1. General Topics

American Institute of Certified Public Accountants (AICPA)

The AICPA develops standards for audits of private companies and other services by CPAs; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and monitors and enforces compliance with the profession's technical and ethical standards.

What does the Balance Sheet ensure?

The Balance Sheet ensures that the total debits equals the total credits in the financial records.

Stable Monetary Unit Principle

The accounting principle that assumes that the value of money stays the same year after year.

Conservative Principle

The accounting principle that requires accountants to resolve financial statement uncertainty in the least favorable way. It anticipates future losses not gains.

Objectivity Principle

The accounting principle that requires business transactions to be recorded using the best objective evidence.

Expectation Gap

The difference between the actual work and assurance required by GAAP and the expectation of that work by the general public.

Public Company Accounting Oversight Board (PCAOB)

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Owner's Equity

The owner's claims to the total assets of the business.

Financial Accounting Standards Board (FASB)

The private board (third party organization) that establishes the generally accepted accounting principles used in the practice of financial accounting.

Capital Allocation

The process of determining how and at what cost money is allocated among competing interests. The choice between risky and risk-free assets.

Accounting Cylce

The process of recording and processing the accounting events of a business. It begins when a transaction occurs (selling a product, an investment, etc.) Is continual throughout the business operating cycle. The natural period of time occurs before certain business activities tend to repeat.

Transaction Analysis

The process of studying a transaction to determine its economic effect on the business in terms of the accounting equation (identify, record, and summarize). It is conducted in order to prepare financial statements for the accounting data received and maintained.

Internal Controls

The processes and procedures implemented to provide reasonable assurance that control objectives are met. Not only allow for monitoring, but also allow for an increase in profit.

Financial statements may be best demonstrated and displayed by:

The specific rules used to govern the creation of the statements themselves.

GAAP (Generally Accepted Accounting Principles)

The standards and rules that accountants follow while recording and reporting financial activities. Created by the Financial Accounting Standards Board.

Code of Ethics

They are issued by a third party on a high level called the American Institute of Certified Public Accountants (AICPA).

What is the purpose of financial statements?

To provide information about overall business performance. They also exhibit changes (losses/gains) in financial position of a business. Useful for making economic decisions (made by owners and investors).

How are transactions recorded?

Transactions recorded using entries, based on receipts, in recognition of a sale. After businesses post entries to accounts, a balance sheet is prepared.

True or False: Net income (all profits earned) is transferred into earnings, as the business prepares to ensure debits and credits match.

True

True or False: The total debits will ALWAYS equal the total credits in order for the accounting equation to always stay in balance.

True

Security and Exchange Commission

U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.

Put a double underline under...

final numbers. It signifies end of period including balance.

Next, to make a sub-calculation move...

once column to the left.

Business variations are categorized based primarily on...

ownership. Who the owners are and how many. • Sole Proprietorship (an individual, no partners, and completely unincorporated). • Partnership (an arrangement between two and slightly more persons, who agree to advance together through business operations for the mutual business interest. Could me individuals or businesses). • Corporation (an artificial person who creates laws within and of themselves, as well as laws governed by the state. Corporation management is very regulated and structured.)

Then draw a single line under...

the last number in the calculation.

What are those specific rules:

• All financial statements have a three-line heading. - The first line is the business name. - The second line is the name of the type of report, i.e., a balance sheet. - The third line is the date and period of time.

Three ways to demonstrate the accounting equation in real-time.

• Assets = Liabilities + Owner's Equity • Liabilities = Assets - Owner's Equity • Owner's Equity = Assets - Liabilities

In order to successfully gain balance and accumulate wealth, we need to account for:

• Funding • Analyze • Make proper deposits • Invoice our customers • Increase our value as much as humanly possible • Cooperate with banks • Hire attorney if need be

Financial statements for businesses show the following:

• Inventory (the products) • Specific accounts, such as income and expenses. • Expenses, bills due and everything paid out. • Costs of goods sold, which is based on product only and the business must buy and resell product. SERVICES DOES NOT APPLY! • Net income.

Within the accounting cycle, financial statements allow for:

• Revenues and expenses to be closed at the end of the accounting period. • Income and expenses must be documented.

Primary Internal Controls for Accounting:

• Sarbanes-Oxley

This principle of accounting includes factors which includes factors which need to be monitored, such as:

• Where the money comes from • Where the money is going • Why the money is going there

(1) Adjusted trial balance is prepared. (2) Transactions are posted to ledgers. (3) Transactions are recorded in a journal. (4) Closing entries are made. (5) Adjusting journal entries are made. (6) Trial balance is prepared. (7) Financial statements are prepared. Each of the principal steps in the accounting cycle is identified above by a number. What is the correct sequence of events in the accounting cycle?

(A) 3, 2, 6, 5, 1, 7, 4

Which of the following will be credited when recording an accrued expense? (A) A liability account (B) A revenue account (C) A prepaid expense account (D) An unearned revenue account (E) A contra owner's equity account

(A) A liability account

The Going-Concern Principle demonstrates that financial statements are to assume that businesses will last indefinitely, and exhibit the efforts to always fulfill: (A) Obligations, Commitments, and Objectives (B) Assets, Liabilities, and Owner's Equity (C) Checks, Balances, and Credits (D) Commitments, Specific Debts only, and Long-term Liabilities

(A) Obligations, Commitments, and Objectives

In a limited partnership, limited partners are at risk for (A) The amount of their investment in the partnership (B) Their share of nonrecourse debt (C) The total debts of the partnership (D) Their percentage of debts (E) No amount

(A) The amount of their investment in the partnership

GAAP Principles always enforce transactions to get recorded more than once, and is usually done: (A) Two times (B) Three times (C) Four times (D) Six times

