INTERMEDIATE ACCOUNTING CHAPTERS 1-4 EXAM 2023/2024 UPDATED.

INTERMEDIATE ACCOUNTING CHAPTERS 1-4 EXAM 2023/2024 UPDATED. The use of financial accounting information by external decision makers - CORRECT ANSWER-- Investors can use this information to determine profitability of a company and assess if they would like to invest in this company - Creditors can use this information when deciding if they should offer a loan to a certain company, ie can access reliability in being able to pay loan back. (before supplying capital to businesses as they want to earn a fair return on the resources they provide) - Use information to predict future risk and potential return on their prospective investments or loans - Financial intermediaries provide advice to investors and creditors and/or make decisions on their behalf (stock brokers, mutual fund managers) Benefits of accrual accounting (as opposed to cash-basis accounting) - CORRECT ANSWER--Get a more accurate prediction of future operating cash flows and periodic performance of the company -Allows us to measure resource inflow/outflows that don't correspond with with cash inflows/outflows -Net income is a better indicator of Future operating cash flows that net operating cash flows -Accrual doesn't only focus on CF's. Also reflects resources provided and consumed by operations during a period Independent auditor's opinion - CORRECT ANSWER--Reports on the fairness of FS -Can give an unqualified, unqualified with explanation, qualified or adverse/disclaimer opinion. -Usually, most companies receive unqualified or "clean" opinions as most mistakes are corrected through the course of the audit. -are the FS fairly representing the financial position, operations, and CF's in compliance with GAAP? -Offer credibility to FS -SOX provides regulation of auditors -in most states, only CPA's can represent that FS's are in compliance with GAAP -Accounting standards created using an objective approach Verifiability - CORRECT ANSWER-Different knowledgeable and independent measures would reach the same conclusion regarding whether information is a faithful representation of what it is intended to depict Verifiability example - CORRECT ANSWER-Cost of land highly verifiable because we can trace it back to receipts of official transaction Four different accountants agree on the amount and method of reporting an economic event Predictive value - CORRECT ANSWER-Confirmation of investor expectations about future cash-generating abilities. Something has predictive value if it hes users predict future CF's. Relative to earnings quality Faithful representation - CORRECT ANSWER-means agreement between a measure and a real-world phenomenon that the measure is supposed to represent -Information, complete, no errors, and free from bias ex: Inventory is known to have items intended for sale, if it included accounts receivable it would LACK faithful representation Timeliness - CORRECT ANSWER-Information is available to users before a decision is made ex: SEC requiring quarterly and annual reporting Comparability - CORRECT ANSWER-information is comparable if similar items are treated the same way and different items are treated differently. Helps users see similarities and differences between events and conditions the level of standardization of accounting information that allows the financial statements of multiple organizations to be compared to each other. ex: investors and creditors being able to compare FS across companies to make their decision Comparability and Consistency - CORRECT ANSWER-Greater consistency in accounting methodologies within organizations in an industry, allows for greater comparability among that industry Representational faithfulness - CORRECT ANSWER-Ex: when making an estimate, we clearly and openly describe that this is an estimate and users are given enough info to understand potential for inaccuracy Consistency - CORRECT ANSWER-Information is consistent if it is measured and reported the same way in each period. Consistency of accounting practices over time permits valid comparisons among different reporting periods. (using same accounting principles year over year) EX: Use FIFO method over LIFO method, thus makes comparability across periods easier. Examples of contra accounts - CORRECT ANSWER--Accumulated Depreciation -Allowance for doubtful accounts -Treasury stock -Sales discounts/bond discounts -obsolete inventory Determining balance in retained earnings at the end of the year - CORRECT ANSWER-beginning balance in RE + Net income - dividends = ending balance in RE Permanent accounts - CORRECT ANSWER-Represent basic financial position elements of the accounting equation. Represent assets, liabilities, and shareholder's equity at a point in time. Cash, Accounts receivable, inventories, retained earnings Permanent accounts would not inlcude: interest expense wages payable Prepaid rent unearned revenues - CORRECT ANSWER-interest expense (Expense so temporary) Temporary accounts are - CORRECT ANSWER-revenues expenses gains