A304 Exam 1 Prep

Not all activities affecting the income statement are _____________________

"central to ongoing operations"

What information is included in the notes of financial statements?

(1) Descriptions of the key accounting rules applied in the company's statements (2) Additional detail supporting reported numbers (3) Relevant financial information not disclosed on the statements

What are the three points you should remember about earnings per share?

(1) If there are preferred stock dividends, the amount is subtracted from net income in the numerator, (2) the denominator for weighted average shares is a complex computation, and (3) outstanding shares are those that are currently held by the shareholders

Gross Profit

(also called Gross Margin) is the difference between net sales and cost of goods sold

Going Concern Assumption

(continuity assumption) It is assumed that the business will continue operating into the foreseeable future, long enough to meet its contractual commitments and plans

Statement of Cash Flows Equation

+/- Cash Flow from Operating Activities (CFO) +/- Cash Flow from Investing Activities (CFI) +/- Cash Flow from Financing Activities (CFF) = Change in Cash +/- Change in Cash + Beginning Cash Balance = Ending Cash Balance

As an additional step of the accounting information processing cycle, a post-closing trail balance should be prepares as...

A check that debits still equal credits and that all temporary accounts have been closed

Chart of Accounts

A list of all account titles and their unique numbers

If total expenses exceed total revenues...

A net loss is reported

What are accounts used?

Accounts are used by companies to accumulate the dollar effect of transactions

What makes up the liabilities section?

Accounts payable, accrued expenses, notes payable, taxes payable, unearned revenue, bonds payable

Examples of Current Liabilities

Accounts payable, unearned revenue, accrued expenses payable, current lease liabilities, and others

Contra-accounts

Accounts that are directly linked to another account or financial statement sections, but with an opposite balance

Cash will be paid in the future?

Accrual

Cash will be received in the future?

Accrual

When is accrual basis accounting used? Why?

Accrual basis accounting is required by GAAP and used to report to external decision makers

What are the balances of accrued expense?

Accrued expense adjustments are necessary when the company has incurred an expense but the cash will be paid in the next period. Because nothing has been recorded yet, an expense needs to be recognized and a liability increased

_______________ accumulate over time but are not recognized as expenses until the end of the period in an adjusting entry

Accrued expenses

What are the balances of accrued revenues?

Accrued revenue adjustments are necessary when the company has earned revenue but the cash will be received in the next period. Because nothing has been recorded yet, revenue needs to be recognized and an asset increased

Revenues that have been earned but have not yet been recorded at the end of the accounting period are called _______________________

Accrued revenues

When are adjusting entries required?

Adjusting entries are required every time a company prepares financial statements

Common Stock

Amounts invested in the business by stockholders Beginning Common Stock + Stock Insurance = Ending Common Stock

Journal Entry

An accounting method for expressing the effects of a transaction on accounts. It is written in a debits-equal-credits format

Expenditure

An outflow of cash for any purpose, whether to buy equipment, pay off a bank loan, or pay employees their wages (don't confuse expenditures and expenses- not all cash expenditures are expenses)

After the financial statements are prepared and disseminated to users, a closing process is needed...

As the last step in the accounting cycle to mark the end of current period and the beginning of the next

Accounts with "receivable" in the title are always _____________

Assets

Prepaid expenses are always _____________

Assets

The Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

How are assets listed on the balance sheet?

Assets are listed on the balance sheet by ease of conversion to cash

How are assets reported?

Assets are reported at amounts that represent the probable future benefits remaining at the end of the period

What happens to the assets if a company goes out of business?

Assets can be sold for cash

What are the functions of assets?

Assets have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future

Non-Current Assets

Assets that will be used or turned in to cash beyond one year

Current Assets

Assets that will be used or turned into cash within one year

Typical Account Titles

Assets, Liabilities, Stockholder's Equity, Revenues, and Expenses

What are the elements of a corporation's balance sheet?

