Acc 3010 Exam 1

Current Ratio Formula

current assets / current liabilities

Working Capital Formula

current assets - current liabilities

What does GAAP stand for?

Generally accepted accounting principles

Accounting Equation

A=L+E
know the variations algebraically

Who has the ultimate responsibility for financial statements?

Management
NOT AUDITOR

Balance Sheet Accounts

• cash

• AR

• inventory

• prepaid expenses

• ppe

• investments

• long term assets

• loans/notes payable

• deferred revenue

• AP

• long term liabilities

• common stock

• RE

• dividends

• APIC

Income Statement accounts

• revenue

• COGS

• R&D

• Marketing

• SGA

• other expenses

  • NOT PREPAID THOSE ARE ASSETS

• Net Income

What is an asset

resources

What is a liability

claims to a resource, obligation to others

Permanent Accounts

Balance sheet accounts

Temporary accounts

Dividends and Income Statement

R.E.D

Primary objective of accounting

Decision making

lightbulb and money cycle

Internal v External accounting

• financial acct is external

• managerial is internal

Completeness

complete

Relevance

applicable in current situation

Faithful representation

• trust

• was reliability, same thing

  • jan 1 is more relevant, but april 1 is more reliable (takes time to close books, jan 1 is estimate)

Predictive

Is it useful to prefict future expectations

Confirmatory

• allows to confirm expectations

  • does the numbers make sense of my choice to invest in xyz comp

Materiality

• Will it change mind of decision maker

  • How is money used, does owner take $ to buy 30k car?

  • All fraud is material

• If it is over or under set $ include or not

  • Is it off enough to look into

Completeness

• is it complete, everything recorded

Neutrality

unbiased

Free from error

correct

Comparability

• aka consistency

• able to compare different years at different comps

• can compara data to others

Verifiability

able to be verified

Timeliness

applicable

Understandability

footnotes, is language not overly complex

Constraint to characterisitcs

Cost effectiveness

• do the benefits exceed costs

• not worth is to fix $20 error when it takes hours

What are the 4 assumptions

• going concern

• Economic entity

• periodicity

• monetary unit

Going concern

• Concern = business, ongoing business keeps going, NOT A WORRY,

• If there is a doubt a comp will go out of business within a year needs to be disclosed (substantial doubt)

Economic entity

• draw a border, does it capture everything in it?

• able to build reports

Periodicity

divided into time periods

Monetary unit

USA statements are in US $

Recognition v Realization

Recognition

• When it goes in financials

  • service is provided, good is received (GAAP)

• accural acct

Realization

• Earnings process is judged to be complete

• Reasonable certainity to collect asset

• CASH CHANGES HANDS

  • Stock

  • Can recognize when earned, but not realized until cash is there

Initial v Subsequent Measurement

Initial

• bought ppe

Subsequent

• depreciation

• later in time

Who sets accounting RULES

• FASB

  • Has rule making authority

Who sets accounting LAWS

• Statutory authority can make laws

• SEC

  • codification is the only stat. authoirtative liteture

Earning per Share

EPS = NI / # shares outstanding

Liquidity v Solvency

Liquidity

• ability to pay current liab with current assets

Solvency

• ability to stay in business long term

  • can be solvent and not liquid

Current v Longterm

current means within a year or reporting period

longterm is over those time periods

Sale of merchandise JE

C.A.R → CoIN

• Cash/ AR ##

  • Rev ##

• COGS ##

  • Inven ##

Allowance for doubtful accouts

contra asset

Allowance and Bad debt

t charts and journal entry

BS limitiations

• Record assets at historical costs and not their market value

• Market value is less reliable than historical cost, but more relevant

• Some assets are not on bs

  • Branding

    • Nike logo

  • Employees

Cash equivalents

• Immediately or super shortly be converted into cash

  • Commercial paper

    • Same thing as tbill for companies

    • <1 yr collection period

  • Money market funds

    • Banks invest in longer term things, higher %

  • US treasury bill

    • Short term treasury bond

      • 30, 60, 90, 1 yr

    • Can be sold for cash at anytime

politics

mid-1990s: accounting for employee stock options

2007: implementation of fair vair accounting standard

Controversy

• Govt pressured FASB to follow EU and world acct standards

• Convergence with intl standards, not 100% work together but not same

• Moving back, not forward

  • Dakota dog story, always find a way outside of the bounds, add more protections

• Works together now, but not same

MAIN CONTROVERSY: revenue recognition and leases

Know how to build BS

A = L + E

Know how to set up IS

rev - cogs

GP - op exp

op inc - non op exp

EBT - taxes

NI