Download Chapters 1-9 Key Terms and Questions | ACCT - Financial Accounting 1 - Introduction and more Quizzes Financial Accounting in PDF only on Docsity!
Two main organizations that write accounting
standards?
FASBIASB*IASB is used by most of the world TERM 2
Balance Sheet Equation
DEFINITION 2 assets = liabilities + owners equity TERM 3
Income Statement
DEFINITION 3 Revenues - Expenses + Gaines - Losses TERM 4
Statement of Cash
Flows
DEFINITION 4 change in cash = cash in - cash out TERM 5
3 types of cash flows with
examples
DEFINITION 5 operating: selling inventory, paying employees, ongoing operations of hte firm investing: buying equipment, selling PP&E, investments financing: borrowing from a bank, paying a dividend to investors
Revenues &
Expenses
Revenues: belong to the ownersExpenses: charged to the ownersBoth go in Owner's Equity TERM 7
What are the purposes of the closing entry?
DEFINITION 7 resets temporary accounts to zero balances so the firm can collect data for the next fiscal period transfers income officially to the balance sheet (to owner's equity) to a permanent account (retained earnings) TERM 8
Ledger's
purpose?
DEFINITION 8 shows all account balances (permanent and temporary) transfers financial data from the journal entries to the ledger TERM 9
What is the difference between current assets
and noncurrent assets?
DEFINITION 9 current assets are cash/assets that will be used, consumed, or turned into cash within 1 year generallynoncurrent assets are not current TERM 10
Assets include...
DEFINITION 10 cash (immediately spendable without penalty) accounts receivable (amounts owed by customers, non- interest bearing) inventory (items held for re-sale) investments (value of investments in the debt or stock of other firms)
do we capitalize or expense buildings when
purchased?
capitalize when purchase (increase in assets)depreciate over time as depreciation expense (decrease in owners equity) TERM 17
difference between revenues and gains?
DEFINITION 17 revenues are repeatable and part of central ongoing operations ex. firm that sells cars, has revenues gains are one-time events ex. firm that doesn't sell cars, books it as a gain TERM 18
Operating income
DEFINITION 18 earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all expenses except interest and income tax expenses. TERM 19
debits &
credits
DEFINITION 19 debit is on the leftcredit is on the rightEXCEPT under assets, where it's switched TERM 20
sources of financial capital (cash)?
DEFINITION 20 internally generated from operations borrowed from banks invested from investors TARP
advantages of obtaining cash from lenders
rather than investors?
cheaper and does not dilute ownership TERM 22
disadvantages of obtaining cash from lenders
rather than investors?
DEFINITION 22 must be repaid can increase firm risk TERM 23
how do we measure the cost of debt?
DEFINITION 23 use the interest rate on debt TERM 24
how do we measure the cost of equity?
DEFINITION 24 must estimate the cost of equity use CAPM Rt + Beta * Risk Premium TERM 25
describe variable expenses vs fixed expenses
DEFINITION 25 expenses that vary with sales ex. cogs do not vary w sales ex. interest - only varies w the amount borrowed and the amount of time elapsed
revenue principle
revenues are recognized when earned and realized or realizable, irrespective of when payment is received TERM 32
matching principle
DEFINITION 32 expenses are booked in the same period as the related revenues, irrespective of when cash is paid TERM 33
from the perspective of the seller, what
corresponds to a buyer's prepaid expense?
DEFINITION 33 deferred revenue TERM 34
from the perspective of the seller, what
corresponds to a buyer's accounts payable?
DEFINITION 34 accounts receivable TERM 35
name an item that is measured at fair
value
DEFINITION 35 investments in stock and bonds of other firms
cost
principle?
The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired. For example, if equipment is acquired for the cash amount of $50,000, the equipment will be recorded at $50,000. If the equipment will be useful for 10 years with no salvage value, the straight-line depreciation expense will be $5,000 per year (cost of $50,000 divided by 10 years). TERM 37
full disclosure principle
DEFINITION 37 disclose everything that a reasonable investor would want to know; extends beyond the 3 main financial statements TERM 38
conservatism principle
DEFINITION 38 firms must not overstate their performance and financial positionfirms book bad news early (that is, losses) but not good news (gains)example: firms must book contingent liabilitiesif a contingent liability is material, probable, and estimable, then yes, the firm would book it TERM 39
earnings per share (EPS)
DEFINITION 39 Earnings per Share (EPS) of a business is the portion of its net income of a period that can be attributed to each share of its common stock. Earnings per share can be calculated by dividing net income of a period by the number of common shares outstanding during the period. Companies are required to show EPS with theirincome statement. TERM 40
why would a firm engage in big bath
accounting?
DEFINITION 40 The firm may wish to show improvement in a subsequent year through the reversal of the previous expense. This reversal boosts net income. If this is done with the willful intent to deceive, it is fraud.
contra-accounts
used to record discounts, allowances, and returns. information is useful for investors to assess payment terms, product quality, etc. TERM 47
two main types of inventory firms
DEFINITION 47 resellers (retailers and wholesalers): only have merchandise inventory manufacturers: three inventories - direct materials (DM), work in progress (WIP), finished goods (FG) TERM 48
inventory equation
DEFINITION 48 beginning inventory + purchases - COGS = ending inventory TERM 49
how does inventory fraud work?
DEFINITION 49 overstating ending inventory understates COGS, which overstates gross margin and eventually net income TERM 50
what accounting principle or accounting
constraint requires application of LCM (lower
of cost or market)?
DEFINITION 50 conservatism
"how" to measure COGS and inventory is
measured by...
LIFO
FIFO
average TERM 52
"when" to measure COGS and inventory is
measured by...
DEFINITION 52 periodic method (end of pd) perpetual method (at the point of each sale) TERM 53
why would the standard setters give two
different treatments for passive investments?
DEFINITION 53 firms did not want all the volatility to be recorded in the income statement via gains and losses. by using AOCI, firms avoid periodic income recognition from the fair value adjustments. TERM 54
why does the investor reduce the investment
account when it receives a dividend?
DEFINITION 54 the FASB wanted the investment account to reflect what was happening to the investee's balance sheet when it pays a dividend. the investee's balance sheet shrinks when it pays a dividend. therefore, the investment account on the investor's balance sheet should also shrink. moreover, the investor, because of its significant influence has a strong say over the dividend policy. TERM 55
equity method
DEFINITION 55 no mark to market impairment testing applies investment account rises with net income of the investee investment account falls when investee pays investor a dividend
