ACG 4101 Exam 1 (Chapter 1-4)

$40,000 was borrowed from a bank and a note payable was signed. Record affect on accounting equation and journal entry.

A = L + E +40,000 = +40,000 Cash D- 40,000 Notes Payable C - 40,000

Specific disclosure notes - Summary of significant accounting policies - subsequent events - noteworthy events & transactions

- Summary of significant accounting policies: information about a company's choices from among various alternative accounting methods (i.e. LIFO, FIFO, average cost of measure) - subsequent events: occur after a company's fiscal year end but before the financial statements are issued (issuance of debt or equity securities, business combination or the sale of a business, sale of assets) - noteworthy events & transactions (related party transactions, errors, fraud, or illegal acts)

Closing entry for dividends

JE Dividends D - 1,000 Cash C - 1,000 JE July 31st Retained Earnings D - 1,000 Dividends C - 1,000

Management discussion and anaylsis

Provides biased but informed perspective of a company's: - operations - liquidity - capital resources Asserts responsibility of management for the company's annual report and internal control procedures. Gives analysis of future operations. Sarbanes Oxley requires executive to personally certify.

Paying dividends to shareholders does what to assets, liabilities, equity?

Reduces current assets

Alpha Co. reports inventory on its balance sheet using the same generally accepted methods as applied by Beta Co. These facts relate most closely to which of the following qualitative characteristics of financial reporting? a. comparability b. materiality c. verifiability d. understandability

a

Consistency and feedback relate most closely to which two of the following accounting concepts, respectively? a. predictive value and confirmatory value b. recognition and full disclosure c. conservatism and cost/benefit d. recognition and matching

a

In a statement of cash flows, cash received from the issuance of common stock would be classified as a: a. financing activity b. investing activity c. operating activity d. non-cash activity

a

The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by: a. monitoring the development of GAAP within the accounting profession and using its stature to influence the development b. exercising its statutory authority to prescribe external financial reporting requirements. c. allying with the AICPA to lobby the efforts of the FASB d. providing auxiliary funding to the FASB

a

the underlying assumption that assumes that the life of a company can be divided into artificial time periods is: a. periodicity b. going concern c. economic entity d. monetary unit

a

Which of the following is not a provision of the public company accounting reform and investor protection act of 2002 (Sarbanes Oxley)? a. required that all auditors assess the effectiveness of all internal control processes b. increased corporate executive responsibility for financial statements c. limited nonaudit services that can be performed by auditors for audit clients d. changed the entity responsible for setting auditing standards

a. b/c not all internal control processes. Only the ones responsible for financial reporting.

Materiality and relevance are both defined by: a. what influences and makes a difference to a decision maker b. quantitative criteria set by the Financial Accounting Standards Board c. the consistency in the application of the methods over time d. the perceived benefits to be denied that exceed the perceived costs associated with it

a. b/c relevance affects decision making

Which of the following adjusting entries causes an increase in liabilities? a. Accruing unrecorded interest expense. b. Recording the amount of expired prepaid insurance. c. Accruing unrecorded interest revenue. d. Recording depreciation expense

a: The associated credit to accrue unpaid interest is to interest payable, a liability

liquidiy

asses a company's ability to pay short term obligations. readiness of assets to be converted to cash.

Current Assets

assets expected to convert to cash within the year or within the normal operating cycle - cash and cash equivalents - short-term investments (a stock or debt security of other companies considered current if the company has the ability and intent to sell those securities w/in the next 12 months or operating cycle) - accounts receivable - notes receivable (expected to be collecting w/in 1 year or operating cycle, whichever is longer) - inventories - prepaid expenses

Noncurrent assets

assets expected to provide economic benefits beyond the next year or operating cycle. - Investments (assets not used directly in operations. i.e. debt securities & equity of other corporations, restricted cash) - Property, Plant, & Equipment (tangible, long-lived assets used in the operations of the business) - Intangible Assets (i.e. patents, copyrights, and franchises) - Other Assets (include deferred charges and other assets not included)

