Accounting 3313 Chapter 1-3

FASB financial accounting standards board

- established in 1973 -replaced the APB -supported by FAF

Temporary Accounts

- represent changes in the retained earnings component of shareholders' equity for a corporation caused by revenue, expense, gain, and loss transactions. - keep track of changes in the retained earnings component of shareholder's equity

Permanent Accounts

- represents assets, liabilities, and shareholders' equity at a point in time - represent the basic financial position elements of the accounting equation

The payment of utilities for the period would have what effect on the accounting equation

Assets decrease; owners' equity decreases

The purpose of closing entries is to transfer:

Balances in temporary accounts to a permanent account.

Which of the following is a long-term liability?

Bonds payable that are due in 5 years.

Journal Entry

Captures the effect of a transaction on financial position in debit/credit form

Step 9:

Close the temporary accounts to retained earnings.

Ledger

Collection of accounts that organizes the accounts and allows for keeping track of increases and decreases and resulting balances

The current ratio is calculated by dividing

Current assets by current liabilities.

Which of the following subjects is most likely to be discussed in the summary of significant accounting policies?

Depreciation methods used.

Which of the following describes the purpose of the statement of shareholders' equity?

Disclose investments by owners, distributions to owners, net income, and other comprehensive income.

Double-Entry Bookkeeping:

Double-entry bookkeeping requires the recording of journal entries for each transaction (both external and internal).

Adjusting entries do not need to be posted to the general ledger.

False ; they do need to be posted

Confirmatory Value

Financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations.

Predictive Value

Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes. Financial information need not be a prediction or forecast to have predictive value. Financial information with predictive value is employed by users in making their own predictions

Periodicity (Time-period) assumption

If users of the financial statements were willing to wait until a business completed its life span, the earnings of the business could be determined exactly. As this is not feasible, the time-period assumption recognizes the need for short-term periodic financial statements in order to provide timely information. The most common time period adopted by business is one year. The time-period assumption makes accruals and deferrals necessary.

Correct order to prepare financial statements

Income Statement, stockholders' equity, and balance sheet.

Materiality

Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity' financial report. Consequently, the Board cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.

Debits on the

Left

An adjusted trial balance is a

List of all accounts and their balances after adjusting entries.

Which of the following would be considered a long-term asset?

Machinery the company intends to use over the next seven years.

Step 1:

Obtain information about external transactions from source documents

The amount that the shareholders have invested into the company is called:

Paid-in capital.

Step 4:

Post from the journal to the general ledger.

Which of the following is likely never a current liability?

Prepaid insurance.

Step 10:

Prepare a post-closing trial balance

Step 7:

Prepare an adjusted trial balance.

Step 5:

Prepare an unadjusted trial balance.

Step 8:

Prepare financial statements

Transaction Analysis

Process of reviewing source documents to determine dual effect on the accounting equation

Step 6:

Record adjusting entries and post to the general ledger accounts

Step 3:

Record the transaction in a journal

RELEVANCE

Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or already are aware of it from other sources. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both, and if it is deemed material to the entity:

Credits on the

Right

Monetary unit assumption

The unit of measure for financial statements should be in terms of a particular monetary unit (U.S. dollars in the U.S.).

Posting

Transferring debits and credits recorded in individual journal entries to the specific accounts affected

Market approach:

Valuation based on market information

Ledger

a record holding all the accounts of a business, the changes in those accounts, and their balances.

Subsidiary ledger

aka control or master files - a group of similar accounts whose combined balances equal the balance in a specific general ledger account.

1934 Securities Exchange Act:

applies to secondary market transactions; created SEC which mandates and oversees reporting requirements for companies whose securities are publicly traded

Assets

are probable future benefits obtained by a single entity (company) as a result of past transactions or events

Liabilities

are probable future sacrifices of economic benefits of a single entity based on past transactions or events

Which statement does not report financial data over a period of time

balance sheet

The Conceptual Framework

consists of the objectives and concepts for use in developing standards of financial accounting and reporting. The Conceptual Framework guides the selection of events to be accounted for, the measurement of those events, and the means of summarizing and communicating them to interested parties.

