Intermediate ACCT test 1 (Chp.1-3)
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nicholasroen on September 10, 2011
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59 terms
Terms | Definitions |
|---|---|
 Financial Accounting | the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties |
| Financial Statements | 1: Balance Sheet. 2: Income Statement. 3: Statement of Cash Flows. 4: Statement of Stockholders Equity (or owners) |
| Objective of Financial Reporting | To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity. |
| General Purpose Financial Statements | provide financial reporting information to a wide variety of users. |
| Entity Perspective | Companies are viewed as separate and distinct from their owners. |
| Decision-Usefulness | Financial reports must provide information that is useful for making decisions. Creditors and investors are interested in information on: 1. the company's ability to generate net cash inflows, and 2. management's ability to protect and enhance capital providers' investments. |
| Accrual-basic Accounting | ensures that a company records events that change its financial statements in the periods in which the events occur, rather than only in the periods in which it receives or pays cash. (A company recognizes revenues when the product/service is provided not when it receives cash.) |
| Generally Accepted Accounting Principles (GAAP) | The common set of standards and procedures. |
| Parties involved in standard-setting | Securities and Exchange Commission (SEC). American Institute of Certified Public Accountants (AICPA). Financial Accounting Standards Board (FASB). |
| FASB standards statement | Four of the seven Board members must support a new standard in order for it to become part of GAAP |
| Due Process System of FASB | Agenda, Preliminary Views, public hearing, Exposure Draft, FASB Standard |
| FASB issues three types of pronouncements | 1. Standards, Interpretations, and Staff Positions. 2. Financial Accounting Concepts. 3. Emerging Issues Task Force Statements |
| Emerging Issues Task Force (EITF) | comprised of representatives from CPA firms and financial statement preparers. They reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices. |
| FASB Codification | Provides in one place all the authoritative literature related to a particular topic. The Codification does not create new GAAP. |
| CRS | Online real-time database that provides easy access to the Codification. Financial Reporting Standards Board Codification Research System (CRS) |
| Sarbanes-Oxley Act | Increases the resources for the SEC to combat fraud and curb poor reporting practices. Establishes an oversight board, the Public Accounting Oversight Board (PCAOB). Implements stronger independence rules for auditors (Audit partners must rotate every 5 years, auditors cannot offer certain types of consulting services to their audit clients), CEO's and CFO's must personally certify that financial statements and disclosures are accurate and complete. Codes of ethics for senior financial officers. |
| Expectations Gap | what the public thinks accounting should do and what accountants think they can do |
| Conceptual Framework | Establishes the concepts that underlie financial reporting. A coherent system of concepts that flow from an objective. Concepts provide guidance on, 1. identifying the boundaries of financial reporting, 2. selecting the transactions, other events and circumstances to be represented, 3. how they should be recognized and measured, 4. how they should be summarized and reported |
| Overview of the Conceptual Framework | Go to page 65 of book and study!!! |
| Relevance | The first fundamental quality. To be relevant, accounting information must be capable of making a difference in a decision. Relevant information has: predictive value, confirmatory value, and materiality. |
| Predictive Value | Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future. |
| Confirmatory Value | Relevant information also has confirmatory value. It helps users confirm or correct prior expectations. |
| Materiality | Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information. It must make a difference. General rule of thumb is that anything under 5 percent of net income is considered immaterial. |
| Faithful Representation | the second fundamental quality. Numbers and descriptions match what really existed or happened. Information must be complete, neutral, and free of error. |
| Completeness | all information that is necessary for faithful representation is provided. |
| Neutrality | a company cannot select information to favor one set of interested parties over another. |
| Free of Error | more accurate representation of a financial item. |
| Enhancing qualities of characteristics | Comparability, verifiability, timeliness, and understandability |
| Comparability | information that is measured and reported in a similar manner for different companies is considered comparable. Enables users to identify the real similarities and differences in economic events between companies. Consistency is also a part of comparability, a company must apply the same accounting methods from period to period for similar events |
| Verifiability | When independent measures, using the same methods, obtain similar results. |
| Timeliness | means having information available to decision-makers before it loses its capacity to influence decisions. |
| Understandability | the quality of information that lets reasonably informed users see its significance. Must be classified, characterized, and presented clearly and concisely. Users of financial reports are assumed to have a reasonable knowledge of business and economic activities. |
| Economic Entity Assumption | the economic activity can be identified with a particular unit of accountability. Companies keep its activity separate and distinct from it's owners and any other business unit. |
