What do investors and creditors use to assess risk and return?
Investors and creditors use information to assess risk and return.
What is the primary focus of financial accounting?
The primary focus of financial accounting is on the information needs of investors and creditors.
What do financial statmements convey?
Financial statements convey financial information to external users.
A type of accounting that is primarily concerned with producing information for external users.
A type of accounting that deals with the concepts and methods used to provide information to an organization's internal users, that is, its managers.
Most frequently provided financial statements:
1. Balance Sheet or Statement of Financial Position
2. Income Statement or Statement of Operations
3. Statement of Cash Flows
4. Statement of Shareholders' Equity
It is a form of business that aquires capital from investors in exchange for owership interest and from creditors by borrowing..
Secondary Market Transaction
Provides for the transfer of stocks and bonds among individuals and institutions.
Primary Market Transaction
Provides for the transfer of capital from investors to the corporation. Money is new and opportunites for stocks and bonds come directly from the company.
Why do people invest or loan?
Investors and creditors both are interested in earning a fair return on the resources provided.
Rate of Return
is the percentage of increase or decrease in the value of your investments from earned interest.
What are key variables in the investment decision?
The expected rate of return and uncertainty, or risk, of that return are key variables in the investment decision.
When will a company be able to provide a return to investors and creditors?
A company will be able to provide a return to investors and creditors only if it can generate a profit from selling its products or services.
What is the objective of financial accounting?
The objective of financial accounting is to provide investors and creditors with useful information for decision making.
method of accounting where revenue and expenses recognized at the time they are incurred or earned (whether or not cash chages hands)
Cash Basis Accounting
Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.
Net Operating Cash Flow
the difference between cash receipts and cash disbursements from providing goods and services. It may not be indicative of the company's long-run cash-generating ability.
What may not be an accurate predictor of future operating cash flows (over short periods of time)?
Operating Cash Flow
Net income is considered a better...
indicator of future cash flows than is current net operating cash flow.
When was the SEC created?
The SEC was created by Congress in 1934 with the Securities and Exchange Act.
Who sets accounting standards?
The SEC has the authority to set accounting standards for companies, but has delegated the task to the private sector.
What does the Emerging Issues Task Force (EITF) do?
The Emerging Issues Task Force identifies financial reporting issues and attempts to resolve them without involving the FASB.
What else has FASB done besides issuing specific accounting standards?
The FASB has formulated a conceptual framework to provide an underlying theoretical and conceptual structure for accounting standards.
How do FASB, SEC, and GAP relate within the U.S. ?
The FASB Accounting Standards Codification is now the only source of authoritative U.S. GAAP. Exceptions are rules and interpretive releases of the SEC, which remain as sources of authoritative GAAP.
What mus the FASB consider if it introduces a new standard?
The FASB must consider potential economic conseuences of a change in an accounting standard or the introduction of a new standard.
What else can prevail in standard setting?
Public pressure sometimes prevails over conceptual merit in the standard-setting arena.
What does FASB doe before issuing an accounting standards update?
The FASB undertakes a series of information-gathering steps before issuing an accounting standards update.
The International Accounting Standards Board (IASB) is...
dedicated to developing a single set of global accounting standards.
The commitment to narrowing differences between U.S. GAAP and international standards has...
influenced many FASB standards.
A principles-based, or objectives-oriented, approach to standard setting stresses...
professional judgment, as opposed to following a list of rules.
The conceptual framework does not prescribe GAAP. It ...
provides an underlying foundation for accounting standards.
FASB: A common goal of the Boards- a goal shared by their constituents-
is for their standards to be clearly based on consistent pinciples. To be consistent, principles must be rooted in fundamental concepts rather than a collection of conventions.
8 Phases of the Joint Conceptual Framework
A. Objective and Qualitative Characteristics
B. Elements and Recognition
D. Reporting Entity
E. Presentation and Disclosure
F. Framework for a GAAP Hierarchy
G. Applicability to the Not-For-Profit Sector
H. Remaining Issues
The primary objective of financial reporting is....
to provide useful information to capital providers.
To be useful, information...
-must make a difference in the decision process.
-should possess the qualities of relevance and faithful representation.
Faithful representation means...
agreement between a measure and a real-world phenomenon that the measure is suppose to represent.
Accounting information should be...
comparable across different companies and over different time periods.
The costs of providing financial information include...
any possible adverse economic consequences of accounting standards.
