A311-Learning Assesment 1 PDF

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CH. 1 1.1    

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The financial statements most frequently provided by public companies include the balance sheet, the statement of cash flows, and the statement of stockholder’s equity. Capital allocation is the process of determining how and at what cost money is allocated among competing interest. Accrual basis accounting better indicates present and continuing ability to generate favorable cash flows for a company. Financial information that is better provided, or can only be provided, by means of financial reporting other than formal financial statements includes the president’s letter, news releases, and management’s forecasts. Cash flow information is provided in the statement of cash flows, which is a formal financial statement. An effective capital allocation process does all of these items. It promotes productivity, encourages innovation and provides an effective market for buying and selling securities. The entity perspective views companies as separate and distinct from their owners. If there was no set of generally accepted and universally practiced accounting standards it would be almost impossible to prepare statements that could be compared, each company would have to develop its own standards, and readers of financial statements would have to familiar themselves every company’s peculiar accounting and reporting practices.

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The role of the SEC in the formulation of accounting standards can be best described as varied – the SEC relies on FASB to develop standards but gives advice and recommendations to the private sector as needed. The federal government established the SEC to help develop and standardize financial information for stockholders. The steps in the establishment of a typical FASB statement. The passage new FSAB guidance in the form of an Accounting Standards Update requires the support of four of the seven Board members. The Financial Accounting Standards Advisory Council (FASAC) consults with the FASB on major policy and technical issues and helps select task force members. Financial Accounting Foundation (FAF) selects members of the FASB. The differences between FASB and its predecessor, APB: greater autonomy, increased independence and broader representation. *Board membership decreased from 18 to 7 members. The EITF (Emerging Issues Task Force) provides implementation guidance within the framework of the Codification to reduce diversity in practice on a timely basis.

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FASB Standards, AICPA Research Bulletins and APB Opinions are considered a GAAP document. * Statements of Financial Accounting Concepts are not considered GAAP documents. The Codification doesn’t create new GAAP, eliminates nonessential information and simplifies user access to all authoritative U.S. generally accepted accounting principles.

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The goal of the Codification was to provide one place where all authoritative literature about a particular topic could be found. *TRUE: The Codification creates one level of GAAP which is considered authoritative.

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Accounting principles are “generally accepted” only when (a) an authoritative accounting rulemaking body has established it in an official pronouncement. (b) a given practice has been accepted as appropriate because of its universal application. GAAP is as much a product of political action as it is of careful logic empirical findings. *FALSE: GAAP is established strictly through the application of careful logic and empirical findings. Pressure do complicate ethics and the decision is more difficult because there is no comprehensive ethical system to provide guidelines. Financial reports focus on hard assets such as inventory and plant assets, instead of soft assets such as intangibles which are often the best assets. Simple adherence to GAAP or following the rules of the profession cannot always provide the answers to ethical dilemmas. Technical competence is not enough when encountering ethical decisions. The PCAOB (Public Company Accounting Oversight Board) was established under the provisions of the Sarbanes-Oxley Act (SOX). Fundamental considerations the FASB must keep in mind that its rule-making activities include improvement in financial reporting, international convergence, and simplification of the accounting literature. Nonfinancial measurements: customer satisfaction indexes, reject rates, and company sustainability. The AICPA’s Code of Professional Conduct requires that members prepare finical statements in accordance with GAAP. Corporations whose securities are listed on a U.S. stock exchange are required to file audited financial statements with the SEC.

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CH. 2 2.1 

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A concept framework establishes the concepts that provide guidance on 1) identifying the boundaries of financial reporting; 2) selecting the transactions, other events, and circumstance to be represented; 3) how they should be recognized and measured and 4) how they should be summarized and reported. The conceptual framework for financial reporting consists of 3 levels: Why, the Bridge between Level 1 & 3, How. The conceptual framework allows the profession quickly to solve new and emerging issues and to issue useful consistent standard. It also increases financial statement users’ understanding of and confidence in financial reporting. The framework consists of 7 Statements of Financial Accounting Concepts.

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The objective of general-purpose financial reporting is to provide financial information about the entity that is useful in making decisions about providing resources to the entity. *TRUE: The objective of the conceptual framework is to provide financial information about the reporting entity primarily to present and potential equity investors, lenders, and other creditors (internal investors) in making decisions about providing resources to the entity.

