Upgrade to remove ads
ACCT 3301 - Exam 1 Review
Terms in this set (127)
What are some different types of prepaid assets accounts on the balance sheet?
- prepaid insurance
- prepaid rent
What is the purpose of financial reporting?
process of providing financial information to external and internal users
When is revenue recognized?
- earnings process is judged to be complete or virtually complete
- reasonable certainty as to the collectability of the asset to be received (usually cash)
What is the expense recognition principle?
- based on exact cause-and-effect relationship
- by associating an expense with the revenues recognized in a specific time period
- by a systematic and rational allocation to specific time periods
- in the period incurred, without regard to related revenue
How do you calculate the rate of return?
dividends + share price appreciation / initial investment
What is the accrual basis of accounting?
measurement of revenues and expenses, REGARDLESS OF WHEN CASH IS RECEIVED/PAID
What is the cash basis?
measurement of cash receipts and cash payments from transactions related to providing goods and services
accrual basis =
- best at predicting future cash flows
- net income/loss (difference between revenues and expenses)
cash basis =
produces net operating cash flow
- difference between cash receipts and cash payments
What is the accounting equation?
assets = liabilities + equity
+ paid in capital and
+ retained earnings
retained earnings =
What is ethics?
- deals with the ability to distinguish right from wrong
- refers to a code or moral system that provides criteria for evaluating right and wrong
What are permanent accounts?
found on balance sheet (asset, liabilities, shareholder equity)
What are temporary accounts?
- changes in the retained earnings component of shareholders' equity for a corporation caused by revenue, expense., gain, loss, and dividend transactions (these happen on income statement)
- closed at the end of he fiscal cycle
What is financial accounting?
chiefly concerned with providing information to external users
What are some examples of external users?
- gov. agencies
- CPA firm (that prepares your tax returns
- someone conducting an audit
What's included in financial statements?
- balance sheet (statement of financial position)
- income statement (statement of operations and comprehensive income)
- statement of cashflows
- statement of shareholders' equity
Where do shareholders receive money from?
- sale of ownership through shares of stock
- periodic dividends
What characteristics help investors/creditors evaluate future cash receipts and disbursements?
What is GAAP?
Generally Accepted Accounting Principles
- broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes
What is the conceptual framework?
provides an underlying foundation for U.S. accounting standards
- establishes objectives and fundamental concepts on which to base standards
- means of communicating/summarizing events to interested parties
What helps enhance the decision usefulness of information?
- faithful representation
- cost effectiveness
What is relevance?
information has predictive and/or confirmatory value (usually both)
- information about it is capable of making a difference in user decisions
What is faithful representation?
exists when there is agreement between a measure or depiction and the phenomenon it purports to represent
- free from error
faithful representation: complete =
if it includes all the information necessary for faithful representation of the economic phenomenon that it purports to represent
faithful representation: neutral =
if it is free from bias
- it should try not to be intended to achieve particular social outcomes or favor particular companies
faithful representation: free from error =
no errors or omissions in the description of the amount or the process used to report the amount
What is comparability?
helps users see similarities and differences between events and conditions
What is consistency?
refers to the same accounting practices being used over time to permit valid comparisons between reporting periods
What is verifiability?
implies that different knowledgeable and independent measure would reach consensus regarding whether information is a faithful representation of what it is intended to depict
What is timeliness?
indicates that information is available to users early enough to allow them to use it in their decision process
What is understandability?
users can comprehend the information within the context of the decision being made
What is cost effectiveness?
benefits of providing information must outweigh the cost
What are the elements of financial statements?
- equity (net assets)
- investments by owners
- distributions to owners
- comprehensive income
What is included in a comprehensive income?
What is an asset?
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
What is a liability?
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.
What is equity?
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.
What is an investment by owner?
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.
What is a distribution to owner?
decreases in equity of a particular enterprise resulting from transfers to owners.
What is a comprehensive income?
- change in equity of a business enterprise during a period from transactions 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.
What is revenue?
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.
What are 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.
What are gains?
increases in equity from peripheral or incidental transactions of an entity.
What are losses?
represent decreases in equity arising from peripheral or incidental transactions of an entity.
What is an economic entity assumption?
presumes that economic events can be identified specifically with an economic entity
What is the going concern assumption?
anticipates that a business entity will continue to operate indefinitely
What is the periodicity assumption?
allows the life of a company to be divided into artificial time periods to provide timely information
What is the monetary unit assumption?
used in U.S. financial statements is the U.S. dollar
What is recognition?
process of admitting information into the financial statements
What is measurement?
process of associating numerical amounts with the elements
What is disclosure?
process of including additional pertinent information in the financial statements and accompanying notes
What are the general recognition criteria?
What is definition?
item meets the definition of an element of financial statements
What is measureability?
item has a relevant attribute measurable with sufficient reliability
What is reliability?
information is representationally faithful, verifiable, and neutral
What are the 5 attributes of the "mixed attribute" measurement model?
- historical cost
- net realizable value
- current cost
- present value
- fair value
What is historical cost?
original transaction value adjusted for depreciation and amortization
What is net realizable value?
the amount of cash into which an asset is expected to be converted in the ordinary course of business
What is the current cost?
the cost that would be incurred to purchase or reproduce the asset
What is the present value?
the current value of future cash flows, calculated by applying the time value of money
What is the fair value?
the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What is the full-disclosure principle?
- requires that the financial reports should include any information that could affect the decisions made by external users
How can full-disclosure information be disclosed?
- parenthetical comments or modifying comments
- disclosure notes
- supplemental schedules and tables
What are parenthetical comments or modifying comments?
placed on the face of the financial statements
What are disclosure notes?
convey additional insights
What are supplemental schedules and tables?
report more detailed information than is shown in the primary financial statements
What are the 3 primary forms of business organizations?
