Accounting 321 Exam 3

Other means of communicating financial information include:

-financial statement notes -management discussion and analysis -managers and independant auditors attestations

management discussion and analysis

-is an extensive narrative discussion and quantitative analysis from the companys managers -provides managers insight into: strategies, evaluation of performance, exposure to business risk factors, and expectations about the future

two basic premises of the FASB are that in establishing financial accounting standards:

-it should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession -it should operate in full view of the public through a "due process" system that gives interested persons ample opportunity to make their views known

An allowance for doubtful accounts is established.

-measurement -fair value

agriculture companies use fair value for purposes of valuing corps

-measurement -fair value

Fair value changes are not recognized in the accounting records.

-measurement -historical cost

Indicates that fair value changes subsequent to purchase are not recorded in the accounts

-measurement -historical cost

goodwill is recorded only at time of purchase

-measurement -historical cost

monetary unit assumption

-money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis -this assumption disregards any inflation or deflation in the economy in whic hthe company operates

statement of shareholders equity

-provides information about the common shareholders equity claims on the company and how those claims changed during the year -contributed capital -earned capital

statement of cash flows

-reports for a period of time the net cash flows from operating, investing, and financiing activities -provides useful informaiton about how an entity is generating and using cash -is useful to creditors and other stakeholders to help evaluate the entitys cash generating ability

Issuance of interim reports is an example of what enhancing quality of relevance?

Timeliness

Major projects have been completed to achieve conbergence of accounting standards for :

consolidated financial statements, fair vaule measurement, financail statement presentation and revenue recognition

subsidiary ledger

contains the details related to a given general ledger account

debits =

credits

retained earnings

cumulative amount of net income generated by the company minus the dividends distributed to owners

earned capital

cumulative net income in excess of dividends decalred (retained earnings), stockholders equity effects from the recognition or valuaiton of certain assets or liabilities (accumulated other comprehensive income)

distribuiton by owners

decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. ? decrease ownership interests (or equity) in an enterprise

net book value (carrying value)

historical cost of an asset minus the accumulated depreciation

financial statements

how financial info of an entity is communicated to user

interal events

realte to transactions totally within an entity

expenses recognition principle (aka the matching principle)

recognition of expenses is related to net changes in assets and earning revenues. The ? is implemented in accordance with the definition of expense by matching efforts (expenses) with accomplishments (revenues)

third level

recognition, measurement, and disclosure concepts, the "how" or implementation

predictive value is an ingredient of the fundamental quality of info

relevance

the fundamental qualities of accounting info are :

relevance and faithful representation

if an accounting transaciton is not covered in any of these documents , ?

the accountant may look to other authoritative accounting literature for guidance

generally accepted accounting principles (GAAP)

the accounting profession has developed a common set of standards and procedures known as ?

depreciation

the allocation of an assets depreciable cost as an expense over its useful life

contributed capital

the amount of capital invested by owners

The financial statements most frequently provided are:

the balance sheet, the income statement, the statement of cash flows , and the statements of owners or stockholders equity

ledger

the book containing all of the accounts

journal

the book of original entry where the company initially records transactions and other events

enhancing qualities

complement the fundamental qualities

Faithful Representation is compromised of :

completeness , neutrality and free from error

(T/F) In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

true

Financing Activities

* Raising equity capital by attracting investments from business owners such as common shareholders * acquiring resources from lenders or by the issuance of bonds

operating activities

*Utilization of resources in day to day activites to produce goods and or services *selling of goods and services to customers

a company charges its sales commission cost to expense

-expense recognition

2 fundamental qualities that make accounting info useful for decisions making purposes

-faithful representation -relevance

FASB Accounting Standards Codification (ASC)

