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Intermediate Accounting I (ACCT-3302-601) > Mid-term (Ch. 1, 2, 3) > Flashcards

Mid-term (Ch. 1, 2, 3) Flashcards

1
Q

What is Cash Basics Accounting?

A

The method where revenues are recorded when cash is received and expenses are recorded when cash is paid.

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2
Q

What is Accrual Accounting?

A

The method where revenues or expenses are recorded when a transaction occurs rather than when payment is received.

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3
Q

What is the American Institute of Certified Public Accountants (AICPA)?

A

The national organization of professional public accountants.

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4
Q

What is the Financial Accounting Standards Board (FASB)?

A

The current private sector body that has been delegated the task of setting accounting standards.

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5
Q

What does the Securities and Exchange Commission (SEC) do?

A

Has the authority to set accounting standards for companies but relies on the private sector to do so.

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6
Q

What is Codification?

A

The FASB accounting standards codification integrates and topically organizes all relevant accounting pronouncements comprising GAAP in a searchable online database.

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7
Q

What is Generally Accepted Accounting Principles (GAAP)?

A

Companies should follow when measuring and reporting their information in their financial statements and related notes.

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8
Q

Who determines how financial statements are prepared?

A

FASB and GASB

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9
Q

What is the role of the Auditor?

A

Examine financial statements to express a professional independent opinion about whether the statements are fairly presented in compliance with GAAP.

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10
Q

What is the purpose of the income statement?

A

The purpose of the income statement is to summarize the profit generating activities of a company that occurred DURING a particular period of time.

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11
Q

What is the purpose of the balance sheet?

A

The purpose of the balance sheet is to present the financial position of the company ON a particular date.

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12
Q

What is the equation(s) for the balance sheet?

A

Assets = Liabilities + Stockholders’ Equity

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13
Q

What is the equation(s) for the balance sheet manipulated?

A

Liabilities = Assets - Stockholders’ Equity

Stockholders’ Equity = Assets - Liabilities

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14
Q

What is the equation(s) for the income statement?

A

Revenues - CGS = Gross Profit

Gross Profit - Expenses = Net Income

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15
Q

What is owners equity made up of?

A

Paid-in capital and Retained Earnings

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16
Q

Paid-in capital -

A

Amount invested by shareholders

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17
Q

Retained Earnings-

A

Amount earned by corporations on behalf of it’s shareholders that has yet to be distributed to them as dividends.

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18
Q

How debits and credits affect accounts?

A

Illustration 2-3

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19
Q

What are temporary accounts?

A

Closed out once a year (income statement)

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20
Q

What are permanent accounts?

A

Financial position at a point in time (balance sheet)

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21
Q

What is adjusting entries and when are they necessary?

A

Internal transactions recorded at the end of any period when the financial statements are prepared. They are necessary in 3 situations: prepayment, accruals, and estimates.

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22
Q

What are Closing entries and closing process-

A

The temporary accounts are reduced to zero balances and these temporary account balances are closed and transferred to RETAINED EARNINGS to reflect the changes that occurred in that account during the period.

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23
Q

Using an adjusted trial balance, what can we prepare?

A

The closing entries.

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24
Q

What are the steps of the Accounting Process Cycle in order?

A

Prepare financial statements.
Record adjusting entries and post to the general ledger accounts.
Post from the journal to the general ledger accounts.
Prepare an adjusted trial balance.
Analyze the transaction.
Close the temporary accounts to Retained Earnings.
Record the transaction in a journal.
Prepare a post-closing trial balance.
Obtain information about external transactions from source documents.

25
Q

Why is the Balance Sheet useful?

A

It is useful because it provides information useful for assessing future cash flows, liquidity, and LT solvency.

26
Q

What are Balance Sheet Limitations?

A
  • Book Value vs. Market Value (building example)
  • Valuable resources not listed (employees, customer relationships, knowledge about services and products)
  • Some balances rely on estimates and judgements rather than determinable amounts (ex: receivables and warranty cost)
27
Q

Current assets-

A

Cash and other assets that can reasonably be converted into cash or consumed within one year OR within the normal operating cycle of the business.

28
Q

Operating cycle-

A

Refers to the PERIOD OF TIME the initial outlay of cash for the purchase of inventory until the time the company collects cash from a customer from the sale of inventory.

29
Q 
Examples of Assets and Liabilities (current vs long-term):
Short-term investments -
Prepaid Expenses-
Investments-
Pension obligations-
Lease obligations-
A 
Short-term investments - current assets
Prepaid Expenses- current assets
Investments- long-term assets
Pension obligations- LT liabilities
Lease obligations- LT liabilities
30
Q

Disclosure Notes: Full-disclosure principle-

A

Requires that financial statements provide all material relevant information concerning the reporting entity.

31
Q

Examples of Disclosure Notes

A 
Examples
Pension plans
Leases
LT debt
Investments
Income Taxes
Property, plant, and equipment
Employee benefit plans
32
Q

Types of Disclosures :

  • Other items
    • Subsequent Event-
    • Related Party Transactions-
A

Subsequent Event
Significant development that takes place after the company’s fiscal year end but before the financial statements are issued
Related Party Transactions
Transactions with other parties that can significantly influence or be influenced by the company

33
Q

Management Discussion and Analysis (MD & A)-

A

It precedes the financial statements and auditors report.

