ACCT 301 EXAM 1

Financial Accounting

The process of recording, summarizing, and reporting on an organization’s financial transactions.

Objectives of Financial Accounting

Provided information should be useful for decision making

Information should help investor and creditors evaluate amounts, timing, and uncertainty.

Users of Financial Information

Investors, Creditors, employees, labor unions, customers, suppliers, government regulatory agencies, and financial intermediaries.

Entity Perspective

A legal theory and accounting concept that all of the business activity conducted by any corporation or limited liability business is separate from that of its owners

Decision-Usefullness

The ability of financial information to make a difference in the decisions of users by helping them evaluate and choose among alternative courses of action

Cash Basis Accounting

Measurement of cash receipts and cash payments from transactions related to providing goods and services. difference is net operating cash flow

Accrual Basis Accounting

Measurement of revenues and expenses, regardless of when cash is received or paid. Difference is net income/loss.

Generally Accepted Accounting Principles (GAAP)

Set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.

Financial Accounting Standards Board (FASB)

The current private sector body that has been delegated the task of setting accounting standards.  

Emerging Issues Task Force (EITF)

Committee of the FASB that identifies, discusses, and resolves narrowly scoped financial accounting issues with the existing framework of GAAP.

International Accounting Standards Board (IASB)

To develop a single set of high-quality, understandable, and enforceable global accounting standards

FASB Accounting Standards Codification

Integrates and topically organizes all relevant accounting pronouncements comprising GAAP in a searchable, online database.

Accounting Standards Update (ASU)

Any new standard issued by FASB

Conceptual Framework

Provides the underlying foundation for US accounting standards

Objective of Conceptual Framework

To provide financial information that is useful to capital providers.

Fundamental Qualitative of Conceptual Framework

Relevance and faithful representation, meaning financial information should be useful, complete, neutral, and free from error

Enhancing Qualitative Conceptual Framework

Comparability, verifiability, timeliness, and understandability, which make financial information even more useful.

Elements of Conceptual Framework

Assets, Liabilities, Equity, Investments by owners, Revenue, Expenses, Gains, Losses, Comprehensive income

Underlying Assumptions of Conceptual Framework

Economic Entity, Going concern, Precocity, and Monetary Unit

Economic Entity

Presumes that economic events can be identified specifically with an economic entity

Going Concern

Anticipates that a business entity will continue to operate indefinitely

Periodicity

Allows the life of a company to be divided into artificial time periods to provide timely information.

Monetary Unit

Used in US financial statements is the US dollar

Principles of Conceptual Framework

Revenue Recognition, Expense Recognition, Mixed-Attribute Measurement, and Full Disclosure

Revenue Recognition

Inflows of assets or settlements of liabilities resulting from providing a product or service to a customer.

Mixed-Attribute Measurment

The process of associating numerical amounts with the elements

Full Disclosure

The process of including pertinent information in the financial statements and accompanying notes

Expense Recognition

Often matches revenues and expenses that arise from the same transactions or other events

Constraints of Conceptual Framework

Cost Effectiveness

Cost Effectiveness

Principles of achieving the greatest possible benefit or output for a given level of cost

Historical Cost

Original transaction value adjusted for depreciation and amortization

Net Realizable value

The amount of cash into which an asset is expected to be converted in the ordinary course of business

Current Cost

The cost that would be incurred to purchase or reproduce the asset

Present Value

The current value of future cash flows, calculate by applying the time value of money

Fair Value

The price that would be received to sell assets or paid to transfer a libaility in an orderly market transaction

How to find net operating cash flow using cash basis

Even if it is prepaid for x number of years, the total amount is stated on the year it was paid for in cash and the starting number is cash collected

How to find net income/loss using Accrual Basis

The starting number is what revenues you received from customers, and even if the amount is prepaid, it is the total amount divided by x number of years, and that divided number is stated each year.

Accounting Equation

Assets = Liabilities + Shareholders Equity

Double Entry System

Refers to the dual effect that each transaction has on the accounting equation

Debits and Credits

Terms used to signify an increase or decrease to an account balance

General Ledger

Collection of accounts

T-Accounts

Used for instructional purposes instead of formal ledger accounts

Transaction Analysis

The process of reviewing the source documents to determine the dual effect on the accounting equation and the specific accounts affected

Posting

The process of moving journal entry into the general ledger accounts

Perpetual Inventory System

Inventory and cost of goods sold accounts are continuously updated for purchase, sale, and return of merchandise

Periodic Inventory System

Inventory and cost of goods sold accounts are updated at the end of the reporting period

Unadjusted Trial Balance

List of general ledger accounts along with their balances to check for completeness and prove that accounting equation is in balance

Prepayments/Deferrals

Occur when the cash flow occurs before the expense or revenue is recognized, includes prepaid expenses and deferred revenues

