Accounting 301

Intraperiod tax allocation is used for

(1) income from continuing operations, (2) discontinued operations, and (3) extraordinary items.

Earnings per share

-A significant business indicator. -Measures the dollars earned by each share of common stock. -Must be disclosed on the income statement

The usefulness of the income statement is

-Allows for the evaluation of past performances -Predictability of future performance -Help assess the risk or uncertainty of achieving future cash flows

The limitations of the income statement are

-Companies omit items that cannot be measured reliably. -Income is affected by the accounting methods employed -Income measurement involves judgment.

Comprehensive Income includes

-all revenues and gains, expenses and losses reported in net income, and -all gains and losses that bypass net income but affect stockholders' equity. -Unrealized gains and losses on available-for-sale securities. -Translation gains and losses on foreign currency.

What are the 5 steps of revenue recognition

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

List the steps in the Financial Accounting Standards Board

1. Topics are identified and placed on the board's agenda 2. Research and analysis are conducted 3. A public hearing is held 4. Board evaluates research/public response draft is made 5. Board make whatever necessary changes to exposure draft and then the final standard is issued

According to the FASB conceptual framework, an entity's revenue may result from

A decrease in a liability from primary operations

This organization is a national professional organization (private companies) that Issued 51 Accounting Research Bulletins (ARBs). They also issued 31 Accounting Principle Board Opinions (APBOs).

American Institute of Certified Public Accountants (AICPA)

Economic entity, going concern, monetary unit and period-icy all fall under?

Assumptions

The process of determining how and what cost money is allocated among competing interests

Capital Allocation

In the conceptual framework of the accounting principles enhancing qualities encompass what?

Comparability, verifiability, timeliness and understandability.

Information that is measured and reported in a similar manner for different companies is considered

Comparable

All the information that is necessary for faithful representation is provided

Completeness

In the conceptual framework of the accounting principles faithful representation encompasses what?

Completeness, neutrality and free from error

All changes in equity during a period except those resulting from investments by owners and distributions to owners.

Comprehensive Income

In the conceptual framework of the accounting principles costs are considered a?

Constraint

Cost of providing information must be weighed against the benefits that can be derived from using it.

Cost Constraint

Occurs when, a company eliminates the results of operations of a component of the business, and there is no significant involvement in that component after the disposal transaction. Amounts reported "net of tax."

Discontinued Operations

Net Income - Preferred Dividends/Weighted Average of Common Shares Outstanding =

Earnings per share

Company keeps its activity separate from its owners and other businesses

Economic Entity

The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. This is an example of?

Economic Entity

Assests, liabilities, equity, investment by owners, distribution to owners, comprehensive income, revenues, expenses, gains and loses all fall under?

Elements

"Let the expense follow the revenues."

Expense Recognition

Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.

Expense Recognition

Cost of goods sold, Depreciation, Interest, Rent Salaries, Wages and Taxes are all examples of?

Expenses

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations

Expenses

Nonrecurring material items that differ significantly from a company's typical business activities

Extraordinary items

The numbers and descriptions match what really existed or happened.

Faithful representation

A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary. True or False?

False

In period costs there is a direct relationship between cost and revenue. True or False?

False

Wheat Committee's recommendations resulted in creation of ______, whose priority is to establish and improve standards of financial accounting and reporting and consult on major policy issues.

Financial Accounting Standards Board (FASB)

The financial information a company provides users to help with capital allocation decisions about the company

Financial Reporting

Non-financial measurements, forward-looking information, soft assets, timeliness and understandability are all

Financial Reporting Challenges

Balance Sheets, Income Statements, Statement of Stockholders' Equity, Statement of Cash Flows and Note Disclosures all are

Financial Statements

Overview of the Conceptual Framework: Levels one, two and three?

First Level = Basic Objectives Second Level = Qualitative Characteristics and Elements Third Level = Recognition, Measurement, and Disclosure Concepts.

An information item that is ______ will be a more accurate (faithful) representation of a financial item

Free from error

Oracle Corporation reports information about pending lawsuits in the notes to its financial statements

Full Disclosure

Providing information that is of sufficient importance to influence the judgment and decisions of an informed user. Provided through: Financial Statements Notes to the Financial Statements Supplementary information

Full Disclosure

Increases in equity (net assets) from peripheral or incidental transactions

Gains

A set of standards that are generally accepted and universally practiced within the accounting profession

Generally Accepted Accounting Principles (GAAP)

Company to last long enough to fulfill objectives and commitments

Going Concern

Walgreen Co. reports current and noncurrent classifications in its balance sheet. This is an example of?

Going Concern

Decreases in equity (net assets) from peripheral or incidental transactions.

Losses

Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater.

Measurement

Money is the common denominator

Monetary Unit

Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. This is an example of?

Monetary Unit

Single step or multiple? -Separates operating transactions from nonoperating transactions. -Matches costs and expenses with related revenues. -Highlights certain components of income that analysts use assessing financial performance.

Multiple Step Income Statement

A citrus grower's Florida crop is damaged by frost. Would this be considered an extraordinary item?

NO

A company experiences a material loss in the repurchase of a large bond issue that has been outstanding for 3 years. The company regularly repurchases bonds of this nature. . Would this be considered an extraordinary item?

NO

A large diversified company sells a block of shares from its portfolio of securities which it has acquired for investment purposes. This is the first sale from its portfolio of securities. Would this be considered an extraordinary item?