Assets, liabilities, and stockholders' equity

What are the elements of the balance sheet?

Assets, liabilities, and stockholders' equity

Each adjusting entry always includes...

At least one income statement account and at least one balance sheet account

What adjustment is made for deferred expenses?

At the end of every period, an adjustment must be made to record the amount of the assets that was used during the period

Cash may be paid at any of these times:

1) Before the expense is incurred to generate revenue 2) In the same period as the expense is incurred to generate revenue 3) After the cost is incurred to generate revenue

Cash may be received at any of these times:

1) Before the goods or services are delivered 2) In the same period as the goods or services are delivered 3) After the goods or services are delivered

What two issues arise when reporting periodic income?

1) Recognition issues: When should the effects of operating activities be recognized (recorded)? 2) Measurement issues: What amounts should be recognized?

Business Analytics: The AMPS Model

1. Ask the Quest 2. Master the data 3. Perform the analysis 4. Share the story

The closing entry has two purposes:

1. To transfer the balances in the temporary accounts (income statement accounts) to Retained Earnings. 2. To establish a zero balance in each of the temporary accounts to start the next period.

What are the four basic financial statements?

Balance sheet, income statement, statement of stockholders' equity, and statement of cash flows (The notes are an integral part of these financial statements)

How are retained earnings calculated?

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Examples of content on a statement of stockholders' equity

Beginning and ending stockholders' equity balances, stock issuances, net income, dividends

What is Data Analytics (also called Business Intelligence and Big Data?

Big data analytics examines large amounts of data to uncover hidden patterns, correlations and other insights. With today's technology, it's possible to analyze your data and get answers from it almost immediately

Adjusting entries never include _____________

Cash

Who uses cash basis accounting? Why?

Cash basis accounting is used by many sole proprietors and small partnerships to determine performance. It is simple and permitted for tax purposes.

What should you be cautious about when using cash basis accounting?

Cash basis accounting may lead to an incorrect interpretations of future company performance. GAAP does not allow the cash basis of accounting

How does cash basis accounting record each cash payment?

Cash basis accounting records each cash payment as a cash outflow and each cash receipt as a cash inflow. This produces net cash flow information that is often quite adequate for organizations that do not need to report to external users

Examples of content on a statement of cash flows

Cash collected from customers, cash paid to suppliers, cash paid to purchase equipment, cash borrowed

Cash Flows from Operating Activities

Cash flows directly related to earning income, such as cash collected from customers less cash paid for operating expenses, such as cash paid to suppliers and employees

Cash Flows from Financing Activities

Cash flows directly related to the financing of the enterprise, such as the receipt or payment of money to investors and creditors (except suppliers)

What are the elements of the statement of cash flows?

Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities

Cash Flows from Investing Activities

Cash flows related to acquisition or sale of the company's plant and equipment and investments

Examples of content on a balance sheet

Cash, accounts receivable, plant and equipment, long-term debt, common stock

What make up the assets section?

Cash, short-term investments, accounts receivable, notes receivable, inventories, supplies, prepaid expenses, long-term investments, equipment, buildings, land, intangibles

Examples of Current Assets

Cash, short-term investments, accounts receivable, supplies, inventory, and prepaid expenses.

Who are the principals?

Common Equity Shareholders, Investors, Creditors, Other Resource Providers

Who are the stakeholders?

Common equity shareholders (primary), banks, creditors (primary), managers and employees, suppliers, labor unions and pension funds, customers, governmental authorities, local communities

What are the elements of the statement of stockholders' equity?

Common stock and retained earnings

What makes up the stockholders' equity section?

Common stock, additional paid-in capital, retained earnings

What are the additional characteristics of financial statements and related disclosures that make them more useful?

Comparative financial statements, additional subtotals and classifications in financial statements, and additional disclosures

Depreciation is recorded in a ________________ account called ____________________________

Contra-asset; Accumulated Depreciation

Financing Provided by Owners is referred to as ____________ ______________

Contributed capital

Buildings and Equipment accounts are listed at __________

Cost

What makes up the expenses section?

