Acct 327 Exam 1

Net income ______ retained earnings

Increases

Gains

Increases in equity (net assets) from peripheral or incidental transactions and other events and circumstances affecting the entity during a period except the one that result from revenues or investments by owners Appears on I/S and is a nominal account

Every general journal entry consists of what four parts?

-The accounts and amounts to be debited -The accounts and amounts to be credited -A date -An explanation

To be recognized in the main body of financial statement an item should meet ...

-The basic definition of a basic element -Be measurable with sufficient certainty -Be relevant and reliable

Users find financial information in what 3 places?

-The main body of financial statements -The notes of those statements -Supplementary information

What factors shape accounting information systems?

-The nature of the business and the transactions it engages in -The size of the firm -The volume of data to be handled -The informational demands that management and others require

How does the investment community use income statements and what does it provide them?

-To determine profitability, investment value, and credit worthiness -Helps to predict the amounts, timing, and uncertainty of future cash flows

What are three ways income statements are useful to investors and creditors?

-To evaluate the past performance of a company -Provide a basis for predicting future performance -Help asses the risk, or uncertainty of achieving future cash flows

In what two ways can companies display components of other comprehensive income?

-Using the continuous statement (one statement approach - "statement of comprehensive income") -Using two separate, but consecutive statements of net income and other comprehensive income (two statement approach - "income statement" and the "comprehensive income statement")

The FASB developed specific guidelines in what two important areas of reporting?

-What to include in income -How to report certain infrequent items

What does gross profit provide?

A useful number for evaluating operating performance and predicting future earnings

Accruals

An adjusting entry for this records revenues for services performed, and expenses incurred in the current accounting period; without adjustments the revenue or expense account would be understated

Accounting cycle

Step 1) Identifying and recording transactions and other events Step 2) Journalization Step 3) Posting Step 4) Adjustments Step 5) Statement perpetration Step 6) Closing

How did SOX affect the board of directors?

-Board must be made up of some members who are independent from company management -All audit committee members must be independent from company management -External auditors must report to the audit committee, not management team

With deferrals ______ comes first, ________ comes later

-Cash -Expenses or revenue

What are three examples of other reporting issues?

-Changes in accounting principles -Changes in estimates -Corrections of errors

What are three limitations to the income statement?

-Companies omit items from the income statement that they cannot measure reliably -Income numbers are affected by the accounting methods used -Income measurement involves judgment

What are the four enhancing qualities that are apart of BOTH relevance and faithful representation?

-Comparability (and consistency) -Verifiability -Timeliness -Understandability -Conservatism (according to lecture)

What are the three main aspects of Faithful representation?

-Completness -Neutral -Free from material error

_____ created the ________ and delegated rule making authority to the ____ who delegated writing GAAP to the _____

-Congress -PCAOB -SEC -FASB

What is disclosed in the statement of stockholder's equity?

-Contribution (number of shares) and distributions (dividends) to owners -Reconciliation of the carrying amount of each component of stockholder's equity form the beginning to the end of the period

What forms do expenses take?

-Cost of goods sold -Depreciation -Interest -Rent -Salaries and wages -Taxes

What are some costs included in preparation of financial statements?

-Cost of preparation -Dissemination to users -Auditing -Potential litigation for improper compliance -Disclosure to competitors

What are some examples of non-financial assets a company has but cannot report on a balance sheet?

-Customer satisfaction reports -Backlog information -Reject rates on goods purchased -Sustainability efforts

An adjusting entry for a prepaid expense results in a ______ to an expense account and a ______ in an asset account

-Debit -Credit

What are the two types of adjusting entries and what are their two subaccounts?

-Deferrals: prepaid expenses and unearned revenues -Accruals: accrued revenues and accrued expenses

What are the two ways that verifiability can occur?

