Financial 1 Mizzou test 1

Financial Accounting provides what

Amounts, timing, and uncertainty of cash flows

Cash based accounting

An accounting method that enters income and expenses into the books at the time when payment is received or expenses incurred.

Accrual base accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

What are the two reporting standards

Gaap and IFRS

What is the chain of command in standard setting

Congress -> SEC -> Private sector -> FASB

Sarbanes-oxley

a law that set new and stronger standards for public companies and accounting firms regarding the reporting of financial results of operations

What is the foundation of all accounting laws

Consitution

What are the players in the reporting ecosystem

Management, Auditors, SEC, FASB, PCAOB

SFAC 8

Conceptual Framework for Financial Reporting

What are the two fundamental characteristics

Relevance and faithful representation

What are the 4 enhancing characteristics?

1. Comparability (consistency)

2. Verifiability

3. Timeliness

4. Understandability

Relevance

The values must be predictive, confirmatory, and material

confirmatory

helps users confirm or update assessments regarding a company's cash-flow generating ability

Faithful Representation

information that is complete, neutral, and free from error

Comparability and consistency

- Helps user compare firms

- Helps users compare across different periods

Verifiability

different measures would reach consensus about whether it is representationally faithful

Timeliness

Available to users before decision is made

Understandability

users can comprehend information

Cost effectiveness

Information is beneficial if the benefits exceeds cost

SFAC 6

Elements of Financial Statements

What are the elements of the financial statement

1. Assets

2. Liabilities

3. Equity

- (Investments by owners)

- (Distribution to owners)

6.Non-owners sources

- (comprehensive income )

7. Revenue

8. Expenses

9. Gains

10. Losses

comprehensive income

net income + other comprehensive income

SFAC 5

Recognition and Measurement in Financial Statements

Economic equity assumption

An assumption that every economic entity can be separately identified and accounted for.

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future.

Time period assumption

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.

Monetary Unit Assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Recognition

The process of admitting information into financial statements

Measurement

The process of using dimensions, quantity, or capacity by comparison with a standard in order to mark off, apportion, lay out, or establish dimensions.

Disclosure

Including pertinent information in the financial statements and accompanying notes

Expense recognition

Matching principle - revenues match expenses

Fair value

the price to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

How are disclosures made

1. parenthetical comments or modifying comments

2. disclosure notes

3. supplemental schedules and tables

Lemon Problem

An economic issue, where there is an information imbalance, typically skewed towards the seller's side

What is the solution to information asymmetry

Accounting

Chapter 1 review

2 fundamental characteristics

4 enhancing characteristics

10 financial statement elements

4 Assumptions

3 Concepts

External events

exchange between the company and a separate economic entity (purchase, sale, payment)

Internal events

directly affect the financial position of a company but does not involve an outside entity

two ways to present comprehensive income

1. In a single continuous statement of comprehensive income

2. in two separate but consecutive statements

Where does the shareholders' equity come from

1. amounts paid in by shareholders

2. amounts earned by the company

Income statements cateogires

Revenues, expenses, NI

Accounting cycle

1. source documents

2. journal entries

3. General ledgers

4. Prepare unadjusted trial balance

5. Prepare adjusted trial balance

6. Financial statements

7. Closing journal entries

8. Post closing trial balance

Types of T-accounts

Permanent and temporary

Where does cash come in prepaid journal entries

First

Where does cash come in accruals

Second

long-term solvency

an assessment to cover all its liabilities, includes long and short term liabilities

How are assets listed on the BS

Current to non-current, Liquid to Illiquid

How are liabilities listed on the BS

Most Short term liabilities first

Acts payable

accruals - like accrued wages

Notes payable

Long term debt

=Total liabilities

What is the issue with the BS

It relies heavily on estimates. Receivables, warranties, and residual/useful life

Management intent (Land)

use for purpose - PPE, Real estate firm - Inventory

Current Maturities

the portion of long term debt or long term notes payable that must be repaid within one year

How do you represent current maturities on the BS

The portion that is going to mature in the year goes in short term L, the other goes in long term L

How are things listed on the SE

permanent to least permanent

What disclosure notes are required

Summary of significant accounting policies (inventory methods, depreciation methods)

Subsequent events (8-k)

management discussion and analysis

Management discussion and analysis

A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.