Cost of goods sold, wages expense, rent expense, interest expense, depreciation expense, advertising expense, insurance expense, repair expense, income tax expense

Examples of Expenses

Costs of Goods Sold, Wage Expense, Rent Expense, Interest Expense, Depreciation Expense, Advertising Expense, Insurance Expense, Repair Expense, Income Tax Expense

The income statement (temporary) accounts with debit balances are ____________ and the income statement (temporary) accounts with credit balances are ______________

Credited; debited

Entities that a company owes money to are called _______________

Creditors

External decision makers include...

Creditors and investors

Current Ratio Equation

Current Ratio = Current Assets / Current Liabilities

Assets are grouped as ______________ or _____________ assets

Current; non-current

Cash was paid in the past?

Deferral

Cash was received in the past?

Deferral

When a customer pays for goods or services before the company delivers them, the company records the amount of cash received in a(n) ___________________ account

Deferred (unearned) revenue

Many assets are used over time to generate revenues, including supplies, prepaid expenses for insurance, advertising, and rent, and buildings and equipment. These assets are ________________

Deferred expenses

What are the balances of deferred expenses?

Deferred expenses (assets) have balances at the end of the period because cash was paid in the past by the company for the assets. If all or part of the asset has been used to generate revenues in the period, an expense needs to be recorded and the asset reduced

What are the balances of deferred revenues?

Deferred revenues (liabilities) have balances at the end of the period because cash was received before it was earned. If all or part of the liability has been satisfied by the end of the period, revenue needs to be recorded and the liability reduced

Depreciation

Depreciation is an allocations of the cost of buildings and equipment over their estimated useful lives to the organization

Managerial Accounting Reports

Detailed plans and continuous performance reports

Why are current assets and current liabilities distinguished on financial statements?

Distinguishing current assets and current liabilities assists external users of the financial statements in assessing the amounts and the timing of future cash flows

What is the potential return for stockholders?

Dividends and higher future stock prices

The Balance Sheet is...

a financial snapshot at a specific point in time

When interpreting the income statement, investors and creditors closely monitor...

a firm's net income because it indicates the firm's ability to sell goods and services for more than they cost to produce and deliver

When interpreting retained earnings, creditors closely monitor...

a firm's statement of stockholders' equity because the company's policy on dividend payments affects its ability to repay its debts

When interpreting the balance sheet, stockholders' equity is considered...

a protective "cushion" to creditors because the creditors' claims legally come before those of the owners

One of the first notes on a financial statement is typically...

a summary of significant accounting policies (this note tells the user which accounting methods the company has adopted)

Accounting focuses on events that have...

an economic impact on the entity

After analyzing the business documents (such as purchase invoices, receipts, and cash register tapes) that describe a transaction, the effects on the accounts...

are recorded in the journal using debits and credits

When interpreting the balance sheet, creditors and shareholders analyze...

assets to determine if the company has sufficient resources available to operate

Separate Entity Assumption

Each business's activities must be accounted for separately from the personal activities of the owners, all other persons, and other entities

What should you keep in mind when looking at a company's chart of accounts?

Each company has its own chart of accounts. Do not try to memorize a typical chart of accounts; instead focus on understanding the nature of each typical account by where it is located in the financial statements

What is the only ratio required to be disclosed on the statement or in the notes to the statements?

Earnings per share

Assets

Economic resources owned or controlled by a company

Adjustments are necessary at the __________________________ to record all revenues and expenses in the proper period and to reflect the proper valuation for assets and liabilities

End of the accounting cycle

Internal Events

Events that are not exchanges between the business and other parties but nevertheless have a direct and measurable effect on the entity

What does the principle of dual effects state?

