Accounting 1
Ch 2 Usefulness of the digital frame work
1 build on and relate to an established body of concepts and objectives 2 provide a framework for solving new and emerging practical problems 3 increase financial statements users' understanding of the confidence in financial reporting 4 enhance comparability among companies finanical statements
Steps of the accounting cycle
1 transactions 2 journalizing 3 posting 4 preparing unjusted trial balance 5 adusjuting entries 6 adjusted trail balance 7 prepare finincaial statements 8 closing
Ch 5 Limits to a balance sheet
1does not reflect fair value because accountants use a historical basis in valuing reporting most assets and liabilites. 2 Companies must use judgements and estimates to determine certain amounts. 3 The balance sheet omits many items that are of finacial value to the buisness but cannot be record objectively
Accounting assits in efficent use of scare resoucres
Accounting provides reliable, reliable, relevant, and timely information to managers, inevstors, and crediots to allow rousrce allocation to the most efficent enterprises. Accounting also provides measurements of efficieny and finicnal soundness.
Idenitfy where to report earnings per share info
Because of inherent dangers of focusing solely on earnings per share, the profession concluded that companies must disclose earnings per share on the face of the income statement. A company that reports a discontinued operation or an extraordinary item must report share amounts for these line tiems either on the face of the income statement or in the notes of the finanical statements
Accounting changes or errors
Changes in accounting princple or corrections of errors are adjusted through retained earnings. The effects of these changes are handled propsectively, with the effects recorded in income in the period of change and in future periods without adjustment to retained earnings
Explain how to report various incomes
Companies generally include irregular gains or losses or nonrecurring items. 1) other items of material amount that are of an unusal or nonrecurring nature and are not considered extroirdnary items are sepsrely disclosed as a compnent of contuining operations. 2) disconued oeprations of a componenat of a buisness as classfied as a serparate item, after contiuing operations 3) The unusual, material, nonrecurring items that are significantly different from the customary buisness activites are shown in a seperate section for extraordinary items, below dicontinued operations. If a company holds a noncontrolling interest in a subsidary company, it mus present an allocation of net income or loss that is attibutable to the noncontrolling interest.
Balance sheet info that requires supplmental disclouse
Contingenices: materials events that have an uncertain outcome Accoutning policies: explanations of valaution methos used or the basic assumptions made concerning inventory valuation, depreciation methods, investments in subsidiaries Contractual situations: explanations of certain restirctions or covenants attached to speficic assets or more likely, to liabilites Fair values: Disclousres related to fair values, particularly related to financial instruments
Classifications on balance sheet
Current assets, long-term investments; propety, plant, and equipment; intangible assets; and other assets. current and longterm liabilires. Owner's equity as capital stock, additional paid in captial, and retained earnings
Level 3 Assumptions of accounting
Economic entity: activity of a company can be kept separate and distinct from its owners and any other business unit. Going concern: The company will have a long life Monetary unit: money is the common denominator by which economic actvitiy is conducted and the monetary unit prodives an appriobiate basis of measurement and analysis. Periodicity: the economic activies of a company can be divided into artifical time periods.
Ethics and finanical accounting
Financial accoutants are called on for moral discernment and ethical deicison making. Decisions sometimes are diffuclt beause a public consensus has not emegered to formulate a comprehensive ehtical system that provides guidelens in making ethical judgements.
Challenges facing finanical reporting
Financial reports fail to provide. 1 Some key performance measures widely used by management. 2 Forward looking infomration needed by investors and crediots. 3 Sufficent information on a company's soft assets (intagiables). 4 real time financial infrmation. 5 easy to comprehend information
GAAP and Codification for GAAP
Generally accepted accounting principles GAAP are those principles that have substantial authoritative support, such as FASB standards, interpretations, and Staff Positions, APB Poinions and interptations, AICPA Accounting Research Bulletins, and other auhtoraitative pronoucemnts. All these documents and others are now classifed in oen doucment referred to as the Codification. The purpose of the Codification is to simplify user access to all autorative U.S. GAAP. The Codification changes the way GAAP is doucmented, presented and updated
FASB's effots to construct concetpual framework
Issued 7 Statements of Financial Accounting Conceps that relate to financial repoting for business enterprises. These concept statements provide the basis for the conceptual framework. They include objectives, qualitative characteristics, and eements. In addition, measurement and reconginitio concepts are developed. The FASB and the IASB are now working on a joint project to develop an improved common conceptual framework that provides sound founation for future accounting standards.
Level 3 Princples of accounting
Measurement principle: GAAP permits the use of histroical cost, fair value and other valuable bases. Although the historcal cost pinricple (measured based on aquisition prices) conitued to be an important basis for evaluation, recording and reporting fair value information is increasing. Revenue recognition principle: A company recongnizes revenue when it satisfies a performance obligation Expense reconition princinple: As a general rule, companies recongnize expenses when the service or the product actually makes its contribution to revenue (matching). Full disclosure: conmpaies generaly provide information that is sufficent importance to influence the judgement and decisions of an informed user.