losses and dividends Purpose of closing entries - CORRECT ANSWER-Close out the balances of temporary accounts to retained earnings, to be ready to collect data for next reporting period. Temporary accounts are not carried forward into the next period thus must be closed out. AKA Reconciling** Purpose of posting journal entries - CORRECT ANSWER-- Transfer individual debits and credits on individual journal entries to specific accounts affected. -Gives a systematic list of all account balances up to date -Gives better picture of what's happening in the business; aids in decision making - Essentially tallies up all the transactions that affect a specific account so you can assess where you stand. Classified balance sheet - CORRECT ANSWER-A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections. "classifies" different assets/liabilities by similar characterisitcs EX: Current assets, all expected to be converted to cash in 1 year or operating cycle examples of cash equivalents - CORRECT ANSWER-Short term investments that have a maturity date 3 months treasury bills, commercial paper, money market funds Cash - CORRECT ANSWER-Bank drafts, cashier's checks, money orders and also cash equivalents Subsequent event - CORRECT ANSWER-a significant development that occurs after a company's fiscal year-end but before the financial statements are issued or available to be issued -ex issuance of bonds -acquisition of another company -major uncertainty -sale of asset -sale of business -workforce reduction managements report on internal control over financial reporting - CORRECT ANSWER-1. Identify Financial Reporting Risks & Controls Implemented to Mitigate those Risks: (identify financial reporting risks, identify controls that mitigate financial reporting risks, assess design effectiveness) 2. Evaluate the Operating Effectiveness of Internal Control Over Financial Reporting: (select & perform testing procedures to evaluate the operating effectiveness, document operating effectiveness) 3. Provide Report on Effectiveness of Internal Control Over Financial Reporting: (evaluate control deficiencies, provide public disclosure of management report, including any material weaknesses). Purpose of managements report on internal control over financial reporting - CORRECT ANSWER--Enhance awareness of the external users of FS (aware of material changes) - provides reasonable assurance regarding the reliability of financial reporting - Management is responsible for information in FS, and thus having an established set of internal control procedures Benefit of multi-step over single step - CORRECT ANSWER--categorizes expenses by function -intermediate subtotals -information useful in analyzing trends *Advantage is by separately classifying operating and non-operating items, it provides information that might be useful in analyzing trends. gross profit - CORRECT ANSWER-relationship between rev and COGS Operating income - CORRECT ANSWER-profitability of core operations Income before teaxes - CORRECT ANSWER-compare companies in diff tax jurisdictions Earnings quality - CORRECT ANSWER-- refers to the ability of reported earnings (income) to predict a company's future earnings. -involves separation of temporary and permanent earnings Assessment of permanent earnings - CORRECT ANSWER-begin assesment with income from continuing operations Permanent earnings are those earnings that are likely to continue into the future. For example, sales revenue from a stable customer contributes to earnings in a fashion that is likely to continue indefinitely into the future. Operating vs. Non-operating Income - CORRECT ANSWER-Operating: : includes all transactions relating to what is at the core of the business and will likely reoccur. includes revenues and expenses directly related to the primary revenue-generating activities of the company, and also gains and losses from selling equipment and other assets used in operating processes Non-operating: : represents transactions relating to business however they will not likely reoccur. relates to peripheral or incidental activities of the company . Example of operating income - CORRECT ANSWER-including selling expenses, general and administrative expenses, advertising expense, restructuring costs, revenue, COGS etc Everything above operating income Examples non-operating income - CORRECT ANSWER--interest revenue -interest expense -gain on sale of asset -gain on investment Examples of other OCI - CORRECT ANSWER--foreign currency translation -gain/loss on derivatives, -debt securities gain/losses -projected benefit obligation Calculation of before tax loss on discontinued operations - CORRECT ANSWER-- If component is sold, take loss from operations and gain/loss on sale -if held for sale, take loss from operations and subtract impairment loss if fair value less than book value. ** if fair value book value you just don't record any impairment We invest in stock - CORRECT ANSWER-D: Investments C: Cash Adjusting entries - CORRECT ANSWER-never involve cash How to calculate co