-Direct verifiability: which would be as simple as counting physical inventory -Indirect verifiability: Which could be using the same accounting convention or methodology

Discontinued operations gain

Takes the amount of the gain, less taxes payable incurred on the gain, and adds the total to income (after taxes) to continuing operations

Discontinued operations loss

Takes the amount of the loss, less the tax reduction from incurring a loss and subtracts it form income (after taxes) from continuing operations

Post-closing trial balance

The trial balance taken immediately after closing entries have been posted - to show equity in permanent account balances

Accounting standards updates

These amend the accounting standards codification - it explains how the codification has been amended and includes information to help the reader understand the changes and when those changes take place

Assumptions

These are four basic principles that underlie the financial accounting structure - 1) Economic entity, 2)Going concern, 3)Monetary unit, and 4) Periodicity

Real accounts

These are permanent asset, liability, and equity accounts that appear on the balance sheet an duo not get closed - balances "roll over"

SFAC No.3

"Elements of financial statements of business enterprises" - provides definitions of items in financial statements, such as assets, liabilities, revenues and expenses

SFAC No.6

"Elements of financial statements" - replaces SFAC No.3 and expands its scope to include not-for-profit organizations

Expense recognition principle

"Let the expense follow the revenues"- that is matching the expense with revenues

SFAC no.1

"Objectives of financial reporting by business enterprises" - presents the goals and purposes of accounting

SFAC No.2

"Qualitative characteristics of accounting information" - Examines the characteristics that makes accounting information useful

SFAC No.5

"Recognition and measurement in financial statements of business entities" - sets forth fundamental recognition and measurement criterion and guidance on what information should be formally incorporated into financial statements and when

SFAC No.7

"Using cash flow information and present value in accounting measurements" - provides a framework for using expected future cash flows and present values as a basis for measurement

Nominal accounts

These are temporary revenue, expense and dividend accounts - all but the dividend accounts appear on the income statement and are all closed periodically

Notes to financial statements

These generally amplify or explain the items presented in the main body of the statements - should provide needed additional information

What are the six types of irregular items?

-Discontinued operations (most common) -Unusual and infrequent gains and losses -Noncontrolling interest -Changes in accounting principles -Changes in estimates -Corrections of errors

How did SOX affect external auditors?

-Established greater independence (auditors cannot have financial interest in a company) -Cannot provide auditing and consulting services

Depreciation is an _____, rather than a factual measurement of the expired cost; it is often the cost of the asset ______ by its useful life

-Estimate -Divided

With accruals ____ comes first, _________ comes later

-Expense or revenue -Cash

What are some changes the FASB and IASB are making to create convergence?

-FASB permits fair value reporting -IASB borrowoing cost

The trial balance may balance even if a company.....

-Fails to journalize a transaction -Omits posting a correct journal entry -Posts a journal entry twice -Uses incorrect amounts -Makes offsetting errors in recording the amount of a transaction

FASB

This board's mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public - issuers, auditors, and users of financial information

Retained earnings can be split into what two accounts?

-Retained earnings free (unrestricted) -Retained earnings appropriated (which can be an amount of retained earnings transferred to a restricted account titled Appropriated Retained Earnings)

What are the major elements of the income statement?

-Revenues -Expenses -Gains -Losses

What forms do gains and losses take?

-Sale of investment or plant assets -Settlement of liabilities -Write offs of assets due to impairments or casually

What form do revenues take?

-Sales -Fees -Interest -Dividend (in) -Rents (in)

What 3 organizations are instrumental in the development of GAPP?

-Securities and exchange commission (SEC) -American institute of certified public accountants (AICPA) -Financial accounting setting board (FASB)

List the progression of due process when passing standards update

-Set agenda -Preliminary views -Public hearing on preliminary views -Exposure draft issued -Exposure draft revised -Approval of draft from FASB

How did the FASB improve compared to the APB and CAP?

-Smaller membership -Full time -Greater autonomy -Increased independence -Broader representation

Double declining method

(cost-accumulated depreciation) x 2/useful life You don't subtract the salvage value but you cannot go below that point

Why are adjusting entries made?

- Daily recording is not feasible -Costs are unrecorded

What are two circumstances where FMV should be used?

- Marketable securities -When FMV is less than book value (more conservative)

What are the two kind of pronouncements that the FASB issues?

-Accounting standard updates (affects GAAP) -Financial accounting concepts (these are principles not standards)

In what accounts to increases occur on the debit side?

-Asset accounts -Expense accounts -Dividend accounts

What are the top five economic crimes?

-Asset misappropriation -Procurement fraud -IP infringement -Cybercrime -Accounting fraud

What are the 10 elements of financial statements?

-Assets -Liabilities -Equity -Investments by owners -Distributions to owners -Comprehensive income -Revenues -Expense -Gains -Losses

What accounts do each of the financial statements use for stockholder's equity?

-B/S: Common stock and retained earnings (Rev. - Exp. - Div.) -I/S: Revenues and Expenses -Statement of retained earnings: net income, Net losses and dividends

What are the key difference between the IFRS and GAAP?

