Wall Street Prep Accounting Crash Course Exam 2023 with complete solutions

Wall Street Prep Accounting Crash Course Exam 2023 with complete solutions What is Accounting? Accounting is the language of business; it is a standard set of rules for measuring a company's financial performance. Assessing a company's financial performance is important for: The firm's officers (managers and employees) Investors Lenders General public Standard financial statements serve as a "yardstick" of communicating financial performance to the general public. Why is Accounting Important? Enables managers to make corporate decisions Enables the general public to make investment decisions Who Uses Accounting? Used by a variety of organizations - from the federal government to non-profit organizations to small businesses to corporations We will discuss accounting rules as they pertain to publicly-traded companies Accounting Regulations Accounting attempts to standardize financial information and follows rules and regulations These rules are called Generally Accepted Accounting Principles (GAAP) In the US, the Securities and Exchange Commision (SEC) authorizes the Financial Accounting Standards Board (FASB) to determine accounting rules GAAP comes from the Statements of Financial Accounting Standards (SFAS) issued by the FASB An Overview of the SEC A US federal agency established by the US Congress in 1934 Primary mission is "to protect investors and maintain the integrity of the securities markets" Division of Corporate Finance oversees FASB An Overview of FASB Established in 1973 as an independent body to carry out the function of codifying accounting standards on the behalf of the SEC Composed of seven full-time members appointed for five years by the Financial Account Foundation (FAF) Decisions are influenced by: International Financial Reporting Standards (IFRS) Over 100 countries, including the EU, UK, Canada, Australia, and Russia, have adopted a unified set of international accounting standards (IFRS) Although we have seen unprecedented convergence over the last few years between US GAAP and IFRS, some differences remain Assumption 1: Accounting Entity A company is considered a separate "living" enterprise, apart from its owners In other words, a corporation is a "fictional" being Assumption 2: Going Concern A company is considered a "going concern" for the foreseeable future; it is assumed to remain in existence indefinitely Assumption 3: Measurement Financial statements can only show measurable activities of a corporation such as its quantifiable resources, its liability, amount of taxes it is facing, etc. Assumption 4: Periodicity Companies are required to file annual and interim reports In the US, quarterly and annual financial reports are required An accounting year (fiscal year) is frequently aligned with the calendar year Four Underlying Assumptions of Accounting (1) Accounting Entity (2) Going Concern (3) Measurement (4) Periodicity Principle 1: Historical Cost Financial statements report companies' resources at an initial historical cost Why? Represents the easiest measurement method without a need for appraisal and revaluation Marking resources up to fair value allows for management discretion and subjectivity, which US GAAP attempts to minimize by using historical cost Note: IFRS allows you to write up the asset to fair value, but most companies use historical value anyways Principles 2 and 3: Accrual Accounting (Revenue Recognition and Matching Principle) Governs the company's timing in recording its revenues (i.e. sales) and associated expenses 2) Revenue Recognition: Accrual basis of accounting dictates that revenues must be recorded when earned and measurable 3) Matching Principle: Under the matching principle, costs associated with making a product must be recorded during the same period as revenue generated from that product Exercise Answer: 1) 1/4/15; 2) 1/4/15 Why can't companies immediately record these revenues and expenses? According to the revenue recognition principle, a company cannot record revenue until that order is shipped to a customer (only then, is the revenue actually earned) and collection from that customer is reasonably assured Why shouldn't a company record an expense when it actually buys the item? According to the matching principle, costs associated with the production of the product should be recorded in the same period as the revenue from the product's sale US GAAP vs. IFRS Accrual Accounting Principle 4: Full Disclosure Companies must reveal all relevant economic information that they determine to make a difference to its users Such disclosure should be accomplished in the following sections of companies' reports: (1) Financial statements (2) Notes to financial statements (3) Supplementary information Four Underlying Principles in Accounting (1) Historical Cost (2) Accrual Accounting: Revenue Recognition (3) Accrual Accounting: Matching Principle (4) Full Disclosure Constraint 1: Estimates & Judgments Certain measurements cannot be performed completely accurately, and must therefore utilize conservative estimates and judgments Constraint 2: Materiality Inclusion and disclosure of financial transactions in financial statements hinge on their size and effect on the company performing them Note: Materiality varies across different entities Constraint 3: Consistency Each company has to prepare financial statements using measurement techniques and assumptions which are consistent from one period to another Constraint 4: Conservatism Financial statements should be prepared with a downward measurement bias Assets and revenues should not be overstated, while liabilities and expenses should not be understated Four Underlying Constraints in Accounting (1) Estimates & judgments (2) Materiality (3) Consistency (4) Conservatism Summary of Accounting Assumptions, Principles, Constraints Most important are the historical cost, revenue recognition, and matching principles Financial Reporting Overview Presented in the companies' financial reports and standardized by accounting Companies must file periodic financial reports with the SEC Finding Financial Reports On the website UK: Canada: Also, company websites and financial websites and services Form 10-K (Annual Filing) Publicly traded companies must file the 10-K at the end of each fiscal year Includes a thorough overview of their businesses and finances, as well as their financial statements Must be filed within 60-90 days within year end, depending on filer's status (large accelerated (60)/accelerated/non-accelerated filer (90))