Studied by 6 people
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
journalize
posting
trial balance- proves equality of dollar amount of debits and credits
adjusting entries (journalize and post)
adjusted trial balance
financial statements
closing entries (journalize and post)
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
prepaid expenses, depreciation or impairment
unearned/deferred revenue
accrued expenses
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
Note 
Flashcard (24)