Accounting Ch 1 and 2

exam 1 material

What is not true about net operating cash flow?

It is a measure used in accrual accounting and is recognized as the best predictor of future operating cash flows

When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?

Faithful representation

predictive value (qualitative characteristics)

Information is relevant if it helps users make predictions about future events and outcomes, such as future cash flows or business performance

confirmatory value (qualitative characteristic)

Relevant information provides feedback, allowing users to confirm or correct their previous expectations and assessments of past events or decisions

materiality (qualitative characteristic)

Will an error or fraud change the view of the results? This means only significant pieces of information should be included in financial reports

fundamental relevance

the capacity to influence decisions by including predictive value, confirmatory value, and materiality

faithful representation

a company's financial information is complete, neutral, and free from material error, ensuring it accurately reflects the underlying economic reality of the transactions

completeness (qualitative characteristic)

an audit assertion that ensures all transactions, events, and account balances that should have been recorded and included in the financial statements for a given period actually are recorded

neutrality (qualitative characteristic)

financial information must be free from bias and should not favor any particular party or influence decision-making to achieve a predetermined outcome

free from error (qualitative characteristic)

financial information is presented without material mistakes, omissions, or biases, ensuring it accurately depicts economic realities for users

enhancing (qualitative characteristic)

comparability, verifiability, timeliness, and understandability

comparability (qualitative characteristic)

allows users to identify similarities and differences between financial phenomena over time or across different entities

EX: “are they switching from LIFO to FIFO"?”

verifiability (qualitative characteristic)

quality of information that allows different, independent experts to reach the same conclusion, ensuring that accounting data is accurate, free from bias, and can be substantiated with evidence

timeliness (qualitative characteristic)

financial information is available to decision-makers before it loses its usefulness or ability to influence their decisions

understandability (qualitative characteristic)

the quality that makes financial information clear, coherent, and easily comprehensible to users who have a reasonable knowledge of business and accounting

assumptions

includes economic entity, going concern, periodicity, and monetary unit.

economic entity (assumption)

any organization or unit that carries out financial activities (LLC, LLP, etc)

going concern (assumption)

assumption that a business will continue to operate indefinitely and remain financially stable

periodicity (assumption)

assumes a business's continuous life can be divided into distinct, manageable periods, such as months, quarters, or years, for reporting purposes

monetary unit (assumption)

an accounting principle stating that all business transactions are recorded in a single, stable currency (like the U.S. dollar)

principles

includes revenue recognition, expense recognition, mixed-attribute measurement, and full disclosure

revenue recognition (principle)

requiring that revenue be recorded when it is earned and realized, not when cash is received, providing a true picture of a company's financial performance

EX: cash vs accrual

expense recognition (principle)

requires businesses to record expenses in the same accounting period as the revenues they help to generate, rather than when the cash is paid

mixed-attribute measurement (principle)

Some items are recorded at what they originally cost (historical cost), while others are updated to reflect current values (like fair value or present value). This “mix” gives a more complete and useful picture of a company’s finances

full disclosure (principle)

requires companies to report all information relevant to the financial statements and their overall financial health, ensuring transparency and allowing users to make informed decisions

income statement

revenue - expenses =

statement of retained earnings

Beg. R/E + net income - dividends = End R/E

balance sheet

total assets = total liabilities + equity

interest =

loan amount * interest * time rate

increase with debit “DEAD”

“debits increase expenses, assets, and dividends”

increase with credit “CLER”

“Credits increase liabilities, equity, and revenues”

rules for AJE

1. never use cash account on adjusting journal entry

2. one account should be on the income statement and the other should be on the balances sheet

in cash accounting, revenue is recognized when

cash is received

in cash accounting, an expense is recognized when

cash is paid

in accrual accounting, revenue is recognized when

when service/product has been provided/received

in accrual accounting, expenses are recognized when

it is incurred