Intermediate Accounting Summary

Chapter 1: Conceptual Framework of Financial Accounting

• Accounting: Identification, measurement, and communication of financial information to interested parties.
• Financial Accounting: Preparing financial reports for external and internal users like investors and creditors.
• Managerial Accounting: Identifying, measuring, analyzing, and communicating financial information for management's planning, control, and evaluation.
• Financial Statements: Key means of communicating financial information externally; includes Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Owners’ Equity, and Note Disclosures.
• Financial Reporting: Includes financial statements and other reports like the president’s letter, news releases, management’s forecasts, reports filed with government agencies, and social or environmental impact statements.
• Objective of Financial Reporting: To provide financial information useful to investors, lenders, and other creditors for decision-making about providing resources to the entity.
• GAAP: Generally Accepted Accounting Principles; standards and practices with authoritative support in the USA, issued by the FASB.
• IFRS: International Financial Reporting Standards; rules for consistent and comparable financial statements globally, issued by the IASB.
• FASB: Financial Accounting Standards Board; sets accounting standards for firms in the U.S.
• IASB: International Accounting Standards Board; issues IFRS standards used by over 115 countries.
• Financial Reporting Challenges: Issues include nonfinancial measurements, forward-looking information, soft assets, and timelines.
• International Convergence: Aiming to eliminate differences between GAAP and IFRS.
• Expectation Gap: Difference between public expectations of accountants and what accountants believe they can do.
• Conceptual Framework: A system of ideas and objectives for creating consistent accounting rules and standards with three levels: Objective, Qualitative Characteristics & Elements, and Recognition, Measurement & Disclosure Concepts.

Level 1: Objective of Financial Reporting

• To provide useful financial information to users of financial reporting.

Level 2: Fundamental Concepts

• Qualitative Characteristics and Elements of Financial Statements.
• Relevance: Information must make a difference in a decision, having predictive value, confirmatory value, and materiality.
• Faithful Representation: Information must match what really existed or happened, being complete, neutral, and free of material error.
• Comparability: Information measured and reported similarly across different companies.
• Verifiability: Independent measurers obtain similar results using the same methods.
• Timeliness: Information available to decision-makers before it loses its capacity to influence decisions.
• Understandability: Enhanced when information is classified, characterized, and presented clearly and concisely.
• Elements of Financial Statements:
  • Assets, Liabilities, and Equity.
  • Investments by Owners, Distributions to Owners, Comprehensive Income, Revenues, and Expenses.

Level 3: Recognition and Measurement Concepts

• Concepts for recognizing, measuring, and reporting financial elements and events through basic assumptions, principles, and constraints.
• Basic Assumptions:
  • Economic Entity.
  • Going Concern.
  • Monetary Unit.
  • Periodicity.
• Basic Principles of Accounting:
  • Measurement (Historical Cost and Fair Value).
  • Revenue Recognition.
  • Expense Recognition.
  • Full Disclosure.
• Constraints:
  • Cost Constraint (Cost-Benefit Relationship).
  • Industry Practices.

Chapter 2: Liabilities

• Liability: A present obligation for a probable future payment arising from past transactions, including a past transaction, a present obligation, and a future payment.
• Short-Term Liabilities: Obligations due within 12 months.
• Long-Term Liabilities: Obligations due beyond 12 months.
• Known Liabilities: Liabilities with little uncertainty, including:
  • Accounts Payable.
  • Sales Tax Payable.
  • Unearned Revenues.
  • Short-Term Notes Payable.
• Estimated Liabilities: Known obligations of an uncertain amount that can be reasonably estimated, including:
  • Employee Benefits (Pensions & Health Care).
  • Vacation Pay.
  • Warranties.
• Contingent Liability: A potential obligation depending on a future event from a past transaction.
• Bond: Issuer’s written promise to pay a PAR value with interest; can be issued at PAR, premium, or discount.

Chapter 3: Investment in Securities

• Security: A tradable financial asset.
• Debt Securities: Represent a creditor relationship (e.g., government securities, corporate bonds).
• Equity Securities: Represent ownership interests (e.g., common stocks).
• Held-to-Maturity: Debt securities held until maturity, accounted for at amortized cost.
• Trading Securities: Bought and held for near-term sale, fair value with changes in net income.
• Available-for-Sale: Securities not classified as held-to-maturity or trading, fair value with changes in other comprehensive income.
  Equity Method: investor share is adjusted each period for changes in the investee’s net assets. The calculation is $Investment \times Percentage$. If percentage, range from $20 \% - 50 \%$, report revenue on investment.

Chapter 4: Accounting for Leases

• Lease: Agreement where lessor gives lessee the right to use an asset for a period in return for rental payments.
• Capital (Finance) Lease: Transfers risks and rewards of ownership to the lessee; meets criteria like transfer of ownership, bargain purchase option, lease term $\geq 75 \%$ of asset life, or PV of payments $\geq 90 \%$ of fair value.
• Operating Lease: A lease that is not a capital lease.

Chapter 5: Accounting Changes and Error Analysis

• Accounting Changes: The FASB reports three types: Change in Accounting Principle, Change in Accounting Estimate, and Change in Reporting Entity.
  Accounting Errors: The mistakes commited in bookkeeping and accounting that may be committed while recording, classifying or summarizing accounting transactions.