Accounting - C13

All terms and problems

What is Bookkeeping?

The preservation of a systematic, quantitative record of an activity

Break down the Accounting system

1. Bookkeeping - collect information and records

2. Organize and evaluate said information

Accounting is

quantitative information, primarily functional in nature about the economic entities that is intended to be useful in making economic decisions

List the key features in Accounting

1. Numbers

2. Financial Dimensions

3. Usefulness

4. Future decisions based on past information

What is the difference between internal users and external users?

Internal users are managers and executives that work within the company

External users are potential leaders and investors

Why are internal users more valuable ?

They work within the company so they have the power to custom design accounting reports to meet their specific needs

The financial statement includes

the balance sheet , income statement, and statement of cash flows

The balance sheet details the

Company’s assets, obligations, and owner’s equity (how much money has been invested by the owners)

The income statement shows

The amount net income earned by the company, most common you see are annual and quarterly.

if the ____ is more than the revenue then there was a loss for a period

Expenses

What is revenue?

How much money generated from the business

List the 3 primary financial statements

the balance sheet , income sheet, and statement of cash flows

Accounting standards are set by the ______, which has no legal power to enforce accounting standards it sets

FASB ( Financial accounting standards board )

What are the 3 factors used to make a signifcant change in accounting right now?

Advanced information technology

International accounting standards board

Increased scrutiny associated with accounting standards

What exactly are the needs for financial statements ?

To reduce the overall cloud of uncertainty, that surrounds business and then allow investors, creditors to identify the level of risk associated with a certain investment.

When you apply for a loan, what information will be required to qualify for that loan?

You must apply through application that ask for financial statements. The lender must be certain if you will repay this loan.

REDUCE THE INTEREST RATE AND UNCERTAINTY

In terms of businesses, what else comes into play when requesting a loan?

Audited financial statements reduce the uncertainty even more

Reveals what a company owns and what it owes

Balance sheet

Provides the best attempt of measuring economic performance

The Income statement

Where the company gets its cash and how it spends its cash

The statement of cash flows

The accounting equation is

Liabilities + Equity = Assets

The balance sheet contains _____ , ______, and ________

Assets, Liabilities, and owner’s equity

Owned or controlled by company that will provide probable future economic benefit

Assets

Obligation that will require a probable future sacrifice in the form of transfer of assets or providing services

Liabilities

The amount the owners originally invested in the business plus the profit they have left in the business

Owner’s equity

What increases Owner’s equity?

Invest in assets

Company generates profit

What decreases Owner’s equity?

Owner’s withdraw assets

Company deals with loss

Paid-in-Capital is

The value of the assets given in exchange for shares of stock

Explain retained earnings

These represent the portion of stockholders equity that has not been paid to the owners as dividends. Basically, Retained earnings are the cumulative profits a company has kept in the business rather than distributed to owners as dividends

What is a Treasury Stock?

When the company buys back its own shares

Describe the format of a Balance sheet

Assets are ALWAYS listed first

Liabilities are next

Owner’s equity completes the balance sheet

Remember the equation for the Balance sheet which is

A = L + E

Lis the three important concepts on the Balance sheet

Entity

Historical cost

Going concern assumption

The idea that personal financial activity is kept separate from business financial activity is

Entity concept

Another name for the Balance sheet is

Statement of Financial position

What does the Income statement detail?

How much did you make? OVER a period of time

Revenues, expenses, net income

What is the prime difference between Balance sheet and Income Sheet?

Balance sheet talks about the point of time

Income sheet talks about the period of time

What even is Revenue?

The amount of assets created from the sale of goods or services

What is an Expense?

The amount of assets consumed while doing business

Expenses are also created when ________ are created in generating revenues

Liabilities

Describe Gains and Loses

Money that is MADE or LOST outside normal operations of the company .

Revenues are NOT ______; Expenses are NOT _______

Assets; Liabilities

How do can you generate a net income?

IF your revenue exceeds the expenses

How can you generate a net loss?

IF your expenses exceed the revenue

Earnings per Share (EPS)

The 4th thing on the income statement. The earnings per share = net income

Another name for income statement is

Statement of earnings

What would increase the sale of goods and services?

Revenues

What does are the 3 things considered in the Statement of cash flows?

Operating, Investing, and Financing

Describe Operating cash flows

Operating activities used in producing or selling goods and services

prime examples include selling goods, purchase inventory, pay wages, taxes, rent, etc.

Describe Financing cash flows

Cash is obtained from or repaid to, owners and creditors.

