Midterm Exam I Review

Question 1

8 steps of the accounting cycle:

Answer 1

1. analyze the transaction
2. record the transaction
3. post to general ledger
4. prepare unadjusted trial balance
5. prepare adjusting entries
6. prepare adjusted trial balance
7. prepare financial statement
8. close temporary accounts

Question 2

why do we prep the financial statement before we close?

Answer 2

when you close, you zero out revenue and expenses. so if you prep the financial statement after, then your whole income summary will be zero

Question 3

what are temporary accounts? why do we close them?

Answer 3

• temporary accounts: revenue and expenses

- we close temporary accounts so their balances don’t get mixed up with the next accounting cycle

Question 4

what are the 4 key characteristics of an account?

Answer 4

1. element (asset, liability, revenue, expense, etc.)
2. financial statement (balance sheet, income statement, statement of stockholders’ equity, statement of cash flows)
3. permanent or temporary
4. normal balance (DR or CR)

Question 5

what are the different financial statements in accounting?

Answer 5

• balance sheet (reports assets, liabilities, and stockholder’s equity)
• income statement (reports income/revenue, expenses, and net income/net loss)
• statement of stockholders’ equity (reports common stock, retained earnings, and stockholders’ equity)
• statement of cash flows (reports operating, investing, and financing activities)

Question 6

what is the difference between accrual-based and cash-based accounting?

Answer 6

• accrual based = record events when a transaction occurs

- cash based = record events when you receive cash

Question 7

when are revenues and expenses recognized under accrual-based accounting?

Answer 7

• revenue is recognized when obligation is fulfilled

- expense is recognized when it is incurred, matches with revenues, and is allocated over time

Question 8

what are the 4 different types of adjusting entires?

Answer 8

1. unearned revenue (deferred revenue) = when cash is received before service is provided
2. prepaid expense (deferred expense) = when cash is paid before expense occurs
3. accounts receivable (accrued revenue) = when service is provided before cash is received
4. accounts payable (accrued expense) = when expense occurs before cash is paid

Question 9

what is FASB?

Answer 9

• FASB = Financial Accounting Standards Board

- creates U.S. GAAP (Generally Accepted Accounting Principles) in the ASC (Accounting Standards Codification)

Question 10

what is the U.S. SEC?

Answer 10

• the U.S. SEC (United States Securities and Exchange Commission)
• gives FASB the authority to create GAAP
• government organization that enforces the rules

Question 11

what is the AICPA?

Answer 11

• AICPA = American Institute of Certified Public Accountants
• provides external auditors to audit financial statements prepared by private companies
• writes the CPA exam and set professional standards

Question 12

what is the PCAOB?

Answer 12

• PCAOB = Public Company of Accounting Oversight Board)

- employ external auditors to audit financial statements for public companies

Question 13

what are the 2 different accounting standards?

Answer 13

1. GAAP = Generally Accepted Accounting Principles (written by FASB)
2. IFRS = International Financial Reporting Standards (written by IASB)

Question 14

what is rules-based accounting?

Answer 14

• specific procedures, not theory-based, bright lines, many exceptions, little judgment
• U.S. GAAP is more rules-based

Question 15

what is principles-based accounting?

Answer 15

• relies on the conceptual framework, theory-based, no bright lines, significant judgment
• ISFR is more principles-based

Question 16

what are the branches of the objective of financial reporting

Answer 16

• qualitative characteristics
• elements
• principles of recognition and measuring

Question 17

what are the fundamental characteristics of qualitative characteristics?

Answer 17

• fundamental characteristics = characteristics that make information useful
  * relevance = is it capable of making a difference in decision-making?
  - predictive value = can it predict future events?
  - confirmatory value = can it provide feedback on past events?
  - materiality = does omitting it make a difference in decision-making?
  * faithful representation = does it depict the economic activity clearly and w/o error?
  - completeness = does it have all the information?
  - neutral = is it unbiased?
  - without material error = are there any errors that may make a difference in decision-making?

Question 18

what are the enhancing characteristics of qualitative characteristics?

Answer 18

• enhancing characteristics = distinguishing useful from useless information
  * comparability = can you compare different financial statements across diff entities
  * verifiability = can you confirm that info is a faithful representation?
  * timeliness = is the info delivered in a timely manner?
  * understandability = is the info classified properly and presented clearly?

Question 19

what is point-in-time when describing the elements of the objective of financial reporting?

Answer 19

• point-in-time = resources of a specific point in time and appear on the balance sheet
• asset, liability, and equity

Question 20

what is period-in-time when describing the elements of the objective of financial reporting?

Answer 20

• period-in-time = results of events and circumstances that affect an entity during a period of time
• revenue/gain, expenses/loss, dividends

Question 21

what are the branches of principles of recognition and measuring of the objective of financial reporting?

Answer 21

• recognition principles = economic event is reported if it is measurable, reliable, relevant, and material
• bases of measurement = does the economic value have historical cost and current value?

Question 22

what is the difference between realized and realizable?

Answer 22

• realized: received

- realizable: expected to be received

Question 23

what is the going concern concept?

Answer 23

an entity will continue to exist into the future indefinitely, unless there is evidence to the contrary

Question 24

what is the economic entity concept?

Answer 24

the business is separate from its owner(s)

Question 25

what is the monetary unit assumption?

Answer 25

economic events are reported in dollars

Question 26

what is the periodicity assumption?

Answer 26

you can divide the life of a company into arbitrary periods (quarters, fiscal year, etc.)

Question 27

what is codification?

Answer 27

• summarizes GAAP standards by topic
• created by FASB
• pronouncements issued as an ASU (Accounting Standards Update)

Question 28

what are the 6 steps in the applied financial accounting research process?

Answer 28

1. establish and understand the facts
2. identify the issue: what’s the research question?
3. search the authoritative literature
4. evaluate results of the search
5. develop conclusions
6. communicate results of the search

Question 29

what characteristics must information have to be considered reliable in financial statements?

Answer 29

1. faithful representation
2. must reflect the economic substance
3. is neutral (free from bias)
4. is prudent (conservative)
5. is complete in all material aspects

Question 30

what group/organization both protects investors and oversees the accounting standard-setting process in the U.S?

Answer 30

the SEC

Question 31

what is fair value?

Answer 31

the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties

Question 32

equation for assets

Answer 32

assets = liabilities + stockholders’ equity

Question 33

equation for net income

Answer 33

net income = revenue - expenses

Question 34

equation for retained earnings

Answer 34

retained earnings = revenue + expenses - dividends