MGMT 350 Exam 1 Review

Current liabilities

Accounts payable Notes payable Accrued liabilities Current maturities of long-term debt

earned; incurred

Accrual accounting: Revenue is recognized when _______. Expenses are recognized when ________.

Operating activity

Activity that creates cash inflows or outflows through day-to-day operations.

Financing activity

Activity that creates cash inflows or outflows through the obtaining or repaying of borrowed or invested funds

Investing activity

Activity that creates cash inflows or outflows through the selling or buying of long-term assets

SEC (Security and Exchange Commission)

An agency of the United States government which enforces federal securities laws and regulating thesecurities industry. It requires public companies to adhere to GAAP and has oversight and enforcement authority

Economic entity

An assumption that a company keeps its activity separate from its owners and other businesses

Going concern

An assumption that financial statements statements are prepared with the expectation that a business will remain in operation indefinitely

Monetary unit

An assumption that only those things that can be expressed in money are included in the accounting records

Periodicity

An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Current assets

Cash Cash equivalents Short-term investments Receivables Inventories Prepayments

received; paid

Cash basis accounting: Revenue is recognized when cash is ____________. Expenses are recognized when cash is ___________.

Current assets, long-term investments, property plant and equipment, intangible assets, and other assets

Classifications of assets on a balance sheet (5)

Capital stock, additional paid-in capital, retained earnings

Classified as owners' equity on balance sheet (3)

Prior period adjustments

Corrections of errors are treated as _____________

FASB (Financial Accounting Standards Board)

Current organization generating accounting standards used to prepare financial statements (GAAP). Is an independent, private sector body whose members represent a broad constituency of interest groups

Current assets / Current Liabilities

Current ratio

Comparability, Verifiability, Timeliness, Understandability

Enhancing qualities

b

Gains and losses that bypass net income but affect stockholders' equity are referred to as a. comprehensive income b. other comprehensive income c. prior period income d. unusual gains and losses

Timeliness

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

Comparability

Information is measured and reported in a similar manner for different companies or different years.

Noncurrent assets

Investments and funds Property, plant, and equipment IntangiblesOther

Current ratio

Measures a company's ability to satisfy its short-term liabilities

Income statement: revenues and gains, expenses and losses

Measures a period of time

Balance sheet: assets, liabilities, owners' equity

Measures at a point-in-time

Investments and funds

Noncurrent assets that are not used in the operations of business

Property, plant, and equipment and intangible assets

Noncurrent assets used in the operations of business

Long-term liabilities

Notes payable Mortgages Bonds payable Pension obligations Lease obligations

Understandability

Quality of information that allows users to comprehend its meaning.

(Cash + short-term investments + current receivables) / current liabilities

Quick ratio

Discontinued operations

Reported when company eliminates the results of operations and cash flows of a component, and when there is no significant continuing involvement in that component. Amount reported "net of tax."

Long-term investments

Securities Fixed assets Special funds Nonconsolidated subsidiaries or affiliated companies

Journalization, posting, trial balance, adjustments, adjusted trial balance, financial statements, closing entries, post-closing trial balance, reversing entries

The accounting cycle

minority/noncontrolling interest

The amount of equity investment made by outside shareholders to consolidated subsidiaries that are not 100% owned by the parent corporation

Fair value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Unusual nature

The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company.

Relevance and faithful representation

Two primary qualities that make accounting information useful for DECISION MAKING purposes

Other comprehensive income

Unrealized holding gain/loss on investments Minimum pension liability adjustment Deferred gain or loss on derivatives Foreign currency translation adjustment

Neutrality, free from error, completeness

What are the ingredients in Faithful Representation?

Materiality, confirmatory value, predictive value

What are the ingredients in Relevance?

Intangible assets, reputation, patents

What economic assets may not be on the balance sheet?

Cash recognizes revenues when received and expenses when paid, accrued recognizes revenues when earned and expenses when incurred

What is the difference between cash basis and accrual basis accounting?

After income from continuing operations

Where are discontinued operations on an income statement?

Seperate section just above "income from continuing operations before income taxes"

Where is unusual gain on an income statement?

To provide a clear and organized representation of a company's financial performance

Why are items separated on the income statement?

Accumulated Other Comprehensive Income

includes unrealized gains and losses reported in the equity section of the balance sheet that are netted below retained earnings

earnings per share

net income - preferred dividends / weighted average common shares outstanding

Acid-test ratio

provides a more stringent indication of a company's ability to pay its current liabilities

Par value

the amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity

Verifiability

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

Changes in estimates

- Accounted for in the period of change and future periods - Not handled retrospectively - Not considered errors or extraordinary items

Single step income statement

- All revenues - All expenses = Net income - No distinction between operating and non-operating activities - Valued for simplicity

Multiple step income statement

- Separates operating and non-operating activities with intermediate sub-totals - Provides more info for analysis than single step format

Examples of changes in estimates

- Useful lives and salvage values of depreciable assets - Allowance for uncollectible receivables - Inventory obsolescence

Examples of changes in accounting principles

-change from FIFO to average cost. -change from the percentage-of-completion to the completed-contract method