The Financial Accounting Standards Board (FASB) a. is a devision of SEC b. is a private body that helps set accounting standards in the US c. is responsible for setting auditing standards that all auditors must follow d. consists entirely of members of the American Institute of Certified Public Accountants

b

The main objective of the IASB is to: a. Set accounting standards for all European Union countries. b. Develop a single set of global accounting standards. c. Regulate financial information for all companies around the world. d. none of the choices are correct

b

The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is: a. verifiability b. representational faithfulness c. neutrality d. materiality

b

The underlying principle that presumes a company will continue indefinitely is: a. periodicity b. going concern c. economic entity d. monetary unit

b

Which if the following is not a potential advantage of accrual accounting over cash basis accounting? a. spreads out the influence of one-time events that affect multiple reporting periods b. highlights the performance for a period of time c. captures underlying economic activity more timely d. better matching of revenues and expenses.

b

Which of the following is not a required disclosure for related party transactions? a. a description of the transaction b. the impact of the transaction on current year's net income c. the nature of the relationship d. the amounts due from or to related parties

b

Which of the following are economic events? (Select all that apply.) a. A proposal to purchase $1,000 of inventory from supplier b. The payment of employee salaries for the week c. Borrowing $10,000 from the bank.

b & c only

An internal event (Select all that apply) a. involves an exchange transaction with another entity. b. does not involve an exchange transaction with another entity. c. does not affect the company's financial position. d. affects the company's financial position.

b & d only

Which of the following are external events? (Select all that apply.) a. Using supplies purchased in the previous month. b. Collecting on a customer account. c. Paying employee salaries. d. Borrowing from the bank.

b, c, & d only

The closing process involves: a. recording year-end adjusting entries b. Transferring revenue and expense balances to retained earnings. c. Closing out the permanent account balances d. All of these answer choices are incorrect.

b; Revenues, expenses and other temporary equity accounts are closed, reduced to $0, with the balances transferred to retained earnings.

If the required adjusting entry for depreciation expense is omitted: a. Assets will be overstated and income understated. b. Assets will be overstated and income overstated. c. Assets will be understated and income overstated. d. Assets will be understated and income understated.

b; The adjusting entry for depreciation is a debit to depreciation expense and a credit to accumulated depreciation. By not recording the expense, net income will be overstated. By not recording accumulated depreciation, the asset's book value will be overstated.

Which of the following adjusting entries causes a decrease in assets? a. Recognizing the portion of revenue collected in advance b. Recording depreciation expense c. Accruing unrecorded salaries expense d. Accruing unrecorded interest revenue

b; The associated credit in the depreciation expense entry is to accumulated depreciation; a contra-asset account (which reduces the associated asset balance).

The adjusting entry required to record accrued expenses include: a. a credit to an asset b. a credit to liability c. a credit to cash d. a debit to an asset

b; accrued expenses are a debit to expense and a credit to a liability.

Which of the following is not a characteristic of the balance sheet? a. The major classifications of the balance sheet are assets, liabilities, and owners' equity. b. The balance sheet reports the change in financial position. c. Assets generally are listed in order of their liquidity. d. The balance sheet provides information useful in assessing liquidity.

b; the balance sheet reports financial position on a specific date, the income statement reports through a period of time.