Proxy Statement

is provided each year and includes compensation information for directors and top executives

Unqualified opinion (clean opinion)

The statements are presented fairly in conformity with GAAP

What is an unqualified opinion with an exclamatory paragraph?

It indicates that the financial statements are free from material misstatement but includes a paragraph emphasizing a specific issue.

What does lack of consistency in accounting policy refer to?

It refers to changes in accounting policies that affect the comparability of financial statements.

What does going concern mean in auditing?

It refers to the auditors' doubt about a company's ability to satisfy its debts in the foreseeable future.

What is a material misstatement?

It is an error in a previously issued financial statement that has been corrected.

What is a qualified opinion in auditing?

A qualified opinion is issued when there is a scope limitation or a departure from GAAP.

When is a qualified opinion needed?

A qualified opinion is needed when there is a scope limitation or a departure from GAAP.

What might cause a qualified opinion?

A qualified opinion may be caused by difficulties in verifying an account or companies using procedures outside of GAAP.

Adverse opinion

Auditors tell investors that financial statements are not correct

Disclaimer

Auditors were not able to gather sufficient information

10-Q

Quarterly financial report

8-K

reports major corporate events

discontinued operations

the disposal of a significant component of a business

Operating Income

gross profit - operating expenses, sales of revenues, services or gain/loss from selling equipment

Interperiod tax allocation

the allocation of income tax between periods whereby there is a recognition of deferred income taxes

Cash flows from financing

Issuance of CS, bonds payable, notes payable, repurchase of stock, repayment of debt, payment of dividends

Cash flow from investing

purchase/sale of long-term assets, proceeds from selling ppe, purchase sale of debt, equities

where would I find the cash down payment on the CFS

Investing

Where on the CFS would i find principle paydown

Financing

Where on the CFS would I find interest expense paydown

operating

Where on the CFS would I find Dividends paid

Financing

Where on the CFS would I find Dividends received

Operating

Realization principle

Revenue is realized when services are rendered to customers or when goods sold are delivered to customers.

Core Revenue Recognition Principle

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

What are the 5 steps of the Core Revenue Recognition Principle

1. Identify the contract

2. Identify the performance obligation in the contract

3. Determine the transaction price

4. Allocate the transaction price to each performance obligation

5. Recognize revenues when performance obligation is satisfied

How to determine transfer of control

Possession of good, accepted good

Obligation to pay

Assumed risk of ownership

Output-based Revenue recognition

passage of time, miles constructed

Input-based revenue recognition

ratio of cost incurred to date to total costs to complete the job

Multiple performance obligations

1. capable of being distinct

2. Separately identifiable

Prepayment

when a seller receives a non-refundable up front fee for a contract (gym membership down payment)

Warranties

guarantees made by a seller that an article, good or service will conform to a certain standard or will operate in a certain manner

Quality- assurance warranty

Obligates sellers to make repairs or replace products that are later found faulty

Are quality-assurance warranties recognized as a separate obligation

No, they are not, as such they do not become a part of separate revenue

Extended Warranty

sold separately, and so creates a separate obligation

Discount relating to performance obligation

performance obligation is when the discount is higher than a prior discount

Variable consideration

portion of a transaction price that depends on the outcome of future events (Bonus)

Percentage of completion method

A type of revenue recognition system where the firm books sales as they complete certain milestones of the service rendered. (miles on a road)

Completed contract method

recognition of revenue for a long-term contract when the project is complete.

Cost-to-cost method

cumulative cost incurred to date divided by the total estimated costs

Gross profit recognized in a period

the percentage of completion times estimated total gross profit minus gross profit recognized in previous periods

When you are journaling a impairment, do you include taxes

No

In the direct method reporting on a CFS, what does an increase in asset do, increase in liability?

Decreases, increases

What are the Owners sources of Equity

Investments by owners and Distributions to owners

How do Investment by owners and Distributions affect equity

Increases, decreases