Unit 4 Flashcards
Statement of retained earnings
A financial statement that outlines the changes in retained earnings for a company over a specific period of time
Annual report
The document that public corporations must provide annually to shareholders that describes their operations and financial conditions
GAAP
Generally accepted accounting principles. A common set of rules and a standard format for public companies to use when they prepare their reports
The Fiscal Period rule
All reporting is done for predetermined periods of time (fiscal year)
The Going Concern Concept rule
The reports are prepared presuming that the company will continue to exist for the foreseeable future
The Conservatism rule
This rule requires that “bad news” be recognised when the condition becomes possible, while “good news” when the transaction actually occurred
The Quantifiable Items rule
The financial statements only include information that can be measured or expressed in numbers
The Materiality rule
The significance of an event or information in influencing the judgement, analysis or perception of the readers of the financial statements
The Full Disclosure rule
The importance of providing all necessary information to ensure that readers of the financial statements are fully informed. Specifically, accountants are required to disclose any major changes in accounting methods and explain how these changes have affected the financial results. This helps readers understand the reasons behind fluctuations in financial figures and enables them to make informed decisions based on the most up-to-date and comprehensive information available.
Audit company
Company that verifies the presentation of the Financial Statements to ensure compliance with laws and that the financial statements are true and fair
Rating company
A company that understands the business, makes a financial forecast for your company and industry as a whole and then assigns your company a grade based on your financial positions and your future financial position (triple A, double A, A, triple B, double B, B, triple C, double C and C)
Top 4 Accounting Scandals
1) Enron
2) Lehman Brothers
3) Worldcom
4) The Wizard of Lies (Bernie Madoff)
Enron
-Kept huge debts off the balance sheet by hiding loses with MTM accounting and special purpose vehicles (SPV)
-Jeff Skilling and Ken Lay
-Whistleblower Sherron Watkins
Mark-to-market (MTM)
Method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. It reports assets and liabilities at the estimated amount of money they would receive if they were to sell the assets or be alleviated of their liabilities in the market today
Special Purpose Vehicles (SPV)
A subsidiary to keep certain assets or activities safe from financial risk. This box is legally independent, so even if the main company gets into financial trouble, the things inside the SPV are protected