FAF financial accounting foundation

created to oversee processes and selection of board members

The purchase of supplies on account would be recorded in a journal entry with a:

debit to supplies

1933 Securities Act:

developed accounting and disclosure requirements for initial offerings of securities (stocks and bonds).

Economic entity assumption

each enterprise is considered as an accounting unit separate from its owners and all other entities; all economics events can be identified with a particular entity.

Income approach:

estiamtes future amounts and then mathematically converts those amounts to a single present value

Cost approach:

estimates the amount that would be required to buy or construct an asset of similar quality and condition

Going concern assumption

in the absence of evidence to the contrary, the entity will continue to operate indefinitely, .i.e., will not liquidate.

GAAP

is the body of both broad and specific accounting conventions, rules, and procedures that a publicly held business must use in preparing external financial statements

general ledger

maintains a listing of accounts, changes to those accounts, and periodic balances

Accrual accounting

measures the corporation's accomplishments and resource sacrifices during the period, regardless of when the cash is received or paid.

which of the following equations is correctly stated

net income +/− Other comprehensive income or loss items -------------------------------------------------- = Comprehensive income

Steps 5-8

occur at the end (or immediately after the end) of the accounting period

Cash basis accounting

produces a measure known as net operating cash flow - the difference in the cash receipts and cash disbursements during a period resulting from the operations of the enterprise.

Steps 1-4

take place during the accounting period

SECONDARY MARKET:

the corporation does not receive new resources on transfer

PRIMARY MARKET:

the corporation receives new resources on issuance/transfer

A characteristic of an accrued expense is:

the expense is recognized before the payment of cash.

Relevance

the information about the item is capable of making a difference in decisions of the user of the information.

Measurability

the item has a relevant attribute (i.e., characteristic) that is reliably measurable. See more on next page of notes.

Definition

the item must meet the definition of an element of financial statements per SFAC No. 6.

Measurement

the process of associating numeral amounts with the elements of the financial statements.

Disclosure

the process of including additional pertinent information in the financial statements and accompanying notes.

Recognition

the process of presenting information in the financial statements (via a journal entry).

The Securities and Exchange Commission (SEC)

was created by The Securities Exchange Act of 1934 as an independent federal regulatory agency

Key variables in investment decision

· Rate of return · Uncertainty or risk

Why do investors and creditors provide capital?

· They want to earn a fair return on the resources they provide · Shareholders receive cash from: o Sale of the ownership shares of stock o Periodic dividends

Stockholders' Equity

· is the residual interest in the assets of a business.

A trial balance can best be explained as a list of:

All accounts and their balances at a particular date.

Predictive and Confirmatory Value

-are interrelated - info that has predictory value often also has confirmatory value

Step 2:

Analyze the transaction

Which of the following statements about the annual report are true?

Annual reports of public companies include an assessment of the company's internal control procedures.

Reliability

1. the information about the item must be representationally faithful, verifiable, and neutral. (Note: SFAC No. 8 replaced 'reliability' with 'faithful representation' as the second primary qualitative characteristic of financial information and a joint FASB/IASB conceptual framework project has replaced the term similarly).

If a company has total assets of $2,000, current assets of $500, current liabilities of $750, and total liabilities of $1,200, what is the company's debt-to-equity ratio?

1.500

Journal

A chronological record of all economic events affecting financial position

Which of the following statements about the balance sheet are true?

A classified balance sheet to provide useful information about liquidity and long-term solvency

Which of the following would be reported as a current asset?

A nine-month insurance policy paid in advance.

Which of the following statements regarding adjusting entries is correc

Adjusting entries are needed because we use accrual-basis accounting.

Which of the following statements regarding adjusting entries is correct?

Adjusting entries are needed because we use accrual-basis accounting.