Intermediate Accounting Exam 1

what are some examples of items that appear on an Income Statement

cost of goods sold, selling expenses and operating income

what are some examples of items that appear on a Balance Sheet

inventory, accounts payable, common stock

what are the three categories on a statement of cash flows

cash flow from operating, cash flow from investing, cash flow from financing

what is the fundamental accounting equation

assets= liabilities + stockholder’s equity

what are the two components of equity

paid in capital and retained earnings

how do you find ending retained earnings

beginning retained earnings + (net income)- dividends

what is the statement of cash flows

presents inflows and outflows of cash due to operations, investments and financing over a period of time

what does the income statement present

presents revenues and expenses over a period of time

what does the statement of retained earnings present

presents changes in retained earnings over a period

what does the balance sheet present

balances of assets, liabilities and equity at a point in time

what is the purpose of financial acocunting

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 to the entity

what is the securities and exchange commission (SEC)

authority to set accounting standards, delegates to the accounting profession, still releases rules and interpretive guidance

what does the financial accounting standards board (FASB)

responsible for setting the accounting standards

• SEC delegates making of rules to FASB

where is the GAAP found and what is GAAP

GAAP is Generally Accepted Accounting Principles

they are codified within the FASB Accounting Standards Codification

what is the IASB and what do they do

International Accounting Standards Board: responsible for setting International Financial Reporting Standards (IFRS)

what is a journal

the book of original entry, shows the debit and credit effects on specific accounts

what is a ledger

the entire group of accounts maintained by a company

what is meant by posting

moving a transaction from the journal to the ledger

what is the purpose of closing entries

to reduce the balance of temporary accounts to prepare for next period’s transactions

what are the accounts that close at the end of a year

revenue, expenses and dividends

what is the term book value with respect to a plant asset

the difference between replacement cost of the asset and historical cost

what is an accrued expense

expenses incurred but not yet paid in cash or recorded EX: rent

what is an accrued revenue

revenues for services performed but not yet received in cash or recorded

what is cash- basis accounting

record revenue when cash is received from customers and record expenses when cash is paid

what is accrual-basis accounting

record revenue when earned (when goods or services are delivered to customers) and record expenses in the period in which they are incurred

what is the revenue recognition principle

record revenue when it is earned (when a performance obligation has been satisfied)

what is the expense recognition (matching principle)

expenses should be recorded in the period that the asset is used up

what is the time-period concept

a company’s activities can be divided into artificial time periods for financial reporting purposes; ensures that accounting information is reported at regular intervals; justification for the need for adjusting entries

what is the accounting cycle steps

1. journalize

2. posting

3. trial balance- proves equality of dollar amount of debits and credits

4. adjusting entries (journalize and post)

5. adjusted trial balance

6. financial statements

7. closing entries (journalize and post)

8. post-closing trial balance

what is the trial balance

a list of accounts and their balances

prepared from the ledger

not a formal financial statement

proves equality of debits and credits in recording transactions during the period

does NOT prove that all transactions are correct or recorded

what are the errors caught by a trial balance

recording or posting 2 debits and no credits

record or post the wrong amount as either a debit OR credit

errors NOT caught by a trial balance

record the wrong amount as BOTh the debit and credit

record or post to the wrong account

fail to record or post a transaction

what is the purpose of adjusting entries

to record revenues earned and expenses incurred that did not get recorded during normal operations

to update balance sheet accounts before preparing financial statements

what are the requirements for an AJE

a revenue or expense AND an asset or liability

NOT CASH

what are the 4 types of adjusting entries

1. prepaid expenses, depreciation or impairment

2. unearned/deferred revenue

3. accrued expenses

4. accrued revenue

what are prepaid expenses

to record an expense which was paid in advance

cash is paid before the expense is recorded

what is unearned/deferred revenue

to record the revenue which was received in advance

cash is received before the revenue is recorded

what is an accrued expense

to record an expense incurred, but not yet paid

cash is paid after the expense is recorded

what is an accrued revenue

to record revenue earned but not yet received

cash is received after the revenue is recorded

how is gross profit computed

net sales-COGS

what are 3 examples of operating expenses

advertising expense, depreciation of sales equipment and salaries

what is a discontinued operation

when a company eliminates the results of operations of a componentof the business

how is the number of outstanding shares of common stock computed

issues shares- # of shares in treasury

what is the formula for earnings per share

Net Income-Preferred Dividends/ weighted average of shares outstanding

what is meant by other comprehensive income

the gains and losses that bypass the income statement

what are the two ways that a company can choose to report comprehensive income in the financial statements

statement of comprehensive income OR income statement and comprehensive income statement

how is a change in accounting principle reported in the financial statements

make a RETROSPECTIVE adjustment that recasts prior years’ income number

what is a prior period adjustment and how is it reported in the financial statements

a correction of error that is reported as an adjustment to the beginning balance of retained earnings

what is noncontrolling interest

part of the company that is owned by someone else

what does the income statement proivde information for

• evaluating past performance

• predicting future performance

• determining the risk of achieving future cash flows

what are the limitations of the income statement

omits items that can’t be measured

differing accounting methods

judgments and estimates

what is earnings management

planned timing of revenues, expenses, gains and losses to achieve a particular income result or earnings trend

what are pro forma income statements

“as if statements”

