Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
ACCT 401
Chapter 1&2 are done (3 in progress)
| Question | Answer |
|---|---|
| Chapter 1 | Environment and Theoretical Structure of Financial Accounting |
| Financial accounting | Provides relevant information to external users. (Investors and creditors) |
| What are the most common financial statements? | - the balance sheet/the statement of financial position - income statement/the statementt of operations - the statement of cash flows The statement of shareholders’ equity |
| Financial reporting | Process of providing financial statement information to external users |
| Capital markets | Mechanisms that foster the allocation of resources efficiently |
| Three primary forms of business organization include… | - Sole proprietorship - Partnerships - Corporations |
| Corporation | Dominant form of business organizing that acquire capital from investors in exchange for ownership interest and from creditors by borrowing |
| Rate of return | (Dividends+Share price appreciantion) / initial investment |
| What some variables to consider before making an investment decision | - uncertainty - risk |
| T/F: A company will never be able to provide a positive return to investors and creditors if they can generate a profit from selling its products or services | False: A company will be able to provide a positive… |
| T/F: Financial accounting can help investors and creditors evaluate the amounts, timing, and uncertainty of the enterprise’s future cash receipts and disbursements | True |
| Accrual accounting | Measures income according to the entity’s accomplishments and resources sacrifices during the period from transactions related to providing goods and services to customers, regardless of when cash is received or paid |
| Cash-basis accounting | Measures income as the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers |
| Net operating cash flow | Difference between cash receipts and cash disbursements from providing goods and services |
| T/F: Accrual accounting produces a measure called “net operating cash flow” | False. Cash-basis accounting produces… |
| T/F: Over short periods of time, operating cash flow may not be an accurate predictor of future operating cash flows | True |
| Net income | The difference between revenues and expenses |
| Generally Accepted Accounting Principles (GAAP) | Set of both and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes |
| T/F: The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence | True. The 1933 Act sets forth accounting and disclosure requirements for initial offerings of securities (stocks&bonds). The 1934 Act applies to secondary market transactions and mandates reporting requirements for companies. (Pg 21) |
| Securities and Exchange Commission (SEC) | Has the authority to set accounting standards for companies, but it relies on the private sector to do so |
| What is the first private-sector body to assume the task of setting accounting standards? | Committee on Accounting Procedure (CAP) |
| Fill in the blank: The CAP was a committee of the ___ | American Institute of Accountants (AIA) which is the national organization of professional public accountants |
| What was the AIA renamed to? | American Institute of Certified Public Accountants (AICPA) |
| What organization replaced the Committee on Accounting Procedure (CAP)? | Accounting Principles Board (APB) which is the second private sector body delegated the task of setting accounting standards |
| How did the APB struggle? | They never established a conceptual framework for financial accounting and reporting was broadly accepted. Members were voluntary, part-time bases so they could not act quickly enough. |
| What organization replaced the Accounting Principles Board (APB) | Financial Accounting Standards Board (FASB) which is the current private sector body that has been delegated the task of setting accounting standards |
| What is the Financial Accounting Standards Board (FASB)’s parent organization? | Financial Accounting Foundation (FAF) which is responsible for selecting the members of the FASB and its Advisory Council, ensuring adequate funding of FASB activities, and exercising general oversight of FASB’s activities |
| Emerging Issues Task Force (EITF) | Responsible for providing timely responses to emerging financial reporting issue |
| Describe the hierarchy of standard-setting authority | (Top): Congress (Middle): SEC - Securities Exchange Commission (Middle 2): Private Sectors which include - Committee on Accounting Procedure (CAP) -> Accounting Principles Board (APB) -> Financial Accounting Standards Board (FASB) (current) |
| Conceptual framework | Deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting standards |
| FASB Accounting Standards Codification | Is the only source of authoritative U.S. GAAP, other than rules and interpretive releases of the SEC |
| International Accounting Standards Committee (IASC) | Umbrella organization formed to develop global accounting standards |
| What organization followed the International Accounting Standards Committee (IASC)? | International Accounting Standards Board (IASB). |
| International Accounting Standards Committee (IASC) | Its objectives are to develop a single set of high-quality, understandable global accounting standards, to promote the use of those standards, and to bring about the convergence of national accounting standards and International Accounting Standards |