Every transaction has at least two effects (dual effects) on the basic accounting equation. Most transactions with external parties involve an exchange where the business entity both receives something and gives up something in return

External Events

Exchanges of assets, goods, or services by one party for assets, services, or promises to pay (liabilities) from another party or parties

Who are the agents?

Executives, Managers, and Employees

When are expenses recorded?

Expenses are recorded when they are incurred to generate revenue (the expense recognition principle)

True or False: Other Items on the Income Statement are included in the subtotal "Income from Operations"

False

The U.S. Securities and Exchange Commission formed the...

Financial Reporting and Audit Task Force (now called the FRAud Group)

What are the types of accounting systems?

Financial accounting reports and managerial accounting reports

Debt

Funds from creditors

Equity

Funds from owners

Examples of Professional Standards

Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS)

After the closing process is complete, all income statement accounts...

Have a zero balance

What does the measurement concept state that financial statements are recorded at?

Historical cost

How are transactions recorded in an accounting system?

In an accounting system, transactions are recorded in chronological order in a general journal

What is the relationship among statements?

Income Statement -> Statement of Stockholders' Equity -> Balance Sheet

The earnings per share ratio is reported on the ____________________

Income statement

Gains

Increases in assets or settlements of liabilities from peripheral transactions

Accumulated Depreciation _____________ with the amount of depreciation expense for the period and _______________ when an asset is sold for the portion used in prior periods

Increases; decreases

External auditors must be...

Independent experts in accounting who carefully evaluate a company's accounting records and verify whether the financial statements are fairly presented in accordance with professional standards

What is the potential for return for creditors?

Interest

Other Items on the Income Statement typically include:

Interest revenue (also investment revenue, investment income, or dividend revenue), interest expense, losses (gains) on sale of investments or disposal of assets

When do investors buy stock?

Investors buy stock when they believe that future earnings will improve and lead to dividends and the ability to sell their stock for more than they paid

Why do investors examine retained earnings?

Investors examine retained earnings to determine whether the company is reinvesting a sufficient portion of earnings to support future growth

What is the purpose of analyzing operating cash flow?

It checks the company's ability to pay back bank debt, expand the company, and distribute cash dividends to shareholders

What is the purpose of earnings per share?

It is widely used in evaluating the operating performance and profitability of a company

How does a trial balance work?

It lists the names of the T-Accounts in financial statement order (assets, liabilities, stockholders' equity, revenues, and expenses)

What does "consolidated" mean when it is stated before a balance sheet?

It means all subsidiaries are combined

What is the separation of ownership and control?

It refers to how the investors and creditors (principals) who provided financial capital own the resources but are separate from the executives, managers, and employees (agents) who have day-to-day control

Prepaid Expenses

It represents amounts paid in advance by the company to others for future benefits, such as future insurance coverage, rental of property, or advertising

Where should the monetary unit sign ($) be included on a financial sheet?

It should be beside the first dollar amount in a group of items and by group total

What do lenders rely on?

Lenders rely on future earnings to provide the resources to repay loans

Accounts with "payable" in the title are always ____________

Liabilities

Accounts with "unearned" in the title are always ______________

Liabilities

How are liabilities listed on the balance sheet?

Liabilities are listed by the maturity (due date)

How are liabilities reported?

Liabilities are reported at amounts that represent the probable future sacrifices of assets or services owed at the end of the period

What influence do losses and dividends have on retained earnings?

Losses and dividends decrease the retained earnings

Internal decision makers include...

Managers

Why are there additional disclosures on financial statements?

Most companies present voluminous notes that are necessary to understand a company's performance and financial condition

News of an SEC investigation into these allegations can...

Negatively affect the company's stock price

Earnings per Share Equation

Net Income ÷ Weighted Average Number of Shares of Common Stock Outstanding

On the balance sheet, the amount that is reported for property and equipment is its _______________

Net book value (also called the book value or carrying value)

What should be single underlined on a balance sheet? Double underline?