doesn’t follow GAAP

doesn’t mean audited

what is other comprehensive income

unrealized gain or loss on AFS debt securities

foreign currency translation gain or loss

pensions

what are the three elements of the income statement

revenues, expenses and gains/losses

what are unusual items

usually reported as “other revenues and gains” or “other expenses and losses” on the income statement- NOT shown net of tax

what are discontinued operations

disposals representing a strategic shift in operations that have a major effect on the organization’s operations and financial results will be required to be presented as discontinued operations

what are the two kinds of disc ops

operating income (loss) prior to sale

gain (loss) on disposal or sale

what is noncontrolling interest

portion of equity interest in the subsidiary not attributable to the parent

reported as a separate item below net income or loss as an allocation of the net income or loss

what is a change in accounting principle

change in accounting method or adoption of a new accounting principle

what does retrospective mean

record cumulative effect of change to the opening balance of impacted asset or liability NET OF TAX

compute the current year using new method

what is a change in accounting estimates

change in useful life or salvage value, change in % used to estimate bad debts, change from straight-line to DDB

prospective: compute the current period using the new estimate and future periods as applicable

DO NOT CHANGE PRIOR PERIODS

What are prior period adjustments

corrections of errors made in a previous accounting period

adjustment to beginning retained earnings, NET OF TAX, of the year impacted or the earliest year presented

what is a cash equivalent

short-term, highly liquid investments that will mature within 3 months or less

what are the three portfolio categories used to classify investments in debt securities on the balance sheet

held to maturity, trading and available for sale

what are the 4 types of investments reported under LT Investments on the balance sheet

debt and equity securities, tangible fixed assets not in operations, inspecial funds, in non-consolidated subsidiaries or affiliated companies

what are current liabilities

the obligations that a company reasonably expects you to settle or pay off either through use of CA or creation of other CL

what is the formula for working capital and what does it measure

CA-CL, net amount of a company’s realtively liquid resources

what is unappropriated retained earnings

available for dividend distribution

what are restricted retained earnings

restricted by bond indentures or other loan agreements

what is a contra account

reduces either an asset, liability or equity account on the balance sheet

what are the three levels of hierarchy used for valuing financial instruments

observable inputs, market-based inputs and unobservable inputs

what does the current cash debt coverage ratio measure

indicates if company can pay off current liabilities from operations in a given year

what is the formula for the current cash debt coverage ratio

net cash provided by operating activities/average current liabilities

what does free cash flow measure

used to evaluate a company’s ability to repay creditors or pay dividends or interest to investors

what is the formula for free cash flow

operating cash flow-cash dividends-capital expenditures

what are the uses of the balance sheet

to provide information related to:

• liquidity: the amount of time until an asset is realized or otherwise converted into cash

• financial flexibility: the ability of an enterprise to take effective action to alter the amounts and timing of cash flow

aids in assessing risk and predicting future cash flows

what are the limitations of a balance sheet

failure to reflect current value information

judgements and estimates

failure to include items of financial value that cannot be recorded objectively

what are current assets

cash and other assets expected to be converted into cash, sold or consumed in either one year or operating cycle, whichever is longer

presented in the order of liquidity

what are the different types of current assets

cash and cash equivalents, equity securities, debt securities, receivables, inventories and prepaid expenses

how are equity securities reported

at fair value or market value

includes unrealized gains from adjusting to fair value

what are trading debt securities

debt securities which management intends to sell in the short-term to maximize profits

• reported at fair market value

what are held to maturity debt securities reported at

amortized cost

• interest goes to the income statement

what are available for sale debt securities

debt securities which are not trading or HTM

• reported at fair market on balance sheet

what are noncurrent assets

long-term investments, PPE, intangible assets and other assets

proper classification of assets depends on what

the nature of the item and the use to which it is put

what are current liabilities

obligations that are reasonably expected to be liquidated through the use of current assets or the creation of other current liabilities within one year or operating cycle, whichever is longer

what are long term liabilities

obligations that are reasonably expected to be liquidated at some date beyond one year or one operating cycle

hat is capital stock

carried at the par value or stated value of the shares issued; amount above par or stated value are recorded in PIC accounts

what are the two segments of retained earnings

appropriated (restricted) and unappropriated

what are appropriated (restricted) retained earnings

bond indenture or loan covenant

what are unappropriated reatined earnings

available for dividend distribution

what are the four types of additional disclosures

contingencies, accounting policies, contractual situations and fair values

what are contingencies

material events with an uncertain future

what are some accounting policies

principles, bases, conventions, rules and practices; must be disclosed under GAAP

what are some contractual situations

pensions, leases, stock compensation, commitments, obligations to maintain working cpaital, limit payment of dividends, restricted use of assets, mainatain financial ration etc.

what are the three levels of fair values

level 1: observable inputs

level 2: market-based inputs

level 3: unobservable inputs

what is the statement of cash flows

relfects the amount and source of cash inflows as well as the amount and use of cash outflows for a period of time

helps the financial statement reader assess the amounts and timing of future cash flows

what are operating activities

translates accrual bases income into cash basis income; reports cash collections from revenue less cash payments for expenses; 2 acceptable methods of reporting: indirect and direct

what are the additions to operating activities

noncash expenses, losse on sale of assets, increases in current liabilities, decreases in current assets other than cash