| Auditors | Independent professionals who render an opinion about whether the financial statements fairly present the company’s financial position, performance, and cash flows in compliance with GAAP |
| T/F: Audits adds credibility to the financial statements, increasing the confidence of those who rely on the information | True |
| Certified public accountants (CPAs) | Licensed individuals who can represent that the financial statements have been audited in accordance with generally accepted auditing standards |
| Principle-based | Approach to standard setting stresses professional judgment, as opposed to following a list of rules also known as objectives-oriented |
| Rules-based accounting standards | A list of rules for choosing the appropriate accounting treatment of a transaction |
| Ethics | A code or moral system that provides criteria for evaluating right and wrong |
| Institute of Management Accountants (IMA) | Primary national organization of accountants working in industry and government |
| Institute of Internal Auditors | National organization of accountants providing internal auditing services for their own organizations |
| Conceptual framework | Deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting standards |
| What are the categories of the Conceptual Framework | Objective; qualitative characteristics; constraints; recognition, measurement, and disclosure concepts; elements, and financial statements |
| Objective | To provide financial information that is useful to capital providers |
| Qualitative characteristics like | - Fundamental relevance - Faithful representation - Enhancing |
| Fundamental relevance include | - Predictive value - Confirmatory value - Materiality |
| Faithful representation include | - Completeness - Neutrality - Free from error |
| Enhancing include | - Comparability (including consistency) - Verifiability - Timeliness - Understandability |
| Constraints like | Cost effectiveness |
| Recognition, measurement, and disclosure concepts like | - Assumptions - Principles |
| Assumptions include | - Economic entity - Going concern - Periodicity - Monetary unit |
| Principles | - Revenue recognition - Expense recognition - Mixed-attribute measurement - Full disclosure |
| Elements | Assets, liabilities, equity, investments by owners, distribution to owners, revenues, expenses, gains, losses, comprehensive income |
| Financial statements | Balance sheet; income statement; statement of comprehensive income; statement of cash flows; statement of shareholders’ equity; related to disclosures. |
| Decision usefulness | The quality of being useful to decision making |
| Qualitative decision usefulness | Relevance | Faithful representation R: Predictive value; confirmatory value; materiality FR: Completeness; Neutrality; Free from error Comparability (Consistency); Verifiability; Timeliness; Understandability |
| Relevance | One of the primary decision-specific qualities that make accounting information useful; made up of predictive value and/or feedback value and timeliness |
| Faithful representation | Exists when there is agreement between a measure or description and the phenomenon it purports to represent |
| Predictive value | Confirmation of investor expectations about future cash-generating ability |
| Confirmatory value | Confirmation of investor expectation about future cash-generating ability |
| Material | Has qualitative or quantitative characteristics that make it matter for decision making |
| Faithful representation | Exists when there is agreement between a measure or description and the phenomenon it purports to represent |
| Complete | Depiction is complete if it includes all information necessary for faithful representation |
| Neutral | Implies freedom from bias |
| Free from error | Information is free from error if it contains no errors or omissions |
| Conservatism | Practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered |
| Comparability | The ability to help users see similarities and differences among events and conditions |
| Consistency | Permits valid comparisons between different periods |
| Verifiability | Implies a consensus among different measures |
| Timeliness | Information that is available to users early enough to allow its use in the decision process |
| Understandability | Users must understand the information within the context of the decision being made |
| Cost effectiveness | The perceived benefit of increased decision usefulness exceeds the anticipated cost of providing that information |
| Recap of Elements of Financial Statements | Assets, liabilities, equity, investments by owners, distribution to owners, revenues, expenses, gains, losses, comprehensive income |
| Assets | Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events |
| Liabilities | Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events |
| Equity (or net assets) | Called shareholders’ equity or stockholders’ equity for a corporation. It is the residual interest In the assets of an entity that remains after deducting its liabilities |
| Investment by owners | Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests in it |
| Distributions to owners | Decreases in equity of a particular enterprise resulting from transfers to owners |