A prepaid expense is an expense: a. Incurred before the cash is paid. b. Incurred and paid. c. Paid but not yet incurred. d. All of these answer choices are incorrect.

c

Fernblatt Inc. recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Fernblatt's accounting approach is an example of: a. matching b. cash basis accounting c. accrual accounting d. periodicity

c

Included in the category of current liabilities would be: a. pension obligations b. Lease obligations. c. Obligations expected to require the creation of other current liabilities. d. Mortgages payable.

c

Information not generally disclosed in the summary of significant accounting policies is: a. The company's depreciation method. b. The fact that the company uses the FIFO inventory method. c. A related-party transaction. d. The company's revenue recognition policy.

c

The journal entry to record the borrowing of cash and the signing of a note payable involves: a. a debit to note payable and a credit to cash b. Debits to cash and interest expense and a credit to note payable. c. A debit to cash and a credit to note payable. d. All of these answer choices are incorrect.

c

Four different competent accountants agree on the amount and method of reporting an economic event. The concept demonstrated is: a. reliability b. comparability c. verifiability d. completeness

c b/c different people are coming up with the same consensus.

Which of the following characteristics does not describe an asset? a. probable future economic benefits b. controlled by an entity c. requires the receipt of cash d. result of a past transaction

c.

Which of the following is not a component of faithful representation as defined in the FASB's conceptual framwork? a. free from error b. neutrality c. understandability d. completeness

c.

Charging off the cost of a wastebasket with an estimated useful life of 10 years an an expense of the period when purchases is an example of ... a. consistency characteristic b. expense recognition principle c. materiality characteristic d. historical cost principle

c. and not b b/c b would be if you were recognizing depreciation (in question... expensing in the period puchased)

According to the FASB's conceptual framework, comprehensive income includes which of the following? Operating income Investment by Owners a. no yes b. no no c. yes no d. yes yes

c. includes changes in equity from noninvestors (everything except investment by owners or distributions by owners)

The accumulated depreciation account is a contra (valuation) account to: a. Owner's equity account b. Expense account. c. Asset account. d. Liability account.

c; Accumulated depreciation is a contra account to a depreciable asset such as a building or equipment.

If revenues exceed expenses for the accounting period, the retained earnings account: a. Will have a lower balance after closing. b. Will have a debit balance prior to closing. c. Will have a higher balance after to closing d. All of these answer choices are incorrect.

c; Revenues are debited to reduce them to zero and the retained earnings account is credited. Expenses are credited to reduce them to zero and the retained earnings account is debited. So, a net credit to retained earnings results from revenues for the period exceeding expenses, increasing retained earnings.

In a classified balance sheet, supplies would be classified among: a. noncurrent assets b. current liabilities c. current assets d. noncurrent liabilities

c; Supplies are a current asset since they will most likely be consumed/used within the next year or operating cycle, whichever is longer.

The correct amount of prepaid insurance shown on a company's December 31, 2018, balance sheet was $900. On July 1, 2019, the company paid an additional insurance premium of $600. In the December 31, 2019, balance sheet, the amount of prepaid insurance was correctly shown as $500. The amount of insurance expense that should appear in the company's 2019 income statement is: a. 1,500 b. 1,400 c. 1,000 d. 600

c; [$900 (beginning balance) + $600 (additional payment) − $500 (ending balance)]

The type of financial information to external decision makers is referred as: a. public accounting b. government accounting c. financial accounting d. managerial accounting

c; provides information primarily to investors and creditors

current ratio

current assets/current liabilities

An item not generally classified as a current liability is: a. Revenue received in advance. b. Accrued interest payable. c. Accounts payable. d. Bonds payable.

d

GAAP includes which of the following pronouncements: a. statements of financial accounting standards b. accounting research bulletins c. accounting principles board opinions d. all of the above

d

Long-lived assets used in the operations of the business refer to property, plant, and equipment, and: a. receivables b. inventories c. investments d. intangible assets

d

Which of the following characteristics does not describe a liability? a. result of a part transaction b. probable future sacrifices c. present obligation d. must be legally enforceable

d

Company A could disseminate its annual financial statements 2 days earlier if it shifted substantial human resources from other operations to the annual report project. Management decided the value of the earlier report was not worth the added commitment of resources. The concept demonstrated: a. timeliness b. materiality c. relevance d. cost-effectiveness