- an electronic data base that integrates and topically organizes U.S. GAAP into one coherent body of literature -became effective on July 1, 2009 -now the only source of authoritative GAAP for U.S. companies to determine how to record their transacitons , events , or circumstances , and how to report the results in their financial statements - it did not change hte GAAP, only repackaged it

economic entity assumption

- economic activity can be identified with a particular unit of accountability in a manner that assumes the company is seperate and distinct from its owners or other business units -an individual , department, division, or an entire industry could be considered a separate entity if we choose to define it in this manner -the entity concept does not necessarily refer to a legal entity. A parent and its subsidiary are seperate legal entities but merging their activities together does not violate the entity assumption

going concern assumption

- in the absence of contrary info, a company is assumed to have a long life. The current relevance of the historical cost principle is dependent on this assumption -only when liquidaiton is imminent is the assumption inapplicable. In this situaiton a revaluation of the assets and liabilities can provide info that closely approximates the companys net realizable value

SEC

- most companies that issue securities to the public or are listed on a stock exchange are required to file audited financial statements with the ? -in addition, the ? has the legal authority to prescribe the accounting practices and standards to be employeed by companies that fall within its jurisdiction

CAP

- this group served the accounting profession from 1939-1959 -during that period it issued 51 Accounting research bulletins (ARBs) that narrowed the wide range of alternative accounting practices then in exercise

Accounting Principles Board (APB)

-AICPA created in 1959 -to advance the written expression of accounting principles -to determine appropriate practices -to narrow the areas of difference and inconsistnecy in practice -designated as the AICPA's sole authority for public pronouncements on accounting priniciples

All significant post-balance-sheet events are disclosed.

-Full Disclosure

financial accounting concepts

-The SFACs represent an attempt to move away from the problem by problem approach to standard setting that has been characteristic of the accounting profession -the concept statements are intended to form a cohesive set of interrelated concepts, a conceptual framework, which will serve as tools for solving existing and emerging problems in a consisten manner -do not establish GAAP

Accounting Standards Updates

-These Updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC. -each update expains how the codification has been amended and also includes informaiton to help the reader understand the changes and when those changes will be effective -the yare considered GAAP adn must be followed in practice

uncollectible accounts (bad debts)

-a company makes a sale on credit (accounts receivable) that will not be collected -must be estimated in the period of the sale -the company must reduce its assets so that its accounting records show the amount of accounts receivables that it expest to collect

financai statement notes

-companies must provide notes as additional information with the financial statements -? explain how the accounts and amounts have been determined -provides important details about the accounting principles, methods, and estimates the company has used to measure values of assets, liabilities , equity, revenues, expenses, gains and losses

Four qualitative characteristics that are related to both relevance and faithful representation.

-comparability -verifiability -timeliness -understandability

Each enterprise is kept as a unit distinct from its owner or owners.

-economic entity

The use of consolidated statements is justified.

-economic entity

FASB - financial accounting standards board

-represents the current rule making body within the accounting profession -mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public , which includes issuers, auditors, and users of financial information

accountants

-serve the greater good of society and owe a responsibility of ethics and fairness to all stakeholders, whode interest are sometime conflicting - face ethical dilemmas , situations in which an ? must make a decision about what is right (ethical) action to take in given circumstances

the FASB developed the codification to achieve 3 goals:

-simplify user access by organizing and categorizing all authoritative U.S. GAAP in one database -Ensure the codified content accurately represented all U.S. GAAP -create a codification research system that is up to date, including the most recently released standards

the FASB differs from the predecessor APB in the following ways :

-smaller membership (7 vs 18 on the APB) -full-time remunerated membership (APB members were unpaid and part-time) -greater autonomy (APB was a senior committee of the AICPA) -increased independance (FASB members must sever all ties with firms, companies, or institutions) -broader representation (it is not necessary to be a CPA to be a member of the FASB)

Managers' and Independent Auditors' Attestations

-the sarbanes oxley act of 2002 imposed responsibilities on managers and auditors -management is responsible for the financial statements and the underlying accounting and control system that generates the financial statements -independent auditors are responsible for assessing a companys interanl control system, designing audit test, and forming an opinion about the fairness of the amounts reported in the financial statement

The FASB issues 2 major types of pronouncements :

1. Accounting Standards Updates 2. Financial Accounting Concepts

the benefits of a soundly developed conceptual framework are :

