Accounting exam 1

FASB

Financial accounting standards board. Sets up GAAP standards

IASB

International Accounting Standards Board. Sets IFRS standards globally

SEC

Secruitites and Exchange Commission. Enforces standards for public companies in the US

IFRS

International Financial Reporting Standards.

GAAP

Generall Accepted Accounting Principles. Set of standardized accounting principles that help keep statments consistent and comparable company to company.

GAAP Codification

Database that organizes all GAAP standards into a single searchable format for reference for accountatns and auditors

Major challenges in financial reporting enviornment

-Gaap in poltical enviornment

-Expectations gap- what people think should do accountants do vs what they think they can do

-Ethical issues

Benefits of a conceptual framework

-Provides a consistent foundation for developing accounting standards

-Enchances comparabilitiy and consistency in financial reporting

-Guides accountatns in making judgements when standards are unclear

Objective of financial reporting

To provide useful information for investors, lender, and other stakeholders to make economic decisions

Qualitative characteristics

Accounting information that distinguish better information from less useful information

Relevance

Fundamental quality. Information capable of aiding a decision

Predictive value

Part of relevance. Allows to make future assumptions

Confirmatory value

Part of relevance. Allows users to compare performance or profitability rto expectations

Matierality

Part of relevance. Line above which missing or incorrrect info is considered to have an impact on user decision making

Representational faithfulnessd

Qualitative. Info, numbers, decriptions match what really happened

Completeness

Part of Represenational faithfullness. Financial statments being complete

Neutrality

Part of representational faithfulness. Free from bias

Free from error

Part of representational faithfulness. Free from matieral omissions/inaccuricies

Comparability

Part of enhancing qualities. Able to compare acorss entites

Verifability

Part of enhancing qualities. Given same data an independent accountant can reproduce same results

Timliness

Part of enhancing qualities. Providing infor in time to influence decisions

Understandability

Part of enhancing qualities. Info is understandable to users with buisness knowledge

Assets

Probable future economic benefits obtained or controlled by entity from past transaction/ events

liabilites

Payments that need to be paid from past obligations

Equity (net assets)

left over interest in the assets of the entity after deducting liabilities

Investments by owners

what the owners contribute

Distributions to owners

Decrease in equity from transfers to owners

Comprehensive income

Change in equity of a buiness.

= net income of the current year ( + or - ) Other comprehensive income

Revenue and expenses vs gains and losses

Revenue and expenses= increase/ decrease of money/income

Gains/losess = increase/decrease in equity

Revenue recognition principle

Revenue is recognized when it is earned

Expense recognition principle

Expenses are recognized and matched with the revenues they go with

Historical cost

Report assets and liabilities for orginal cost

Fair value

Report assets and liabilities as the price that would be recivied to sell as assets or paid to transfer a liability” or the value it is worth in the market

Full disclosure principle

Revealing in financial statments any facts or importance to influence judgment should be shown

Cost constraint

Benefits dervied from having accounting info should exceed the cost of providingit

Economid entity assumption

Company keeps its activity seperate and distinct from its owners and any other buisness unti

Normal balance

The side of ther account that increases the account.

ex. if normal balance is a debit then a debit increases the acount and a credit decreases the account

Contra account

Account that decreases the account.

Steps of accounting cycle

1. Accounting events happens

2. Journalize the event

3. Post to ledger

4. Unadjusted trial balance

5. Adjusting journal entries

6. Adjusted trial balance

7. Prepare financial statments

8. Closing entries

Ledger

Summarizes the account to individual t accounts

trial balance

List of all accounrs and balances at a given point in time

-before adjusted entries.

-end of acc period

Nominal accounts

Close at the end of the period

Real accounts

Always stay open/ permanent accounts

Mixed accounts

have both real and nominal components

ABCD

Accurals Before Cash. cash before Defferals

Accured revenue

Services done. no cash paid

→ Debit an asset credit a revenue

Accured expense

Expense has been incurred. not yet paid

→ Debit an expense. Credit a liability

Deferred revenue

Cash received before revenue is recognized

Deferred expense

Cash is paid before expense is recognized

Accurals

Service/ expense first before cash

Deferrals + rule

Cash first before service/ expense.

-To record an AJE on deferrals we must know how the orginal entry was recorded when cash is intially paid/ received

Financial statment articulation

each financial statment is linked. Order or prepation comes from the articulation.

-Income statment

-Statment of stockholders equity/ retained earnings

-Balance sheet

-cash flows

Closing process

1. close credit accounts to income summary with a credit

2. close debit accounts to income summary with a debit

3. close income summary to retained earnings

4. close dividends to retained earnings

5. close oci to accumulated oci

uses of income statment

assess risk or unvertainity of getting future cash flows

evaluatre future and past performance

Limiations of income statment

companies omit or leave out items from income statment that they cannot measure reliably

income numbers are affected by the accounting methods employed

income measurement involves judgement

opertaing section

part of income statment. revs and exps of companys operations

non operating section

part of income statment/. revs and exps from 2nd activities and unsual or infrequent gain/losses or non recurring

Discontinued operations

matieral gains or losses from discontinuing part of a buisness

non controlling interest

allocation of income to noncontrolling shareholders

earnings per share

performance indicator that breaks down net income on per share basis

FAF

finaicial accounting foundation

AICPA

American institution of cerftified public accountants