- corporation (lesser of the two)
- sole proprietorship
What is the financial account standards board?
FASB - private sector organization that sets accounting standards in the US
What is the American Institute of Certified Public Accountants (AICPA)?
responsible for the standard setting process for states and cities in the US
What is the Securities and Exchange Commission (SEC)?
regulatory oversight - US GAAP
What is an auditor?
helps ensure management has appropriately applied GAAP in preparing the financial statements
What are the 4 basic account assumptions?
- economic entity assumption
- going concern assumption
- periodicity assumption
- monetary unit assumption
What is predictive value?
information is useful in predicting the future
What is materiality?
concerns the relative size of an item and its effect on decisions
Which component would allow a large company to record the purchase of a 120 printer as an expense rather than capitalizing the printer as an asset?
Donald Kirk, former chairman of the FASB, once noted that "...there must be public confidence that the standard-setting system is credible, the selection of board members is based on merit and not the influence of special interests..." Which characteristic is implicit in Mr. Kirk's statement?
Allied Appliances, Inc., changed its revenue recognition policies. Which characteristic is jeopardized by this change?
National Bancorp, a publicly traded company, flies quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings?
In general, relevant information possesses which qualities?
predictive value, and/or confirmatory value
When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?
Jeff Brown is evaluating two companies for future investment potential. Jeff's task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jess will be using possess?
A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe?
Jim Marley is the sole owner of Marley's Appliances. Jim borrowed 100,000 to buy a new home to be used as his personal residence. This liability was not recorded in the records of Marley's Appliances.
economic entity assumption
Apple Inc. distributes an annual report to its shareholders
Hewlett-Packard Corporation depreciates machinery and equipment over their useful lives
expense recognition (also going concern assumption)
Crosby Company lists land on its balance sheets as 120,000, its original purchase price, even though the land has a current fair value of 200,000.
historical cost (original transaction value) principle
Honeywell International Inc. records revenue when products are delivered to customers, even though the cash has not yet been received.
Liquidation values are not normally reported in financial statements even though many companies do go out of business.
going concern assumption
IBM Corporation, a multibillion-dollar company, purchased some small tools at a cost of 800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense.
- Pastel Paint Company purchased land two years ago at a price of 250,000. Because the value of the land has appreciated to 400,000, the company has valued the land at 400,000 in its most recent balance sheet
historical cost (original transaction value) principle
Atwell Corporation has not prepared financial statements for external users for over three years
The Klingon Company has not prepared financial statements for external users over 3 years
Don Smith is the sole owner of a company called Hardware City. The company recently paid a 150 utility bill for Smith's personal residence and recorded a 150 expense
economic entity assumption
Golden Book Company purchased a large printing machine for 1 million (a material amount) and recorded the purchase as an expense)
expense recognition (materiality)
Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for 2 million, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.
What is the primary objective of financial reporting?
to provide information useful to capital providers
What do the statements of financial accounting concepts issued by the FASB identify?
the framework within which accounting standards are developed
Astro Turf Company recognizes an expense, COGS< in the period the product is manufactured
McCloud Drug Company owns a patent that it purchased 3 years ago for 2 million. The controller recently revalued the patents to its approximate market value of 8 million.
historical cost (original value) principle
Phillips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.
economic entity assumption
Winderl Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress.
- disagree / full disclosure principle
Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC.
- agree / periodicity assumption
Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense
- disagree / expense recognition
Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance
- agree / revenue recognition
SiriusXM Radio Inc. files its annual and quarterly financial statements with the SEC
The president of Applebee's International, Inc., travels on the corporate jet for business purposes only and does not use the jet for personal use
economic entity assumption
Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications
Lady Jane Cosmetics depreciates the cost of equipment over their useful lives
What are external events?
involve an exchange transaction with another entity (outside the company)
Wha are the internal events?
DO NOT involve an exchange transaction with another entity/company
What are economic events?
cause changes in the financial position of the company
What is a double entry?
dual effect that each transaction has on the accounting equation
What is a general ledger?
collection of storage areas, accounts, used to keep track of increases and decreases in financial position elements
What are subsidiary accounts?
many customers that contains all individuals accounts receivable or respected balances
- this total would then show up as one accounts receivable amount on the balance sheet
During the accounting period =
- source documents
- analyze transactions
- post from journal to general ledger
At the end of the accounting period =
- unadjusted trial balance
- adjusting entries
- adjusted trial balance
- financial statements
At the end of the year =
- close temporary accounts
- post closing trial balance
When do you use adjusting entries?
- prepayments, sometimes called deferrals
cash flow precedes expense or revenue recognition
cash outflow or inflow takes place in a period subsequent to expense or revenue recognition
- include accrued liabilities and receivables
What is an income statement?
change statement that summarizes the profit-generating transactions that caused a shareholders' equity (RE) to change during the period
What is a statement of cash flow?
reports the events that cased cash to change during the period
What is the statement of shareholders' equity?
discloses the sources of the changes int eh various permanent shareholders' equity accounts from during the period
What is the purpose of the closing process?
- close temporary accounts (rev, exp. gains, losses, dividends) are reduced to 0
- these zeroed accounts are then transferred/closed to RE to show changes from the period
What is a post-closing balance?
verify that the closing entries were prepared and posted correctly and that the accounts are now ready for next years transactions
Sets with similar terms
Chapter 2 Key Terms
Test 1 (Ch 1 & 2)
ACCT 331 Midterm 1 Review
Other sets by this creator
Tax Exam 1
ACC 231 - Exam 1
Other Quizlet sets
MOP Admin - Final Review
electricity study guide
Human Geo Quiz 2-questions