1. Guide the FASB in establishing accounting standards 2. It should be easier to issue a coherent set of standards and rules 3. Establish objecitves and concepts to guide financial statemetn preparers and auditors to resolve questions and make appropriate judgements 4. Increase users understandability of and confidence in financial reporting 5. Enhance financial statement comparability across companies and over time

the ultimate goal of convergance

? is a single set of high quality, international accounting standards that companies worldwide would use for both domestic adn cross border financial reporting

Adjusting entries - periodic inventory

1. Some companies use a periodic inventory system to derive cost of goods sold and adjust inventory. 2. Inventory purchases are recorded in a Purchase account. 3. Inventory balances do not change during the year. 4.Calculate cost of goods available and cost of goods sold 5. Adjusting entry to close purchases, record COGS and adjust inventory

who are stakeholders

1. anyone that has some type of interest in the company 2. most companies have many different stakeholders. the users may be interal or exteranl 3. ? include: stockholders, banks, creditors, governmental agencies, management , employees, customers, suppliers, and others

Information useful to external users (investors, lenders, and other creditors) in assessing expected returns

1. decisions by existing and potential investors about selling, or holding equity instruments 2. decisions by existing and potential investors about buying, selling , or holding debt instruments

adjusting entries can be classified as :

1. deferrals (prepaid expenses, unearned revenues) 2.accruals (accrued revenues, accrued expenses) 3.accounting estimates 4.periodic inventory

info concerning the companys net income, comprehensive income, and their components is useful to external users in :

1. evaluating managements performance 2. estimating the companys "earning power" or other amounts that are representative of persistent long term income producing ability 3. predicting future income adn net cash flows 4. assessing the risk of investing in or lending to the company

the accounting equation

Assets = Liabilities + Equity

balance sheet

Assets = Liabilities + Stockholders' Equity

information useful in decision making

1. info useful to external users in assessing expected returns 2. info useful in assessing the amounts , timing, and uncertainty of the prospective company cash flow 3. info about economic resources and claims on the company 4. info about changes in the companys resources and claims

info about changes in the companys resources and claims

1. provie info about the financial performance which causes the companys resources and claims on the company resources to change during the period 2. info concercing the companys net income, comprehensive income, and their components is useful to external users

Principles of the AICAP code of professional ethics

1. responsibilities 2.the public interest 3. integrity 4. objectivity and independence 5. due care 6. scope and nature of services

full disclosure trade offs strive for:

1. sufficient detail to disclose matters that make a difference to user. 2. Sufficient condesation to amke the info understandable, keeping in mine costs of prepairing and using it

What do stakeholders need to know (creditors)?

1. the amount of equity capital in place 2. resources the company owns and the debt it owes 3. Cash flows and the companys ability to meet interest and principal payments when due

what do stakeholders need to know (investors) ?

1. the business model, strategies, and competitive advantages of the company 2.resources the company owns and the debt it owes 3. the net income or net loss, cash flows, and whether profits and cash flows are growing over time

info about economic resources and claims on the company

1. to identify the companys resources , obligations, financial strengths and weaknesses, and to asses its liquidity adn solvency 2. to specify the types of resources in which the company has invested, as well as the types of the claims on the company 3. To indicate the potential future cash flows from the companys resources and the ability of the resources to satisfy the claims on the company

Financial Accounting is the :

1.identification 2. measurement 3. communication of financial informaiton 4.about the business activities of economic entities 5. to its stakeholders 6.to aid in the decision making process

the conceptual framework has how many levels ?

3

the net balance in the income statement account is ?

= to net income or net loss for the period

professional accounting organization

? have established codes of ethics for their members

The IASB

? is the internaitonal accounting standard setter, establishing IFRS which are required or permitted in rougly 130 countries , includes 16 members from various contries -studies the topic, issues a discussion paper, issues an exposure draft, evaluates comments, and drafts the proposed standard, if approved by 10 of the 16 members, the proposed standard becomes an international financial reporting standard (IFRS)

international convergence of accounting standards

? refers to both a goal and the path chosen to reach it

after the stock market crash in 1929 and the great depression,

? there were calls for increased government regulation and supervision - especially of financial institutions and the stock market

scope and nature of services

A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.

due care

A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.

