ACCT 3001 Exam 1

What is decision usefulness

financial accoutiing has the burden of providing useful information

what groups of users use accounting information

owner/manager, creditors (banks), and stockholders (investors)

what are financial statements

the principle means of assessing financial performance

what type of financial statement answers how successful was the company in generating revenues and expenses

incolme statement

what financial statement best answers the question, how did the equity of the owners change in the current year

statement of stockholder’s equity

what financial statement best answers the question, what does the company own (assets) and what does it owe (liabilities)

balance sheet

what financial statement best answers the question, where did the company obtain cash and how was it used

the statement of cash flows

what does financial accounting help investors do

assess the amounts timing and uncertainty of future cash inflows and outflows.

they can compare companies

the use of financial reporting by investos are part of what

capital allocation process

what does GAAP stand for

generally accepted accounting principles

what is GAAP and what is it used for

a set of standards

to enhance the decision usefulness of accounting information

what does SEC stand for

Securities and exchange commision

what is the SEC and what do they do

it is a federal agency that develops and standardizes financial information presented to stockholders. they prescribe accounting standards

what does FASB stand for

financial accounting standards board

what is the FASB and what do they do

they are a major standard-setting organization in the private sector. They are a private organization that develops accounting standards

who does the SEC rely on to do

FASB, to develop accounting standards

what are the two major types of FASB pronouncements

accounting standards updates

financial accounting concepts

what are accounting standard updates and is it a part of GAAP

it is a source of authoritative accounting standards

yes

what is financial accounting concepts and is it a part of GAAP

fundamental objectives and concepts used in developing standards

no

what is the FASB Accounting Standards Codification

the online database that can be used to assess authoritative literature

what does a conceptual framework do

establishes the concepts that underlie financial reporting

what is the objective of general-purpose financial reporting

to provice financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

what is the hierarchy of accounting qualities

decision usefulness —> relevance and faithful representation (both fundamental qualities)

Relevance ——> predicitive value, confirmatory value, materiality

Faithful rep. ——> completeness, neutrality, free from error

what is relevance

capable of making a difference in a decision

what is faithful representation

numbers and descriptions match what really happened

when is information material

if it was omitted or misstated, it would influence the decisions of users

how do we asses in determining materiality

through nature and magnitude, and the quantitative and qualitative factors need to be considered in determining whether or not it is material

what are the enhancing qualitative characteristics that make accounting information useful

comparabilitiy, verifiability, timeliness, understandability

what is comparabilitity

allows identificiation of similarities and differences in events between companies

what is verifiability

independent measures obtain the same results

what is timeliness

having information available before it loses capacity to influence decisions

what is understandabilitiy

information should be classified, characterized, and presented clearly and concisely

what is consistency

present when the same company follows the same accounting treatment from period to period

what are the ten elements of the financial statement

assets

liabilities

equity

investments by owners

distributions to owners

comprehensive income

revenues

expenses

gains

losses

what are the two groups the 10 elements are in

moment in time and period of time

what elements are in which group

assets, liabilities, and equity are in moment in time

the others are all in period of time

what is an asset

present rights of an entity to economic benefits

what are liabilities

present obligations of an entity to transfer economic benefits

what is equity/net assets

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

what are investments by owners

increases in equity of an entity resulting from transfers to the entity from other entities of something valuable to obtain or increase ownership interests (or equity) in the entity

what are distributions to owners

decreases in equity of an entity resulting from transferring assets, rendering services, or incurring liabilities by the entity to owners

what is comprehensive income

the change in equity of a business entity during a period from transactions and other events and circumstances from nonowner sources. it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

what are revenues

inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities

what are expenses

outflows or other using up of assets of an entity or incurrences of its liabilities (or a combination of both) frolm delivering or producing goods, rendering services, or carrying out other activities

what are gains

increases in equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from revenues or investments by owners

what are losses

decreases in equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from expenses or distribution to owners

what is predictive value

helps users form their own expectations about the future

what is confirmatory value

helps users confirm or correct prior expectations

what is completeness

all the information that is necessary for faithful rep is provided

what is neutrality

that a company cannot select information to favor one set of interested parties over another

what is free from error

will be more accurate (faithful) representation of a financial item

what are the assumptions of accounting

economic entity, going concern, monetary unit, periodicity

what is economic entity

economic activity can be identified with a particular unit of accountabilitiy

what is going concern

the company will have a long life

what is monetary unit

money is the common denominator of economic activity and measurement

what is periodicity

a company can divide its life into artificial time periods

what type of measurement does GAAP use

mixed-attribute

what is historical cost

when assets and liabilities are reported at the acquisition price. through this, cost is thought to be more verifiable