Accruals

Occurs when the cash flow comes after the expense or revenue is recognized, includes accrued liabilities and receivables

Bad Debt Expense

Amount of accounts receivable that will not be collected

Prepaid Expense

Costs of assets acquired in one period and expensed in a future period

Deferred Revenue

Cash received from customers in advance of providing a good or service

Accrued Expenses

Represent liabilities recorded when an expense has been incurred prior to cash payment

Accrued Revenues

Involve situations when revenue is recognized in a period prior to the cash receipt

Adjusted Trial Balance

Trial balance after adjusting entries have been recorded

Financial Statements

Primary means of communicating financial information to external parties

Income Statement

A change statement that reports the changes in shareholders’ equity that occurred during the period as a result of revenues, expenses, gains, and losses

Income Statement Equation

Sales - CGS = Gross Profit - Operating Expenses = Operating Income - Other Income (rent revenue & Interest Expense) = Net income/loss

Balance Sheet

Presents the financial position of a company in an organized list of assets, liabilities, and shareholders equity at a point in time

Current Assets

Cash, Will be converted into cash, will be used up within one year or the operating cycle

Current Liabilities

Will be satisfied within one year or the operating cycle

Noncurrent Assets

Include property and equipment, long-term receivables, and long-term investments

Long-term Liabilities

Include all liabilities not classified as current

Shareholders Equity

Lists the paid-in capital portion of equity, common stock, and retained earnings

Statement of Cash Flows

Reports the events that caused cash to change during the period

Operating Activities

Involve the inflows and outflows of cash related to transactions entering into the determination of net income

Investing Activities

Involve the inflows and outflows of cash caused by buying and sell long-term assets and nonoperating investment assets

Financing Activities

Involve the inflows and outflows of cash from transactions with creditors and owners

Order of Statement of Cash Flows

Operating cash inflows and outflows, operating activities, and financing activities

Statement of Retained Earnings Equation

Beginning RE + Net income - dividends = Ending RE

Statement of Retain Earnings

Reports how net income/loss and dividends affected the company’s financial position during a period of time

Noncurrent assets order on the balance sheet

Investments - property, plant, and equipment - Intangible assets

Closing Entry’s Process

Temporary accounts are reduced to zero balances, and are transferred to retained earrings to reflect the changes that have occurred during the period

Order of closing entries

Revenues, expenses, then dividends

Closing Entries to Expenses and Dividends

Debit to RE and credit to Dividends

Closing Entries to Revenues

Debit Revenues and credit RE

Cash Basis to Accrual Basis Conversion

Produces a measure called net operating cash flow

Cash to Accrual Basis Equation

Cash collections - Cash Payments (from operating activities)

Liquidity

The ability of a company to convert its assets to cash

Long-Term Solvency

Whether a company will be able to pay all its liabilities including its long-term liabilities

Financial Flexibility

The ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs.

Balance Sheet Limitations

Historical Costs: Many assets are recorded at their original purchase price, not their current market value.

Unrecorded assets: Some valuable resources are not recorded on the balance sheet, so they have zero book value

Elements of Current Assests

Cash and cash equivalents, short-term investments, accounts receivable, inventory, and prepaid expenses

Cash and Cash Equivalents

Maturity date no longer than three months from the date of purchase

Short-Term Investments

Investments in stock and debt securities of other corporations

Accounts Receivable

Result from the sale of goods or services on account

Inventory

Finished Goods, Work in process, and raw materials

Prepaid expenses

A company incurs a cost of acquiring as asset in one period that won’t be expensed until a future period.

Elements Long-Term Assets

Investments, Operative Lease Agents, Other long-term assets, property, plant, and equipment, and intangible assets

Investments

Assets that are not used directly in the operations of the business.

Property, Plant, and Equipment

Tangible, long-lived assets used in the operations of the business and reported as a single amount in the balance sheet.

Operating Lease Assets

Rental agreement giving a company the right to use an asset with periodic cash payments required, and the asset is returned at the end of the lease

Intangible Assets

Generally represents exclusive rights and are reported in the balance sheet net of accumulated amortization

Other Long-Term Assets

Represents a catch-all classification of long-term assts that were not reported separately in one of the other long-term classifications such a long-term prepaid expense and long term restricted cash

Elements of Current Liabilities

Accounts Payable, notes payable, deferred revenues, accrued liabilities, and current maturities of long-term debt

Accounts Payable

Obligations to suppliers of merchandise or services usually due in 30-60 days

Notes Payable

Written promises to pay cash at some future date

Deferred Revenues

Represent cash received from a customer for goods or services to be provided in a future period

Accrued Liabilities

Represent obligations created when expenses have been incurred but will not be paid until a subsequent reporting period

Current Maturities of Long-Term Debt

Long-term notes, loans, mortgages, leases, and bonds payable that either become payable within the next year or are payable in installments