-IFRS very little industry specific rules, GAAP as substantial amounts of information on industry specific rules -IFRS is principle based (very broad) and GAAP is rule based -IFRS doesn't allow FIFO and reversal of inventory is allowed, GAAP allows FIFO and reversal of inventory isn't allowed -IFRS doesn't include comprehensive income in financial statements while GAAP does

What is the first step in the "building" process? What groups do they talk to while researching? (according to the video watched in class)

-Identify the problem is the first step -Companies, Governments, Auditors, Investors, and Academics

In financial reporting, what does the conceptual framework provide guidance on?

-Identifying the boundaries of financial reporting -Selecting the transactions, other evens, and circumstances to be represented -How they should be recognized and measured -How they should be summarized and reported

Is a leased building considered an asset?

-If it is an operation lease then No -If it is a capital lease then Yes

Changes in accounting principles, and prior period adjustments may either _______ or _______ retained earnings

-Increase -Decrase

What two purposes dos the number in the positing reference column have?

-Indicates the ledger account number of the account involved -Indicates the completion of posting for the particular item

Who can cyber crime be committed by?

-Insiders who have authorized access -Competitors seeking unfair advantage -Foreign governments committing espionage -Trasnational criminal enterprises -Activists protesting organizational actions or policies

Events are of what two types?

-Internal -External

The ____________________ is an international GAAP equivalent, that was issued by the London-based _________________

-International financial reporting standards (IFRS) -International accounting standards board (IASB)

The FASB has issued ___________ on opinions, and ____________________ that have modified or extended existing standards

-Interpretations -FASB staff positions

Who is the key stakeholder and what are the key outputs of financial accounting?

-Investors and creditors -Financial statements, financial statement disclosures, prospectuses, etc.

What are the two bars premises that the FASB relies on?

-It should be responsive to the needs and view points of the entire economic community - not just accounting -It should operate in full view of the public through a "due process" system that lets those interested to make their views known

In what accounts do increased occur on the credit side?

-Liability accounts -Revenue accounts -Stockholder's equity accounts (Common stocks and retained earnings)

Who is the key stakeholder and what are the key outputs of managerial accounting?

-Management -Management reports (very ad hoc)

Errors occur as a result of what?

-Mathematical mistakes -Mistakes in the application of accounting principles -Oversight or misuse of facts that existed at the time financial statements were prepared

What are the two distinct groups the FASB classifies elements into?

-Moment in time -Period of time

How did SOX affect company management?

-Must physically sign off on reports -Must establish a code of ethics -Creates penalties for management for incomplete or inaccurate information

What are a few of the current issues facing financial reporting?

-Nonfinancial measurement -Forward looking information -Soft assets -Timeliness -Understandability

The ______ sets auditing standards and inspects _______ who check GAAP compliance and express opinions of financial statements of _________

-PCAOB -Auditers -Companies

What are the three main aspects of relevance?

-Predictive value -Confirmatory value -Materiality

A company that reports a discontinued operation must...

-Report the per share affect of income from continuing operations -Per share amounts for discontinued operations

What are the 5 steps of performance based revenue recognition?

1) Identify the contract with the customer 2) Identify the separate performance obligations in the contract 3) Determine the transaction price 4) Allocate the transaction price to the separate performance obligations 5) Recognize revenue when each performance obligations is satisfied

What are Bob Hertz's 3 fundamental considerations FASB must keep in mind?

1) Improve financial reporting 2) Simplification of accounting literature and the rule making process 3) International convergence

What are the four principles of accounting?

1) Measurement principle, 2) Revenue recognition principle, 3) Expense recognition principle, and 4) Full disclosure principle

Essential characteristics of accounting

1) the identification, measurement, and communication of financial information about 2) economic entities to 3) interested parties

How many members of the FASB are required to pass accounting standards updates?

4 of the 7

Auditing standards board

A board within the AICPA that has been a leader in developing auditing standards

What analogy does the video watched in class make for the standard setting process?

