Necessities Flashcards
Accounting Cycle (JLT AF CP)
DURING PERIOD
- journal
- Ledger
- Trial Balance
- End-of-period spreadsheet is prepared
END OF ACCT PERIOD
- Adjusting entries (journalized and posted to ledger)
- Adjusted trial balance
- Financial Statements are prepared
YR END
Closing entries are journalized and posted to ledger
Post-closing trial Balance
(JLTAFCP)
Financial Accoutning
Reporting information to external users (investors, creditors, employees, government, suppliers)
Managerial Accoutning
For internal managerial purposes
NYSE
actual place of exchange of stocks and bonds
Pro’s accrue
Amateurs cash basis
Accrual vs Chash
Accrual recognizes things when they occur and cash recognizes them when the outlow occurs. Accrual provides a more accurate picture of the business
SEC
Securities and Exchange Commision, has the authority to set accounting standards for companies, but has delegated the task to the private sector, like the FASB (financial accounting standards board), who created GAAP
Conceptual Framework
Acct is not rules based but rather principles based.
CF provides underlying foundation for accounting standards
Objective of financial reporting
provide useful information to capital providers
Decision-usefulness
to be useful, information must make a difference in the decision process
Qualitative Characteristics of Financial reporting
Relevance (predictive value, confirmatory value, materiality) faithful representation (Completeness, neutrality, free from error)
Comparability to previous years (Consistency by using the same methods as previous), verifiability, timeliness, understandability
Materiality
makes an effect on decisions
Conservatism
Be conservative
Key constraint
Cost effectiveness
Underlying Assumptions
- -Going concern
- -Economic Entity-events are tied to one economic entity
- -periodicity- can be divided into periods for timely information
- -Moneetary assumption principle–always measured in a consistent currency
Recognition and Measurement Concepts
–General recognition criteria: Probability of future economic benefit, measurability
–Revenue recognition
–Expense recognition:matching- expenses recognized in the period they are incurred
–Historical Cost– Measure things on their original recorded value
–Net realizable value– measure assets on what they can be converted into.
Current Cost
Full disclosure
notes, parentheticalism, supplemental schedules and tables.
Acct equation
assets= liabilities + owners’ equity
Four Financial statements
Income statement (rev-exp=net income),
balance sheet,
Statement of retained earnings, Cash flow
Why say a double entry system?
because it always affects both sides of the equation
Adjusting entries
adjusting things used up to give the most accurate information. Typically show reasoning as well.
How can you tell if adjustments have been made?
look at last period’s amounts. They should be different.
When are adjusting entries necessary
Prepayments (aka deferrals), accruals, and estimates
Common adjusting entries:
- -Supplies/Supplies Expense
- -Rent Expense/Prepaid Rent
- -Depreciation Expense/Accum Depreciation
- -Unearned Revenues
- -Salaries Expense/Salaries Payable
- -Interest receivable/Interest Revenue
- -bad debt expense/allowance for uncollectible accounts
What is a reversing entry?
Optional entries that remove the effects of some of the adjusting entries made at the end of the previous period to simplify journal entries made in new period. If this happens, be sure to post the first day of the new period
NOTE: Balance in accounts afterward must be identical
On the balance sheet (statement of financial position), what is listed first?
Most liquid and most current
APR
Annual Percentage Rate
Nominal—-simple over the whole year
effective– APR—- compound over the whole year.
Lien (leen)
legal claim on somebody’s property: the legal right to keep or sell somebody else’s property as security for a debt
What is the most common form of corporate debt?
bonds
When is interested typically paid for a bond
semiannually
Describe a bond indenture
Normally the issuer is not in a business relationship with each issuer, rather they are in contact with a trustee, who is in charge of the individual relationships with the bondholders
What is the main determinant of bond price?
the lower the risk of the company issuing the bond, the higher the price of the bonds
to determine a interest rate
imputing the interest rate
Depreciation computation
Depreciable cost (which is cost - salvage) x depreciation annual rate = deep for the year
Depreciation: ant received at end of an asset life
Salvage value (residual value, scrap value)
Straight line method for depreciation
rate= 1/useful life in years
Units of production for depreciation
Units produced this year/EST units produced over life
Double declining balance
(Book value of asset at beginning of year) x (2/useful life in years) = depreciation expense for the year
NOTE: DDB multiplies against the BOOK VALUE (which is hist cost- accumulated depreciation) not depreciable cost (which is hist-salvage)
Salvage value is only used to know when to stop depreciating
Tax method of depreciation
Macros
Historical cost x IRS decimal (which is on a tax table)= depreciation this year
NOTE: residual value is ZERO when using MACRS
What is a depreciation convention?
The IRS assumes you bought your asset in the middle of the first year, therefore you only get to depreciate half of the cost for the first year to simply depreciation.
Change in accounting estimates and isn’t this against the consistency principle?
Allows businesses to change estimates (such as useful life or salvage value in depreciation) to more accurately convey current information. Allows for no retroactive changes, but uses new estimates in the current and future years.
THIS DOES NOT WORK FOR CHANGING DEP methods, for that is against the consistency/comparability principle, which states you must use the same PROCESSES each year to compare it to last’s.
calculating effective interest
[1+(I/n)]^n - 1= r
Where n = number of periods
Early retirement (early extinguishment of a debt) usually results in:
a loss or a gain
To capitalize something
to record the cost as an asset on the balance sheet rather than an expense and be able to amortize or (depreciate) on a long term basis.
who grades your cpa exam
AICPA (American institute of Certified public accountants)
