Midterm Exam I Review Flashcards
8 steps of the accounting cycle:
- analyze the transaction
- record the transaction
- post to general ledger
- prepare unadjusted trial balance
- prepare adjusting entries
- prepare adjusted trial balance
- prepare financial statement
- close temporary accounts
why do we prep the financial statement before we close?
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
what are temporary accounts? why do we close them?
- temporary accounts: revenue and expenses
- we close temporary accounts so their balances don’t get mixed up with the next accounting cycle
what are the 4 key characteristics of an account?
- element (asset, liability, revenue, expense, etc.)
- financial statement (balance sheet, income statement, statement of stockholders’ equity, statement of cash flows)
- permanent or temporary
- normal balance (DR or CR)
what are the different financial statements in accounting?
- 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)
what is the difference between accrual-based and cash-based accounting?
- accrual based = record events when a transaction occurs
- cash based = record events when you receive cash
when are revenues and expenses recognized under accrual-based accounting?
- revenue is recognized when obligation is fulfilled
- expense is recognized when it is incurred, matches with revenues, and is allocated over time
what are the 4 different types of adjusting entires?
- unearned revenue (deferred revenue) = when cash is received before service is provided
- prepaid expense (deferred expense) = when cash is paid before expense occurs
- accounts receivable (accrued revenue) = when service is provided before cash is received
- accounts payable (accrued expense) = when expense occurs before cash is paid
what is FASB?
- FASB = Financial Accounting Standards Board
- creates U.S. GAAP (Generally Accepted Accounting Principles) in the ASC (Accounting Standards Codification)
what is the U.S. SEC?
- the U.S. SEC (United States Securities and Exchange Commission)
- gives FASB the authority to create GAAP
- government organization that enforces the rules
what is the AICPA?
- 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
what is the PCAOB?
- PCAOB = Public Company of Accounting Oversight Board)
- employ external auditors to audit financial statements for public companies
what are the 2 different accounting standards?
- GAAP = Generally Accepted Accounting Principles (written by FASB)
- IFRS = International Financial Reporting Standards (written by IASB)
what is rules-based accounting?
- specific procedures, not theory-based, bright lines, many exceptions, little judgment
- U.S. GAAP is more rules-based
what is principles-based accounting?
- relies on the conceptual framework, theory-based, no bright lines, significant judgment
- ISFR is more principles-based
what are the branches of the objective of financial reporting
- qualitative characteristics
- elements
- principles of recognition and measuring
what are the fundamental characteristics of qualitative characteristics?
- 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?
what are the enhancing characteristics of qualitative characteristics?
- 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?
what is point-in-time when describing the elements of the objective of financial reporting?
- point-in-time = resources of a specific point in time and appear on the balance sheet
- asset, liability, and equity
what is period-in-time when describing the elements of the objective of financial reporting?
- period-in-time = results of events and circumstances that affect an entity during a period of time
- revenue/gain, expenses/loss, dividends
what are the branches of principles of recognition and measuring of the objective of financial reporting?
- 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?
what is the difference between realized and realizable?
- realized: received
- realizable: expected to be received
what is the going concern concept?
an entity will continue to exist into the future indefinitely, unless there is evidence to the contrary
what is the economic entity concept?
the business is separate from its owner(s)
what is the monetary unit assumption?
economic events are reported in dollars
what is the periodicity assumption?
you can divide the life of a company into arbitrary periods (quarters, fiscal year, etc.)
what is codification?
- summarizes GAAP standards by topic
- created by FASB
- pronouncements issued as an ASU (Accounting Standards Update)
what are the 6 steps in the applied financial accounting research process?
- establish and understand the facts
- identify the issue: what’s the research question?
- search the authoritative literature
- evaluate results of the search
- develop conclusions
- communicate results of the search
what characteristics must information have to be considered reliable in financial statements?
- faithful representation
- must reflect the economic substance
- is neutral (free from bias)
- is prudent (conservative)
- is complete in all material aspects
what group/organization both protects investors and oversees the accounting standard-setting process in the U.S?
the SEC
what is fair value?
the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties
equation for assets
assets = liabilities + stockholders’ equity
equation for net income
net income = revenue - expenses
equation for retained earnings
retained earnings = revenue + expenses - dividends