A builder putting up a house

Conceptual framework

A coherent system of concepts, that in the case of financial reporting, identified the purpose of financial reporting

FinREC (Financial Reporting Executive Committee)

A committee of the AICPA whose mission is to determine the AICPA's technical policies regarding financial reporting standards, and audit and accounting guides, with the ultimate purpose of serving the public interest by improving financial reporting

GAAP

A common set of standards and procedures that most members of the finical community recognize as having proven to be most useful

SEC

A federal agency that helps develop and standardize financial information presented to stockholders

Product costs

A group of classified costs including material, labor, and overhead costs attached to the product - these costs can be carried into the future if companies recognize revenue in subsequent periods

Period costs

A group of classified costs including officers' salaries and other administrative costs, attached to the period - they are expensed as the are incurred

Event

A happening of consequence; it is generally the source or cause of changes in assets, liabilities, and equity; and can be internal or external

Other expenses and losses (non operating section)

A list of expenses or losses incurred, generally net of related incomes, from non operating transactions

Other revenues and gains (non operating section)

A list of the revenue recognized or the gains incurred, generally net of related expenses, from non operating transactions

One statement approach

A method of accounting for comprehensive income; in this approach net income is reported as a subtotal ( the biggest disadvantage) and comprehensive income is reported as the final total - the advantage is that this approach uses one statement

Two statement approach

A method of accounting for comprehensive income; the biggest disadvantage and advantage are the opposite of the one statement approach

What are the major sources of GAAP?

A mixture of 2,000 documents that have been developed over the past 60+ years including APB opinions, FASB standards, and AICPA research bulletins

Modified cash basis

A mixture of the cash basis and the accrual basis - it is based on the cash basis but with modifications that have substantial support

AICPA

A national professional organization of CPAs, that has been an important contributor to the developing of GAAP

Predictive value

A potential quality of financial information if it has value as an input to predictive processes used by investors to form their own expectations about the future

Proprietary prospective

A prospective that financial reporting should be focused only on the numbers of shareholders, which isn't considered appropriate

Fair value principle

A recent increase in GAAP calling for the use fo fair value measurement in financial statements

Non-operating section

A report of revenues and expense resulting form secondary, or auxiliary activities of the company. In addition special gains and losses Tha are infrequent or unusual, or both, are normally reported here. These items break into two main subsections: a) Other revenues and gains b) Other expenses and losses

Income tax

A section reporting federal and state taxed levied on income from contenting operations

Wheat committee

A study group on establishment of accounting principles by the APB, intended to examine the organization and operation of the APB

Sales revenue (in the operating section)

A subsection presenting sales, discounts, allowances, returns, and other related information. Its purpose is to arrive at the net amount of sales revenue

Administrative or general expense (in the operation section)

A subsection reporting expenses of general administration

Selling expense (in the operating section)

A subsection that lists expenses resulting form the company's efforts to make the sale

Cost of goods sold (in the operation section)

A subsection that shoes the cost of goods that were sold to produce the sales

Double entry accounting

A system where a company records the dual effect of each transaction in appropriate accounts

Account

A systematic arrangement that shows the effect of transactions and other events on a specific element (assets, liabilities, and equity); companies often keep a separate account for each element; and it is sometimes referred to as a T-account

The _____ _________ _________ is the primary basis for the preparation of financial statements

Adjusted trail balance

What is included in comprehensive income?

All revenues, gains, expenses and losses reported in net income and all gains and losses that bypass bet income but still effect stockholder's equity (other comprehensive income)

Noncontrolling interest

Allocation of income to non controlling shareholders

Transaction

An external event involving a transfer or exchange between two or more entities

Condensed income statement

An income statement that only reports the totals of expense groups, while also preparing supplementary schedules to support the totals

FASB codification research system (CRS)

An online, real time database that provides easy access to the codification; provides a topically organized structure: topic, subtopic, sections, and paragraphs using a numerical index system

Consistency

Another type of comparability that is present when a company applies the same accounting treatment to similar events, from period to period - through such an application the company shows consistent use of accounting standards

Committee on accounting procedure (CAP)

Appointed by AICPA in 1939 and issued 51 accounting research bulletins over 20 years, but failed to provide a structured body of accounting principles

Qualitative characteristics

Are either fundamental or enhancing, depending on how they affect the decision - usefulness of information and contributes to said decision - usefulness of financial reporting information

Current operating performance approach

Argues that the most useful income measure reflects only regular an reoccurring revenue and expense elements - infrequent items do not show a company's future earning power

How do companies determine materiality?

As a rule of thumb anything under 5% of net income is immaterial, however, companies must consider both quantitative and qualitative factors

What is the expanded accounting equation?