Information is cost effective if...
the perceived benefit of increased decision usefulness exceeds the anticipated costs of providing that infomation.
a justification for some accounting practices, not a desired qualitative characteristic of financial information.
10 Elements of Financial Statements
3. Equity (or net assets)
4. Investments by owners
5. Distributions to owners
6. Comprehensive Income
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entitites in the future as a result of ast 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
Investments by owners
Increses in equity of a particular business enterprise resulting frm transfers to it from other entities of something of value to obtain or increase ownership interests in it
Distribution to owners
Decreases in equity of a particular enterprise resulting from transfers to owners
The change in equity of a business enterprise during a period from transactoins and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners
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
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 central operations
Represent decreases in equity arising from peripheral or incidental transactions of an entity
4 Requirements for recognition
1. Definition- The item meets the definitio of an element of financial statements.
2. Measurability- The item has a relevant attribute measurable with sufficient reliability.
3. Relevance- The information about it is capable of making a differene in user decisions.
4. Reliability- The information is represntationally faithful, verifiable, and neutral.
The economic entity assumption...
presumes that economic events can be identifieid specifically with an economic entity.
The periodicity assumption allows...
the life of a company to be divided into aritificial time periods to provide timely information.
The monetary unit assumption states...
that financial statement elements should be measured in terms of the United States dollar.
The historical cost principle states that...
asset and liability measurements should be based on the amount given or received in the exchange transaction.
Historical Cost measurement provides...
relevant cash flow information and also is highly verifiable.
Revenue should be recognized...
when the earnings process is virtually coplete and colleciton is reasonable assured.
Managerial Accounting (def)
deals with the concepts and methods used to provide information to an organization's internal users (i.e., its managers)
the dominant form of business organiation that acquries captial from investors in exchange for ownership interest and from creditors by borrowing.
Secondary Market Transactions (def)
provide for the transfer of stocks and bonds among individuals and institutions.
Cash Basis Accounting (def)
difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers.
Accrual Accounting (def)
measurement of the entity's accomplishmets and resource sacrifices during the period, regardless of when cash is received or paid.
Generally Accepted Accounting Principles (def)
set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.
Securities and Exchange Commission (SEC) (def)
responsible for setting accounting and reporting standards for companies whose securities are publicly traded.
Committee on Accounting Procedure (CAP) (def)
the first private sector body that was delegated the task of setting accounting standards.
American Institute of Accountants (AIA) (def)
national organization of professional public accountants.
American Institute of Certified Public Accountants (AICPA) (def)
national organization of professional public accountants.
Accounting Principles Board (APB) (def)
the second private sector body delegated the task of setting accounting standards.
Financial Accounting Standards Board (FASB) (def)
the current private sector body that has been delegated the task of setting accounting standards.
Financial Acccounting Foundation (FAF) (def)
responsible for selecting the members of the FASB and its Advisory Council, ensuring adequate funding of FASB activities, and exercising general oversight of the FASB's activities.
Emerging Issues Task Force (EITF) (def)
responsible for providing more timely responses to emerging financial reporting issues.
Government Accounting Standards Board (GASB) (def)
responsible for developig accounting standards for governmental units such as states and cities.
International Accounting Standards Committee (IASC) (def)
umbrella organization formed to develop global accounting standards.
International Accounting Standards Board (IASB) (def)
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.
International Financial Reporting Standards (IFRSs) (def)
developed by the IASB and used by more than 100 countries.
independent intermediaries who help ensure that management has appropriately applied GAAP in preparing the company's financial statements.
Certified Public Accountants (CPAs) (def)
licensed individuals who can represent that the financial statements have been audited in accordance with generally accepted accounting standards.
Objectives- Oriented / Principles- Based Accounting (def)
approach to standard setting stresses professional judgment, as opposed to following a list of rules.
Rules- Based Accounting Standards (def)
a list of rules for choosing the appropriate accounting treatment for a transaction.
Institute of Management Accountants (IMA) (def)
primary national organization of accountants working in industry and government.
Institute of Internal Auditors (def)
national organization of accountants providing internal auditing services for their own organizaitons.
Conceptual Framework (def)
deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting standards.
one of the primary decision-specific qualities that make accounting information useful; made up of predictive value and/or feedback value.
Faithful Representation (def)
exists when there is agreement between a measure or description and the phenomenon it purports to represent.