d. benefits do not outweigh the costs

Cash equivalents would include: a. accounts receivable from a financial institution b. highly liquid equity securities c. restricted funds for bonds that mature in 3 years d. debt instruments with maturity dates of less than 3 months from the date of the purchase

d; a - current asset b - investment c- restricted cash; long-term asset

The Esquire Clothing Company borrowed a sum of cash on October 1, 2018, and signed a note payable. The annual interest rate was 12% and the company's year 2018 income statement reported interest expense of $1,260 related to this note. What was the amount borrowed? a. 22,000 b. 31,500 c. 10,500 d. 42,000

d; Amount borrowed × 12% × 3/12 = $1,260. Amount borrowed × 0.03 = $1,260. $1,260 ÷ 0.03 = $42,000.

The Wazoo Times Newspaper Company reported an $11,200 liability in its 2018 balance sheet for subscription revenue received in advance. During 2019, $62,000 was received from customers for subscriptions and the 2019 income statement reported subscription revenue of $63,700. What is the liability amount for deferred subscription revenue that will appear in the 2019 balance sheet? a. 0 b. 11,200 c. 12,900 d. 9,500

d; [$11,200 (beginning balance) + $62,000 (additional receipts) − $63,700 (subscription revenue recognized)]

The primary objective of financial reporting is to provide information: a. about a firm's financial and investing activities b. about a firm's management team c. about a firm's product lines d. that is useful in decision making

d; objectives are (1) useful for decision making; (2) that helps predict cash flows; and (3) about economic resources, claims to resources, and changes in resources and claims.

Current liabilities

expected to be satisfied w/in 1 year or the operating cycle, whichever is longer - accounts and notes payable (less than a year; purchase on account) - deferred/unearned revenue (cash received for goods or services to be provided in a future period) - accrued liabilities (obligations created when expenses have been incurred but not paid; i.e. accrued salary payable, interest payable, taxes payable) - current maturities of long-term debt (long-term notes, loans, mortgages, bonds payable, etc.)

Full disclosure principle

financial reports should include any information that could affect the decisions made by external users

Is composition of long-term debt disclosed in the summary of significant accounting policies disclosure note? Is depreciation method disclosed in the summary of significant accounting policies disclosure note?

no; yes

Long-term liabilities

obligations that will not be satisfied in the next year or operating cycle, whichever is longer. - Long-term notes - Bonds - Pension Obligations - Lease Obligations

acid-test ratio (quick ratio)

quick assets ((includes unrestricted cash, cash equivalents, short-term investments, marketable securities & accounts receivables) - inventory)/current liabilities

Statement of comprehensive income

reports changes in stockholders' equity during the period that were not a result of transactions with owners.

Shareholder's equity (2 parts)

residual amount derived by assets - liabilities. Referred as net assets. 1. Paid-in capital: amount invested by shareholders in the corporation. Represented by common stock. 2. Retained earnings: amount earned by the corporation. Represents accumulated net income reported since the inception of a corporation and not yet paid to shareholders as dividends.

Revenue (realization principle)

revenue is recognized when goods or services are transferred to customers for the amount the company expects to be entitles to receive.

Subsequent Event

significant development that occurs after a company's fiscal year end but before the financial statement are issued or available to be issued.

debt to equity ratio

total liabilities/shareholder's equity higher ratio indicates higher risk; ability to pay long-term debt

Restrictive Cash

when you have cash that you plan to pay off debt w/in 3 years (could be a current or long-term asset). Not classified as cash or cash equivalent but rather a short/long-term asset.

