MGMT 1A MIDTERM VOCAB

pg 36-37 in course reader (plus a couple extras)

Monetary Unit

Accounting Assumption (1)

• Usually the national currency of the reporting country

• US dollar

Economic Equity

Accounting Assumption (2)

• A business is an economic unit separate and distinct from its owners

Period of Time

Accounting Assumption (3)

• Information is reported in a company’s financial statements at least on an annual basis.

• Publicly traded companies must report information on a quarterly basis

Going Concern (Continuity)

Accounting Assumption (4)

• The company will continue to operate in the near future.

• We assume a business will operate indefinitely.

Accrual Accounting

Accounting Principles

• Relating the financial effects of transactions, events, and circumstances having cash consequences to the period in which they occur rather than the period when the cash receipts or payments occur

Revenue Recognition

Accounting Principles (1)

• The revenue recognition standard states that:

  • An entity should recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer.

  • An asset is transferred when (or as) the customer obtains control of that asset.

  • Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

• Recognize revenue when (or as) the entity satisfies the performance obligation, not necessarily when cash changes hands (accrual basis of accounting).

Matching

Accounting Principles (2)

• To determine the income of a company for an accounting period, the total expenses involved in obtaining the revenue of the period must be computed and related (matched against) the revenues recorded in the period.

• Costs incurred in generating revenues are expensed in the same period as the revenue is recognized.

Full Disclosure

Accounting Principles (3)

• Circumstances and events that make a difference to financial statement users should be disclosed

• Any information that will influence the actions of a decision maker must be disclosed:

  • decision makers:

  • investors

  • creditors

  • government

  • management

Historical Cost

Accounting Principles (4)

• The acquisition of goods, services & other resources are entered into the accounting records at their exchange price (the price).

• we record assets at historical cost because the purchase price is objective and verifiable.

Materiality

Accounting Constraints (1)

• An item is material if it is likely to influence the decision of a reasonably prudent investor or creditor

Conservatism

Accounting Constraints (2)

• Accounting measurements take place in a context of significant uncertaintes therefore, when alternative accounting valuations are equally possible, select the one that is least likely to:

  • overstate assets and income

  • understate liabilities and expenses

Securities and Exchange Commission (SEC)

an agency of the U.S. gov that was established in 1933 to administer laws and regulations to the exchange of securities and the publication of financial information by U.S. businesses

Securities Act of 1933

S-1 Registration Statement - must have audited financial statements

Securities Exchange Act of 1934

10-K - annual report

10-Q - quarterly

8-K - is a current report companies must file with the SEC to announce major events that shareholders should know about. For example, Completion of Acquisition, Bankruptcy, Changes in Registrant’s Certifying Accountant

Sarbanes-Oxley Act of 2002

have to certify financial statements if fraud and you knowingly sign then jail

in 2002 - major fraud w/ ENRON and Worldcom and Arthur anderson (largest pub acc firm that went under)

Financial Accounting Standards Board (FASB)

An organization with the responsibility for developing accounting principles in the US

Generally Accepted Accounting Principles (GAAP)

part of (FASB)

• The established set of standards and rules that are recognized as a general guide for financial reporting purposes, which have been established by the accounting profession

International Accounting Standards Board (IASB)

an independent organization that develops and approves international financial reporting standards

International Financial Reporting Standards (IFRS)

principles based

helped the world converge to one set of rules
(US is rules based, close but not the same as IFRS)

Public Accounting Firms

Generally Accepted Auditing Standards (GAAS)

• The established set of standards and rules that are recognized as a general guide for performing audits of financial statements, which have been established by the accounting profession.

Contra Accounts

1) They are always attached to another account

2) They have the opposite balance of the normal account balance

3) They reduce the account to which they are attached

Permanent Accounts

Stay on the books

• Assets

• liabilities

• Equity:

  • Contributed Capital or Common Stock

  • Retained Earnings

Temporary Accounts

Closed out (zeroed out) to Retained Earnings at year end

• Revenue

• Expenses

• Drawings or Dividends

Assets

Economic resources owned by the company that are expected to provide future economic benefit

Current Assets (in order or liquidity)

1) Cash & Cash Equivalents

2) Investments or Marketable Securities (stocks and bonds)

3) Accounts Receivable - amounts owed to a company

4) Merchandise inventory

5) Prepaid Expenses - services and goods purchased in advance of use (ex: prepaid insurance, prepaid rent, prepaid advertising)

6) Supplies

Non-Current Assets

1) Property, Plant & Equipment (PP&E)

• Also called: Long-Lived Assets or Fixed Assets (includes land & building)

2) Intangible Assets - eg. Patents, Trademarks, Copyrights, Goodwill

Liabilities

amounts owed by company

presented in order they will be paid

Current Liabilities

1) Payables - amounts we will pay later:

• Accounts Payable

• Taxes Payable

• Notes Payable (debt)

• Interest Payable

• Dividends Payable

2) Unearned Revenue - when customer pays in advance - before the goods are shipped or the services are rendered

(we owe goods or services to the customer therefore we have a liability)

Non-Current Liabilities (Long-Term Liabilities)

1) Bonds Payable

2) Loans Payable (long-term debt)

Equity

Presented in the order of liquidation preference

• excess of assets over liabilities

• the owner’s claim on the company’s assets

Types of Equity Accounts

1) Contributed Capital

• Preferred Stock (at Par)

• Common Stock (at Par)

• Additional Paid In Capital (in excess of Par)

• Treasury Stock

2) Retained Earnings

• Beginning Retained Earnings

• + Net Income

• - dividends

• Ending Retained Earnings