Management provides a biased informed perspective of a company’s operations, liquidity, and capital resources

34
Q

What are Management’s Responsibilities of the MD&A?

A

Management acknowledges responsibility and certifies accuracy of financial statements
It also enhances the awareness of the users of the financial statements concerning the relative roles of management and the auditor
Also includes an assessment of the company’s internal controls

35
Q

Proxy Statement-

A

Contains disclosures on compensation of directors and top executives; sent to shareholders.

36
Q

Auditors Report and what 4 types-

A

A report issued by CPAs who audit the financial statements that informs users of the audit findings.
Unqualified
Unqualified with an explanatory or emphasis paragraph
Qualified
Adverse or disclaimer

37
Q

Unqualified-

A

Unqualified-
Auditor’s judgement that a company’s financial statements are fairly and and appropriately presented without any identified exceptions, and in compliance with GAAP.

38
Q

Unqualified with an explanatory or emphasis paragraph-

A

Unqualified with an explanatory or emphasis paragraph-
Auditor’s judgement that a company’s financial statements are in compliance with GAAP but the auditor feels that other important information needs to be emphasized.

39
Q

Qualified Opinion-

A

Qualified-
When either the audit process has been limited (scope limitation) or there has been a departure from GAAP, but neither is of sufficient seriousness to invalidate the financial statements as a whole.

40
Q

Adverse-

A

Adverse-
When the auditor has specific knowledge that the financial statements or disclosures are seriously misstated or misleading

41
Q

Disclaimer-

A

Disclaimer-

When the auditor is not able to gather sufficient information that the financial statements are in conformity with GAAP

42
Q

Common methods for analyzing financial statements-

A

Comparative financial statements, horizontal analysis, vertical analysis, ratio analysis.

43
Q

Comparative financial statements-

A

Comparative financial statements-

Financial statements are accompanied by the corresponding financial statements of the preceding year

44
Q

Horizontal analysis-

A

Horizontal analysis-
Each item in the financial statement is expressed as a percentage of that same item in the financial statements of another year (base amount). For example, company inventory this year to last year would provide a percentage change in inventory.
(Horizontal analysis can be with any line from any financial statement)

45
Q

Vertical analysis-

A

Vertical analysis-
Each item in the financial statement is expressed as a percentage of an appropriate corresponding total, or base amount, but within the same year.
For example, cash, receivables, and inventory in the current year can be restated as a percentage of total assets in the current year.

46
Q

2011 2012 Difference % of change
Cash $10,000 $12,000 $2,000 20%

Difference= $12,000-$10,000 = $2,000
Percentage of change = $2,000 / $10,000 = 20%

A

Horizontal Analysis on Balance Sheet

47
Q

2011 2012 Difference % of change
Sales $100,000 $105,000 $5,000 5%

Difference= $105,000 - $100,000 = $5,000
Percentage of change = $5,000 / $100,000 = 5%

A

Horizontal Analysis on an Income Statements

48
Q

2011 %
Cash $10,000 5% (10,000/200,000 x 100%=5%)
Total Assets $200,000 100%

A

Vertical Analysis on Balance Sheet

49
Q

2011 %
COGS $40,000 40% (40,000/100,000 x 100%=40%)
Sales Revenue $100,000 100%

A

Vertical Analysis on Income Statement

Vertical Analysis divides an amount to the total

50
Q

Ratio Analysis-

A

Ratio Analysis-

Financial statements are converted to ratios for evaluating the performance and risk of a company

51
Q

Liquidity vs. Solvency

A

Liquidity refers to the ability of a company to converts its assets to cash to pay its current obligations.
Solvency refers to a company’s ability to meet its LT debt obligations

52
Q

What are the 3 liquidity ratios?

A

Current Ratio
Working Capital
Acid Test (Quick Ratio)

53
Q

Current Ratio-

A

Current Ratio-
Measures a company’s ability to satisfy its ST obligations.

Current Ratio = Current Assets
_______________
Current Liabilities

54
Q

Working Capital-

A

Working Capital-
Measures a company’s ability to satisfy its ST obligations

Working Capital = Current Assets – Current Liabilities

55
Q

Acid-test Ratio (Quick Ratio)-

A

Acid-test Ratio (Quick Ratio)
More stringent indication of a company’s ability to satisfy its ST obligations.

Acid-test (Quick Ratio) = Quick Assets
_____________
Current Liabilities
* Quick Assets = (Cash & AR)

56
Q

What are the 3 solvency ratios?

A

Debt to equity
Times Interest Earned Ratio
Return on Equity

57
Q

Debt to Equity Ratio-

A

Debt to Equity Ratio-
Indicates the extent of reliance on creditors, rather than owners, in providing resources.

Debt to Equity Ratio = Total Liabilities
______________
Stockholders Equity

58
Q

Times Interest Earned Ratio-

A

Times Interest Earned Ratio-
Indicates the margin of safety provided to creditors.

Times Interest Earned Ratio =

Net Income + Interest Expense + Income Taxes
_____________________________________
Interest Expense

59
Q

Return on Equity-

A

Return on Equity-
Measure of profitability of a corporation in relation to stockholders’ equity.

Return on Equity = Net Income
________________
Average Stockholders Equity

Intermediate Accounting I (ACCT-3302-601) (1 decks)

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