Elements - Assets - Liabilities - Equity (net assets) - Investments by owners - Distributions to owners - Comprehensive Income - Revenues - Expenses - Gains - Losses

- Assets: resources; probable future economic benefits obtained or controlled by a particular entity as a result of past transactions. - Liabilities: obligations; 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. - Equity (net assets): difference between assets & liabilities - Investments by owners: paid in capital; increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests in it. - Distributions to owners: dividends; decreases in equity of a particular enterprise resulting from transfers to owners. - Comprehensive Income: change in equity due from noninvestors; all changes in equity except for investments by owners or distributions to owners. (includes net income) - Revenues: inflows from main business operations from delivering goods or providing services. Predictable. - Expenses: outflows from main business operations - Gains: can happen randomly; increases in equity from peripheral or incidental transactions of an entity - Losses: can happen randomly; decreases in equity arising from peripheral or incidental transactions of an entity

Expense recognition x4

- Cause-and-effect (i.e. cost of goods sold) - associating an expense w/a revenue in a specific time period (matching principle; monthly salaries, etc.) - systematic and rational allocation (i.e. depreciation) - in period incurred (i.e. advertising costs)

GAAP Measurement "mixed attribute" - Historical cost - Net realizable value - Current cost - Present (or discounted) value - Fair Value

- Historical cost: purchase price (original transaction value) - Net realizable value: amount of cash to which an asset is expected to be converted (i.e. account receivable) - Current cost: cost that wold be incurred to purchase or reproduce the asset (i.e. inventory) - Present (or discounted) value: calculated by removing the time value or money from future cash flows - Fair Value: price that would be received to sell assets or paid to transfer a liability in an orderly transaction b/w market participants at the measurement date

Conceptual Framework Map - Objective - Qualitative Characteristics - Constraints - Elements - Recognition & Measurement Concepts = Financial Statements

- Objective: provide financial statements that are useful to capital providers.

Sarbanes-Oxley Act - Oversight board - Corporate executive accountability - nonaudit services - retention of work papers - auditor rotation - conflicts of interest - hiring of auditors - internal controls

- Oversight board: the Public Company Accounting Oversight Board set standards of auditing, quality control, ethics, etc. that relate to the prep of auditing reports. SEC has oversight and enforcing authority. - Corporate executive accountability: corporate executives must personally certify financial statements and company disclosures - Nonaudit services: Makes it unlawful for auditors of public companies to perform a variety of nonaudit services (i.e. bookkeeping, internal audit outsourcing, appraisal, tax services etc.). - Retention of work papers: auditors of public companies must retain all audit or review work papers for 7 years or face the threat of a prison term. - Auditor rotation: Lead audit partners are required to rotate every 5 years. - Conflicts of interest: audit firms are not allowed to audit public companies whose chief executives worked for the audit firm and participated in that company's audit during the preceding year. - Hiring of auditor: audit firms are hired by the audit committee of the board of directors of that company, not company management. - Internal control: section 404 requires that company management document and asses the effectiveness of all internal control processes that could affect financial reporting. Requires company auditors express an opinion of whether the company has maintained effective internal control over financial reporting.

- Recognition - Measurement - Disclosure

- Recognition: the process of admitting information into the financial statements (Meets the definition of an element, has a measurement attribute, is relevant, and reliable; i.e. revenue & expenses) - Measurement: process of associating numerical amounts w/the elements - Disclosure: process of including additional pertinent information in the financial statements and accompanying notes

Underlying Assumptions - economic entity - going concern - periodicity - monetary unit

- economic entity: entities are separate and distinct from their owners and other entities - going concern: a business entity will continue to operate indefinitely - periodicity: allows the life of a company to be divided into artificial time periods to provide timely information - monetary unit: u.s. dollar used in u.s. financial statements

Examples of things that would have disclosure notes

- pension plans - long-term debt - income tax - leases - investments - employee benefit plan - property, plant, & equipment

Fair Value Hierarchy

1 (most desired) - quoted market prices in active markets for identical assets or liabilities 2 - inputs other than quoted prices that are observable for the asset or liability. Quoted prices for similar a & l. 3 (least desired) - unobservable inputs that reflect the entity's own assumptions.

Hierarchy of standard-setting authority (x4 levels)

1. Congress, 2. SEC, 3. Private Sector, 4. FASB (1973-present) - SEC has final authority on accounting standards but has delegated task of setting accounting standards to the private sector.