Assets = Liabilities + Common stock + Retained earnings - Dividends + Revenue - Expense

Prepaid expenses

Assets paid for, and recorded before a company uses them

Where is discontinued operation on the income statement?

Below income from continued operations but above net income

How does a company choose an acceptable accounting method?

By determining which alternative provides the most useful information for decision making purposes

How to companies correct errors?

By making proper adjusting entries in the accounts and reporting the corrections in the financial statements, these corrections are treated as prior period adjustments - like changes in accounting principles - and are reported as an adjusting entry to the beginning balance of retained earnings

Comprehensive income

Changes in equity (net assets) of an entity during a period from transactions or other events and circumstances from non owner sources. It includes all changes in equity during a period except those resulting from investments bu owners and distributions to owners

SFAC No.8

Chapter. 1 "The objective of general purpose financial reporting" and chapter. 3 "Qualitative characteristics of useful financial information" - replaces SFAC No.1 and SFAC No.2

Accounting information system

Collects and processes transaction data and then disseminates the financial information to interested parties

Cost constraint

Companies must weight the cost of providing information against the benefits that can be derived form using it

Moment in time

Consists of assets, liabilities, and equity, and describes amounts of resources and claims to resources at at moment in time

Period of time

Consists of investments by owners, distribution to owners, comprehensive income, revenues, expenses, gains and losses, and describes transactions, events and circumstances that affects a company during a period of time

User groups

Consists of the most interested in, or effected by accounting rules, and act like lobbyist to the FASB to influence changes in existing rules

FASAC (Financial accounting standards advisory council)

Consults with the FASB on major policy and technical issues and also helps select task force members

Subsidiary ledger

Contains details to a given general leader account

Public company accounting oversight board (PCAOB)

Has oversight and enforcement authority and established auditing, quality control, and independence standards and rules - Established by SOX act

What does the acronym D.E.A.D stand for?

Debits increase expense, assets, and dividends

Both cash and stock dividend ______ retained earnings

Decrease

A net loss _____ retained earnings

Decreases

Losses

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investment by owners Appears on I/S and is a nominal account

Distributions to owners

Decreases in net assets of a particular enterprises resulting form transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interest (equity) in an enterprise

Debit

Does not mean increase or decrease, it simply means left. If the total of this side exceed the total of the opposite side it is said to be a debit balance

Credit

Does not mean increase or decrease, it simply means right. If the total of this side exceeds the total on the opposite side than it is said to be a credit balance

Timeliness

Having information available to decision makers before it loses its capacity to influence decisions

What must be displayed whether using the one statement or two statement approach to comprehensive income?

Each component of net income and each component of other comprehensive income - companies are not required to report per share information related to other comprehensive income

Economic entity assumption

Economic activity can be identified with a particular unit of accountability, in other words, a company keep sits activities separate and distinct from its owners and any other business unit - this concept does not necessarily refer to a legal entity

How does a company account for changes in estimates?

Either in only one period (if the change only affects the one period) or a change in a period and in all future periods to come, but never retrospectively - changes in estimates are not errors and therefore do not need to be changed in prior periods

What was the main cause of the SOX act?

Enron scandal

Accrual basis accounting

Ensures that a company records events that change its financial statements in the periods in which they occur, rather than the period in which it receives or pays cash

Adjusting entries

Entries made at the end of the accounting period to bring all accounts up to date on an accrual basis; so that the company can prepare correct financial statements

Changes in accounting estimates

Examples of this include - estimated useful lives and salvage values of depreciable assets, uncollectible receivables, inventory obsolesce, and the number of periods expected to benefit from a particular expenditure

Accrued expenses

Expenses incurred but not yet paid or recored at the statement date; an adjusting entry results in a debit to an expense account and a credit to a liability account

Deferrals

Expenses or revenues that are reconfnized at a date later than the point when cash was originally exchanged - without this assets and liabilities would be overstated and expenses and revenues would be understated

Confirmatory value

Explains how relevant information can help users of financial statements confirm or correct prior expectations, it is often thought of to be interlaced to predictive value

Finical reporting

Financial information that is better provided by means other than formal financial statements. Examples include the president's letter, prospectuses, government agency reports, news releases, management forecasts, and social or environmental impact statements

Principles of accounting

Four generally used principles to record and report transactions

What does the "move in" represent? (according to the video watched in class)