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For the information to be relevant, it needs to have predictive value or confirmatory value or both. *FALSE: it must have predictive value and confirmatory value. Anything under 5% of net income is generally considered not material. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. Materially?

2.3

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CH. 3 3.1

Inflation/deflation is ignored under the monetary unit assumption. The periodicity assumption suggests that the economic life of a business can be divided into artificial time periods such as a month, quarter or year. Parent-subsidiary financials are an example of the economic entity assumption. The entity concept does not necessarily refer to a legal entity. A parent and its subsidiaries are separate legal entities but merging their activities for accounting and reporting purposes does not violate the economic entity assumption. Comprehensive income is the change in equity (net assets) during a period form transaction and other events and circumstances from non-owner sources. An increase in equity (net assets) from peripheral or incidental transactions is called a gain. The elements that describe resources and claims to resources at a moment in time include assets, liabilities, and equity. The other elements (investments by owners, revenues, comprehensive income) describe transactions, events and circumstances that affect a company during a period of time. Issuance of preferred stock: investments by owners. Fair value is a market-based measure. It is more relevant, more subjective, and FASB gives companies the opinions of using fair value for financial assets and financial liabilities. Companies issue liabilities such as bonds and accounts payable in exchange for assets or services for an agreed-upon price. The price established in the exchange transaction is the “liability” of a liability. The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.

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Factors that shape an accounting information system include the 1) transactions in which business engages; 2) informational demands of management; 3) volume of data to be handled. Real/permanent accounts are nor closed; nominal/temporary accounts are closed at the end of each accounting period. Journalizing is entering data into the journal or “book of original entry”. Posting is the process of transferring the accounts and amounts form the book of original entry to the ledger accounts. Companies may prepare a trial balance ay any point in time, including after adjusting entries and after closing entries. The double-entry accounting system means that the dual effect of each transaction is recorded with a debit and a credit. When a dividend is paid assets decrease and liabilities decrease; When a dividend is declared, the liabilities increase and stockholders’ equity decreases. The accounting cycle is performed in the same fashion by both a service firm and a merchandiser. The general journal chronologically lists transactions and other events. A trial balance proves that debits and credits are equal in the ledger. Each journal entry consists of four parts: 1) the accounts and amounts to be debited; 2) the accounts and amounts to be credited; 3) a date; 4) an explanation

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Accumulated depreciation is referred to as the asset’s book value. Adjustments are often prepared after the balance sheet date but are dated as of the balance sheet date. Adjusting entries can classified as either deferrals or accruals. Financial statements can be prepared directly from the adjusted trial balance. If the adjusting entry for an accrued revenue is nor made: assets are understated, revenues are understated, and equity will be understated.

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The columns generally found on a worksheet include the trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.

CH. 4 4.1  

4.2

The income statement can be used to assess creditworthiness. Not liquidity and solvency. An example of how income measurement involves judgment would be when companies use different useful lives to depreciate similar assets; An example of how a company omits items that cannot be measured reliably is that a company may not record unrealized gains and losses on certain investment securities in income when there is uncertainty that it will ever realize the changes in value.

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The transaction approach focuses on the income-related activities that have occurred during the period. The major elements of the income statement are revenues, expenses, gains and losses. Expenses are defined as outflows or other using-up of assets or incurrences of liabilities during a period form delivering or producing goods, rendering services, or carrying our other activities that constitute the entity’s ongoing major or central operations. In the single-step income statement, just two groupings exist-revenues and expenses. Acceptable presentation of the income statement includes a single-step, multiple-step, and a condensed income statement.

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Noncontrolling interest is reported as a separate item below net income or loss as an allocation of the net or loss. (that is, it is not an item of income or expense) A change in accounting principle is recognized by making a retrospective adjustment to the financial statement. The four items companies are required to highlight include unusual gains and losses, discontinued operation, noncontrolling interest, and earnings per share. The purpose of intraperiod tax allocation is to relate the income tax expense to the items that give rise to the amount of income tax provision.

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Other comprehensive income includes gains and losses that bypass net income. When a company transfers an amount of restricted retained earnings into a different account, that account is titled Appropriated Retained Earnings.