(A) Two times

The lower of cost or market (LCM) is an application of (A) Materiality (B) Conservatism (C) The Matching Concept (D) Full Disclosure (E) The Going-Concern Assumption

(B) Conservatism

As it pertains to GAAP Standardization, the governing body that always enforces GAAP in the United States is called: (A) SEC (B) FASB (C) AICPA (D) IRS

(B) FASB

Falcon, Inc., a manufacturer and supplier of kitchen appliances, provides a two-year warranty on component parts at no cost. Which accounting principle requires Falcon to recognize as an expense the estimated cost of fulfilling a warranty in the year the equipment is sold? (A) Cost principle (B) Matching principle (C) Going-concern principle (D) Entity principle (E) greed

(B) Matching principle

The Objectivity Principle allows for business transactions to be recorded using the best objective evidence in order to always: (A) Present information to be altered at a later time (B) Prevent any accounting department of a business from documenting slanted information, based on bias (C) Prevent a supervisor from noticing a mistake (D) Present information on a balance sheet that exhibits mostly accurate data

(B) Prevent any accounting department of a business from documenting slanted information, based on bias

The purpose of documenting information presented in notes relevant to the financial statements is to always: (A) Maintain a relationship with the SEC (B) Provide disclosure required by generally accepted accounting principles. (C) Hope for the IRS to cut a tax break (D) Allow for the balance sheet to display accurate assets and liabilities

(B) Provide disclosure required by generally accepted accounting principles.

GAAP Principles always enforce debts to be paid in one year, or one business cycle, whichever is always: (A) More beneficial for the accounting department (B) More lucrative long-term asset purchases (C) Longer (D) Shorter

(C) Longer

The Conservative Principle attempts to resolve financial statement uncertainty in the least favorable way by anticipating future losses, not gains, where understating net assets and net income always allows companies to: (A) Risk losing only short-term assets (B) Assume an ultra-conservative financial position (C) Play it safe (D) Formulate risk

(C) Play it safe

GAAP issues protocol essential to industry regulations which are also attributable to characteristics to accounting principles, and include: (A) Financial statement creation and banking procedures (B) Auditing and analytical tools (C) The identification, measurement, and communication of financial information for businesses (D) Book-keeping and court testimony

(C) The identification, measurement, and communication of financial information for businesses

The owner of a small business paid the property taxes on her personal residence from the business checking account. The payment should be charged to which of the following? (A) Wages (B) Property taxes (C) Rent (D) Withdrawals (E) Building

(D) Withdrawals

The Accumulated Depreciation account should be shown in the financial statements as: (A) An operating expense (B) An extraordinary loss (C) A liability (D) Stockholders' equity (E) A contra (deduction) to an asset account

(E) A contra (deduction) to an asset account

GAAP contains specific facts that must be adhered to, and they include:

1. Transactions get recorded twice (checks and balances). 2. Financial statements report on the business entity only (not owner or investors). 3. Debts are paid within one year, or one business cycle, whichever is longer. Called the end of the financial year or fiscal year.

Creditors

People who are owed money by business owners.

Financial statements start all computations by...

Placing number in the column farthest to the right.

Going Concern Principle

Principle that prescribes financial statements to reflect the assumption that the business will continue operating.

Historically Cost Principle

Principle that requires assets to be reported a historical costs. Also known as book or true value. What are we paying for and at what rate?

Statement of Owner's Equity

Record of the change in owners' equity from the end of one fiscal period to the end of the next.

SOX (Sarbanes-Oxley Act)

Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

Accountants place the results of a business calculation in one of three different places on the statement:

Actual, budget estimate, future estimate, etc.

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

Accounting Equation

An equation showing the relationship among assets, liabilities, and owner's equity.

GAAP Contains Principles:

- Conservative Principle - Going-Concern Principle - Historically Cost Principle - Objectivity Principle - Stable Monetary Unit Principle

Information from financial reporting is information to help users based on capital allocation decisions. Who are these users?

- Investors - Creditors - Authorities who provide oversight

Standard-setting bodies

- Securities and Exchange Commission (SEC) - Financial Accounting Standards Board (FASB) - International Accounting Standards Board (IASB) - Public Company Accounting Oversight Board (PCAOB)

Income Satement

A financial statement showing the revenue and expenses for a fiscal period

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Activity Based Costing

A method of allocating overhead based on each product's use of activities in making the product. Hence, we have costs aligning with all of our business operations.

Double-entry Accounting

A principle that requires that all transactions get recorded twice. Therefore equal debits and credits are made in accounts for all transactions (assets, liabilities, equities). This allows for checks and balances.

Sarbanes-Oxley Act (SOX)

A system that auditors must test and evaluate. Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

For any business, an analysis of transactions must display two things:

CLEAR & CONCISE Increases and decreases within the statement. (Credits & Debits) Any increases or decreases from business transactions should display where the assets, liabilities, and owner's equity are balanced.

Liabilities

Debts that normally must be paid within a year, but can be paid by using assets when current.

For who was GAPP designed for?

Economic and business oriented entities, as well as the parties that are actually interested in them. Designed for business and economic growth.

Assets

Economic resources (things of value) that business plans use in the future to make money.

Ethics

Ethics are internalized standards considered to be the legality of any action performed. Ethics also initiate Internal Controls (checks and balances of human actions).

Financial Statements

Financial reports that summarize the financial condition and operations of a business.

The Accounting Cycle is

Financial statements within the cycle include cash flow, they're documented on a balance sheet, they display income and owner's equity (what is owed to creditors).

Full Disclosure

Guideline that financial statements should not include just numbers but should also furnish management's interpretations and explanations of those numbers.