| Comprehensive income | Change in equity from business enterprise during period from transactions & other events and circumstances from non-owner sources. Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners |
| Revenues | Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity;s ongoing major or central operations |
| Expenses | Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations |
| Gains | Increases in equity from peripheral or incidental transactions of an entity |
| Losses | Represent decreases in equity arising from peripheral or incidental transactions of an entity |
| Recap of Assumptions | - Economic entity - Going concern - Periodicity - Monetary unit |
| Economic entity | All economic events can be identified with a particular economic entity |
| Going concern | In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely |
| Periodicity | The life of a company can be divided into artificial time periods to provide timely information to external users |
| Monetary unit | In the United States, financial statement elements should be measured in terms of the U.S. dollar. |
| Recognition | Process of admitting information into the basic financial statements |
| General recognition criteria | - Definition: item meets definition of an element of financial statements - Measurability: item has relevant attribute measurable with sufficient reliability |
| General recognition criteria (pt. 2) | - Relevance: information about it is capable of making a difference in user decisions - Reliability: information is representationally faithful, verifiable, and neutral |
| T/F: Revenue recognition is guided by the realization principle | True. Here’s the two criteria before revenue can be recognized. 1. The earning process is judged to be complete or virtually complete 2. There is reasonable certainty as to the collectibility of the asset to be received (usually cash) |
| Four different expense recognition approaches | 1. On exact cause-and-effect relationship 2. Associating an expense with the revenues recognized in a specific time period 3. A systematic and rational allocation to specific time periods 4. In the period incurred, without regard to related revenues |
| Five measurement attributes employed in GAAP | - Historical cost - Net realizable value - Current Cost - Present (or discounted) value of future cash flows - Fair value |
| Historical cost | Original transaction value… bases measurement on the amount given or received in the original exchange transaction |
| Depreciated (or amortized) cost | Reduces historical cost to reflect depreciation (or amortization) recognized to date |
| Net realizable value | Estimated selling prices of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation |
| Current cost | Are the costs that would be incurred to purchase or reproduce an asset |
| Present value | Is today’s equivalent of a particular amount in the future, after backing out the time value of money |
| Fair value | Bases measurements on the price that would be received to sell assets or transfer liabilities in an orderly market transaction |
| Fair value can be measured using… (3) | - market approaches - income approaches - cost approaches |
| Fair value option | Allows companies to report specified financial assets and liabilities at fair value |
| Full-disclosure principle | Financial reports should include any information that could affect the decisions made by external users |
| This includes | - Parenthetical/modifying comments - Disclosure notes: additional insights about company operations, accounting principles, contractual agreements, and pending litigation written in note that accompany statements - Supplemental schedules and tables |
| Revenue/expense approach | Recognition and measurement of revenues and expenses are emphasized; with balance sheet accounts adjusted as necessary to reflect revenues and expenses |
| Asset/liability approach | Recognition and measurement of assets and liabilities drives revenue and expense recognition |
| Chapter 2 >>> | Review of the Accounting Cycle |
| Economic events | Events that directly affect the financial position of the company |
| External events | Exchange between the company and separate economic entities |
| Internal events | Events that directly affect the financial position of the company but don’t involve an exchange transaction with another entity |
| Accounting equation | Assets = liabilities + shareholders’ equity |
| Paid-in capital | Invested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation |
| Retained earnings | Amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends |
| Transactions | Economic events |
| Accounts | Storage areas used to keep track of how transactions and events cause increases and decreases in the balances of financial elements |
| General ledger | Collection of accounts that organizes the accounts and allows for keeping track of increases and decreases and resulting balances |
| Debits | Represent the left side of the account |
| Credits | Represent the right side of the account |
| Double-entry system | Dual effect that each transaction has on the accounting equation when recorded |
| Permanent accounts | Represents assets, liabilities, and shareholders’ equity at a point in time |
| Temporary accounts | Represent changes in the retained earnings component of shareholders’ equity for a corporation cause by revenue, expense, gain, and loss transactions |
