Mod 9

Question 1

Accrual

Answer 1

When cash follows the economic activity

Question 2

Accrual basis accounting assumption

Answer 2

Key assumption in financial reporting

Firm records transactions that change its financial statements in the period when the events occur (not when it receives the benefits or pays the costs)

Question 3

Auditor’s report or Auditor’s opinion

Answer 3

A statement by the auditor expressing its view of a company’s accounting process and the resulting financial statements

Of importance is the auditor’s opinion on whether the accounting process complies with GAAP and if the company’s financials fairly represent the company

Question 4

Cash basis accounting

Answer 4

An accounting approach where the company records revenue only when it receives cash and records expenses only when it pays cash

Prohibited by GAAP

Question 5

Classified balance sheet

Answer 5

A balance sheet that groups together similar assets and liabilities

Question 6

Comparability

Answer 6

An enhancing quality of useful information

Results when different companies use the same accounting principle

Question 7

Cost constraint

Answer 7

The constraint of determining whether the costs incurred to provide the financial information outweigh the benefit that financial statement users will gain from having the info available

Question 8

Cost principle or historical cost principle

Answer 8

When companies record assets at their initial cost

Question 9

Current assets

Answer 9

Assets that a company expects to convert to cash within 1 year or its operating cycle (whichever is longer)

Appear in assets section of balance sheet

Question 10

Current liabilities

Answer 10

Obligations that a company expects to pay within 1 year or the operating cycle (whichever is longer)

Appear in liabilities section of balance sheet

Question 11

Deferral

Answer 11

When cash comes before economic activity

Question 12

Depreciation

Answer 12

Practice of allocating costs of assets across a number of years

Question 13

Economic entity assumption

Answer 13

Position that company transactions should not intermingle with personal transactions or transactions of other companies

Question 14

Expense recognition principle or matching principle

Answer 14

Practice of recording expenses in the period in which the firm incurs them (regardless of when they are paid)

Match expenses with revenues in the period when it expends effort to generate revenue

Question 15

Fair value principle

Answer 15

When a business reports assets and liabilities at their fair market value on the balance sheet

Question 16

Faithful representation

Answer 16

A fundamental quality of useful information
Accounting info accurately depicts what happened

Question 17

Financial accounting standards board

Answer 17

Primary accounting standard setting body in the US

Question 18

Full disclosure principle

Answer 18

Principle that companies must disclose all circumstances and events that would make a difference to financial users

Question 19

Generally accepted accounting principles

Answer 19

Set of accounting rules and practices in the US that have authoritative support

Question 20

Going concern assumption

Answer 20

Assumption that the business will not liquidate shortly and that the business will continue to operate and satisfy its obligations

Question 21

Goodwill

Answer 21

Intangible asset that results from the acquisition of one company by another for a premium (amount equals the difference between what a purchasing company pays for the target company over the target’s book value)

Appears in asset section of balance sheet

Question 22

Intangible assets

Answer 22

Assets that do not have a physical substance but are very valuable
Brand names, copyright, patent, trademark
Appear in asset section of balance sheet

Question 23

International accounting standards board

Answer 23

Primary accounting standard setting body for foreign countries

Question 24

Internal financial reporting standards

Answer 24

Set of accounting rules and practices adopted by most foreign countries that have authoritative support of the IASB

Question 25

Liquidity

Answer 25

Degree to which you can convert an asset quickly at its fair market value

Question 26

Long term investments

Answer 26

Assets that are generally

Investment in stock and bonds of other corps held for more than 1 year

Long term assets (land or buildings) not currently used in the company’s operations

Appear in asset section of balance sheet

Question 27

Long term liabilities

Answer 27

Financial obligations to creditors that a company expect to pay after more than 1 year
Appear in liabilities section of balance sheet

Question 28

Materiality constraint

Answer 28

Constraint in determining whether a financial statement item is large enough to influence the decision of a creditor or investor

Question 29

Monetary unit assumption

Answer 29

Requirement that only things expressed in money are included in financial statements

Question 30

Operating cycle

Answer 30

Average time it takes a company to convert cash invested in inventory back into cash creating revenue

Question 31

Other assets

Answer 31

Long term assets not classified as property, plant, equipment, investments, or intangible assets

Question 32

Periodicity assumption

Answer 32

Point of view that life of the business can be divided into artificial time periods and that the company can prepare useful reports covering those periods

Question 33

Property plant and equipment

Answer 33

Physical asses with relatively long useful lives currently used in operating the business

Buildings, factories, automobiles

Reported in assets section of balance sheet

Question 34

Public company accounting oversight board

Answer 34

Regulatory body created by SOX that determines auditing standards and oversees performance of auditing firms

Question 35

Revalence

Answer 35

Fundamental quality of useful info
Accounting info is relevant if it would make a difference in the business decision

Question 36

Retained earnings

Answer 36

Portion of net income retained by the corporations rather than distributed to shareholders as dividends
Appears in stockholders equity portion of balance sheet

Question 37

Revenue recognition principle

Answer 37

Accounting requirement that companies recognized revenue in the period in which the business earns it (regardless of when cash is received)

Question 38

Securities and exchange commission

Answer 38

An agency of the US gov that oversees US financial markets and accounting standard setting bodies

Question 39

Statement of stockholders equity

Answer 39

A financial statement that presents the factors that changed stockholders equity during the period

Question 40

Timeliness

Answer 40

An enhancing quality of useful info
Info must be available to decision makers before it loses its capacity to influence decisions

Question 41

Treasury stock

Answer 41

Shares of the firm’s stock repurchased in the secondary market
Appears in shareholders equity section on the balance sheet

Question 42

Understandability

Answer 42

An enhancing quality of useful info
Financials should present accounting info in a clear and concise manner

Question 43

Verifiability

Answer 43

An enhancing quality of useful info
Accounting info is verifiable if we can prove it is free from error

Question 44

Working capital

Answer 44

A measure of the company’s liquidity
The difference between the amounts of assets and current liabilities