Accounting test 2

Consistency

"A company's use of the same accounting principles and methods from year to year." •eg: if use straight-line depreciation method in year 1, then should continue to use it in year 2, 3, etc.

Comparability

"Ability to easily evaluate one company's results relative to another's." •ie: accounting data can be compared between companies.

Going concern assumption

"Belief that a company will continue to operate for the foreseeable future." •ie: Not going out of business in the near future.

Historical cost principle

"Belief that items should be reported on the balance sheet at the price that was paid to acquire the item." •ie: accounting data is recorded at original cost.

Monetary unit assumption

"Reporting only those things that can be measured in dollars."

Sarbanes-Oxley Act

"The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30, 2002 to protect investors from the possibility of fraudulent accounting activities by corporations." "mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud."

Faithful representation

"The desire to minimize errors and bias in financial statements." •ie: Accuracy, Objectivity

Materiality

"The judgment concerning whether an item is large enough to matter to decision-makers." •eg: Company reported $1,000,000 in net income; the auditing CPAs recalculated the net income to be $999,999. Is the $1 difference material?

Periodicity assumption

"The practice of preparing financial statements at regular intervals." •eg: Monthly, quarterly, annual reports.

Relevance

"The quality of information that indicates the information makes a difference in a decision." "Information is considered relevant if it provides information that has predictive value, that is, helps provide accurate expectations about the future, and has confirmatory value, that is, confirms or corrects prior expectations."

Full disclosure principle

"The reporting of all information that would make a difference to financial statement users." •ie: disclose ALL information important to users of financial statements.

Economic entity assumption

"Tracing accounting events to particular companies." •ie: "The "Economic entity assumption" states that the activities of the entity are to be kept separate from the activities of its owner and all other economic entities."

. (a) What are generally accepted accounting principles (GAAP)?

(a) Generally accepted accounting principles (GAAP) are a set of rules and practices, having substantial support, that are recognized as a general guide for financial reporting purposes.

(b) What body provides authoritative support for GAAP?

(b) The body that provides authoritative support for GAAP is the Financial Accounting Standards Board (FASB).

Deferrals

-Prepaid expenses OR -Unearned revenues.

PPE characteristics

1.Long Term (>1yr) 2.Tangible 3. Used in operations of business 4. ability to depreciate due to wear and tear meaning it must be converted from an asset to an expense

Your roommate believes that accounting standards are uniform throughout the world. Is your roommate correct? Explain.

Accounting standards are not uniform because individual countries have separate standard-setting bodies. Currently many non-U.S. countries are choosing to adopt International Financial Reporting Standards (IFRS). It appears that accounting standards in the United States will move toward compliance with IFRS.

Public Company Accounting Oversight Board (PCAOB)

Created as a result of the Sarbanes-Oxley Act. Determines auditing standards. Reviews performance of auditing firms.

FASB

Financial Accounting Standards Board "The Financial Accounting Standards Board (FASB) is the primary accounting standard-setting body in the United States."

GAAP

Generally Accepted Accounting Principles "A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes."

IASB

International Accounting Standards Board Issues International Financial Reporting Standards (IFRS) FASB and IASB have worked on minimizing the differenesbetween GAAP and IFRS

IFRS

International Financial Reporting Standards "International version of GAAP" Over 115 countries in the world, including European Union, use IFRS.

Prepaid Expenses

Prepaid Expenses are not expenses. They are assets. The most common types of Prepaid Expenses are Prepaid Insurance, Prepaid Rent, and Prepaid Advertising. Expenses paid in cash before they are used or consumed (must be converted rom asset to expense)

SEC

Securities and Exchange Commission "agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies."

Expense Recognition Principle

The principle that matches expenses with revenues in the period when the company makes efforts to generate those revenues.

Transactions

Transactions are economic events that require recording in the financial statements. -Not all activities represent transactions. -Assets, liabilities, or stockholders' equity items change as a result of some economic events.

Generally accepted accounting principles are: a. a set of standards and rules that are recognized as a general guide for financial reporting. b. usually established by the Internal Revenue Service. c. the guidelines used to resolve ethical dilemmas. d. fundamental truths that can be derived from the laws of nature.

a. a set of standards and rules that are recognized as a general guide for financial reporting.

accrued expenses

expenses incurred but not yet paid in cash or recorded An adjustment serves two purposes: 1.Records the obligations, and 2.Recognizes the expenses.

Revenue Recognition Principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied •Performance obligation is satisfied when the company has earned the revenue. •Revenue is earned when the service has been provided or when the product sold has been shipped.

Accrued Revenues

revenues for services performed but not yet received in cash or recorded An adjustment serves two purposes: 1.Shows the receivable that exists, and 2.Records the revenues for services performed.

Adjustments

•Adjustments to the accounting records are necessary at the end of the month before financial statements are prepared.

Unearned Revenue Adjustment

•As work is being completed (ie as revenue is earned) , the company needs to convert the Unearned Revenue liability to Revenue. •Unearned Revenue liability is reduced and Revenue is increased.

•Auditing Firms

•CPA firms •Auditing, Taxation, Advisory practices •Auditing: main practice for large CPA firms •Auditors examine accounting records/financial statements of companies so investors and others (creditors, government, etc) can trust the financial statements.

Unearned Revenue

•Liability account. •Results from cash received in advance from customers before service is performed. •In other words, the business has not "earned" its revenue yet. Business now owes money to its customer until work is done. Customer can ask for money back until work is done.

Supply Adjustment

•Supply is an Asset (ie things you own with future benefits). •As Supply is being consumed, the amount consumed needs to be converted from asset to expense.

Fiscal Year

•The accounting year used by a business. •Typically 12-month period. •Can be same as calendar year (ie Jan. to December). •But can also start in any month of the year.

Cash-Basis Accounting

►Revenues are recognized only when cash is received. ►Expenses are recognized only when cash is paid. ►Not in accordance with generally accepted accounting principles (GAAP). •Not GAAP compliant •Not taught or used in most accounting courses (or textbooks). •Use by some small businesses •IRS allows some small businesses to use Cash Basis accounting for tax returns.

Accrual-Basis Accounting

►Transactions recorded in the periods in which the events occur. ►Revenues are recognized when services performed, even if cash was not received. ►Expenses are recognized when incurred, even if cash was not paid. •GAAP compliant •Taught & used in accounting courses & textbooks •Required method if sells stocks to the public •May be required by some creditors/governmental entities