Helping people understand the new standard

Relevance

Is one of two fundamental qualities that make accounting information useful for decision making, it says that accounting information must be capable of making a difference in a decision it has this capability when it has predictive value, confirmatory value, or both

Historic costs

GAAP required for companies to account for, and report many assets and liabilities; it has one important advantage - it is generally thought to be verifiable

Strategic shift

Generally includes the disposal of 1) a major line of business, 2) a major geographical area, or 3) a major equity method investment

Fair value hierarchy

Going from Least subjective to most subjective: -LEVEL 1: Observable inputs that reflect quoted prices for identical assets or liabilities in active markets (securities) -LEVEL 2: Inputs other than quoted prices included in level 1 that are observable for the asset or liability either directly or through corroboration with observable data (interest rate swap) -LEVEL 3: unobservable inputs (Ex: a company's own data or assumptions) (illiquid securities- mortgage backed securities)

Modified all inclusive concept

In this approach, companies record most items, including unusual or infrequent ones, as a part of net income. These items fall into one of four categories: 1)Unusual and infrequent gains and losses 2) Discontinued operations 3) Noncontrolling interest 4) Earnings per share

Investment by owners

Increases in net assets of an enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interest (equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversions of liabilities of the enterprise

Revenues

Inflows or other enhancement of assets of an entity or settlement of its liabilities (or a combination of both) during a period of delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations Appears on I/s and is a nominal account

Comparability

Information that is measured and reported in a similar manner for different companies, this in turn enables users to identify the real similarities and differences in economic events between different companies

Soft asset

Intangible assets, whereas hard assets are things such as inventory

Periodic inventory method

Inventory is not recorded as sold when sales are made, rather COGS is calculated as a 'plug' at the end of each accounting period

General ledger

Is a collection of all the asset, liability, stockholder's equity, revenue, and expense accounts

Materiality

Is a company specific aspect of relevance, and is considered relevant if omitting it or mistaking it could influence decisions that users make on the basis of the reported finical information; it is based on both nature, and/or magnitude

How must earning per share be reported?

It must be disclosed on the fact of the income statement, if discontinued operation is reported, it must disclose per share amounts for this line item

Intraperiod tax allocation

It related the income tax expense of the fiscal period to specific items that give rise to it - such as continuing operations and discontinued operations

Neutrality

Means that a company cannot select information to favor one set of interested parties over another - unbiased information must be the overriding consideration

Completness

Means that all information that is necessary for faithful representation is provided - an omission can cause information to be false or misleading

Income statement

Measures the results of operations during the period

The __________ _______ is relevant, simple, universally acceptable, understandable, and useful

Monetary unit

Earnings per share

Net income minus dividends, divided by the weighted average of common shares outstanding - represents number of dollars earned by each share of common stock

Net income is a ________ account, meaning its balance resets at the beginning of each fiscal year

Nominal

What does the section of the income statement from interest and other income down to income from continuing operations represent?

Non-operating activities

Reversing entry

Occurs at the beginning of the next period, it is the exact opposite of an adjusting entry and it is not required

Verifiability

Occurs when independent measures, using the same methods, obtain similar results

Contra asset account

Offsets an asset account on the balance sheet

What does the section of the Income Statement from the top down to income from operations represent?

Operating activity

Expenses

Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period of delivering or producing goods, rendering services, or carrying out other activities that constitute the entities ongoing major or central operations Appears on I/S and is a nominal account

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions Appear on b/s and is a real account

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide serious to other entities in the future as a result of past transactions or events Appear on b/s and is a real account

Emerging issues task force (EITF)

Provided implementation guidance within the framework of the codification t reduce diversity in practice on a timely basis - becomes a "problem filter" for the FASB by providing quick resolution to less pervasive, short-term issues

General purpose financial statements

Provides financial reporting information to help shareholders, creditors, suppliers, employees and regulators to better understand its financial position and related performance - provides at the least cost the most useful information possible

What issues does XBRL resolve?

