Int Acct Exam 1

Ch 1. & Ch 2.

The why of financial accounting

To communicate and provide financial (to external users: investors, analysts, creditors, IRS, SEC) information to allow the efficient transfer of capital.

Generally Accepted Accounting Principals (GAAP)

Rules accountants in the US need to follow

Financial Accounting Standards Board (FASB)

Sets the GAAP

Why are GAAP so important?

For Investor Confidence (in the information)

SEC (Securities and Exchange Commission) Act

Created to protect investors; can create GAAP and outsource them to FASB

Before the FASB were the:

CAP and APB

Are the members of the FASB robots?

No

Auditors

a professional authorized to examine, verify, and report on the accuracy of a company's financial records and accounts

Audior Related factors encouraging high quality financial reporting

Education, CPA Exam

Reform encouraging high quality financial reporting

Sarbanes-Oxley Act (2002) After Enron, Executives could be criminally and civilly charged for wrongdoing (issuing false records)

Away from “Bright Lines”

Hard + Fast rules, distance from those for high quality reporting

Ethics

CPA - must take ethics exam; ethics case every year

Relevance

One of the primary-decision specific qualities that make accting useful; made up of predictive value and/or feedback value, and timeliness.

Faithful Representation

Exists when there’s an agreement between a measure or description and the phenomenon it purports to represent

Predictive/Confirmatory Value

Confirmation of investor expectations about future cash-generating ability

Materiality

Has qualitative or quantitative characteristics that make it matter for decision-making

Complete

Depiction is complete if it includes all information necessary for faithful representation

Neutral

Implies freedom from bias

Free from Error

Information that contains no errors or omissions in a description of the amount or the process to report the amount

Comparability

Information helps users see similarities in differences among events and conditions

Consistency

Information permits valid comparisons if measured and reported the same way in each time period

Verifiability

Considers if different knowledgable and independent measures would reach consensus about whether information is representationally faithful

Timeliness

Information that is available to users early enough to allow its use in the decisive process

Understandability

Information within the context of the decision being made that users can comprehend

Cost effectiveness

The percieved benefit of increased decision usefulness exceeds the anticipated cost of providing that information

Income Statement

Revenues - Expenses = Net Income (NI)

Statement of Retained Earnings (SE)

Beginning RE + NI - Dividends = End RE

Balance Sheet

Includes Assets, Liabilities, and Equity (Accounting Equation)

Statement of Cash Flows

Cash flows for the year + Beginning Cash = Ending Cash

Financial Statement Order

1. Income Statement

2. SE (takes NI from I/S)

3. Balance Sheet (takes RE for Equity from SE)

4. Statement of Cash Flows (Ending Cash + Total from Assets (?))

Asset

Present Right (of an Entity) to an economic benefit

Liability

A present obligation (of an entity) to transfer an economic benefit

Equity (Net Assets)

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

Common Stock

Investment by Owners

Dividends

Distribution to Owners

Comprehensive Income

Net income + Other comprehensive income

Revenues

Inflows or enhancements of assets or liability settlements

Expenses

Outflows or asset use up or incurrences of liabilities

Gains

Increases in Equity

Losses

Decreases in Equity

Economic Entity Umbrella

Includes: subsidiaries

Excludes: Extraneous Things (ex: owner's seperate dog walking business)

Going Concern

Assume things will keep going into the forseeable future

Periodicity

Break a firm's lifespan into artificial reporting periods (allows for timely reporting)

Monetary Unit

Needs to be expressed in USD

Recognition

Knowing when we need to makw Journal Entries

Criteria used for general recognition of elements

1. Be an element (asset, liability, etc.)

2. Measurable

3. Depict using faithful representation

Methods for Expense Recognition

1. An exact cause-and-effect relationship (ex: Inventory + COGS)

2. Associating an expense with the revenues recognized in a specific period (ex: Salaries Expense) (actual 3. Is about the same)

3. (4.) In a period incurred, regardless of related revenues (EX: research and development expense)

Measurement

What amount goes into financial statements

Methods of Measurement

1. The historical cost (what we paid for it)

2. Sometimes it’s net realizable value, current cost, present value, or fair value as well

Full Disclosure Principle

Anything that would influence makers should be disclosed

3 Methods of Disclosure

1. On the face of the financial statement in parentheses (Parenthetical)

2. Notes (like potential litigation) (Bulk of a 10k)

3. Supplemental Schedules

Accounting Equation

Assets = Liabilities + SE (/SE = A-L)

DEALER

DEA Increases with Debits and Decreases w Credits. LER Increases with Credits and Decreases w Debits

Accounting Cycle Step 1

Get information from source documentation

Accounting Cycle Step 2

Analyze the transaction

Accounting Cycle Step 3

Record it in the general journal using journal entries

Accounting Cycle Step 4

Post from the general journal to the general ledger accounts (t-accounts)

Accounting Cycle Step 5

Prepare an unadjusted trial balance (from t-accts/general ledger)

Accounting Cycle Step 6

Record any adjusting entries and post to the general ledger (t-accts)

Accounting Cycle Step 7

Prepare an adjusted trial balance

Accounting Cycle Step 8

Prepare financial statements

Unadjusted Trial Balance

List of all the accounts (in balance sheet order (A,L,SE,Rev,Exp) and their ending balances

Adjusting Journal Entries

Transactions covering multiple periods; these happen when it’s time to create financial statements @ the end of a period (fiscal year usually)

Main categories of AJE

1. Prepaid expenses

2. Deferred (unearned) revenue

3. Accrued expenses

4. Accrued revenues

Interest Expense Calculations

Principal x interest rate x # of months passed/12

COGS is…

An expense!

Closing process

Only happens at the end of the fiscal year

Accounting Cycle Step 9

Close all of the “temporary accounts” (close in order of: revenues, expenses, dividends)

Reasons for closing accounts

1. Start our income statement accounts at 0 for the new year

2. Adjust the RE account so it matches the statement of RE

Accounting Cycle Step 10

Create a post closing trial balance (all the same accounts from the ATB are listed)

Deferred Revenue is…

A liability!

Prepaid expense is…

An asset!

Billed/debt means…

Notes/Accounts/Interest Payable!

Fixed Assets signifies..

Equipment (most likely)!

Accumulated Depreciation is…

A contra asset! (Special asset type (acct no in the 100s))

Dividends Payable is…

A liability! (Usually signified by: “declares a dividend”, which would mean debit div and credit div payable)

Depreciation Expense Calculations

((Cost - residual)/# months useful life) x # of months already used up

100s for Acct No.

Assets (remember Acc. Dep)

200s for Acct No.

Liabilities

300s for Acct No.

Equity

400s for Acct No.

Revenue

500s for Acct No.

Expenses

600s for Acct No.

Dividends