receives an asset that is convertible to cash)
What are the two types of expense matching?
Product costs and period costs
Business Analysis
the evaluation of a company’s prospects and risks for the purpose of making business decisions