Accounting chapters 1 + 10

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What is accounting
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the process of identifying, measuring, and communicating economic information about an entity for decisions and informed judgments
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what two acts helped develop accounting principles?
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The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the Securities and Exchange Commission (SEC) the authority to establish accounting principles for companies whose securities had to be registered with the SEC.
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authoritative standard-setting body within the accounting profession.
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FASB
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set of standards and rules that are recognized as a general guide for financial reporting.
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GAAP
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what act created a five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics standards for public companies.
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The Sarbanes-Oxley Act of 2002
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seeks methods of providing comparability between financial statements prepared according to the differing accounting standards of its member nations.
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International Accounting Standards Board (IASB)
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What does IASB make
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International Financial Reporting Standards (IFRS) that have been adopted by more than 100 countries.
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Financial Accounting
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generally refers to the process that results in the preparation and reporting of financial statements for an entity. externally oriented and concerned with the historical results of an entity’s performance
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Managerial Accounting
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is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process.
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cost accounting
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Cost accounting is a subset of managerial accounting that relates to the determination and accumulation of product, process, or service costs.
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Who provides auditing services and issue an independent auditor’s report
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Public accounting firms and individual Certified Public Accountants (CPAs)
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what is in an independent auditor’s report?
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An independent auditor’s report usually contains four brief paragraphs and states whether the financial statements are prepared in conformity with generally accepted accounting principles. An auditor’s report can be unqualified (a “clean opinion) or qualified
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Internal Auditing
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Organizations with many plant locations or activities involving many financial transactions employ professional accountants to do internal auditing. In many cases, the internal auditor performs functions much like those of the external auditor/public accountant, but perhaps on a smaller scale. For example, internal auditors may be responsible for reviewing the financial statements of a single plant or for analyzing the operating efficiency of an entity’s activities. The qualifications of an internal auditor are similar to those of any other professional accountant. In addition to having the CPA and the CMA designation, the internal auditor may have also passed the examination to become a Certified Internal Auditor (CIA).
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Governmental and Non for Profit Accounting
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Governmental units at the municipal, state, and federal levels and not-for-profit entities such as colleges and universities, hospitals, and voluntary health and welfare organizations require the same accounting functions to be performed as do other accounting entities. Religious organizations, labor unions, trade associations, performing arts organizations, political parties, libraries, museums, country clubs, and many other not-for-profit organizations employ accountants with similar educational qualifications as those employed in business and public accounting. Page 9
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Income Tax Accounting
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The growing complexity of federal, state, municipal, and foreign income tax laws has led to a demand for professional accountants who are specialists in various aspects of taxation. Tax practitioners often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or in international tax law issues. These accountants work for corporations, public accounting firms, governmental units, and other entities. Many tax accountants have bachelor’s degrees and are CPAs; some have a master’s degree in accounting or taxation or are attorneys as well.
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The authoritative financial accounting standards-setting body in the United States is presently the:
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Financial Accounting Standards Board (FASB).
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Which of the following is not an example of a decision or informed judgment that a potential investor would make from accounting information? Future profitability based on past profitability. Probability of success of a new product development. A forecast of dividends. Assessment of risk that a company may have more debt than it can repay if the economy enters a recession.
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probability of success of a new product development
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Which classification of accounting is most concerned with the use of economic and financial information to plan and control many of the activities of the entity?
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managerial accounting
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An unqualified auditors’ opinion about an entity’s financial statements:
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states that they are presented in conformance with U.S. generally accepted accounting principles.
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unqualified is ___ qualified is ___
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unqualified is good, qualified is bad
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characteristics or limitations of the kind of information that financial reporting by business enterprises can provide
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the information results in approximate, rather than exact, measures. The information largely reflects the financial effects of transactions that have already happened. The information is provided and used at a cost.
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The ethical concept of independence means that an accountant employed
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by an auditing firm cannot own any stock in the company being audited.
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The ethical concept of integrity means that an individual must:
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attempt to be honest and forthright in dealings and communications with others.