Format of income statement
Revenues, Expenses, Gains, and Losses
Major policy setting bodies and their role in standardization
Secutires and Exchang Comission SEC is a federal agency that has the broad powers to prescibe, in whateer detail it desires, the accounting standards to be employed by companies that fall within its jurisdiction. The American Institude of Cerified Public Accountants ACIPA issued standards through its Committee on Accounting Procedure and Accounting Pinrciples Board. The Finanical Accounting Standards Board FASB establishes and improves standards of financial accounting and reporting for the guidence and education of the public.
Preparing income statements
Single step: Revenues and expenses. Expenses are deducted from reveues to arrive at net income or loss, a single subtraction. Companies report income tax serparelty as the last item for net income Multiple step: shows serpartion of operating results from those obtained through the subordinate or noperating activites of a company and classifcatio of expenses of functions such as merchandsing or manufacturing, selling, and adminsitration.
Level 3 Cost Constraint
The cost of providing the information must be weighed against benefits that can be derived from using information
Ch 4 Limitations of an income statement
The income statement provides investors and crediots with information that helps them predict the amounts timing and unceratinity of cash flow. Income statement also helps users determine the risk (level of uncertainity) of not achieveing particular cash flows. The limitations of an income statement are as follows: 1 The statement does not include many items that contribute to general growth and well being of a company 2 Income numbers are oftern affected by accounting methods used 3 Income measures are subject to estimates The transaction aprach focues on activites that occured during a given period. Instead of presenting only a net change in assets, it doslocses the compnents of the change. The transaction apprach to income measurement requires the use of revenue, expense, loss and gain accounts
Ch 3 Double-entry rules
The left side of any account is the debit side; the right side is the credit side. All asset and expense accounts are increased on the left or debit side and decreased on the right or credit side. All liability and revenue accounts are increased on the left or debit side. Stockholder's equity accounts, Common Stock, and Retained Earnings, are increased on the credit side. Dividends increase on the debit side.
Retained earnigs statement
The retained earnings statement should dosclose net inome, dividens, adjustments due to changes in accouting pricniples, error corrections and restirctions of retained earnings.
Impact of user groups on role making process
User groups may want particular econimic events accounted for or reported in a particular way, they fight hard to get what they want, They espeically target the FASB to influence changes in existing GAAP and in th develoment of new rules. Because of the accelrated rate of change and the increased complexity of our economy, these preasures have been multiplying. GAAP is as much a product of political action as it is careful logic and emprical findings. The IASB is owrking with the FASB toward international convergnce of GAAP
Ch 1 Major financl Staements and other means of financial reporting
ablance sheet, income statement, statement of cash flows, and statement of owner's equity.
Reasons for preparing adjusting entries
adjustments achieve a proper recognition of revenues and expenses so as to determine net income for the current period and to achieve an accurate statement of end of the period balances in assets, liabitles, and owner's equity accounts. Major types of adjusting entires are deferrals (prepaid expenses and unearned revenues) and accural (accrued revenues and accrured expenses).
Level 2 Basic Elements
assets, liabilites, equity, investment by owners, distrubtion by onwers, comprehensive income, reveues, expesnes, losses, and gains. page 53
Cash basis vs Accural basis
cash basis: cash when recived and paid. acurral: cash when earned and incurred.
Level 2 Qualtive charcteristics of accounting information
decision making information. Relevance and faithful representation are the two fundamental qualities that make information decision useful. Relevant information makes a difference in a decision by having predictive or confirmatory value and is material. Faithful representation is characterized by completeness, neutrality, and being free from error. Enhancing qualities of useful information are 1 comparability 2 verabilitiy 3 timieliness 4 understandability
Objective of financial reporting
is to provide general purpose finanical reporting is to provide finical information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in decisions about providing resoucres to the entity through equity investments and loans or other forms of credit. Infomraon that is useful for decisions and other users who are not investors
Reversing entries
most often used to reverse two types of adjusting entries: accrued revenues and acrued expenses. Deferals may also ve reversed if the inital entry to record the transaction is made to an expense or revenue account.
Prepare closing entries
transder all revenue and expense account blances (income statement items) to a lcearing account called Income Summary, which is used only at the end of the fiscal year. Revenues and expenses are matched in the Income summary account. the net result of this matching represnts the net income or loss for the period. The amount is then transfered to an owner's equity account (retained earnings)
Why we need accounting standards.
without these, each company would have to develop its own standards making comapring hard. Readers of reports would have to famlarize themselves with every compan'y peculiar accounting and reporting practices.
