Davidson 1

Usefulness of Income Statements

Predicts future performance

Limitations of Income statements

Items like intangibles are omitted, some are estimates, different accounting methods

4 elements of Income statement

revenue

expense

gains

losses

What comes after gross profit on a multi-step income statement?

admin and selling expenses

what comes after gains and losses on a multi-step income statement?

income before tax

• Gee L, imma have to tax that a**

what should always be taken net of tax?

discontinued operations AND change in accounting principle/errors on SRE

how do you calculate EPS?

net income - preferred dividends

__________________________

weighted average of common shares outstanding

How should you title an income statement?

Year ended dec. 31, 20X2

what is a balance sheet portray?

a point in time/snapshot

How should you calculate gains vs losses

Gains - add

Losses - subtract

What kind of costs go in the non-operating section?

infrequent or unusual

(litigation, impairment, gain/loss on sale of PPE)

What is important to know about EPS?

Its the most significant business indicator

• has a common share focus in calculation

How do you calculate CI (comprehensive income)?

NI ± OCI

What are the transactions in OCI?

1. Fair value gains/losses for certain derivatives

2. Foreign currency translation adjustments

3. Certain pension adjustments

   1. Fair value gains/losses for certain debt security investments

What gets closed into AOCI?

OCI

Describe AOCI

• balance sheet account

• stockholders equity

  • what OCI gets closed into

What are the 5 steps in revenue recognition?

1. Identify contracts

2. Identify performance obligations (list of things to do)

3. Determine transaction price (what THEY need to do)

4. Allocate the transaction price (what will they pay us)

   1. Recognize revenue

What kind of perspective is change in accounting principle and errors?

Retrospective

How do you set up a SRE with adjustments now?

beg RE

± Adjustments for change in acct principle (net of tax)

± Adjustments for error corrections (net of tax)

= RE revised

+NI

-Dividends

=end RE

How do you calculate depreciation?

cost - salvage value divided by useful years

how do you calculate book value?

original cost - depreciation

what is the primary goal of financial reporting?

provide investors and creditors with decision-useful information

What is GAAP?

A common set of standards and procedures for preparing financial statements

Who regulates the markets with oversight?

SEC

Who enforces US GAAP // Market watchdog?

SEC

How many board members are on the FASB?

Seven

True or False: the ASC is in compliance with GAAP

True, the ASC contains all US GAAP in one place

Describe the Sarbanes Oxley Act

CEOs and CFOs must personally sign off on financial statements

“the auditor of auditors”

What is the purpose of conceptual framework?

Define the objectives/boundaries of accounting

Why is defining the objective of financial reporting important?

its useful to existing/potential lenders in providing resources to the entity

True or False: the concept statements are GAAP

False

What are the 2 fundamental qualities of the conceptual framework?

Relevance and Faithful Representation

What are the enhancing qualities of the conceptual framework?

Comparability

Verifiability

Timeliness

Understandability

How can information be relevant?

Predictive value, confirmatory value, and materiality

How can information be faithfully represented?

Completeness, Neutrality, and free from error

Describe assets

A present right of an entity to an economic benefit

Describe liabilities

A present obligation of an entity to transfer an economic benefit

Describe equity

the residual interest in the assets of an entity that remains after deducting its liabilities

How do you calculate comprehensive income?

CI = NI ± OCI

Describe the going-concern assuption

A business is assumed to continue operating indefinitely

Economic entitiy assumption

activities of an entity are separate from its owners or other business units

monetary unit assumption

economic activities of an entity are measured and reported in dollars

Historical cost

assets/liabilities should be accounted for at their purchase price

Fair Value market based measure levels of estimating

1. Active market - identical asset

2. Active market - similar asset

3. No market - based on unobservable manager assumptions

5 step process of revenue recognition

Identify contract, identify obligation, determine transaction price, allocate price across separate obligations, recognize revenue

What are the ingredients of Relevance?

Predictive, Confirmatory, and Materiality

What are the ingredients of Faithful Representation?

Completeness, neutrality, free from error

What kind of accounts are on the balance sheet?

Assets, Liabilities, Stockholder’s equity

What kind of accounts are on the Income Statement?

Revenue and Expenses

What accounts have a normal debit balance?

Dividends, expenses, assets

What accounts have a normal credit balance?

Liabilities, owners equity, revenue

Describe accruals

Cash comes after // later down the line

What account is never included in AJE?

Cash

Describe deferrals

Cash comes before // cash in first

What are things to keep note of?

• Timing of question

• Adjustments for interest % or months

• Should it be taken net of tax (discontinued ops, SRE adjustments)

What should you do to close accounts?

Do the opposite of what you would normally do!

What types of accounts are Sales discounts & returns/allowances

Contra-revenue (normal debit)

how do you calculate revenue when moving from cash to accrual based acct?

cash received + change in A/R - change in U/R

how do you calculate expense when moving from cash to accrual based acct?

cash paid + change in payable - change in prepaids

how do you calculate “change in "account name””

ending balance - beginning balance

plug number directly into formula

what types of accounts are in the nonoperating section?

sale of PPE for gain/loss, litigation, dividends, disasters, interest rev/exp

what is included in other comprehensive income?

● Derivative gains/losses

● Foreign currency translation loss

● Pension adjustments

● Unrealized gains/losses on available-for-sale securities

in what ways is the balance sheet useful?

• liquidity

• solvency

  • financial flexibility

What kind of classification does “land” fall under?

Current asset OR long term asset

What is an example of an intangible asset?

Copyrights

What is treasury stock?

Stock we buy back (contra OE)

What are the types of supplementary disclosures and where do you find them?

Contingences, accounting policies, contractual situations, fair value (found in notes of financial statements)