Predictive Value/ Confirmatory Value (def)
confirmation of investor expetations about future cash-generating ability.
the ability to help users see similarities and differences among events and conditions.
information that is available to users early enough to allow its use in the decision process.
users must understand the information within the contet of the decision being made.
Cost Effectiveness (def)
the perceived benefit of incresed decision usefulness exceeds the anticipated cost of providing that information.
if a more costly way of providing information is not expected to have a material effect on decisions made by those using the information, the less costly method may be acceptable.
practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.
Going Concern Assumption (def)
in the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.
Periodicity Assumption (def)
allows the life of a company to be divided into artificial time periods to provide timely information.
Realization Principle (def)
requires that the earnings process is judged to be complete or virtually complete, and there is reasonable certainty as to the collectibility of the asset to be received (usually cash) before revenue can be recognized.
the goods or services sold to the buyer are delivered (the title is transferred).
Full-Disclosure Principle (def)
the financial reports should include any information that could affect the decisions made by external users.
Disclosure Notes (def)
additional insights about company operations, accounting principles, contractual agreements, and pending litigation.
Supplemental Financial Statements (def)
reports containing more detailed information than is shown in the primary financial statements.
inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major, or central, operations.
outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing good, rendering services, or other activities that constitute the entity's ongoing major, or central, operations.
The process of providing financial information to external decision makers is referred to as:
GAAP includes which of the following pronouncements:
A) Statements of Financial Accounting Standards.
B) Accounting Research Bulletins.
C) Accounting Principles Board Opinions.
*** D) All of the above.
The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by
Monitoring the development of GAAP within the accounting profession and using its stature to influence that development
The documents that set forth fundamental concepts on which financial accounting and reporting standards will be based are
Statements of Financial Accounting Concepts
The two primary decision-specific qualities that make accounting information useful are
Relevance and faithful representation
Relevance requires that information possess predictive and/or feedback value and be
The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is:
Which of the following is considered a practical constraint on the qualitative characteristics?
The underlying assumption that assumes that the life of a company can be divided into artificial time periods is:
In general, revenue is recognized when the earnings process is virtually complete and:
Collection of the sales price is reasonably assured.
The primary objective of the matching principle is to:
Recognize expenses in the same period as the related revenue.
The journal entry to record the borrowing of cash and the signing of a note payable involves:
A debit to cash and a credit to note payable.
The Esquire Clothing Company borrowed a sum of cash on October 1, 2011, and signed a note payable. The annual interest rate was 12% and the company's year 2011 income statement reported interest expense of $1,260 related to this note. What was the amount borrowed?
Which of the following adjusting entries creates a decrease in assets?
Recording depreciation expense.
Which of the following adjusting entries creates an increase in liabilities?
Accruing unrecorded interest expense.
If the required adjusting entry for depreciation expense is omitted:
Assets will be overstated and income overstated.
The correct amount of prepaid insurance shown on a company's December 31, 2011, balance sheet was $900. On July 1, 2012, the company paid an additional insurance premium of $600. In the December 31, 2012, balance sheet, the amount of prepaid insurance was correctly shown as $500. The amount of insurance expense that should appear in the company's 2012 income statement is:
The Wazoo Times Newspaper Company showed an $11,200 liability in its 2011 balance sheet for subscription revenue received in advance. During 2012, $62,000 was received from customers for subscriptions and the 2012 income statement reported subscription revenue of $63,700. What is the liability amount for unearned subscription revenue that will appear in the 2012 balance sheet?
In a classified balance sheet, allowance for uncollectible accounts would be classified among:
In a statement of cash flows, cash received from the issuance of common stock would be classified as a(n):
If revenues exceed expenses for the accounting period, the income summary account:
Will have a credit balance prior to closing.
Which of the following is not a characteristic of the balance sheet?
The balance sheet reports the change in financial position.
The basis used to classify assets as current or noncurrent is:
Usually one year, because the operating cycle typically is less than one year.
Included in the category of current liabilities would be:
Obligations expected to require the creation of other current liabilities.
Long-lived assets used in the operations of the business refer to property, plant, and equipment, and:
Balance sheets prepared using International Financial Reporting Standards often:
Report noncurrent assets and liabilities before current assets and liabilities.
Information not generally disclosed in the summary of significant accounting policies is:
A related party transaction.
Which ratio most directly indicates the extent of the company's reliance on financial leverage?
