Intermediate Financial Accounting 1-3 – Flashcards
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What is Profitability?
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Measured on the income statement. (Revenues exceed Expenses)
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What is Liquidity?
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If a business can pay its debts when they become due. (includes cash/equivalents)
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What are the 3 objectives of financial reporting?
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Provide information that is 1.Useful in making rational investment, credit, and similar decisions. 2. Helps users assess the amounts, timing, and uncertainty of prospective cash flows. 3. Clearly portrays a company's resources (assets), claims against them (liabilities) and changes in them (equity)
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What is a business transaction?
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An economic event that directly affects the financial position of a business entity.
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What does SEC stand for?
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Securities Exchange Commission
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Notes about SEC.
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-Can establish GAAP but chooses not to. -Can issue deficiency letters or stop orders which prevent registrants from issuing or trading securities. -Can work to file criminal charges for violations of certain laws -Issues comment letters.
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What does AICPA stand for?
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American Institute of Certified Public accountants.
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Notes about AICPA
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-Contributed to past development of GAAP. -Issued ARBs -Created the APB. -All it does now is write and grade the CPA exams.
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What does APB stand for?
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Accounting Principles Board
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Notes on APB
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-Created to be more responsive to needs and steer away from problem by problem approach. -Issued APB Opinions.
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What does FASB stand for?
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Financial Accounting Standards Board
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Differences in FASB
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-Smaller membership (18 to 5) -Full time membership -Greater autonomy (separate from AICPA) -Increased independence (no longer practicing CPAs) -Broader representation (CPA not required)
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Steps in Due process
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1. Items placed on Agenda. 2. Research conducted with preliminary views issued. 3. Public hearing takes place. 4. Board takes comments from public and issues exposure draft. 5. Board evaluates responses toexposure draft and makes changes as necessary. 6. Final standard issued
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What establishes GAAP?
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-Standards issued by FASB. -Interpretations issued by FASB that modifies or extends existing standards. -APB Opinions and interpretations unless superseded. -FASB Staff Opinions
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Financial Accounting Concepts.
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Sets forth fundamental concepts as guiding principles to be used when setting future standards but does not establish GAAP. (although goes through same due process)
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Emerging Issue Task Force Statements
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Members come to consensus on how to account for new and unusual financial transactions that may potentially cause differing reporting practices. (subset of FASB)
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FAF & FASAC
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-Financial Accounting Foundation. (Oversees FASB) -Financial Accounting Standards Advisory Council (Helps select task force members and advises FASB)
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IASB
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International Accounting Standards Board
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FASB Codification
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-Project that arranged all the rules into a systematic code. -Explains what GAAP is and eliminated non essential information or redundant information in the accounting standards. *Integrated and synthesized existing GAAP not create it*
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Financial Statement
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-Income Statement -Statement of Owner's Equity (Retained Earnings) -Balance Sheet -Statement of Cash flows (prepared in that order)
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Income Statement
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Summarizes the revenues earned and expenses incurred by a business over a period of time (month quarter year) Revenues - Expenses = Net Income
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Income Statement Setup
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Sales - Discounts/allowances - Returns (Net Sales) - COGS =Gross Profit - SG&A =Income before other gains and losses + Gains - Losses = Income from continuing Operations - Tax = Net Income (This goes on to RE)
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Statement of Owner's Equity (Retained Earnings)
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Illustrates changes in owner's equity (retained earnings) over a period of time
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Retained Earnings Setup
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Beginning RE + Net Income (from Income statement) - Dividends = Ending Balance (This goes under Owners equity on Balance sheet)
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Balance Sheet
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Communicates the financial position of a business on a certain date (month/end of year) Assets = Liabilities + Owner's Equity
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Balance Sheet Setup
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Assets = Liabilities + Owner's Equity (from Retained earnings)
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Statement of Cash flows
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Illustrates the inflows and outflows of cash from a business over a period of time (includes operating investing and financial activities
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Management vs CPA responsibility
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Management is responsible for information presented in financial statements. CPA is responsible to providing information as to whether the information is fairly presented.
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Sarbanes Oxley
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-Established PCAOB (establishing auditing standards) -Independence rules (audit partners must rotate every 5 years and cannot offer consulting services anymore) -Audit committees must be independent from business and have at least one member with a financial expertise -Section 404 (Required separate certification of effectiveness of a company's internal controls)
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What is the primary objective of financial accounting?
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To provide useful, economic information about a business to help internal and external users make informed financial decisions.
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What is relevant information?
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Information provided that would impact a decision. (Mel's is on the corner of Busch Gardens)
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Predictive Value
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Helps users make future predictions based on past results.
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Feedback (confirmatory) value
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Confirms or corrects prior expectations
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What is reliable information?
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Information that can b independently verified to be accurate. (Mel bought the hot dog stand 60 years ago for $10,000.)
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Faithful Representation
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Numbers represent what truly happened.
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Neutrality
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Information selected cannot favor one party over the other.
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Comparable
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Similar accounting methods have been applied across different companies.
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Consistent
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Within a company, similar accounting methods have been applied.
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Assets
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Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
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Liabilities
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Future economic sacrifices arising from present obligations.
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Equity
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Residual interest (assets - liabilities)
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Investment by Owners
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Increase in assets as a transfer from other entities to obtain an ownership interest.
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Distributions to Owners
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Decreases in net assets resulting from transfer of assets, rendering services, or incurring liabilities by an enterprise to owners.
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Comprehensive Income
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Changes in equity during a period except those resulting from investment or distributions to owners.
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Revenues
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Earnings
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Expenses
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Outflows or other using up of assets or incurrences of liabilities during a period from carrying on normal operations of business enterprise.
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Gains
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Increases in equity from peripheral or incidental transactions.
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Losses
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Decreases in equity from peripheral or incidental transactions.
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Measurement
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Historical cost vs. Fair value
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Historical Cost
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The amount paid on the transaction date is used to initially record the elements.
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Fair Value
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Initial purchase, Historical cost = fair value. Subsequent periods is based on a market measure.
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Fair value hierarchy
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-Level One: Quoted prices on actual market (most reliable) -Level Two: Evaluate based on similar assets or liabilities in active market. -Level Three: Unobservable inputs (least reliable)
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Revenue recognition
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Record revenue only when it is measurable, realized or realizable, and has been earned.
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Matching principle (Expense recognition)
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Records the expenses when the expense is incurred to generate revenues.
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Full disclosure
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Must provide users with information that could impact a decision.
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Unit of measure
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Assumption that measurements are in monetary units. (Dollar)
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Economic entity
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Assumption that the activities of a business are separate and distinct from its owners.
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Periodicity
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Assumption that the financial life of a company can be reported in shorter time periods. (month, quarter, year)
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Going concern
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Assumption that the entity will not be going out of business in the near future. (No liquidation)
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Cost/Benefit Constraint
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Benefits to providing information to the users should outweigh the costs to provide it.
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Materiality Constraint
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Determination that relatively small amounts if omitted or recorded incorrectly would not affect or impact a decision.
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Industry Practices
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Acceptable industry specific practices that deviate from normal GAAP principles.
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Conservatism
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When alternative accounting valuations can be used, the amount that is least likely to overstate assets and/or revenues or to understate liabilities and/or expenses should be used.
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What's found on Income statement accounts?
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Revenues and expenses
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Steps in the Accounting Cycle
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1. Business Transaction 2. Record Journal entry (general journal) 3. Post to general ledger 4. Trial Balance 5. Adjusting entries 6. Adjusted trial balance 7. Prepare financial statements 8.Closing entries 9. Post Closing trial balance
