ACCT 5110 Holt Exam 1

Financing Activities

Involve raising the capital needed to run the company

Investing Activities

Once a company has financial capital, it typically invests that capital in productive resources that are needed to operate the business

Operating Activities

With necessary resources in place, the company can commence day-to-day operating activities, producing goods and/or services and selling them to customers

Shareholder's Equity Includes:

-Contributed Capital

-Retained Earnings (Net Income-Dividends)

-Accumulated Other Comprehensive Income (AOCI)

Verifiability

Different knowledgeable and independent observers can reach consensus that a particular representation is faithful

Relevance

Capacity to make a difference in a decision, enabling users to predict future outcomes and/or confirm prior expectations

Decision Usefulness

Overall objective of financial information, relevant and faithfully represented.

Free from Error

Presented as accurately as possible, using a process that reflects the best available inputs

Predictive Value

Helps decision makers form expectations about the future

Completeness

Full disclosure of all the information necessary to understand the information being reported

Comparability

Enables users to identify and explain similarities and differences between two or more sets of economic facts

Materiality

The nature and magnitude of an omission or misstatement that would influence the judgment of reasonable users of that information

Confirmatory Value

Helps decision makers confirm or correct prior predictions or expectations

Faithful Representation

When the words and amounts accurately depict the economic substance of what they purport to depict

Expense Recognition

Appropriate recognition when a company consumes economic resources in conducting business operations

Reporting Entity

The financial statements represent the business, rather than its owners

Going Concern

In the absence of evidence to the contrary, the business can be reasonably expected to operate long enough to carry out its existing commitments

Revenue Recognition

Appropriate recognition when a company creates economic benefits (inflows of assets or settlements of obligations) by providing goods or services to customers

Recognition

The process of formally recording and reporting an item in the financial statements of a company

Purchase Allowance

When the company agrees to keep damaged inventory and receives a refund from its supplier

Perpetual Inventory System

A system to update the inventory account for each purchase or sale

Deferrals

Arise when cash flows occur prior to recognition of an item in income (for example, prepaid expenses and deferred revenues)

Closing Entries

-Journal entries that a company makes at the end of the period to reduce the balance in each temporary account to zero and update the Retained Earnings account

1)Close out revenues (and gains on any revenues), to income summary account

2)Close out expenses (and losses) to income summary account

3) Close income summary account to retained earnings account

4) close dividends to retained earnings

Income Summary

A temporary account is used to store income statement account balances during the closing entry step of the accounting cycle

Reversing Entries

-Journal entries that are the exact opposite of the adjusting entries made in the previous period

-Occur either immediately following closing entries, or on the first day of next fiscal period

-Only do when balance sheet account is increased

-Do not reverse accumulated depreciation or bad debt

Cash-Basis Accounting

A method under which a company records revenues when it collects cash from sales and records expenses when it pays cash for its operations

Concept Statements (SFAC)

Fundamental theories and truths that provide the foundation for financial accounting and financial reporting. Broad and definitional

Return on Investment

Provides a measure of overall company performance.

Operating Capability

The ability of a company to maintain a given physical

level of operations.

Cost Constraint

Benefits of the information must exceed the cost of it. Applies to the 4 enhancing characteristics (comparability, verifiability, timeliness, understandability)

Mixed Attribute Measurement

Measures assets, liabilities, revenues, expenses, and other elements of the financial statements with the most relevant and faithful measurement available