Debt to equity
The acid-test ratio excludes which of the following elements from the numerator?
A) Short-term investments
C) Cash equivalents
** D) Inventories
For a firm with a current ratio of 2.0, which of the following transactions would most likely cause the ratio to decrease?
For a firm with a current ratio of 2.0, which of the following transactions would most likely cause the ratio to decrease?
The purchase of inventory on account
Which of the following captions would more likely be found in a multiple-step income statement?
A) Total expenses
B) Total revenues and gains
** C) Gross profit
D) None of the above
An item typically included in the income from continuing operations section of the income statement is:
The application of intraperiod income taxes requires that income taxes be apportioned to each of the following items except:
For a manufacturing company, each of the following items would be considered nonoperating income for income statement purposes except:
Cost of goods sold.
On May 31, 2011, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. The assets of the component were sold on October 13, 2011, for $1,120,000. The component generated operating income from January 1, 2011, through disposal of $300,000. In its income statement for the year ended December 31, 2011, the company reported before-tax income from operations of a discontinued component of $620,000. What was the book value of the assets of the cosmetics component?
The Compton Press Company reported income before taxes of $250,000. This amount included a $50,000 extraordinary loss. The amount reported as income before extraordinary items, assuming a tax rate of 40%, is:
Which of the following material items would not be reported as an extraordinary item?
A loss caused by obsolescence of inventory.
The Stibbe Construction Company switched from the completed contract method to the percentage-of-completion method of accounting for its long-term construction contracts. This is an example of:
A change in accounting principle.
In 2011, the Perasso Meat Packing Company revised the useful life of its equipment from eight years to six years. Depreciation recorded in prior years on existing equipment was $126,000 applying the eight-year useful life. Depreciation in prior years would have been $186,000 if the six-year useful life had been used. Assuming an income tax rate of 40%, Perasso's increase in 2011's beginning retained earnings would be:
Earnings per share should be reported for each of the following income statement captions except:
International Financial Reporting Standards allow companies to report the components of other comprehensive income in each of the following ways except:
In the statement of shareholders' equity.
Selected information from the 2011 accounting records of Dunn's Auto Dealers is as follows:
Cost of furniture purchased for cash
Proceeds from bank loan
Repayment of bank loan (includes interest of $4,000)
Proceeds from sale of equipment
Cash collected from customers
Purchase of stock of another corporation as an investment
Common stock issued for cash
In its 2011 statement of cash flows, Dunn's should report net cash inflows from financing activities of:
Using the information in question 12, Dunn's should report net cash outflows from investing activities of:
Which of the following items would not be included as a cash flow from operating activities in a statement of cash flows?
Purchase of equipment
In a statement of cash flows, International Financial Reporting Standards allow companies to report interest paid as:
Either an operating or a financing cash flow
events that directly affect the financial position of the company but don't involve an exchange transaction with another entity.
the process used to capture the effect of economic events; Assets = Liabilities + Owner's Equity.
invested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation.
amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends.
account with space at the top for the account title and two sides for recording increases and decreases.
represent changes in the retained earnings component of shareholders' equity for a corporation caused by revenue, expense, gain, and loss transactions.
relay essential information about each transaction to the accountant, e.g., sales invoices, bills from suppliers, cash register tapes.
process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved.
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 at a particular date.
represents an asset recorded when an expense is paid in advance, creating benefits beyond the current period.
internal transactions recorded at the end of any period when financial statements are prepared.
cash received from a customer in one period for goods or services that are to be provided in a future period.
statement of operations or statement of earnings is used to summarize the profit-generating activities that occurred during a particular reporting period.
a position statement that presents an organized list of assets, liabilities, and equity at a particular point in time.
includes assets that are cash, will be converted into cash, or will be used up within one year or the operating cycle, whichever is longer.
Statement of cash flows
change statement summarizing the transactions that caused cash to change during the period.
inflows and outflows of cash related to transactions entering into the determination of net income.
involve the acquisition and sale of long-term assets used in the business and non-operating investment assets.
Statement of shareholders' equity
statement disclosing the source of changes in the shareholders' equity accounts.
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 account during the period.
account that is a bookkeeping convenience used in the closing process that provides a check that all temporary accounts have been properly closed.
used to organize the accounting information needed to prepare adjusting and closing entries and the financial statements.
optional entries that remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period.
record of a group of subsidiary accounts associated with a particular general ledger control account.