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financial accounting > lesson 1 and 2 > Flashcards

lesson 1 and 2 Flashcards

1
Q

Two ways of debt financing

A

Bank loans (private)
Bonds (public)

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2
Q

why do we need accounting

A
  • information asymmetry between managers and outside stakeholders
  • accounting ensures some level of verifiable information that allows markets to function
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3
Q

Sarbanes-Oxley act

A

imposed additional regulations on firms with publically traded securities and on their auditors

  • CEO and CFO personally attest to the accuracy and completeness of financial statements and effectiveness of internal control over financial reporting
  • Auditors test effectiveness of companies’ internal control over financial reporting
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4
Q

U.S. Account standards issued by

A

Financial Accounting Standards Board (FASP)

Generally Accepted Accounting Principles (GAAP)

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5
Q

International Accounting Rules are created by

A

International Accounting Standards Board (IASB)

International Financial Reporting Standards (IFRS)

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6
Q

Annual Report

A

(Q4): 10-K

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7
Q

Quarterly report

A

(Q1, Q2, Q3): 10-Q

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8
Q

6 components of Financial Statements

A

1) Balance sheet (statement of financial position)
2) Income statement (profit or loss)
3) Statement of Shareholders’ Equity
4) Cash Flow Statement
5) Footnotes to above financial statements
6) Audit opinion

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9
Q

Footnotes

A
  • explain line items in four main financial statement
  • provide information not in main financial statements
    ex: firms’ accounting policies or its segment-level financial data
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10
Q

Audit Opinion

A
  • cannot test every transaction, regular audits not designed to detect fraud
  • ‘reasonable assurance’ financial statements meet required standards

Unqualified / Clean: conforms with GAAP
Qualified: ‘material but not pervasive’ violation
Adverse: Pervasive violation
Disclaimer: cannot obtain information to audit

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11
Q

2 Fundamental qualitative characteristics of decision-useful accounting information

A

Relevance: info makes a difference in users’ decisions
- material and predictive/confirmatory

Faithful representation: complete, neutral, and free from error

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12
Q

Enhancing Qualitative characteristics

A

Comparability: information can be compared across time and entities
- consistency: same accounting methods

Verifiability: Different knowledgeable and independent observers could reach consensus that information is faithfully represented

Timeliness: older information is less useful

Understandability: information is as clear and concise as possible, to a reasonably knowledgeable user

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13
Q

Cost constraint

A

accounting information should only be prepared if the cost of collecting, processing, verifying, and disseminating it Is outweighed by its benefits

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14
Q

accounting entity (assumption)

A

economic activity can be identified to a particular unit of accountability (a business or other organization), separate from its owners

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15
Q

monetary unit (assumption)

A

economic activity can be measured (quantified) in monetary accounts

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16
Q

going concern (assumption)

A

the business will continue operating in the future

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17
Q

periodicity (assumption)

A

the entity’s economic activity can be measured over specified time periods (years, quarters)

18
Q

Guiding questions

A

Recognition: When should an item be included or removed from financial statements?

Measurement (Valuation): At what value should an item be shown in financial statements (and how should the value change over time)?

Presentation and disclosure: How should an item be classified in the financial statements? What related information should be disclosed?

19
Q

*** Revenue recognition

A

revenue is only recognized when it is earned and realized or realizable

20
Q

*** Matching principle

A

expenses are recognized at the same time as the revenue they helped generate

21
Q

Historical cost

A

assets and liabilities are accounted for on the basis of their acquisition prices

22
Q

Conservatism (prudence)

A

when in doubt, choose the accounting treatment that least likely overstates assets

23
Q

Accounting Equation

A

Asset = Liability + Shareholders’ Equity

  • must hold at every point in time

Economic resources = Claims to Economic Resources from creditors and shareholders

24
Q

Balance Sheet

A

i) what is owned (ASSETS)
ii) what is owed (LIABILITIES)
iii) what is left for owners (SHAREHOLDERS’ EQUITY)
at the end of the report period

25
Q

Assets

A

Future economic benefits or rights that are owned or controlled by the firm

ex: equipment, land, cash, accounts receivable, prepaid rent

26
Q

Liabilities

A

fixed and unavoidable obligations to transfer cash or another good / service to an outside party at some future time

ex: accounts payable, sales of gift cards

27
Q

Shareholders’ Equity

A

money invested in the firm by its owners
i) directly, when they purchase shares from the company
ii) indirectly, when they allow the firm to retain its earnings rather than paying them in the form of dividends

28
Q

Liquidity

A

How easily can asset / liability be converted to cash inflow / outflow?

29
Q

Contributed Capital (Common Stock and Paid-In Capital)

A

amount invested in the company by its owners

30
Q

Retained earnings

A

cumulative amount of profits kept for use in the business

Retained Earnings = Reinvested Profits

31
Q

Income Statement

A

Reports on the operating performance of the firm, all the revenues and expenses during a given period.

Revenue - Expense = Net Income

32
Q

Statement of Shareholders’ Equity

A

reports the amounts and sources of changes in each shareholders’ equity account over the reporting period

33
Q

Two types of shareholders’ equity

A
  1. Investment by owners: Paid-in Capital (Common stocks / ordinary shares / contributed capital)
  2. Cumulative earnings since incorporated: Retained Earnings
34
Q

Balance of Paid-in Capital

A

The issuance of proceeds of the current outstanding shares

35
Q

Outstanding

A

Shares that are actively-held by investors

36
Q

Stock Issuance / Stock Repurchase

A

Stock Issuance: Distribute more ownership to the investors

Stock Repurchase: Firms buy back their own shares from the marketplace

37
Q

Balance of Retained Earnings

A

the cumulative amount of profits kept for use in the business

Change in Retained Earnings = Net Income - Dividends

Retained Earnings (Ending Balance) = Retained Earnings (Beginning Balance) + Net Income - Dividends

38
Q

Statement of Cash Flows

A

describes the flow of cash in and out of the firm during a period of time

  • sum of operating, investing, and financing activities cash flows = total change in cash
39
Q

Stockholders’ equity

A

Contributed Capital + Retained Earnings

40
Q

Net Income

A

Revenues - Expenses + Gains - Losses

financial accounting (4 decks)

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