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an objective of financial reporting by business enterprises
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Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and changes in those resources and claims to them.
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How does management use accounting information?
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when performing functions of planning, directing, and controlling, management uses accounting to make decisions and informed judgments. Examples: measuring costs and benefits of expanding a product line
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How do investors use accounting information?
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When considering whether or not to invest in the common stock of a company, investors use accounting information to assess the amounts, timing, and uncertainty of future cash returns on their investment
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how do creditors/suppliers use accounting information?
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creditors assess the probability of assess the probability of collection and the risk of non payment
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how do employees use accounting information?
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planning for retirement
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Earnings per Share
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the portion of a company’s profit allocated to each outstanding share of common stock AKA the price of a company’s stock (net income-dividends)/average outstanding shares
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net income
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(revenue-expenses)
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why are notes included as an integral part of the financial statements?
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Because of the complexities related to financial reporting and because of the number of alternative generally accepted accounting principles that can be used
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Explanatory notes
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Summary of significant accounting policies including Depreciation method used, Inventory valuation method used. The cost of employee benefit plans, Earnings per share information, Stock option and stock purchase plans.
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management discussion and analysis
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A corporation is required to include a section called “Management Discussion and Analysis” in its annual report. This section describes the firm’s activities for the year, including comments about its financial condition and results of operations.
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summary of financial data
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Most corporate annual reports contain a 5-year or 10-year summary of key financial data. This information often includes significant ratios and stock market prices of it common stock.
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Independent auditor’s report format: paragraph 1
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Introductory Paragraph – Describes the financial statements audited and states that management is responsible for the financial statements and that the auditor’s task is to express an opinion about the financial statements.
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Independent auditor’s report format: paragraph 2
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Scope Paragraph – Describes the nature and extent of the audit process. The auditor wish to obtain reasonable assurance that the financial statements are free from material misstatements.
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Independent auditor’s report format: paragraph 3
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Opinion Paragraph – Auditors express an opinion on the fairness of the financial presentation. Corporations wish to get an unqualified report (can get qualified, adverse, or disclaimer)
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Independent auditor’s report format: paragraph 4
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Internal Control Opinion Paragraph – Auditors make reference to the Internal Control Effectiveness Audit and opinion that accompanies the Auditor’s Report as required by the Public Company Accounting Oversight Board.
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Independent auditor’s report opinions: Unqualified
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Unqualified – the best, financial statements are in compliance with GAAP
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Independent auditor’s report opinions: Qualified
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Qualified – for the most part the statements follow GAAP, but there is a slight reservation in one or more areas
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Independent auditor’s report opinions:Disclaimer
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Disclaimer – auditor is unable to confirm compliance or noncomplance with GAAP
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Independent auditor’s report opinions: Adverse
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Adverse – financial statements do not follow GAAP and are misleading to the average user of the statements
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Corporate Governance
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concerned with business ethics and social responsibility, the responsibilities of the board of directors, equitable treatment of stakeholders, disclosures and transparency.
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Sarbanes-Oxley Act (SOX)
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In response to the public outcry, SOX was passed in 2002 in order to improve corporate governance. Public Company Accounting Oversight Board (PCAOB) Restricted consulting services Internal control report by companies/auditors Increased penalties
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Dodd-Frank Act
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in response to the financial crisis of 2007-2008, Congress passed the Wall Street Reform and Consumer Protection Act of 2010 (referred to as the Dodd-Frank Act ). Say on pay CEO/Chair of the Board of Directors separation
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The most powerful corporate governance legislation to date has been:
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Sarbanes-Oxley Act (SOX) of 2002
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MC Management’s statement of responsibility:
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affirms that management is responsible for assuring adherence to internal control policies and procedures.
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A firm’s independent auditors have the responsibility to
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assess the firm’s accounting policies
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the explanatory notes of the financial statements
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explain the significant accounting policies of the company.
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Significant accounting policies are described in the explanatory notes to the financial statements because:
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the reader must be aware of which of the alternative generally accepted accounting practices have been used.

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