intermediate accounitng exam 1

Why does the SEC require firms to “account” financially for their transactions before their stock can be traded on a U.S. stock exchange?

investors need information to allocate scarce resources, and without reliable information investors would leave the market, hurting long-term growth.

What is the Decision-Usefulness Criterion?

It’s the burden placed on accountants to provide relevant and reliable information that investors can use for decision-making.

How do financial statements provide useful information?

By following the expanded Balance Sheet equation and presenting operating, investing, and financing activities across the financial statements.

Who determines Generally Accepted Accounting Principles (GAAP)?

SEC and FASB, though AICPA, professional organizations, and academics also contribute.

. Who has the final authority over GAAP?

The SEC.

What is the FASB Codification?

The official documentation of GAAP (all rules organized in one place).

. Do ALL companies need to follow U.S. GAAP?

No. Only companies that want their stock traded on U.S. exchanges or that access U.S. debt markets.

What do foreign companies use instead of U.S. GAAP?

International Financial Reporting Standards (IFRS).

Why do investors in foreign companies face challenges?

They must understand both U.S. GAAP and IFRS since the rules and information differ.

What do we mean by a Conceptual Framework?

A coherent system of concepts that flow from an objective, identifying the purpose of financial reporting.

What is the main objective of financial reporting?

To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources.

basic characterisstcs that make a piece of data useful

relevance and faithful representation

relevance

Predictive Value, Confirmatory Value, and Materiality.

faithful representation

Completeness, Neutrality, and Freedom from Error.

four basic assuptions of gaap

economic entity assumption, going concern assumption, monetary unit assumption, periodicity assumption

Economic Entity Assumption

Economic events can be identified with a particular business entity.

Going Concern Assumption

Businesses are assumed to have a long enough life to justify accruals and deferrals.

Monetary Unit Assumption

the dollar is the most effective means of expressing economic effects.

Periodicity Assumption

Activities of an enterprise can be divided into artificial time periods.

Four basic principles of GAAP

Measurement Principle, Revenue Recognition Principle, Expense Recognition (Matching) Principle , Full Disclosure Principle

Measurement Principle

transactions must be representable as a number with sufficient certainty (primarily Historical Cost or Fair Value).

Revenue Recognition Principle

Revenue is recognized when the performance obligation is satisfied.

expense Recognition (Matching) Principle

Expenses should be matched with the revenues they help generate; if not possible, recognize rationally and systematically (e.g., depreciation).

Full Disclosure Principle

Disclose any fact important enough to influence informed readers’ decisions.

Cost Constraint

The benefits of financial information must exceed the costs of providing it.

. What does the Income Statement measure?

The success of a company’s operations for a given period of time.

What are the uses of the Income Statement?

1. Evaluate past performance of the company.

2. Provide a basis for predicting future performance.

3. Help assess the risk of achieving future cash flows.

What are the limitations of the Income Statement?

• Immeasurable items are omitted.

• Income numbers are affected by the accounting methods used.

• Income measurement involves judgment.

What is the correct order of the sections in a multiple-step Income Statement?

G, I, O, I, N, E, (Gross profit, income form operations, other revs and gains, other expenses and losses, income tax, net income, Earnings per share)

comprehensive income equation

NI + OCII

where is NI accumalated

RE

where is ocii accumalated

AOCI

what is OCII

unrealized balance sheet changes

if payables goes up

current expense, future cash out

if payable goes down

current cash receipt, past expense

When prepaid goes up

current cash out, future expense

when prepaid goes down

current expense, past cash out

When AR goes up

current rev, future cash in

When AR goes down

current cash receipt, past revenue

When UR goes up

current cash receipt, future rev

when UR goes down

current rev, past cash reciept

when converting

you want the current of whatever you are converting to

What are the main uses of the Balance Sheet?

1) Assess financial flexibility (liquidity & solvency), 2) Calculate rates of return, 3) Evaluate capital structure.

What does “financial flexibility” mean in the context of the Balance Sheet?

The ability to adapt to opportunities and adverse situations; measured by liquidity and solvency.

What are the main limitations of the Balance Sheet?

1) Many assets are valued at historical cost.
👉 2) Historical cost aids matching on the Income Statement but prevents market-value reporting.
👉 3) Asset values involve judgment.
👉 4) Many assets of financial value are omitted.

Current Assets

Cash or assets convertible within 1 year/operating cycle (whichever longer).

Non-Current Assets

Not current; includes Long-term Investments, PP&E, Intangibles, Other Assets.

Current Liabilities

Obligations expected to be settled with current assets or by creating other current liabilities.

Long-Term Liabilities

Obligations not expected to be settled within 1 year/operating cycle.

Owners’ Equity

Capital Stock, Additional Paid-In Capital, Retained Earnings, treasury stock

What are examples of Non-Current Assets?

Long-term Investments, Property/Plant/Equipment, Intangible Assets, Other Assets.

What are the main sections of Owners’ Equity on balance sheet?

Capital Stock, treasury stock, ending retained earnings

where is Retained Earnings in its ending format

only on the balance sheet

What is the purpose of the Statement of Cash Flows (Operating Section)?

to adjust Net Income to Net Cash Provided (or Used) by Operating Activities.

What are the adjustments made in the Operating Section of the Statement of Cash Flows?

1. Add back non-cash expenses (Depreciation, Amortization, etc.).

2. Undo gains/losses on investing and financing (subtract gains, add losses).

   1. Adjust for changes in current assets and liabilities (payables, prepaids).

. How is Current Cash Debt Coverage calculated?

Net Cash Provided by Operating Activities ÷ Average Current Liabilities.

How is Cash Debt Coverage calculated?

Net Cash Provided by Operating Activities ÷ Average Liabilities.

How is Free Cash Flow calculated?

Net Cash Provided by Operating Activities – Capital Expenditures – Cash Dividends.