| Tell me the steps of the accounting processing cycle… (during the accounting period) | 1. Obtain information about external transactions from source documents 2. Analyze the transaction 3. Record the transaction in a journal 4. Post from the journal to the general ledger accounts |
| Tell me the steps of the accounting processing cycle… (at the end of the accounting period) | 5. Prepare an unadjusted trial balance 6. Record adjusting entries and post to the general ledger accounts 7. Prepare an adjusted trial balance 8. Prepare financial statements |
| Tell me the steps of the accounting processing cycle… (at the end of the year) | 9. Close the temporary accounts to retained earnings. 10. Prepare a post-closing trial balance |
| Source documents | Relay essential information about each transaction to the accountant, e.g., sales invoices, bills from suppliers, cash register tapes |
| Transaction analysis | Process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved |
| Journal | A chronological record of all economic events affecting the financial position of a company |
| Special journal | Record of a repetitive type of transaction, e.g., a sales journal |
| General journal | Used to record any type of transaction |
| Journal entry | Captures the effect of a transaction on financial position in debit/credit form |
| Posting | Transferring debits and credits recorded in individual journal entries to the specific accounts affected |
| Unadjusted trial balance | A list of the general ledger accounts and their balances after recording all transactions during the period but before any adjusting entries |
| Adjusting entries | Internal transactions recorded at the end of any period when financial statements are prepared |
| Adjusted trial balance | Trial balance after adjusting entries have been recorded |
| Financial statements | Primary means of communicating financial information to external parties |
| What are some examples of financial statements | - the income statement and statement of comprehensive income - the balance sheet - the statement of cash flows, and - the statement of shareholders’ equity |
| Closing entries | Transfer the balances of temporary accounts to the retained earning account and reduce the balance of temporary accounts to zero |
| Post-closing trial balance | List of all permanent accounts and their balances after closing entries have been recorded |
| Unadjusted trial balance | A list of the general ledger accounts and their balance after recording all transactions during the period but before any adjusting entries |
| Adjusting entries | Internal transactions recorded at the end of any period when financial statements are prepared |
| Prepayments | The cash flow precedes either expense or revenue recognition |
| Accruals | When the cash flow come after either expense or revenue recognition |
| Estimates | Predictions of future events |
| Prepaid expenses | Costs of assets acquired in one period and expensed in a future period |
| Deferred revenues | Cash received from a customer for goods or services to be provided in a future period |
| Accrued liabilities | Expenses already incurred but not yet paid (accrued expenses) |
| Accrued receivables | Recognition of revenue for goods or services transferred to customer before cash is received |
| Estimates | Predictions of future events |
| Adjusted trial balance | Trial balance after adjusting entries have been recorded |
| Income statement | Statement of operations or statement of earnings that is used to summarize the profit-generating activities that occurred during a particular reporting period |
| Other comprehensive income (OCI) or loss | Changes in shareholders’ equity other than transactions with owners and other than items that affect net income |
| Comprehensive income | Change in shareholders’ equity for the period from nonowner sources; equal to net income plus other comprehensive income. Traditional net income plus other nonowner changes in equity |
| Balance sheet | A financial statement that presents an organized list of assets, liabilities, and equity at a particular point in time |
| Current assets | Includes assets that are cash, will be converted into cash, or will be used up within one year from the balance sheet date (or operating cycle, if longer) |
| Current liabilities | Expected to require the use of current assets for payment, and usually are payable within one year from the balance sheet date (or operating cycle, if longer) |
| Statement of cash flows (SCF) | Statement summarizing the transactions that caused cash to change during the period |
| Operating activities | Inflows and outflows of cash related to transactions entering into the determination of net income |
| Investing activities | Involve the acquisition and sale of long term assets used in the business and nonoperating investment assets |
| Financing activities | Involve cash flows and outflows from transactions with creditors (excluding trade creditors) and owners |
| Statement of shareholders’ equity | Statement disclosing the source of changes in the shareholders’ equity account during the period |
| Closing process | The temporary accounts are reduced to zero balances, and these temporary account balances are closed (transferred) to retained earnings to reflect the changes that have occurred in that accounting during the period |
| Post-closing trial balance | List of all permanent accounts and their balances after closing entries have been recorded |
