Midterm Study Guide Essay

Two perspectives: Economic Consequence (understand decision impact) & User-Orientation (how to read/analyze stmts) Corporate Governance: encourages mgmt. to report in good faith and act in best interests of shareholders. GAAP: needed for comparability and minimize bias; established by SEC, enforced by stock exchange, bank regulations, AICPA. IASE: International accounting Standards Committee. IFRS: International Financial Reporting Standards. Operating Activities: prod & sale of goods/service; Investing: acquisitions and dispositions of producing assets; Financing: raising capital thru debt/equity issuances. Balance Sheet: Assess liquidity and financial flexibility. A-L=Book value. Current Assets: Cash (FV), STI(FMV/held to market), A/R(Net value), Inventory (LCM), PP Exp (Net book value)Principles of financial accounting: Objectivity: financial acct is verifiable & reliable; Matching: efforts (Exp) should be matched with acc. (Rev) ex. Direct association exists, exp cost when rev. is recognized. If assoc. diff. to identify, allocate costs systematically; no association, expense immediately. Revenue Recognition: rev. recogn when earnings process is virtually comp & transaction occurred, 4 criteria to meet 1) complete sign portion of prod. & sales 2)rev is objectively measurable 3)major portion of cost incurred remaining cost reasonably estimated 4)collection of cash is reasonably assured. Consistency: use same method period to period. Exceptions: Materiality: latitude allowed when $ value is so small that it has no effect on decision making. Conservatism: if in doubt, understate assets, overstate liabilities, accelerate rec. of losses, delay recognition of gains. Operating transactions: Persistent: attributed to transactions that are fundamental to operations; Transitory: marginally related to operations. Complete Income Statement Format: Operating Rev & Exp: asset/liab related to acquisition and delivery (usual & frequent) Other Rev & Exp: related to secondary activities unusual/infrequent (int. income/exp) Disposal of Bus. Segment: sale of separate line of business Extraordinary Items: unusual and infrequent out of the normal transactions Mandatory Changes in accounting principles. Intrinsic Value: Book Value + PV of future cash flows. Book value doesn’t reflect Market b/c of business environment (historical stmts), unrecorded events, Management bias. NRV of A/R: Face Value- adjustments for Bad Debt, returns, discounts. Inventory: too much, waste resources, too little and risk sales. Methods: Perpetual: purchases & sales are recorded in the inventory account as they occur. Cr Inv & D COGS. Periodic: Purchases recorded in Purc acct & closed @ end of yr, COGS = Purch + Beg Inv-End Inv. Items to include: Consigned Goods: inventory owned by cosignor, goes on their balance sheet. Goods in Transit: FOB Shipping point: Buyer is resp when shipped FOB Dest.: Buyer resp. when goods are received. Cash (sales) Discounts Gross Method: sales & rec recorded @ gross amt. Discounts taken are recorded as sales discounts, reduction to gross sales revenue Net Method: sales & rec recorded @ net amount. Discounts are not recorded as interest revenue. Balance sheet: assess future cash flows & LT solvency (liquidity & financial flexibility). Income Stmt formats: Single Step: expenses & losses are subtracted from Revenues & expenses. Multi-step: separate journal entries & t-accounts by activity and function. Financial Assumptions: Economic Entity: profit-seeeking entities, separate & distinct from owners can be measured & identified. Fiscal Period: life of entity can be divided into fiscal periods and performance can be measured during each period. Going Concern: life of economic entity will extend beyond the current fiscal period. Stable Dollar: performance and fin. position can be measured in terms of a monetary unit that maintains constant purchasing power across all fiscal periods. Economic Events: Must be both relevant and objectively

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