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Internal users of accounting information

Managers, sales staff, officers, budget officers, internal auditors, and controllers.

External users of accounting information

Lenders, consumer groups, shareholders, external auditors, governments, customers, and non-managerial employees.

Objective of financial reporting

To provide financial information about the reporting entity that is useful to current and potential investors, lenders, and other creditors.

Securities and Exchange Commission (SEC)

Established by the federal government through the Securities Exchange Act of 1934; oversees accounting and reporting for public companies, requires adherence to GAAP, provides oversight and enforcement authority, and encourages private standard-setting.

Financial Accounting Foundation (FAF)

Selects members of the FASB and advisory councils, funds their activities, and provides general oversight.

Financial Accounting Standards Board (FASB)

Establishes and improves standards of financial accounting and reporting for guidance and education of the public, including issuers, auditors, and users.

Financial Accounting Standards Advisory Council (FASAC)

Consults on major policy issues, technical issues, project priorities, and selection and organization of task forces.

Conceptual framework hierarchy

Foundation: Objective of financial reporting. Constraints: Cost-benefit, Materiality. Fundamental qualities: Relevance and Faithful representation. Ingredients of fundamental qualities: Predictive value, Confirmatory value, Completeness, Neutrality, Free from error. Enhancing qualities: Comparability, Verifiability, Timeliness, Understandability.

General Principles

Assumptions, concepts, and guidelines for preparing financial statements.

Specific Principles

Detailed rules used in reporting business transactions and events.

Going Concern Assumption

The business is presumed to continue operating instead of being closed or sold.

Monetary Unit Assumption

Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Time Period Assumption

The life of a company can be divided into artificial time periods, such as months and years.

Economic or Business Entity Assumption

A business is accounted for separately from other business entities, including its owner.

Measurement (Cost) Principle

Accounting information is based on actual cost, which is considered objective.

Revenue Recognition Principle

Recognize revenue when goods or services are provided to customers and at an amount expected to be received from the customer.

Expense Recognition (Matching) Principle

A company records its expenses incurred to generate the revenue reported.

Full Disclosure Principle

A company reports the details behind financial statements that would impact users' decisions in the notes to the statements.

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Steps of the Accounting Cycle

Analyze business transactions, Journalize the transactions, Post to the ledger, Prepare unadjusted trial balance, Prepare adjusting journal entries and post, Prepare adjusted trial balance, Prepare financial statements, Prepare closing journal entries and post, Prepare post-closing trial balance.

Chart of Accounts

Lists the accounts and account numbers that identify their location in the ledger.

Income Statement

A financial statement that shows the company's revenues and expenses during a specific period.

Statement of Retained Earnings

A financial statement that outlines the changes in retained earnings for a specific period.

Balance Sheet

A financial statement that reports a company's assets, liabilities, and equity at a specific point in time.

Statement of Cash Flows

A financial statement that provides aggregate data regarding all cash inflows and outflows a company receives.

Income Statement time period

Covers a specific period of time (month, quarter, or year).

Balance Sheet time period

Reports financial position at a single point in time.

Trial Balance

A list of all accounts and their balances to check if debits equal credits.

Limitations of a Trial Balance

Does not detect errors of omission, posting to the wrong account, or equal offsetting errors.

Cash Basis Accounting

Revenue and expenses recorded when cash is received or paid. Not GAAP.

Accrual Basis Accounting

Revenue recognized when earned and expenses when incurred, regardless of cash flow.

Accruals

Revenues or expenses recognized before cash is exchanged. Examples: Accrued revenues, accrued expenses.

Deferrals

Cash received or paid before revenue or expense is recognized. Examples: Prepaid expenses, unearned revenue.

Interest Adjustment Formula

Interest = Principal × Rate × Time.

Closing Entries Order

Close revenues to Income Summary, Close expenses to Income Summary, Close Income Summary to Retained Earnings, Close Dividends to Retained Earnings.

Gross Profit Formula

Sales − Cost of Goods Sold.

Net Income Formula

Revenues − Expenses.

Ending Retained Earnings Formula

Beginning Retained Earnings + Net Income − Dividends.

Earnings Per Share (EPS)

(Net Income − Preferred Dividends) ÷ Average Common Shares Outstanding.

Book Value

Total Assets − Total Liabilities.

Reversing Entries

Optional entries made at the beginning of a new period to simplify recordkeeping for certain accruals.

Multi-step Income Statement Format

Sales Revenue → Less COGS → Gross Profit → Less Operating Expenses → Income from Operations → ± Other Revenues/Expenses → Income Before Tax → Less Tax → Net Income → ± Discontinued Operations → Comprehensive Income.

Discontinued Operations

Results from disposing of a business component; reported separately on the income statement, net of tax.

Comprehensive Income

Net income plus other comprehensive income (OCI) items such as unrealized gains/losses and foreign currency adjustments.

Accumulated Other Comprehensive Income (AOCI)

Cumulative total of all OCI items in the equity section of the balance sheet.

Retained Earnings with Prior Period Adjustment

Beginning RE ± Prior Period Adjustment (net of tax) + Net Income − Dividends = Ending RE.

Steps of Revenue Recognition

Identify the contract with a customer, Identify the performance obligations, Determine the transaction price, Allocate the transaction price to the obligations, Recognize revenue when obligations are satisfied.

Performance Obligations

Promises in a contract to transfer distinct goods or services to a customer.

Bundled Package (Multiple Performance Obligations)

Each distinct good/service in a bundled sale is a separate performance obligation; allocate price proportionally.

Expected Value Approach

Transaction price calculated as the weighted average of possible outcomes multiplied by their probabilities.