Place a single underline below the last item in a group before a total or subtotal, and a double underline below the group totals

Deferrals as Assets

Prepaid Expenses Examples: Prepaid expenses for insurance, rent, and advertising, Supplies, and Buildings and Equipment

There are two components when borrowing money:

Principal and interest

Examples of Long-Term Assets

Property and equipment (land, buildings, and equipment), operating lease right-of-use assets (rented assets), intangibles, and stocks and bonds of other companies

What is the role of provision for income taxes (income tax expense) on the classified income statement?

Provision for Income Taxes is subtracted from income before income taxes to obtain net income

Example of External Events

Purchase of a machine from a supplier

When actual performance lags behind expectations, managers and owners may manipulate accruals and deferrals to make up the difference. They might:

Record cash received as revenue before it is earned or fail to accrue expenses at year-end

What is the purpose of retained earnings?

Reinvestment of earnings, or retained earnings, is an important source of financing for companies

What is the purpose of a statement of stockholders' equity?

Reports changes in the company's common stock and retained earnings during the accounting period

What is the purpose of a statement of cash flows?

Reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories operating, investing, and financing

Statement of Cash Flows

Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing

What is the purpose of an income statement?

Reports the accountant's primary measure of economic performance during the accounting period

Statement of Stockholders' Equity

Reports the changes in each of the company's stockholders' equity accounts, including the change in the retained earnings balance caused by net income and dividends, during the reporting period

Balance Sheet

Reports the financial position (amount of assets, liabilities, and stockholders' equity) of an accounting entity at a point in time

What is the purpose of a balance sheet?

Reports the financial position (economic resources and sources of financing) of an accounting entity at a point in time

Income Statement

Reports the revenues less the expenses during the accounting period

Stockholders' Equity

Represents the residual interest in the assets of the entity after subtracting liabilities. It is a combination of the financing provided by the owners and by business operations

Revenues

Resources (cash and promises) earned from delivery of goods and services; increases in assets or settlements of liabilities from the major or central ongoing operations

Expenses

Resources used (incurred) to earn period's revenue; decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues

The portion of profits reinvested in the business is called _____________ _____________

Retained earnings

The Income Statement Equation

Revenues - Expenses = Net income

What are the elements of the income statement?

Revenues and expenses

When are revenues recorded?

Revenues are recorded when earned (the revenue recognition principle)

Net Income

Revenues earned minus expenses incurred

Examples of Revenues

Sales Revenue, Service Revenue, Rental Revenue, Interest Revenue, Dividend Revenue

Examples of content on an income statement

Sales revenue, cost of goods sold, selling expense, interest expense

What makes up the revenues section?

Sales revenue, fee revenue, interest revenue, rent revenue, service revenue

What are the assumptions that underlie the definitions of financial statement elements?

Separate entity assumption, going concern assumption (continuity assumption), and monetary unit assumption

Problems can arise because of the ____________________ within a company

Separation of ownership and control

What is it important to remember when looking at the additional subtotals and classifications in financial statements?

Slightly different statement formats may be used by different companies

Are all events reported in the financial statements?

Some events are not reflected in the financial statements. For example, events that have future economic impact or the exchange or promises

What kind of liabilities are sometimes not reported on the balance sheet?

Some liabilities, called off balance-sheet financing, are not reported as liabilities on the balance sheet (e.g. leases with an initial term of 12 months or less)

Accrued Revenues

Sometimes companies perform services or provide goods before customers pay. Because cash is owed, the revenue that was earned may not have been recorded

Why do stakeholders need financial information?

Stakeholders need financial information to make informed resource allocation decisions

Who are the sources of financial resources?

Stockholders and creditors

What does the FRAud group do?

The FRAud Group concentrates on detecting fraud and prosecuting corporations and individuals for violations involving false or misleading financial statements and disclosures

How are accounts organized?

The accounts are usually organized by financial statement element, with asset accounts listed first, followed by liability, stockholders' equity, revenue, and expense accounts in that order. Each company has its own chart of accounts.