Steps of the Accounting Processing Cycle - During the accounting period x4 - At the end of the accounting period x4 - At the end of the year x2

During the accounting Period: 1. Identification 2. Transaction analysis 3. Journalization 4. General Ledger Posting At the end of the accounting period: 5. Unadjusted trial balance 6. Adjusting entries 7. Adjusted trial balance 8. Financial statements At the end of the year 9. Closing process 10. Post-closing trial balance

Classification of elements: Assets = Liabilities + Shareholder's Equity

Assets Current Assets - Cash & Cash Equivalents (money orders, commercial papers, money market funds, and U.S. military bills w/maturity date less than 3 months; if more than 3 months, it's an investment) - Account Receivable - Prepaid Expenses - Inventory - Short-term investments Long-term Assets: - Investments - Property, plant, & Equipment - Intangible Assets - Other assets Liabilities - Current Liabilities - Long-term liabilities Shareholder's Equity - Paid-in Capital - Retained Earnings

Converting cash basis to accrual basis income... affects on assets and liabilities as they increase or decrease

Assets: - Increase: Add - Decrease: Deduct Accrued Liabilities: - Increase: Deduct - Decrease: Add

US GAAP vs IFRS

Balance Sheet Presentation US GAAP - no minimum requirements of items - some companies use the statement of financial position title - current assets and liabilities are presented before noncurrent assets and liabilities IFRS - specifics a minimum list of items to be presented in the balance sheet - change the title of balance sheet to statement of financial position, not required tho - reports noncurrent items first Segment Reporting US GAAP - requires companies to report information about reported segment p&l, including revenues and expenses, segment assets, and the basis of measurement IFRS - along with US GAAP requirements, requires companies also disclose total liabilities of its reportable segments`

Difference b/w cash basis and accrual basis

Cash Basis: - Measurement of cash receipts and cash payments - Difference is net operating cash flow Accrual Basis: - Measurement of revenue and expenses - Difference is net income or net loss

Closing entries for revenues and expenses

D - Revenue C - Retained Earnings D - Retained Earnings C - Expense

Deferred/Unearned/Prepayments vs Accruals

Deferred: After cash flow but before expense or revenue recognition. Accruals: Before cash flow but after expense or revenue recognition.

Under accounting principles generally accepted in the United States, in order for an item to qualify for recognition in the financial statements of a company, the item must I. Be measurable in monetary terms II. Reflect the consensus expectations of investors III. Meet the definition of an element of the financial statements

I and III only

Conceptually, interim financial statements can be described as emphasizing which of the following? I. Timeliness II. Relevance III. Verifiability

I and III only; When decisions are made during an entity's year, the most recent financial statements may be outdated and the decision may need to be made before the next annual statements are available. Interim financial reports are designed to give financial statements users updated information that is relevant to decisions on a timely basis, sometimes at the sacrifice of other qualities, such as verifiability.

Information is considered material to the financial statements if I. It falls within industry-specific quantitative guidelines published by the Financial Accounting Standards Board. II. Its omission could make a difference in the decisions made by a user relying on the financial statements. III. Its misstatement could make a difference in the decisions made by a user relying on the financial statement.

II and III only

U.S. GAAP requires which of the following to be reported at fair value in a company's financial statements? I. Bonds payable II. Stock options held as an investment

II only; Although an entity is allowed to elect the fair value option and report almost any of its financial instruments at fair value, the only times that fair value is required to be applied include the recognition of assets acquired, liabilities assumed, and minority interests in business combinations reported as acquisitions; the reporting of assets after recognition of an impairment loss; the reporting of certain marketable securities that are reported as trading or available for sale securities; and all derivatives. Stock options held for investment are derivatives that are required to be reported at fair value. Bonds payable represent a liability, which is a financial instrument, and may be reported at fair value but is not required to be.

