Intermediate Accounting Exam 1 All Answers Correct

Intermediate Accounting Exam 1 All Answers Correct Financial Accounting The process that culminates in the preparation of financial reports on the enterprise for use by both *internal* and *external* parties. Objective of Financial Reporting Provide *information about the reporting entity* that is *useful to* present and potential to equity *investors, lenders, and others.* Securities and Exchange Commission (SEC) -Federal agency created to help *develop and standardize financial information presented to stockholders* -Companies that issue securities to public are required to file with SEC -Have powers to prescribe auditing practices and standards to be employed by companies that fall within its jurisdiction -Requires registrants to adhere to GAAP -Relies on FASB to develop accounting standards -Mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation -Regulations require filing of annual (10-K) & quarterly (10-Q) reports and others -Enforcement authority American Institute of CPAs (AICPA) the National professional org of CPAs -Important in the development of GAAP -Established the Committee on Accounting Procedure (CAP) → Accounting Principles Board (APB) → FASB How was the AICPA created? 1. Established the committee of accounting procedure (*CAP*) 2. Accounting principles board (*APB*) 3. Financial Accounting and standards Board (*FASB*) Financial Accounting Standards Board (FASB) structure for financial accounting* -Major organization of the *standard-setting -Wants to establish and improve standards of financial accounting and reporting for the guidance and education of the public -Accounting guidance issued by FASB is considered GAAP -Issues: Accounting standards updates & financial accounting concepts Generally Accepted Accounting Principles (GAAP) *common set of accounting standards and procedures* for which either an authoritative accounting rule making body has established a principle of reporting in a given area, or over time, a given practice has been accepted as appropriate because of its *universal application* FASB Codification place -Provides all the authoritative literature related to a particular topic in one -Topic → subtopics → sections → paragraphs Major Challenges in Financial Reporting *careful logic* or empirical findings Measurement Principle GAAP is as much a product of *political action* as it is of - *Historical cost* (maintain same value originally assigned) - *Fair value* (estimate of the potential price) Revenue Recognition Principle Requires companies recognize revenue in the *period* performance *obligation is satisfied*. Expense Recognition Principle Full Disclosure Principle Expenses follows the revenues. Providing information that is of *sufficient importance to influence and inform the judgement and decisions of an informed user* (financial statements, notes to the statements, supplementary information). Two Perspectives of Time 1. Date (point in time): *"as of"*; balance sheet 2. Time between two dates (period): *"for the year ended"*; income statement, cash flow DEAD CRLS *E*xpenses *A*ssets *Debits* INCREASE *D*ividends declared *Credits* INCREASE *R*evenues *L*iabilities *S*tockholders Equity Owners Equity is made up of ... -Net contributed capital: *accumulated capital contributed* to the firm *by owners* to repurchase shares since inception -*Retained earnings*: accumulated earnings of the firm less accumulated dividend payments since inception Step *ONE* in the Accounting Cycle Step *TWO* in the Accounting Cycle Step *THREE* in the Accounting Cycle Step *FOUR* in the Accounting Cycle Step *FIVE* in the Accounting Cycle Step *SIX* in the Accounting Cycle Step *SEVEN* in the Accounting Cycle Step *EIGHT* in the Accounting Cycle 1. Record and post basic "transactions" 2. Prepare an Unadjusted Trial Balance 3. Record and post adjusting entries 4. Prepare an Adjusted Trial Balance 5. Prepare Income Statement 6. Record and post closing entries 7. Prepare a Closed Trial Balance 8. Prepare Balance Sheet -Deferrals: Cash is paid or received *before* a Recording and Posting Adjusting Entries (step 3) related expense or revenue is recognized -Accruals: Cash is paid or received *after a related expense or revenue is recognized -Estimates: Accountants must often make estimates in order to comply with the accrual accounting model Deferrals Accruals cash is paid or received *BEFORE* a related expense or revenue is recognized cash is paid or received *AFTER* a related expense or revenue is recognized Recording and Posting Closing Entries (step 6) accounts to Retained Earnings. Closing temporary accounts *revenue* -Move balances of temporary "income statement" D- revenues C- income summary Closing temporary accounts *expense* C- expenses D- income summary Closing *income summary* to retained earnings C- retained earnings Closing *dividends* to retained earnings D- income summary D- retained earnings C- dividends Usefulness of Income Statement -*Evaluate* past performance and predict future *performance* -*Assess* uncertainty of achieving *future cash flows* Limitations of Income Statement -Items that cannot be reliably measured are omitted -Choice of accounting methods affects reporting -Subjective judgments affect reporting Single-step Income Statement Multiple-step Income Statement Non-controlling Interest -owns 50% but not 100% of a business -portion of equity (net assets) interest in a subsidiary not attributable to the parent company