Capital Structure

The acquisition of assets is financed from two source: debt and equity

What do the agents do?

The agents have day-to-day control of resources

Principal

The amount borrowed (or loaned)

Operating Revenues

The amounts earned and recorded from a company's day-to-day business activities. Amount earned when a company sells products or provides services to customers or clients. Earnings from the central focus of the business. e.g., when Chipotle sells burritos, it has earned revenue.

What is the purpose of a trial balance?

The purpose of the trial balance is to check the equality of the debits and credits. Errors may still exist if the wrong accounts or amounts were used in the journal entries

What is the purpose of treasury stock?

The treasury stock account represents the amount the company paid to its investors to repurchase common stock

What are non-operating (other) items?

These are revenues, expenses, gains and losses that do not relate to the company's primary operations

How are buildings and equipment listed?

These assets are used over time to generate revenue. Their cost should be recorded as an expense in the same period

Where are non-operating items on the classified income statement?

These items are added to or subtracted from operating income to obtain income before income taxes

What are the functions of liabilities?

They are expected to be settled in the future by transferring assets or providing services

Why are the notes an integral part of financial statements?

They are important because they provide the reader with supplemental information to help the reader better understand the financial statements

How are liabilities listed on a financial statement?

They are listed in order of maturity (how soon an obligation is to be paid) and grouped by current and noncurrent (long-term)

Accounts Receivable

They represent amounts owed by (receivable from) customers and others to the business

Accounts Payable

They represent amounts owed by the company to be paid to others in the future

Deferred (Unearned) Revenues

This unearned revenue is a liability representing the company's promise to perform or deliver the goods or services in the future. Recognition of (recording) the revenue is postponed (deferred) until the company meets its obligation

________ __________ and a ____________ ______________ underlie the definitions of financial statement elements

Three assumptions; measurement concept

How are operating activities recognized and measured?

Through cash basis accounting and accrual basis accounting

Accountants follow the ________ __________ assumption

Time period

What is the purpose of comparative financial statements?

To allow users to compare performance from period to period, companies report financial statement values for the current period and one or more prior periods (2 years for balance sheets, 3 years for all other statements)

How do companies handle the multitude of daily transactions that a business generates?

To handle the multitude of daily transactions that a business generates, companies establish accounting system, usually computerized, that follow a cycle

_________________ is a contra-account and reduces stockholders' equity

Treasury stock

What influence does treasury stock have on stockholders' equity?

Treasury stock reduces stockholders' equity

True or False: Corporations are required to disclose earnings per share (EPS) on the income statement or in the notes to the financial statements

True

True or False: Many very valuable intangible assets, such as trademarks, patents, and copyrights are not reported on the balance sheet

True

Deferrals as Liabilities

Unearned (or Deferred) Revenue Examples: Unearned revenue for gift cards, subscriptions, and airline tickets sold, and customer deposits

Accruals as Liabilities

Unrecorded Payables Examples: Utilities Payable, Taxes Payable, Wages Payable, Interest Payable, and sometimes Accounts Payable

Accruals as Assets

Unrecorded Receivables Examples: Interest Receivable, Rent Receivable, and sometimes Accounts Receivable

Example of Internal Events

Using up insurance that was previously paid in advance

To understand amounts appearing on a company's balance sheet, consider these questions:

What business activities cause changes in the balance sheet from one period to the next? How do specific activities affect each of the balance sheet amounts? How do companies keep track of the balance sheet amounts?