Quicker and lower cost access to companies' financial information

Fair value option

Recently the board has taken additional steps by giving companies the option of using fair value as the basis for measurement of assets and liabilities

Statement of retained earnings

Reconciles the balance of the retained earnings account from the beginning to the end of the period

Statement of cash flows

Reports the cash provided and used by operating, investing, and financing activities during the period

Free from error

Required so that information is a faithful representation of a financial item; this is not to say that financial statements must be totally free from error

Revenue recognition principle

Requires companies to recognize revenue in the accounting period in which the performance obligation is satisfied

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise the equity is ownership interest Appear on b/s and is a real account

Accrued revenues

Revenues for services performed but not yet recorded at the statement date; Debit to an asset account credit to a revenue account

Decision usefulness approach

Says that investors are interested in financial reporting because it provides information that is helpful for making decisions such as 1) the company's ability to generate cash net cash flow and 2) management's ability to protect and enhance the capital providers' investments

Financial accounting foundation (FAF)

Selects the members of the FASB and the FASAC, funds their activities, and generally oversees the FASB's activities

After preparing an initial sketch, how does the board gather feedback on the document? (according to the video watched in class)

Shares it with the public (Public hearings, face to face meeting, and written comments)

Balance sheet

Shows the financial condition of the enterprise at the end of a period

Accounting research bulletins

Solutions to problems that dealt with a variety of accounting problems, issued by CAP

Financial statements

Statements that reflect the collection, tabulation, and final summarization of the accounting data

Journal

The "book of ordinary entry" where the company initially records transactions and selected other events; various amounts are transferred from here to the ledger

What caused the need for GAAP?

The Great Depression in 1929

Going concern

The assumption that a company will have a long life - as a rule of thumb, companies are expected to last long enough to satisfy their obligations and commitments - only where liquidation is imminent is the assumption inappropriate

APB opinions

The board's official pronouncements that were intended to be based on research studies and be supported by reason and analysis

Ledger

The book, or computer printouts, containing the accounts

Norwalk agreement

The commitment of the FASB and the IASB to converge GAAP and IFRS. The two agreed to 1) make existing financial standards as comparable as soon as possible and 2) coordinate future programs to ensure that compatibility is sustained

Cost-benefit constraint

The cost of implementing an accounting rule should not exceed the benefits to users of financial statements

What does disclosing income from operations highlight?

The difference between regular and non-reoccurring activities

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation

Articulation

The first class, effected by the second class provides at anytime the cumulative result of all changes - in other words - key figures in one financial statement corresponds to balances in another

Closing entries

The formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income of net loss to a stockholder's equity account

Entity prospective

The idea that companies are separate and distinct from their owners. This means that assets belong to a company, not its investors or creditors, rather its investors and creditors have claims on said assets in the form of liability or equity claims

Trial balance

The list of all open accounts in the ledger and their balances, can be prepared at anytime

Stewardship

The management of a company has the responsibility of protecting its economic resources from unfavorable effects of economic factors, such as price changes, and technological and social changes

Faithful representation

The numbers and descriptions match what really existed or happened, which is necessary because most users neither have the time nor the expertise to evaluate the factual content of the information; for this to be fulfilled it muse be complete, neutral, and free of material error

How does GAAP require noncontrolling interest be reported in a consolidated income statement?

The parent - when consolidating income statements - must allocate net income to the controlling (parent) and noncontrolling (subsidiary) interest - this appears after net income - not an expense or divided, but. a (loss) allocation to noncontrolling interest

Noncontrolling interest

The portion of equity (net assets) interest, in a subsidiary not attributable to the parent. In other words ownership of the subsidiary is divided into two classes 1) The majority interest represented by stockholders who own the controlling interest (the parent) and 2) The noncontrolling interest represented by stockholders who are not apart of the controlling group

Other comprehensive income

The portion of the comprehensive income classified as non-owner changes in equity that bypass the income statement

Fair market value

The price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants and the measurement date - is argued to provide better insight to a company's value of assets and liabilities More relevant but less verifiable

Financial statements

The principle means through which a company communicates it financial information to those outside it. These include the b/s, I/s, statement of cash flows, and statement of stockholders equity

Depreciation

The process of allocating the cost of an asset to expense over its useful life in a rational and useful manner

Journalizing

The process of entering transaction data in the journal

Managerial accounting

The process of identifying, measuring, analyzing, and communicating finical information needed by management to plan, control, and evaluate a company's operations

Posting

The process of transferring the essential facts and figures from the journal entries to the ledger accounts

Financial accounting

The process that culminates in the preparation of finical reports of the enterprise for use by both internal and external parties. Used by investors, creditors, managers, unions and government agencies

Understandability

The quality of information that lets reasonably informed users to see its significants; it is enhanced when information is classified, characterized, and presented clearly and concisely