Basic elements

Assets, Liabilities, Equity, Investment by owners, Distribution by owners, Comprehensive income, Revenue, Expenses, Gains, Losses

Investing Activities

Acquiring productive resources such as property, plant, equipment, technology, legal rights, and other assets necessary to operate the business

transaction

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

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 expenses or distributions to owners.

chart of accounts

comprehensive list of all accounts and their assigned account numbers

the third level of the framework consists of ?

concepts that implement the basic objective of levle one. These concepts explain how companies should recognize, measure, and report fincancial elements and events

quality of info that confirms users earlier expectations

confirmatory value

comprehensive income

Change in equity (net assets) of an 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.

the qualitative characteristics

Companies must decide what type of information to disclose and how to disclose it. These choices are determined by which method or alternative provides the most decision-useful information. ? of accounting information distinguish better and more useful information from inferior and less useful information.

predictive value

means that the info can help users form expectations about the future

free from error

means that the info is measured and described as accurately as possible

Accounting principles that have substantial authoritative support are those found in ?

FASB statements , interpretations , and staff positions ; APB opinions, and accounting research bulletins (ARBs)

T/F: info that is a faithful representation is charectorized as having predictive or confirmatory value

False

All important aspects of bond indentures are presented in financial statements.

Full Disclosure

Financial info is presented so that investors will not be misled

Full Disclosure

Substantial authoritative support

Generally accepted accounting principles (GAAP) are those principles that have ?

neutrality

means that the info is unbaised. It is not manipulated to achieve a predetermined result or to influence users behavior in a particular direction

Step 7: Financial Statements

Income Statement. Statement of stockholders equity, and balance sheet are prepared directly from the adjusted trial balance

gains

Increases 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 investments by owners.

investments by owners

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

revenues

Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

level 2: fair value hierarchy

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. Rely on evaluating similar assets or liabilities in active markets (more subjective)

income statement (profit and loss statement)

Measures and reports the financial results of an entitys performance for a period of time, Net income (loss) = revenues - expenses + gains - losses

Four Basic Accounting Principles

Measurment , Revenue recognition, expenses recognition, full disclosure principle

the public interest

Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.

Ignores the economic consequences of a standard or rule.

Neutrality

Separates financial information into time periods for reporting purposes

Periodicity

Balance sheet (statement of financial position)

Presents , as of a specific date: a snapshot of the resources of an entity (assets) and the claims on the entity (liabilities and shareholders equity) Assets = liabilities + shareholders equity

equity

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.

income statement

Revenues - Expenses = Net Income

the SEC mandates corporations are subject to ?

U.S. GAAP or IFRS

level 3: fair value hierachy

Unobservable inputs. Much judgement is needed, based on the best info available to arrive at a relevant and representationally faithful fair value measurement. Measures may be developed using expected cash flows and present value techniques

measurement principle

a 'mixed attribute' system permits the use of various measurement bases

Conceptual Framework

a ? in accounting is important because rule making should be built on and relate to an established body fo concepts.

general ledger

a collection of all the financial statement elements

Step 2: journalizing

a company records in accounts those transactions and events that affect its assets , liabilities, and equities

straight line depreciation

a depreciation method which allocates a proportionate amount as an expense to each period and is calculated : annual depreciation expense = ( Cost - Estimated Salvage Value) / Estimated Useful Life

Event

a happening of consequence. Generally the source or cause of changes in assets, liabilites, and equity. ? may be internal or external

Step 4: trial balance

a list of accounts and their balances at a given time. An entity may prepare a ? at any time in the accounting cycle. A ? prepared after posting has been completed serves to check the mechanical accuracy of the posting process and provides a listing of accounts to be used in prepairign financail statements

trail balance

a listing of all open accounts in the ledger and thier balances. Also have adjusted trial balance and post closing trial balances

objectibity and independence

a member should be objective and free from conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services

Step 9: Post Closing Trial Balance

a trid trial balance may be prepared after the closing entries are recorded and posted

the monetary unit is ?

assumed to remain relatively stable over the years in terms of purchasing power

the american institute of certivied public accountants (AICPA) or the financial acounting standards board (FASB)

at the time the SEC was created, it encouraged the creation of a private standards setting body. As a result , accounting standards have generally been developed in the private sector either through ?