The SEC uses data analytics to...

build a proactive enforcement program

Common stock and additional paid-in capital result in an increase in stockholders' equity with a ______________

credit

Retained earnings result in an increase in stockholders' equity with a _____________ and a decrease in stockholders' equity with a ________________

credit (net income); debit (dividends declared)

Liabilities increase with a __________________ and decrease with a __________________

credit; debit

If a company cannot make the required debt payments, then...

creditors can force bankruptcy and require the sale of assets

Assets increase with a _______________ and decrease with a ________________

debit; credit

The term __________ is the left side of an account and the term ___________ is the right side of an account

debit; credit

Financing Provided by Operations is referred to as _____________ ______________

earned capital (or retained earnings)

The final category of notes on a financial statement includes...

information that impacts the company financially but is not shown on the statements

Managerial accounting reports are provided to...

internal decision makers to run the company

Every dollar a company pays to stockholders as a dividend...

is not available for use in paying back its debt

Debt payments are...

legal obligations

The accounting principles that determine when revenues and expenses are recorded are the __________________ and the ___________________

revenue recognition principle; expense recognition principle (also called the matching principle)

The Earnings Per Share Initiative uses...

risk-based data analytics to uncover earnings management practices designed to hide week performance

The FRAud Group relies on...

statistical modeling and other data tools to detect differences and potential fraud

The second category of notes on a financial statements provide...

supplemental information concerning the data shown on the financial statements

The Statement of Stockholders' Equity reports...

the change in each stockholders' equity account during the period

If a company does not pay its creditors, then...

the creditors can force the sale of assets

The need to solve information asymmetry problems controls...

the demand for financial accounting information

The time period assumption assumes that...

the long life of a company can be reported in shorter time period such as months, quarters, and years

The income statement measures..

the performance of the business

Manufacturing and merchandising companies that sell goods report...

the subtotal Gross Profit

Title revenue accounts by...

their source followed by the word revenue

Title expense accounts by...

what was incurred or used followed by the word "expense", except for inventory sold, which is titled Cost of Goods Sold

Revenues are recognized...

when good and services are provided to customers (they are earned)

When interpreting the balance sheet, creditors and shareholders are concerned about...

whether the company has sufficient sources of cash to pay its liabilities (debts)

What drives the demand for accounting standards and independent audits?

• A natural demand arises for accounting standards that managers can use to measure and report financial statements that are relevant and representationally faithful • Professional standards, such as Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) are not sufficient to meet users' demands

Intangible assets not reports include:

• Assets developed inside a company (not purchased) • Assets developed over time through research, development, and advertising (not purchased) • e.g. Coca-Cola does not report the value of its patented Coke formula

The four basic financial statements can be prepared at any point in time such as:

• End of the year (for the year ended, annual reports) • Quarterly (for the quarter ended, quarterly reports) • Monthly (for the month ended, monthly reports)

What are the principles of transaction analysis?

• Every transaction affects at least two accounts • The accounting equation must remain in balance after each transaction

Agency Problem Example - Enron

• Legal obligation to protect and promote investor interests • Board of directors failed to carry out its regulatory role in the company • Enron's management hid losses by misrepresenting them in the accounting records

The financial statement heading includes:

• Name of the entity (company name) • Title of the statement (e.g. Balance Sheet) • Specific date of the statement (e.g., At December 31, 2020) • Unit of measure (in millions of dollars)

What is the purpose of the financing provided by owners?

• Owners invest in the business by providing cash and sometimes other assets, receiving in exchange shares of stock as evidence of ownership • Use the accounts Common Stock and Additional Paid-in Capital to represent the amount investors paid when they purchased the stock from the company • The Treasury Stock account represents the amount the company paid to its investors to repurchase common stock

What drives stakeholders' demand for accounting information?

• Stakeholders need financial information to make informed resource allocation decisions • The financial reporting process must communicate financial accounting information to existing and potential investors, creditors, lenders, and other external decision makers • Information must be relevant and faithfully representative

Creditors: What do these stakeholders need to know?

• The amount of equity capital in place • Resources the company owns and the debt it owes • Cash flows and the company's ability to meet interest and principal payments when due

Investors: What do these stakeholders need to know?

• The business model, strategies, and competitive advantages of the company • Resources the company owns and the debt it owes • The net income or net loss, cash flows, and whether profits and cash flows are growing over time

What is the purpose of the financing provided by operations?