Accrual basis accounting

The recognition of revenue when the performance obligation is stratified and expenses in the period incurred (GAAP)

Strict cash basis

The recording of revenue only when they receive cash and expenses only when they pay cash (not GAAP)

Earnings management

The timed planning of revenues, expenses, gains and losses to smooth out bumps in earnings - EX: increase in current year at expense of later year, or decrease earnings in the current year for the benefit of later years

Adjusted trial balance

The trial balance taken immediately after all adjustments have been posted - to prove equity of debit and credit balances after adjustments

Accounting principles board (APB)

This board's purpose was to 1) advance the written expression of accounting principles, 2) determine appropriate practices and 3) narrow the areas of difference and inconsistency - lasted from 1959 to 1973 and issued 31 opinions - by recommendation of the wheat committee it was disbanded and replaced in 1973 by the FASB

Quality of earnings

This can be negatively affected by earnings management if it distorts the information in a way that is less useful for predicting future earnings and cash flows

Changes in accounting principle

This can include a change in the method of inventory from FIFO to average cost, or a change in accounting for construction contracts from the percentage of work completed to the complete contract method The "big change"

Single-step income statement

This consists of two groupings: Revenues and Expenses. The primary advantage of this lies in the simple presentation and the absence of any implication that one type of revenue or expense item has priority over another

Periodicity assumption

This implies that a company can divide its economic activities into artificial time periods; the shorter the period the more likely errors are to occur

What is the third level of the conceptual framework?

This is the 'how' - the implementation, it includes recognition, measurement, and disclosure concepts

What is the first level of the conceptual framework?

This is the 'why' - purpose of accounting, it includes the objective of financial reporting

What is the second level of the conceptual framework?

This is the bridge between one and three, it includes Qualitative characteristics of accounting information and Elements of financial statements "the conceptual building blocks"

Supplementary information

This may include details or amounts that present a different prospective form that adopted in the financial statements

Transaction approach

This method of income measurement focuses on the income-related activities that have occurred during the period

Discontinued operation

This occurs when two things happen: 1) A company eliminates the results of operations of a component of the business and 2) The elimination of a component represents a strategic shift, having major affect on the company's operations and financial results (must be a large component)

Measurability principle

This principle is made up of two most commonly used methods - 1) historic costs, and 2) Fair value

FASB accounting codification

This provides, in one place, all of the authoritative literature to a particular topic. It changes the way GAAP is documented, presented and updated, and eliminated nonessential information such as redundant summaries, conclusion sections and historical content

Full disclosure principle

This recognizes that the nature and amount of information included in financial reports reflects a series of judgement trade offs - these trade offs being 1) sufficient detail to disclose matters that make a difference to users, and 2) sufficient condensation to make the information understandable

Monetary unit assumption

This says that menu is the common denominator of economic activity and provided an appropriate basis for accounting measurement and analysis - that is, money is the most effective means of expressing to interested parties changes in capital and exchanges of goods and services

Statements of financial accounting concepts

This sets forth fundamental objectives and concepts that the board uses in developing future standards of financial accounting and reporting. This does NOT establish GAAP, but still goes through the same due process system

Sarbanes-Oxley act

This was passed in response to a string of accounting scandals and it increased the resources for the SEC to combat fraud and curb poor reporting practices. It not only approved new auditor independence rules and materiality guidelines for financial reporting, but it also introduced sweeping changes to the institutional structure of the accounting profession

Objective of financial reporting

To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and creditors in decisions about providing resources to the entity

Expectations gap

What the public thinks accountants should do and what accountants think they can do

Impairment

When an asset's book value is higher than its fair market value, a loss is recorded to reduce the BV to FMV

Unearned revenues

When companies receive cash before services are performed, they are recorded as a liability by crediting this account; the adjusting entry results in a debit to a liability account and a credit to a revenue account

Multiple-step income statement

When companies separate their income into sections of different income characteristics for the aid of the reader, and to help them calculate basic ratios

Conservatism

When in doubt, choose the accounting treatment that will be least likely to overstate assets or income and/or understate liabilities or expenses

Retrospective adjustment

When the company recasts the prior years' income numbers under the newly adopted method; this preserves comparability across years

Operating section

a report of the revenues and expenses of the company's principle operations. Comprised of... a) Sales revenue b) COGS c) Selling expense d) Administrative or general expenses

Internal controls

a system of checks and balance within a company designed to prevent and detect fraud and errors