Need for a conceptual framework

a. build on and relate to an established body of concepts b. issue more useful and consistent pronouncements over time c. increase financial statement users understanding of and confidence in financial reporting d. enhance comparability among companies financial statements e. provide a framework for solving new and emerging practical problems

accruals

accrued revenues and accrued expenses , revenues and expenses recognized in the current period for which the corresponding payment or receipt of cash is to occur in a future period, an entry has not yet been recorded for an accrual

Historical Cost Principle

acquisition cost is considered a reliable basis upon which to account for assets and liabilities of a company, advantage over other valuaitons because it is thought to be verifiable

Step 8: closing process

after financial statements have been prepared, nominal (revenue, expenses, and dividend) accounts should be reduced to zero in preparartion for recording the transactions of the next period

in 2007 the SEC decided to ?

allow foreign companies to use IFRS rather than U.S. GAAP, agreed to accept IFRS-based filings , and decided that these companies do not need to reconcile how differences between IFRS and U.S. GAAP affect their reported financial statements

contributed capital

amounts contributed by shareholders for an interest in the entity (common stock, additional paid in capital)

expense

an ? is defines as outflows or other "using up" of assets or incurring of liablilities during a period as a result of delivering products or producing goods and/or performing services (i.e.....generating revenues)

all adjusting entries will include ?

and income statement account and a balance sheet account

external events

are those between an entity and its environment

specialized journals

are used to accumulate transactions possessing common characteristics (sales journal, purchases journal, cash disbursements journal and cash receipts journal)

the securities and exchange commission (SEC)

as a result from the great depression, the federal government established ? to help develop the and standardize financial information presented to stockholders

IFRS foundation

as the parent organization of the IASB, ? consists of a group of trustees that is responsible for fund raising, appointing IASB members, and overseeing the effectiveness of the IASB

an important aspect of developing an accounting theoretical strucutre is the ?

body of basic elements or definitions

source documents

business documents that provide initial info for recording transactions and events within an accounting system

adjusting entries - accounting estimates

certain types of adjusting entries are based on accounting amounts that are not known with certainty and must be estimated at the end of each period

The AICPA has adopted the

code of professional conduct (CPC)

qualitative charectoristics being employed when companies in the same industry are using the same accounting principles

comparability

Imperative for providing comparisons of a company from period to period.

comparability (consistency)

enhancing qualities include :

comparability, consistency, verifiability, timeliness, understandability

step 1: transaction analysis

determines which events represents transactions that should be recorded , an item should be recognized in the financial statements if it is an element, is measurable , and is relevant and representationally faithful

Indicates that personal and business record keeping should be separately maintained.

economic entity

four basic assumptions

economic entity, going concern, monetary unit, periodicity

journalizing

entering transactions into the journal

Step 5: Adjusting Entries

entries made at the end of accounting period to bring all accounts up to date on an accrual accounting basis so that correct financial statements can be prepared

adjusting entries

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

transactions recorded in a general journal must be posted individually, whereas ?

entries made in specialized journals are generally posted by columnar total

external or internal

events are classified as ? or ?.

allocates expenses to revenues in the proper period

expense recognition

intangible assets are amoritized over periods benefited

expense recognition

fair value principle

fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in on orderly transaction between market participants at the measurement date.

Neutrality is an ingredient of this fundamental quality of accounting information.

faithful representation

T/F: comparability pertains only to the reporting of info in a similar manner for different companies

false

T/F: relevant info only has predicted value, conformatory value , or both

false

T/F: the fundamental qualitative charecteristics that make accounting info useful are relevance and verifiability

false

T/F: verifiability is solely on enhancing characteristics for faithful representation

false

what are business activities ?

financing, investing , and operating acitivies

the basic objective of financial reporting is the ?

foundation of the conceptual framework and requires that general purpose financial reporting provide informaiton about the reporting entity that is useful to present and potential equity investors, lendors, and other creditors in making decisions about providing resources to the entity