NO

Revenues - expenses =

Net Income (single-step)

A company cannot select information to favor one set of interested parties over another

Neutrality

The portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

Noncontrolling interest

Gains and losses that bypass net income but affect stockholders' equity are referred to as

Other comprehensive income

Salaries and administrative costs are?

Period costs

Company can divide its economic activities into time periods

Periodicity

The economic activities of KC Corporation are divided into 12-month periods for the purpose of issuing annual reports. This is an example of?

Periodicity

Financial information has ______ if it has value as an input to predictive processes used by investors to form their own expectations about the future.

Predictive value

In the conceptual framework of the accounting principles relevance encompasses what?

Predictive values, confirmatory values and materiality.

Measurements, revenue recognition, expense recognition and full disclosure all fall under?

Principles

FASB Standards, Interpretations, and Staff Positions. APB Opinions and AICPA Accounting Research Bulletins are all

Principles that have substantial authoritative support

Materials, labor and overhead are what type of cost?

Product costs

Fundamental qualities, faithful representation and enhancing qualities all fall under?

Qualitative characteristics

Sales, fee, interest, dividends and rent are all examples of?

Revenue

KC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected.

Revenue Recognition

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

Revenue Recognition

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations.

Revenues

This organization was established by the federal government (public companies). Does accounting and reporting for public companies, encouraged private standard-setting body, requires public companies to adhere to GAAP and is an enforcement authority. Also responsible for the Securities Acts of 1933 and 1934.

Securities and Exchange Commission (SEC)

What are the primary 3 GAAP organizations?

Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) American Institute of Certified Public Accountants (AICPA)

How many statements of financial accounting concepts (SFAC) has FASB issued?

Seven

Reports the changes in each stockholders' equity account and total equity for the period.

Statement of Stockholders' Equity

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on?

The needs of the users of the information

What are the Statements of Financial Accounting Concepts intended to establish?

The objectives and concepts for use in developing standards of financial accounting and reporting.

In the conceptual framework of the accounting principles Assumptions, principles and constraints fall under?

The recognition, measurement and disclosure concepts.

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

Timeliness

What is the purpose of information presented in notes to the financial statements?

To provide disclosure required by generally accepted accounting principles.

The objective of financial reporting is to

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

The first step taken in the establishment of a typical FASB statement is

Topics are identified and placed on the board's agenda.

A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements. True or False?

True

Companies must display the components of other comprehensive income in one of two ways: A single continuous statement (one statement approach) or two separate, but consecutive statements of net income and other comprehensive income (two statement approach). True or False?

True

Extraordinary Items are reported after "Income from continuing operations" and after "Discontinued Operations." True or False?

True

Gains and losses can result from: -sale of investments or plant assets, -settlement of liabilities, -write-offs of assets. True or False?

True

In product costs there is a direct relationship between cost and revenue. True or False?

True

Multiple-step income statements contain three sections: Operating, nonoperating and income tax. True or False?

True

Period costs are expensed as they are incurred. True or False?

True

Product costs are recognized in period of revenue (matching). True or False?

True

Companies have incentives to manage income to meet or beat Wall Street expectations, so that market price of stock increases and value of stock options increase. True or False?

True.

Is the quality of information that lets reasonably informed users see its significance

Understandability

-Losses on the write-down or write-off of assets. -Gains or losses from exchange or translation of foreign currencies. -Restructuring charges. -Other gains or losses from sale or abandonment of property, plant, or equipment used in the business. -Effects of a strike. -Adjustment of accruals on long-term contracts. Are all?

Unusual Gains and Losses

Extraordinary item must meet both of the following criteria:

Unusual nature and Infrequently of occurrence Company must consider the environment in which it operates. Amount reported "net of tax."

Investors and creditors use financial reports to make their capital allocation decisions

Users, present and potential

Cccurs when independent measurers, using the same methods, obtain similar results

Verifiability

A company sells a block of common stock of a publicly traded company. The block of shares, which represents less than 10% of the publicly-held company, is the only security investment the company has ever owned. Would this be considered an extraordinary item?

YES

A large portion of a tobacco manufacturer's crops are destroyed by a hail storm. Severe damage from hail storms in the locality where the manufacturer grows tobacco is rare. Would this be considered an extraordinary item?

YES

An earthquake destroys one of the oil refineries owned by a large multi-national oil company. Earthquakes are rare in this geographical location. Would this be considered an extraordinary item?

YES

To be relevant, accounting information must be capable of making

a difference in a decision

A separation of operating and non operating activities of a company exists in

a multiple-step but not a single-step income statement.

Irregular transactions such as discontinued operations and extraordinary items should be reported separately in

both a single-step and multiple-step income statement.

Which of the following accounting pronouncements is the most authoritative? a. FASB Statement of Financial Accounting Concepts. b. FASB Technical Bulletins. c. AICPA Accounting Principles Board Opinion. d. AICPA Statement of Position

c. AICPA Accounting Principles Board Opinion.

The most commonly used measurements are based on ______ and ______.

historical cost, fair value

Information is _______ if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

material

An effective process of capital allocation is critical to a healthy economy, which

promotes productivity, encourages innovation and provides an efficient and liquid market for buying and selling securities.

The single-step income statement emphasizes

total revenues and total expenses