Intermediate Accounting Test 1

What are the 8 chapters of the conceptual framework?

1. Objective

2. Reporting entity

3. Qualitative characteristics

4. Elements

5. Recognition/Derecognition

6. Measurement

7. Presentation

8. Notes

What are the elements of the financial statements? (10)

Assets

Liabilities

Equity or net assets

Investments by owners

Distributions to owners

Comprehensive income

Revenues

Expenses

Gains

Losses

Asset

Present rights of an entity to economic benefits.

Liabilities

Present obligations of an entity to transfer economic benefits.

Equity or net asset

The residual interest in the assets of an entity that remains after deducting its liabilities.

Investments by owners

Increases in equity of an entity resulting from transfers to the entity from other entities of something valuable to obtain or increase ownership interests (or equity) in the entity.

Distributions to owners

Decreases in equity of an entity resulting from transferring assets, rendering services, or incurring liabilities by the entity to owners.

Comprehensive income

The change in equity of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Revenues

Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities.

Expenses

Outflows or other using up of assets of an entity or incurrences of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities.

Gains

Increases in equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from revenues or investments by owners.

Losses

Decreases in equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from expenses or distribution to owners.

Moment in time group of elements

Assets, liabilities, and equity or net assets

What are the 4 assumptions associated with accounting, and what is each?

1. Economic entity: economic activity can be identified with a particular unit of accountability (company is separate from owners)

2. Going concern: the company will have a long life

3. Monetary unit: money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis

4. Periodicity: a company can divide its economic activities into artificial time periods

What is the expectations gap?

What the public thinks accountants should do versus what accountants think they can do.

Sarbanes oxley act: Protects investors and improved the accuracy and reliability of financial reporting

What are the normal balances for various accounts?

Remember: DEAD CLIC

Dividends

Expenses

Assets

Debit

Common stock

Liabilities

Income/Revenue

Credit

What does double-entry accounting system mean?

For every debit their must be a credit, and vice versa.

What are the types of adjusting entries?

Deferrals:

1. Prepaid expenses: Expenses paid in cash before they are used or consumed.

2. Unearned revenues: Cash received before services are performed.

Accruals:

1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.

2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

What are closing entries?

Reducing the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period’s transactions.

Temporary accounts:

Revenues, expenses, dividends

How is the balance in Retained Earnings calculated?

Beginning RE

Add: Net income

Less: Dividends

= Ending RE

What is the overview of the income statement?

Main structure:

Sales Revenue

− Cost of Goods Sold

= Gross Profit

− Operating Expenses

= Income from Operations

± Other Revenues/Expenses

= Income Before Income Taxes

− Income Tax Expense

= Net Income

What is the purpose of the income statement?

To measure the success of company operations for a given period of time.

How do you find gross profit?

Net sales - COGS

How do you find income from operations?

Gross Profit − Operating Expenses

How do you find net income at the end of the income statement?

Income Before Tax − Income Tax Expense

What are the steps in revenue recognition?

1. Identify the contract with a customer

2. Identify the performance obligations

What exactly did the company promise to provide?

3. Determine the transaction price

How much consideration does the company expect to receive?

4. Allocate the transaction price to the performance obligations

Divide the transaction price among the goods/services based on their relative standalone selling prices.

5. Recognize revenue when/as each performance obligation is satisfied

COPAR

What do you do when there are multiple performance obligations?

They are recorded whenever they are finished, one at a time.

How do you calculate earnings per share?

(Net income - preferred dividends) / Weighted average number of common shares outstanding

How do you calculate income tax on an income statement at a flat rate?

Income before tax * tax rate

Ex. $40,000 x .25 = $10,000 income tax expense

How do you calculate transaction price when a performance bonus is involved?

Ex: Contract price: 100,000

Performance bonus: 40,000

Goes down by 10,000 each week late

Odds of being on time: 60% x 40,000 = 24,000

Odds of being 1 week late: 40% x 30,000 = 12,000

Performance bonus total: 36,000 recorded

What is the outline of the conceptual framework (diagram)?

What are the two fundamental qualities and what do they mean?

Relevance: The information can influence a decision. It helps users predict outcomes or confirm/revise previous expectations.

• Example: Knowing a company's current revenue helps investors decide whether to invest.

Faithful representation: The information accurately represents what it claims to represent. It should be complete, neutral, and free from material error.

• Example: If a company reports $50,000 of equipment, that amount should faithfully represent the equipment owned.