Final Accounting INT fall 2024

Investors, creditors, and other external decision-makers

Who is the primary user of financial accounting information?

Financial Accounting Standards Board (FASB)

Which entities currently establish U.S. accounting standards?

Securities and Exchange Commission (SEC)

Which entities have enforcement authority of accounting standards for public companies?

Generally Accepted Accounting Principles (GAAP)

What is GAAP?

It provides a foundation for consistent standards and helps resolve accounting disputes.

Why do we need a conceptual framework in accounting?

Assumptions, principles, and constraints

Know how they apply to GAAP.

Assets and expenses have debit balances; liabilities, equity, and revenues have credit balances.

What is the normal account balance for common accounts?

To ensure revenues and expenses are recognized in the correct period.

What are the primary purposes of adjusting entries?

Identify the accounts affected, determine the increase or decrease, and record the debit and credit amounts.

How do you make the journal entries for common transactions?

A list of all accounts and their balances, used to ensure debits equal credits.

What is the trial balance?

An expense incurred but not yet paid or recorded.

What is an accrued expense?

Revenues, expenses, gains, losses, and net income.

What are the major elements/categories of the income statement?

Adjust future periods without restating prior financial statements.

How do you account for changes in estimates?

Beginning retained earnings, net income, dividends, and adjustments for errors or changes in accounting principles.

What items appear in the retained earnings statement?

Divide net income available to common shareholders by the weighted average number of common shares outstanding.

How do you calculate earnings per share?

Net income and other comprehensive income, such as unrealized gains or losses on investments.

What items are included in comprehensive income?

Assets, liabilities, and equity, classified into current and noncurrent categories.

What are the major elements/categories of the balance sheet?

Current assets are expected to be converted to cash or used up within one year; noncurrent assets are long-term.

How do you classify assets as current or noncurrent?

By liquidity, starting with cash.

In what order are current assets presented in the balance sheet?

An account that offsets another account, such as accumulated depreciation or allowance for doubtful accounts.

What is a contra account?

Operating, investing, and financing activities, with each showing cash inflows and outflows.

What are the major elements/categories of the cash flow statement?

Start with net income and adjust for non-cash items and changes in working capital.

How do you calculate cash flow from operations under the indirect method?

The income statement affects retained earnings on the balance sheet, and changes in cash flow affect the cash account.

How do the different financial statements relate to each other?

The process of evaluating a company’s financial health and performance using ratios and trends.

What is financial statement analysis?

To assess profitability, liquidity, and solvency.

What is the most prevalent objective of financial statement analysis?

Money today is worth more than the same amount in the future due to its earning potential.

What is the time value of money?

For long-term receivables, payables, leases, and pensions.

When is the time value of money used in accounting transactions?

An annuity is a series of equal payments; it can be valued as the present or future value of a series of single sums.

What is an annuity, and how does that relate to a single sum?

Compounding calculates interest on the principal and previously earned interest, increasing future value.

What is compounding, and how does it change the time value of money?

When a performance obligation is satisfied.

At a broad level, when can you recognize revenue?

Performance obligations are distinct goods or services promised in a contract.

Be able to identify performance obligations in a contract.

The price excludes amounts like discounts, rebates, and non-performance penalties.

What contractual amount should be used as the transaction price?

Use the percentage of completion method for construction contracts.

What method do you use to measure revenue recognition over time?

Cash includes currency and bank deposits; cash equivalents are short-term investments readily convertible to cash.

What is cash and a cash equivalent?

Match the bank statement balance to the company’s cash account, adjusting for outstanding items and errors.

How do you prepare a bank reconciliation?

Estimate uncollectible accounts, recording bad debt expense and an allowance; write-offs reduce accounts receivable and the allowance.

How do you account for bad debts under the allowance method?

Determine if the sale is with or without recourse and recognize any gains or losses.

What are the key accounting considerations when selling receivables?

Purchase cost, conversion costs, and other costs to bring inventory to its present condition and location.

What costs should be included in inventory?

FIFO assumes oldest costs are sold first; LIFO uses the newest costs, affecting COGS and taxes.

What are the key differences between inventory costing methods?

They carry over, impacting retained earnings and potentially requiring restatements.

What impact do prior period misstatements have on current period financial statements?

Cost, lower of cost or net realizable value, or market value.

What are the methods to value/measure inventory?

The estimated selling price minus costs to sell.

What is net realizable value?

Debit loss on inventory write-down and credit inventory.

What is the entry to adjust inventory to net realizable value?

Perpetual updates continuously; periodic updates at period-end.

What are the characteristics of a perpetual and a periodic inventory system?

To record a cost as an asset rather than an expense.

What does it mean to capitalize something?

At its purchase price plus costs to prepare it for use.

How and at what value is equipment capitalized?

When the selling price differs from the net book value.

When is a gain or loss recognized on the sale of equipment?

Capitalize purchase price and preparation costs; expense maintenance and repairs.

What costs are capitalized to property, plant, and equipment, and what costs are expensed?

The asset’s cost minus accumulated depreciation.

What is the net book value of an asset?