acc test

fundmental characteristics of accounting information

predictive value - earnings should be able to help predict future earnings

comparability - you should be able to easily compare 2 companies

consistency - companies apply the same accounting processes each period

timeliness - information is all on time so investors can make decisions

economic entity

separates transactions from its owner (financial actives must be kept separate from personal finances)

going concern

assumes the business will keep operating for foreseeable future - means that things like depreciation and amortization and non current and current assets are all reasonable because you assume you can go based off the future

monetary unit assumption

things are measured in dollars assumed to be stable over time - financial aren’t adjusted for inflation

periodicity

allows company to be divided into time periods -

historical cost vs fair value

historical cost - assets and liabilities (including ppe, prepaid exp, inventory) are reported at historical cost because they are subjective and costly to measure

fair value - any type of security

revenue recognition principle

revenue is recognized when performance obligation is met

matching principle

expense recognition - expenses are recognized when they occur to support revenue related actives

expenses are matched with their revenues

full disclosure

statements must include important information even if it makes the company look bad

fasb and sec

sec - oversees financial market - they are the regulators and most powerful

fasb - creates and improves gaap and sets the accounting standards

accrual basis accounting

accrual based accounting says revenues and expenses are recorded when they are earned not when there is cash moving (cash basis)

it is much better at predicting cash flows

propose of adjusting entries

ensures revenues and expenses are in the correct period in which they occur - matching purposes

purpose of trial balance

verify debits = credits

purpose of closing entries

resets the temporary accounts to 0 at the end of an accounting period

temporary vs permentant accounts

temporary - revenues, expenses, dividends

permanent accounts - assets, liabilities, equity

what happens where there is a failure to record an adjusting entry to accrue an expense

expenses understated

liabilities understated

net income overstated

retained earnings/ equity overstated

all of the adjusting entries

purpose of the income statement

displays a company’s financial performance during a given reporting period

compare companies

predict future performance

assess risks and uncertainty of cash flows

single step vs multi step income statement and how to prepare when given list of accounts

single step - groups all revenue/ gains and expenses/ losses together simpler

multistep - reports several subtotals before arriving at income of operations (gp,ebit,operating income) better info on trends, gross profit, better assess earnings quality

non gaap earnings

non gaap earnings - reporting additional information in schedules about what they consider permeant earnings which does not align with gap (often higher)

earnings quality

the ability of reported earnings to predict a company’s future earnings

some people may forge this to make it look better

less predicitbality = lower quality

earnings management

when managers manipulate income to make an impact on earnings quality to make them look less risky

income shifting - accelerate or delay when revenues/expenses are recognized

manipulating income statements classification

eps

measures the number of dollars earned per share of common stock

= net income - dividends / number of common shares outstanding

other comprehensive income

all unrealized gains or losses that bypass net income but are representative of a company’s performance

can be shown in single continuous statement or two separate statements

purpose of the balance sheet

reports aloe, provides information about resources, obligations, and equity

helps predicting cash flows

evaluating capital, assess risk, analyze company’s liquidity and solvency

operating vs non operating items of income statement

operating - things the company does day to day

sales, cogs, operating expenses (g&a, selling exp, sales return/allow, depriciation)

non operating - things that don’t happen very often (selling ppe, interest exp, dividend income)

classifications of aloe

how to prepare a balance sheet given list of accounts

find on formula sheet

purpose and limitations of stamens of cash flows compared to other statements

financing vs investing vs operating vs non cash activities

financing activities - current assets and current liabilities (ar, ap, inventory, depreciation)

investing activities - long term assets - (land and equipment)

financing activities - long term liabilities, common stock, dividends (bond repayments, dividends paid, stock issuance)

indirect method

takes net income and converts it to operating cash flow, removes non cash items and adjusts them

direct method - cash collections - cash expenses

how to prepare statement of cash flows given accounts

formula sheet

where are significant non cash activities reported and how to check your statement of cash flows

things that are important to the business but do not involve cash, reported at bottom of statement of cash flows or in notes

your ending cash flows should always equal the net income from the beginning

trade vs non trade accounts receivables

trade - things that result from the main business (ar, notes rec, )

non trade - thing that don’t happen from the main course of business (dividends recievable, interest receivable)

how to account for sales discount gross method

gross method - assumes customer will not take the discount - most companies use this

puts in the discount once the customer uses it

how to account for sales discount net method

net method - assumes customer will take discount

do the discount from the beginning and at the end you will credit discounts forfeited

how to account for realized and anticipated sales returns and allowances

meaning of refund liability account

an adjusting entry for estimated returns

why we need anticipated sales return account

it realizes sales when they occur and makes sure there’s not an overstatement of income

why direct write off method is not allowed by gaap

not allowed by gaap because there is a mismatch of revenues and expenses because you don’t do anything at the end of the year (estimating) you wait till something actually happens

allowance method

required by gaap for public companies - you do an adjusting entry at end of every year to estimate your risk (how many people aren’t going to pay)

journal entries for write offs

write off occurs when customer doesn’t pay

direct write off method - debit credit loss expense

credit accounts receivables (doesn’t comply with gaap)

allowance method - debit allowance for da or credit losses

credit accounts recievables

notes receivables vs ar and how interest works

notes receivables - used for new customers, high risk customers, to extent payment periods, can be interest or non interest = principle * rate * time

there might be an adjusting entry If it crosses a reporting period

pledging accounts receivables as collateral

if a company has a lot of accounts recievables/ sales on credit they can put it up for collateral so they can get instant cash

sales with recourse and recourse liability account

whatever the collection company isn’t able to collect is the amount the seller must pay them

worse for the seller so they record recourse liability on the balance sheet

sales without recourse

the sale to the collection agecy is final

collection agency will charge a fee bc it is worse for them but better for the seller

conformity value

confirms out expectations about future cash generating ability

limitations of the income statement

not always comparable (different accounting methods)

lots of judgement involved

important info (customer satisfaction, things that aren’t valued) can be omitted

does not show which expenses are fixed or variable

limitations of the balance sheet

most assets/liabilities reported at historical cost

use of judgements and estimates

many things omitted

which accounts do you close

temporary accounts - rev, exp, div, income

unrealized gains or losses included in other comprehensive income do not affect net income until they are realized

true

what happens where there is a failure to record an adjusting entry to accrue a revenue

revenues understated

net income understated

assets understated

retained earnings / equity - understated

where are unrealized gains or losses, which are not included in net income, usually reported

in other comprehensive income (not a part of net income at all, not even in non operating)

can be after net income or in its own statement

what does eps represent

the profit earned on each outstanding common share

why do we estimate bad debt expense

match revenues with expenses and make sure accounts recievables is not overstated

purchasing other companies stock is reported where in statement of cash flows

investing

sales discounts forfeited represents an expense

FALSE this is a good thing it goes in other revenues

estimating expected returns helps to match revenues and expenses and make sure things aren’t overstated

true