| Going Concern Assumption | The company will have a long life. |
| Monetary Unit Assumption | money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. |
| Periodicity Assumption | implies that a company can divide its economic activities into artificial time periods. (monthly, quarterly, yearly) |
| Measurement Principles | Most commonly used measurement principles are historical cost and fair value. Historical Cost: It is generally thought to be verifiable. Fair Value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. |
| Revenue Recognition Principle | Revenue recognition generally occurs when 1. when realized or realizable, and 2. when earned. A company realizes revenue when it exchanges a product or service or asset for cash or claims to cash. Revenues are realizable when assets received or held are readily convertible to cash or claims to cash. Revenues are considered earned when the company substantially accomplishes what it must do to be entitled to the benefits or revenues. Recognition at the same of sale provides a uniform and reasonable test. |
| Expense recognition Principle | Companies recognize expenses when the work or the product actually contributes to revenue. Revenues and expense are matched (matching principle). |
| Full Disclosure Principle | Must provide all information that is of sufficient importance to influence the judgement and decisions of an informed user. Users find information from three places: the main body of the financial statements, the notes of the financial statements, and supplementary information. Notes to the financial statements generally explain the items presented in the financial statements. Supplementary information includes details or amounts that present a different perspective from that adopted in the financial statements. |
| Cost Constraint | Companies must consider the costs of providing the information against the benefits that can be derived from using it. Costs should not be higher than benefits. |
| Industry Practices Constraint | The peculiar nature of some industries and business concerns sometimes require departure from the basic theory. |
| Accounting Information System | collects and processes transaction data and then disseminates the financial information to interested parties. |
| Debits and Credits | Mean left and right, respectively. account shows a debit balance if the debit amounts exceed the credits. Credit balance of credit amounts exceed the debits. |
| Accounting Equation | Assets= Liabilities +Stockholders Equity |
| Accounting Cycle | Study Page 94! 1. Enter transactions in appropriate journals. 2. Post from the journals to the ledger(s). 3. Take an unadjusted Trial Balance. 4. Prepare adjusting journal entries and post to ledger(s). 5. Take the adjusted trial balance. 6. Prepare the financial statement from the adjusted trial balance. 7. Prepare closing journal entries and post to ledger(s). 8. Take a post-closing trial balance (optional). 9. Prepare reverse entires (optional). |
| General Ledger | contains all asset, liability, and stockholder equity accounts |
| Journal | "book of original entry." General Journal chronologically lists transactions and other events, expressed in terms of debits and credits to accounts. Each general journal entry consists of four parts: 1. the accounts and amounts to be debited, 2. the accounts and amounts to be credited, 3. a date, and 4. an explanation. There are also special journals (cash receipts, sales, purchases, cash payments.) |
| Posting | The procedure of transferring journal entries to the ledger accounts |
| Trial Balance | lists accounts and their balances at a given time. Usually prepared at the end of an accounting period. A trial balance can prove the mathematical equality of debits and credits after posting. It does not prove that a company recorded all transactions though. |
| Adjusting Entries | Ensure that a company follows the revenue and expense recognition principles. Adjusting entries are required every time a company prepares financial statements. Adjusting entires are either called deferrals or accruals. Deferrals are prepaid expenses or unearned revenue. The adjusting amount represents the expense incurred or revenue earned in the current accounting period. Accruals record unrecognized revenues earned, and expenses incurred in the current accounting periods. |
| Contra Asset Account | offsets an asset account on the balance sheet. |
| Book Value | of any depreciable asset is the difference between its cost and its related accumulated depreciation. |
| Accrued Revenues | revenues earned but not yet received in cash at the statement date are accrued revenues. An adjusting entry for accrued revenues results in a debit to an asset account (increase) and a credit to a revenue account (decrease). |
| Accrued Expenses | expenses incurred but not yet paid or recorded at the statement date. (Interest, rent, taxes and salaries). Interest Accumulation Calculation: face value of the note X annual interest rate X time outstanding in terms of a year. |
| Adjusted Trial Balance | Shows the balance of all accounts at the end of the accounting period. Financial Statements are prepared directly from the adjusted trial balance. |
| Closing Process | reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions. Nominal accounts include: revenues, expenses, and dividends. |
| Post-Closing Trial Balance | Consists only of asset, liability, and owners' equity accounts. |
| Reversing Entries | reversing some of the adjusting entries before recording the regular transactions of the next period. The entry is the exact opposite of the related adjusting entry. It is an optional step in the accounting cycle. Look at appendix 3B. |
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