• The portion of profits reinvested in the business is called retained earnings • Losses and dividends decrease the retained earnings

Losses

Decreases in assets or increases in liabilities from peripheral transactions

Financial Accounting Reports

Periodic financial statements and related disclosures

From a firm's perspective, __________ is considered riskier than ______________

Debt; equity

What are the other names for net income?

Net income is also called "profit", "net earnings", and "the bottom line"

Examples of Noncurrent Liabilities

Notes payable and long-term lease liabilities

Accrued Expenses

Numerous expenses are incurred in the current period without being paid until the next period

Liabilities

Obligations resulting from a past transaction

Non-Current Liabilities

Obligations that will be paid or settled after one year

Current Liabilities

Obligations that will be paid or settled within one year

Operating Expenses

Operating expenses are the costs of operating the business that are incurred to generate revenues during the period. Many expenses are incurred in making a sale or providing a service. Expenses may be incurred before, after, or at the same time as they are paid in cash

How is operating income computed?

Operating income is computed by subtracting operating expenses from gross profit

Stakeholders

Parties with an interest in a company

Retained Earnings

Past earnings not distributed to stockholders

Historical Cost

The balance sheet elements are initially recorded at their cost

The end balance in Retained Earnings now is up-to-date and is carried forward as...

The beginning balance for the next period

Interest

The cost of borrowing (or lending)

If a company goes out of business and its assets are sold, then what happens to the creditors and shareholders?

The creditors are paid back before the shareholders receive any money

Net book value

The ending balance in the property and equipment accounts minus the ending balance in the Accumulated Depreciation account

Expense Recognition Principle

The expense recognition principle (also called the matching principle) requires that costs incurred to generate revenues be recognized in the same period - a matching of costs with benefits

What must the financial reporting process communicate?

The financial reporting process must communicate financial accounting information to existing and potential investors, creditors, lenders, and other external decision makers

Monetary Unit Assumption

The financial statements are reported using the national monetary unit (e.g. dollars in the United States)

What do the principals do?

The investors and creditors (principals) provide financial capital and own the resources

The closing entry is dated ___________________ and is posted to the _______________

The last day of the accounting period; ledger (or T-accounts)

What is the most important section of the cash flow statement? Why?

The operating activities section is though to be the most important because it indicates the company's ability to generate cash from sales to meet its current cash needs

What are the steps of the operating cycle?

The operating cycle begins with the purchase or manufacture of a product for sale. When products are purchased from suppliers, those suppliers must be paid. After a sale has been made, the company must deliver the product or service to the customer. Many business sales are made on credit. If credit is extended, payment must be received from customers. Once the cash has been collected from customers, the business cycle begins all over again.

The income statement helps investors and creditors...

estimate the company's future earnings

Financial accounting reports are provided to...

external decision makers to evaluate the company

The basic accounting equation refers to a company's...

financial position: the economic resources that the company owns and the sources of financing for those resources

Expenses are recognized...

in the same period as the revenues to which they relate (resources are used or debts are incurred to generate revenues), regardless of when cash is received or paid

The statement of cash flows reports...

inflows and outflows of cash during the accounting period

Both stockholders and creditors estimate future performance, in part, based on...

information in the company's financial statements

A natural demand arises for accounting standards that...

managers can use to measure and report financial statements that are relevant and representationally faithful

Accounting standards require... This gives rise to demand for...

many choices, judgements, and estimates; independent audits

GAAP and SEC regulations set...

only the minimum level of required financial disclosures so many companies provide addition information

Revenues, expenses, gains, or losses that result from _______________ are categorized as Other Items

other activities that are NOT central to ongoing operations

Liabilities are what the company...

owes to creditors (financing from creditors)

Stockholders' Equity is what the company...

owes to owners (financing from stockholders)

Assets are what the company...

owns (economic resources)