ex. land on the balance sheet

what is faire value

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

obtaining faire values can be subjective

what is the revenue recognition principle

requires that companies recognize (record) revenue in the accounting period in which the performance obligation is satisfied

what is the expense recognition principle

expenses are matched (recorded) with the revenues when possible

ex. when wages are recorded as expenses when the work contributes to revenue, not when the wages are paid

according to the expense recognition principle, what happens when expenses are difficult to associate with revenue

a rational and systematic allocation policy may be used

ex. long term asset like equipment is depreciated each period

what are the types of cost

product and period costs

what do product costs include

material, labor, and overhead and may be carried into future periods and recognized as expenses with revenues from the product is recognized

recognized in period of revenue

what do period costs include

salaries and administrative expenses, and are recognized immediately because there is no direct relationship between period costs and revenue

expense is incurred

what is the full disclosure principle

dictates that companies should provide information that is of sufficient importance to influence judgement and decisions of informed users

where do users find financial information

within the financial statements

in the notes to the financial statements or

as supplementary information

what is cost contraint

weighing the cost of providing information with the benefits from using it

what groups are a powerful force influencing the development of GAAP

user groups

what are the provisions of the Sarbanes Oxley Act

establising the PCAOB

requires CEOs and CFOs to personally certify Financial Statements

requires independent audit committies

what are the financial reporting challenges

nonfinancial measurements, forward-looking information, soft assets, timeliness, understandability, changing landscape

what is the issue to be addressed about nonfinancial measurements

financial reports fail to provide some key performance measures such as customer satisfaction and reject rates of products

what is the issue to be address about forward looking information

financial reports fail to provide the forward looking information needd by present and potential users

what is the issue to be addressed about soft assets

financial reports focus on ahrd assets like PPE and inventory

what is the issue to be addressed about timeliness

companies only prepare financial statements quarterly and provide audited financials annually

what is the issue to be address about understandability

financial reports are complex, and users may have difficulty in understanding them

what is the issue that needs to be addressed about changing landscape

consideration should be given to issues such as environmentsal, social, and governance (ESG) reporting, cybersecurity, and the impact of artificial intelligence (AI) models on the reporting function

end of chapter 1: look over images on the notes

what does an accounting information system do

collects and processes transaction data and communicates financial information to decision makers

what are general ledger accounting systems and what do they do

software programs, and they integrate the carious accounting functions

what types of general ledger accounting systems do smaller and larger companies use

smaller companies: entry-level programs

larger: enterprice resource planning (ERP) systems

what do manual accounting systems have

the accounting cycle steps performed by hand

what are the reasons for a class learning manual accounting systems

most small businesses use manual accounting systems, and to understand what computerized accounting systems do, you will need to understand the mechanics of manual accounting systems

what does debit and credit mean

debit left, credit right

normal asset account

debit

normal expense account

debit

normal liability accounts

credit

normal stockholder equity account

credit

normal revenue account

credit

what is the stockholdr equity account calculation

common stock + retained earnings + revenues - expenses - dividends

what are the basic financial statements

income statement

retained earnings statement

balance sheet

what does the income statement report

revenues and expenses

what does the reatined earnings report

net incomes/loss and dividends

what does the balance sheet report

assets, liabilities, and stockholders equity (where SE reports common stock and retained earnings)

what do the types of accounts in the equity section of a balance sheet depend on

a company’s ownership structure

a corporation uses common stock, paid in capital in excess of par, dividends, and retained earnings account

a proprietorship/partnership uses an owner’s capital account, and an owner’s drawing account

what are the steps in the accounting cycle that are used to record transactions and prepare the financial statements

analyze business transactions

journalize (enter) the transaction of the period in appropriate journals

post the journals to the ledger

prepare an unadjusted trial balance

prepare adjusting journal entries and post to the ledger

prepare an adjusted trial balance

prepare the financial statements from the adjusted trial balance

prepare closing entries and post to the ledger

what are the types of events of accounting transactions

external and internal transactions

what are external transactions

between an entity and its environment

what are internal transactions

event occuring entirely within an entity

when does a company record

when those transactions and events affect the assets, liabilities, equities, revenues, and expenses

each transaction will have a duel effect on the accounting equation