CH.5 5.1    

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The balance sheet is not used in analyzing profitability. *liquidity, solvency, and financial flexibility. Liquidity describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid. The account form lists assets on the left and liabilities and stockholders’ equity on the right. The report form balance sheet format lists the assets above the liabilities and stockholders’ equity. A company with a high degree of financial flexibility is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities. The only difference in balance sheets prepared using the report form or account form is the layout of the balance sheet. Current assets and total assets will be the same in both formats. The correct order to present current assets is cash, accounts receivable, inventories and prepaid items. Trading securities should always be reported as current assets. Available-for-sale securities and held-to-maturity securities would be classified as current or noncurrent depending on the circumstances and long-term investments would be classified as noncurrent.

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Receivables are valued at estimated amount collectible (not lower-of-cost-or-market), and inventories are valued at lower-of-cost-or-market. Prepaid expenses-Cost; Cash-Fair Value; Shortterm Investments-Generally Fair Value.

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Companies are not required to disclose information about the identity of all stockholders. A company discloses its accounting policies including depreciation methods used, inventory cost flow assumption used, and the basis for valuing investment. A company doesn’t disclosure the length of its operating cycle. The cash debt coverage ratio is computed as net cash provided by operating activities divided by average total liabilities. A lower debt coverage ratio and negative free cash flow are indicators of poor financial flexibility. Free cash flow=net cash provided by operating activities-capital expenditures-dividends

5.3

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Coverage ratios include debt to total assets, times interest earned, cash debt coverage ratio, book value per share, and free cash flow. The payout ratio: Cash dividends/Net income Return on assets: Net income/ Average total assets Companies use a “cross-reference” to show a direct relationship between an asset and a liability on the balance sheet.

Chapter 1 Learning Objectives Review 1. Understand the financial reporting environment. Companies provide four primary financial statements of financial reporting: (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners’ or stockholders’ equity. Financial reporting other than financial statements may take various forms. Examples include the president’s letter and supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and descriptions of a company’s social or environmental impact. The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity through equity investments and loans or other forms of credit. Information that is decision-useful to investors may also be helpful to other users of financial reporting who are not investors. To achieve this objective, the accounting profession has attempted to develop a set of standards that is generally accepted and universally practiced. Without this set of standards, each company would have to develop its own standards. Readers of financial statements would have to familiarize themselves with every company’s peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared. 2. Identify the major policy-setting bodies and their role in the standard-setting process. The Securities and Exchange Commission (SEC) is a federal agency that has the broad powers to prescribe, in whatever detail it desires, the accounting standards to be employed by companies that fall within its jurisdiction. The American Institute of Certified Public Accountants (AICPA) issued standards through its Committee

on Accounting Procedure and Accounting Principles Board. The Financial Accounting Standards Board (FASB) establishes and improves standards of financial accounting and reporting for the guidance and education of the public. 3. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Generally accepted accounting principles (GAAP) are those principles that have substantial authoritative support, such as FASB standards, interpretations, and Staff Positions, APB Opinions and interpretations, AICPA Accounting Research Bulletins, and other authoritative pronouncements. All these documents and others are now classified in one document referred to as the Codification. The purpose of the Codification is to simplify user access to all authoritative U.S. GAAP. The Codification changes the way GAAP is documented, presented, and updated. 4. Describe major challenges in the financial reporting environment. One major challenge is that user groups may want particular economic events accounted for or reported in a particular way, and they fight hard to get what they want. They especially target the FASB to influence changes in existing GAAP and in the development of new rules. A second challenge is that financial reports fail to provide (1) some key performance measures widely used by management, (2) forward-looking information needed by investors and creditors, (3) sufficient information on a company’s soft assets (intangibles), (4) real-time financial information, and (5) easy-to-comprehend information. Finally, financial accountants are called on for moral discernment and ethical decision-making. Decisions sometimes are difficult because a public consensus has not emerged to formulate a comprehensive ethical system that provides guidelines in making ethical judgments.

Chapter 2 Learning Objectives Review 1. Describe the usefulness of a conceptual framework. The accounting profession needs a conceptual framework to (1) build on and relate to an established body of concepts and objectives, (2) provide a framework for solving new and emerging practical problems, (3) increase financial statement users’ understanding of and confidence in financial reporting, and (4) enhance comparability among companies’ financial statements. The FASB issued seven Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises. These concept statements provide the basis for the conceptual framework. They include objectives, qualitative characteristics, and elements. In addition, measurement and recognition concepts are developed. 2. Understand the objective of financial reporting. The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Information that is decision-useful to capital providers may also be helpful to other users of financial reporting who are not capital providers. 3. Identify the qualitative characteristics of accounting information. The overriding criterion by which accounting choices can be judged is decis...