Ensures that all relevant financial information is reported

full disclosure

notes to financial statements

generally amplify or explain the items presented in the main body of the statements. Examples : descripitons of accounting policies and methods used in measuring elements reported in the statement, explanations of uncertainties or contingencies, and statistics and details to voluminous for inclusion in the statements

Rationale why plant assets are not reported at liquidation value. (do not use historical cost principle)

going concern

Study group on establishment of accounting principles (Wheat committee)

in 1971, a committe known as the ? was set up to study the APB and recommend changes in its structure and operations , the result of the ? findings was the demise of the APB and the creation of the Financial Accounting Standards Board (FASB) in 1973.

responsibilities

in carrying out their ? as professionals, members should exercise sensitive professional and moral judgments in all their activities

full disclosure principle

in the preparation of financial statements, the accountant should include sufficient info to influence the judgment and decision of an informed user.

CPC

includes 6 principles that express the basic tenets of ethical and professional conduct and call for an unswerving commitment to honorable behavior, even at the sacrafice of person advantage

Accumulated Other Comprehensive Income (AOCI)

includes certain unrealized income items that the FASB has designated to be recognized as a separate component of equity

the terms debit and credit are used to ?

indicate the effect a transaction has on an account balance

relevance

info that is capable of making a difference in a decision

Posting

involves transferring amounts entered in the journal to the general ledger

Assumes that the dollar is the "measuring stick" used to report on financial performance.

monetary unit

consistency

is another type of comparability and means the company uses the same accounting methods from period to period

general journal

is merely a chronological listing of transactions expressed in terms of debits and credits to particular accounts

the ledger

is the entire set of accounts of a company

the debit side ?

is the left side

the credit side

is the right side

a normal balance

is what indicates how an account will increase

the overiding criterion for evaluating accounting info is that is must be useful for decision making. To be useful, ?

it must be understandable

APB opinions

its pronouncements , known as ? were intended to be based mainly on research studies and be supported by reason and analysis

An item is not recorded because its effect on income would not change a decision.

materiality

supplementary information

may include details and amounts that present a different perspective from that adopted in the financial statements. It may be quantifiable information that is high in relevance but low in faithful representation. (Example: Oil and gas companies providing information on proven reserves as well as the related discounted cash flows.) Supplementary information may also include management's explanation of the financial information and its discussion of the significance of that information.

completeness

means that all info necessary to understand the info being reported is provided

comparability

means that companies record and report info in a similar manner

verifiability

means that independent people using the same methods arrive at similar conclusions

timeliness

means that info is available before it loses its relevance

materality

means that info is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial info

confirmatory value

means that info provides feedback which validates or refutes expectations based on previous evaluaitons

understandability

means that reasonably informed users should be able to comprehend the info that is clearly classified and presented

all accounts have a ?

normal balance

liabilities , stockholders equity, and revenues have a ?

normal credit balance. Therefore ,these accounts are increased by credits and decreased by debits

dividends, expenses, and assets have a ?

normal debit balance, therefore these accounts are increased by debits and decreased by credits

level 1: fair value hierachy

observable inputs that reflect quoted market prices for identical assets or liabilities in active markets (least subjective)

expenses

outflows or the using up of assets or incurrences of liablities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entitys ongoing major or central operations

Reporting must be done at defined time intervals.

periodicity

real accounts

permanent accounts , the asset , liability, and equity accounts whose balances at the end of the period are carried forward to the next period

relevant info has :

predicted value, confirmatory value, and materiality

deferrals

prepaid expenses and unearned revenues , refer to situations where cash has been paid or received but the corresponing expense or revenue will not be recognized until a future period, an entry has already been recorded for an asset (prepaid expense) or liability (unearned revenue) and must be adjusted at the end of the period

Step 6: adjusted Trial Balance

prepared after adjusting entries are journalized and posted . It shows the balance of all accounts at the end of the accounting period

assets

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

liabilities

probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

closing entries

process of closing all nominal accounts, reducing their balance to zero, and determines and transfers the net income (loss) to retained earnings

costs are generally classified into 2 groups

product cost and period cost

post closing trial balance

proves the equality of the permanent account balances that the company carries forward into the next accounting period