| T/F: Cash-basis accounting produces a measure called net operating cash flow | True |
| Chapter 3 >>> | The Balance Sheet & Financial Disclosures |
| Balance sheet | a financial statement that presents an organized list of assets, liabilities, and equity at a particular point in time |
| T/F: The balance sheet provides information useful for assessing future cash flows, liquidity, and long-term solvency | True |
| Liquidity | the ability of a company to convert its assets to cash to pay its current liabilities |
| Long-term solvency | an assessment of whether a company will be able to pay all its liabilities, which includes long-term liabilities |
| T/F: Liquidity provides information about financial flexibility - the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs. | False. Solvency.. |
| Book value | assets minus liabilities as shown in the balance sheet |
| limitations to balance sheet | - the book value will not directly measure the company's market value - balance sheets are heavily reliant on estimates and judgments rather than determinable amounts |
| assets | economic resources of the company |
| liabilities | obligations of a company |
| equity/net assets/shareholders' equity (corporation) | equals total assets minus total liabilities |
| accounting equation is... | assets = liabilities + shareholders' equity |
| current assets | reasonably expected to be converted to cash or consumed within one year from the balance sheet date |
| operating cycle | period-of-time necessary to convert cash to raw materials, raw materials to finished goods, the finished product to receivables, and then finally receivables back to cash |
| cash equivalents | short-term investments that have a maturity date no longer than three months from the date of purchase |
| T/F: cash equivalents are highly liquid and include commercial paper, money market funds, and U.S. treasury bills | True |
| short-term investments | investments not classified as cash equivalents that the company has the ability and intent to sell within one year (or operating cycle if longer) |
| accounts receivable/trade receivables | amounts to be received from the sale of goods or services on account |
| T/F: accounts receivables are usually due in 60-90 days depending on the terms | False. It's usually 30-60 days |
| inventory | goods awaiting sale (finished goods), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials). goods acquired, manufactured, or in the process of being manufactured for sale |
| prepaid expenses | arises when a company incurs a cost of acquiring an asset in one period that wont be expensed until a future period |
| long-term assets include... | investments, PPE, intangible assets, other long-term assets |
| investments | assets not used directly in operations |
| property, plant, equipment | tangible, long-lived assets used in the operations of the business, such as land, buildings, equipment, machinery, furniture, and vehicles, as well as natural resources, such as mineral mines, timber tracts and oil wells. |
| intangible assets | operational assets that lack physical substance and often involve an exclusive right to a compnay to provide a product or service; example includes patents, copyrights, franchises, and goodwill |
| other long-term assets | long-term assets that do not fit clearly in investments, PPE, or intangible assets |
| two common types of long-term assets | 1. operating leases 2. long-term prepaid expenses |
| current liabilities | are expected to be satisfied within one year from the balance sheet date (or operating cycle, if longer) |
| accounts payable | obligations to suppliers of merchandise or of services purchased on account, with payment usually due within 30-60 days |
| notes payable | written promises to pay cash at some future date (i.o.us) unlike accounts payable, notes usually require the payment of explicit interest in addition to the original obligation amount |
| deferred revenues | represent cash received from a customer for goods or services to be provided in a future period. also known as unearned revenues (ex: gift cards) |
| accrued liabilities | represent obligations created when expenses have been incurred, but amounts owed will not be paid until a subsequent reporting period (ex: salaries) |
| current maturities of long-term debt | the portion of long-term notes, loans mortgages, and bonds payable that is payable within the next year (or operating cycle if longer), reported as a current liability |
| long-term liabilities | obligations that are due to be settled or have a contractual right by the borrowing company to be settled in more than one year (or operating cycle, if longer) after the balance sheet date |
| long-term liabilities examples include... | long-term notes, bonds, pension obligations, lease obligations |
| Shareholders' equity | net assets/book value of a company... arises primarily from paid in capital and retained earnings |
| paid in capital | invested capital consisting primarily of amounts invested by shareholders when they pruchase shares of stock from the corporation |
| retained earnings | amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends |
| T/F: a third component of stockholders' equity is accumulated other comprehensive income (AOCI) | True |
| start on page 8 of book notes... |
Created by:
jalicoolrip94
Popular Accounting sets