IFRS?

International Financial Reporting Standards issues new standards for international accounting. IASC created the IASB that through IFRS set new standards.

5. Prepare an unadjusted trial balance

List of general ledger accounts along w/their balances. Checks completeness and proves accounting equation is in balance.

What are the roles of an auditor?

Make sure that GAAP standards are followed. Provide a professional, independent opinion of whether a company's financial statements fairly present company's financial position, its results of its operations, and its cash flow in compliance w/GAAP.

6. Adjusting journal entries

Necessary for prepayments (cash flows precedes expense or revenue recognition; i.e. prepaid expenses or deferred revenue), accruals (outflow or inflow takes place in a period subsequent to expense or revenue recognition; i.e. accrued liabilities or accrued receivables), and estimates. - Record the effect of internal events on the accounting equation at the end of the fiscal period. Record frequent revenues and expenses that have occurred but have not been recognized through daily entries (recorded at the end b/c of this). INCLUDE 1 income statement and 1 balance sheet account. NEVER include cash.

Auditor's report

Provide independent and professional opinion about: - fairness of representations - effectiveness of internal controls - whether financial statements are in conformity w/GAAP unqualified opinion (all parts of financial statement are prepared by them)

Conceptual framework - Accounting Constitution - Purpose?

Provides an underlying foundation for US accounting standards (lead to consistent standards that guide the standards of events to be accounted for, measurement of those events, and means of summarizing and communicating them to interested parties). Provides structure and direction to reporting but does not directly prescribe GAAP. The FASB disseminates this framework in their Statements of Financial Accounting Concepts.

1. Identification & 2. Transaction Anaylsis

Obtain source documents (i.e. sales invoices, bills, etc.) that identify the date and nature of e/transaction. W/source documents can now do 2. Can review transaction source and determine effect on accounting equation and specific elements involved.

Accounting equation

Portrays the equality b/w the total economic resources of an entity (assets) and the total claims against the entity (liabilities + equity). Assets = Liabilities + Equity

Qualitative Characteristics & Constraint

Primary Qualities: Relevance & Faithful Representation Ingredients of Primary: Relevance - Predictive Value (predict future operations), Confirmatory Value (helps investors confirm or change prior assessments regarding company's operations), and Materiality (if that information is omitted, could affect user's decisions) Faithful Representation - Completeness (includes all information for faithful representation and economic phenomenon it purports to represent), Neutrality (free from bias), and Free from Error (no errors or omissions) Secondary Qualities: Comparability (Consistency; helps users see similarities & differences b/w events and conditions), Verifiability (can be verified by other independent measures and would reach same consensus), Timeliness (info. available early enough for decision process), and Understandability (users can comprehend info. w/in the context of decision being made) Constraint: cost effectiveness = benefits of providing information must outweigh the cost.

Interest formula for notes receivable

Principle x Interest rate x time = Interest

Conversion from Cash Basis to Accrual Basis Formulas Revenue/Cash Receipts: - =End. AR? - =End. Unearned Revenue? Expenses/Cash Payments: - =End. Inventory? - =End. AP? - =End. Prepaid Expense? - =End. Payable?

Revenue/Cash Receipts: - Beg. AR + Sales - Cash Receipts =End. AR - Beg. Unearned Revenue + Receipts - Revenue =End. Unearned Revenue Expenses/Cash Payments: - Beg. Inventory + Purchases - COGS =End. Inventory - Beg. AP + Purchase - Payment =End. AP - Beg Prepaid Expense + Payment - Expense =End. Prepaid Expense - Beg. Payable + Expense - Payment =End. Payable

Purpose of GAAP

Set both broad and specific guidelines that companies can use for measuring and reporting in their financial statements. Enhance comparability of information among companies.

True or false: The objective of an Enterprise Resource Planning (ERP) system is to create a customized software program that integrates the information of departments and functions of a company into a single computer system.

True