Prime example is cash received from or proceeds from a loan counts as this

Describe Investing activities of cash flows

Investing is the purchase and sell of land, buildings, and equipment. Also buying and selling stocks

Vital information that CANNOT be captured solely by dollar amount is reported in a firm’s

Notes to financial statements

Which one of the four general types of financial statements are NOT true?

List an example that is considered significant in the notes of financial statements?

The method used to estimate deprecation of an equipment

List an example that is NOT considered for the notes of financial statements

The disclosure of the uncertain, potential outcome of a lawsuit

What does an External auditor do?

They independently verify financial statement numbers and the internal system provided by a company

What is the difference between public and private companies receiving external audits?

Private = they get audits to provide additional assurance to bankers

Public = are required BY LAW by SEC

Who is qualified to be a External Auditor??

CPAs ( Certified Public Accountants )

Describe the certification process with External Auditors

They certify past financial statements with the GAAP ( Generally Accepted Accounting Principles ) while upholding GAAS ( Generally Accepted Accounting Standards )

This does not gurantee that the company is successful in the future

Why is it important for external audits at the end of the year?

Promotes good business and keeps companies in line

External Auditors are required to

Provide some assurance that the financial statements are NOT misleading

Who is in charge of maintaining the accuracy provided in financial statements?

MANAGEMENT

List two economic factors involved in the External Auditors duty

Uphold reputation and avoid risk of lawsuit

Reliability vs Relevance is like a

trade off of information

RELEVANCE is _______ and uncertain

RELIABILITY is _______ and precise

fast; slow

What is accounting conservatism?

When there is bad news, tell it first then if there is good news, you can tell later.

Lenders encourage accounting conservatism

Is conservatism “good accounting?”

Not necessarily, it is good for banks

This refers to the question of whether an item is large enough to make a difference to anyone

Auditors are the main ones reporting how much and how it SHOULD be reported

Materiality

What is the Balance sheet?

The listings of the companies assets, liabilities, and equity which is used to evaluate the company’s financial position

What are current assets and how long is current?

Current assets are short term items like cash, accounts receivable, and inventory.

Usually current is one year or less

Accounts receivable are amounts owed to a business by its credit customers and are usually collected in cash within ____ to _____ days

10 to 60 days

Where are current assets usually listed on the balance sheet?

They are placed first before the long time assets

What is classified as a long term asset?

More than ONE year,

Equipment, Land, Investment, Intangible assets

Why make long term investment?

Earn money and exert their influence

PPE is

Property, plant, and equipment

What are intangible assets?

Assets with no physical or tangible characteristics

Ex. agreements, contracts, copyrights, goodwill, franchises

Deferred tax benefits are deferred because

Income tax savings that you wont get until the future therefore its long term

Current Liabilities are expected to be repaid within

ONE YEAR

Common current liabilities are

Accounts payable, Accrued Liabilities, Short term loans payable, Current portion of short term debt, and Unearned revenue

Accounts receivable vs Accounts payable

You will receive the money in the future = asset

You will pay the money in the future

Short term loans payable are expected to be paid within or less than

12 MONTHS + interest

Unearned revenue is a obligation because

Businesses are required to deliver services paid beforehand

Ex. Paying for a plane ticket

Deferred income tax liabilities are obligations to

pay income on a income statement but has not yet been required to be reported

Other long term liabilities include

Pension obligations, Warranty, Environmental cleanup

Stockholder’s Equity is described as

Amount invested in the company by the other is either directly or by retaining in the business some assets created by profitable business

E = A - L

A = L + E

Equity is the residual amount of assets would remain if all _________ are satisfied

Liabilities

What makes preferred stock different from common stock ?

Preferred stock is giving up rights of ownership in exchange of protection by the creditors

Which types of accounts show as acquired resources?

What even is a dividend?

A portion of the company’s profit paid to shareholders

CA - CL is the

working capital

Recognition is basically ____________ and shows in the financial statement

Summarization in one SINGLE number

Convey the complexity of the situation is called

Disclosure

Financial capital maintance is

Measured in terms increase in dollar amount of wealth

The main one we focus on

Physical capital maintenance is

Increase in physical resources

ex. improve the house infrastructure

List the 5 practical measures of income

1. Gross Profit

2. Net Income

3. Operating Income

4. Comprehensive income

5. Income from operating expenses

Sales - Costs of goods sold =

GROSS PROFIT

Gross profit - Operating Expenses =

OPERATING INCOME (EBIT)

All expenses are operating expenses EXCEPT

interest expense and income tax

Operating income - Interest expense - Income tax expense =

Income from continuing operations

________ is the summary of overall economic performance of a company for a given period