Gains and losses

results from transactions in which the company sells assets or settles liabilities for more or less than their book value

the dividends account is closed into ?

retained earnings

Rational for accrual accounting

revenue and expense recognition

Revenue Recognition Principle

revenue is recognized at the time in which the performance obligation is satisfied

Revenue is recorded when the product is delivered

revenue recognition

nominal accounts are:

revenues, expenses, and dividends

account

show the effect of transactions or events on a specific financial statement element

contra account

shows a reduction in a related account

statement of retained earnings

shows changes in retained earnings during a period

statement of cash flows

shows sources and used of cash during a period and also reconciles the beginning cash balance to the ending cash balance

The accounting cycle

step 1: transaction analysis step 2: journalizing step 3: Posting step 4: trial balance step 5: adjusting entries step 6: adjusted trial balance step 7: financial statements step 8: closing process step 9 : post closing trial balance

product cost

such as material , labor, and overhead, attach to the product, and are recognized in the same period the products are sold

period cost

such as officers salaries and other administrative expenses, attach to the period , and are recognized in the period incurred

nominal accounts

temporary accounts , used to determine the changes in earnings that occur during a period. Their balances are not carried forward (revenues, expenses, gains, losses, dividends)

the difficulty in cost benefit analysis is ?

that the cost and especially the benefits are not always evident or measurable

cost constraint

the ? (or cost benefit relationship) relates to the notion that the benefits to be derived from providing certain accounting information should exceed the costs of providing that information

FASB

the SEC has affirmed its support for the ? by indicating the financial statements conforming to standards set by the ? will be presumed to have substantial authoritative support

the securities act of 1933 and the securities exchange act of 1934

the SEC is a federal agency and administers ? and several other acts

depreciable cost

the difference between the original cost and salvage value

periodicity assumption

the economic activities of a company can be divided into artificial time periods for the purpose of providing the companys periodic reports

Committe on Accounting Procedure (CAP)

the first group appointed by the AICPA to address the issue of uniformity in accounting practice was the ?

Faithful Representation

the numbers and descriptions match what really existed or happened

first level

the objective of financial reporting , the "why" or purpose of accounting

the accounting system

the primary purpose of an accounting system is to record, organize, summarize, and report useful info to external financial statement users and stakeholders, as well as to company managers for making operating, investing, and financiing decisions

Financial Statements

the principal means through which a company communicates its financial information to external stakeholders.

posting

the process of transferring info from the journal to the ledger

second level

the qualitative characteristics and elements of financial statemetns, which form a bridge between the 1st and 3rd levels

in a double entry system,?

there msut be a debit for every credit and vice versa

GAAP

these principles serve as a general guide to the accounting practitioner in accumulating and reporting the financial information of a business enterprise. The main controversy in setting accounting standards is , "whose rules should we play by, and what should they be?"

closing process

this ? requires recording and posting of closing entries. All nominal accounts are reduced to zero by closing them through the income summary

certain basic principles are followed by accountants in recording and reporting the transactions of a business entity. These principles relate to how assets , liabilites, revenues, and expenses are ?

to be identified, measured, and reported

? the FASB established a fair value hierachy provides insight into the priority of valuation techniques to use to determine fair value

to increase consistency and comparability in fair value measures

integrity

to maintain and broaden public confidence, members should perform all professional resposbilities with the highest sense of ?

the net income of net loss for the period is ?

transferred to an owners equity accout by closing the income summary account to retained earnings

in order to understand general purpose financail reporting , ?

users need reasonable knowledge of business and financial matters

-General purpose financail statements -presents fairly, clearly, and completely the companys financial position

users of financial accounting standards have both coinciding and conflicting need for informaiton of various types. To meet these needs, companies prepare a set of ?. Users expect these statements to ?

Requires a high degree of consensus among individuals on a given measurement.

verifiability

professional accountants must be fluent in U.S. GAAP and IFRS and ?

well informed about their differences