9A FAR Handout 9A1 And 9A2 Flashcards Preview

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Flashcards in 9A FAR Handout 9A1 And 9A2 Deck (36):
0

4 basic assumptions

1 economic entity assumption
2 going concern assumption
3 monetary unit assumption
4 periodicity assumption

1

Economic Entity Assumption

Economic activity can be identified with a particular unit of
Accountability

However, you can define entity at higher level (parent)
or lower level (subsidiary)

2

Going concern assumption

Business enterprise life is long

Going concern assumption does not apply if liquidation of
Business appears imminent

3

In the going concern assumption, the fair value of an asset is irrelevant if...

2) What is this another reason for?

We need the asset on business operations

2) this is reason to use historical cost instead of fair value

4

Monetary unit assumption

Money (the U.S. dollar) is common denominator for economic
Activity

Provides appropriate basis for accounting measurement and
analysis

5

Periodicity assumption

Economic activities of enterprise can be divided into artificial time
Periods

We report financial information periodically to apprise users of
Performance and economic status

6

4 basic principles of accounting

1 Historical Cost Principle
2 Revenue Recognition Principle
3 Matching Principle
4 Full Disclosure Principle

7

Historical Cost Principle

2) why?

GAAP requires that most assets and liabilities be accounted for
And reported on basis of acquisition price

2) Because it's the most reliable valuation

8

Exceptions to historical cost principle being the best valuation in certain situations ?

2 examples

1 impairments

2 lower-cost-or-market

9

Revenue recognition principle

Revenue is generally recognized when:

1 realized or realizable
And
2 earned

10

Revenues are realizable when...

Assets received are readily convertible into cash or claims to
Cash

11

Revenue recognition principle:

Revenues are considered earned when the entity has...

Substantially accomplished what it must do to be entitled to
The benefits represented by revenues

12

Revenue Recognition Principle:

Recognition at time of sale provides...

A reasonable test

13

Revenue Recognition Principle:

Exceptions to recognition at time of sale 4

1 during production (% completion)
2 receipt of cash (installment sales, cost recovery)
3 multiple deliverable revenue arrangements
4 milestone method for R&D

14

Matching Principle

Expenses are matched to revenues whenever reasonable or
Practicable

15

Full Disclosure Principle

Accountants use their judgement in deciding what gets reported
on financial statements

If something doesn't appear in financial statements, it may appear
In footnotes or supplementary info

16

Full disclosure principle:

The footnotes generally...

Amplify or explain the items in the main body of the statements

17

Full disclosure principle:

Supplementary info (compared to footnotes)

Contains other info that may be highly relevant, but less reliable

18

Full disclosure principle:

Segment reporting is a good example of...

Footnote disclosure

19

3 Constraints

1 Cost benefit relationship

2 materiality

3 conservatism

20

Cost benefit relationship

Information is expensive

The costs of providing the info must not outweigh the benefits
That can be derived from using it

21

Materiality

Item is material if it's inclusion or omission would influence or
Change judgement of reasonable person

22

Conservatism

When in doubt, choose solution that will least likely overstate
Assets and income

23

What are the 4 main processes of the Accounting Cycle?

1 Transaction JEs
2 Adjusting JEs
3 Financial Statements
4 Closing JEs

24

Accounting Cycle: Transaction JEs (steps 1-3)

1 prepare transaction JEs and record them in journal

2 Post transaction JEs to general ledger

3 prepare unadjusted trial balance

25

How many steps are in the accounting cycle?

10

26

Accounting Cycle:

Adjusting JEs pertains to what numbered steps?

Steps 4-6

27

Accounting Cycle:

Step 4

Prepare adjusting JEs, record them in the journal

28

Accounting Cycle:

Step 4: accrual type adjusting JEs, what are the 2 entries needed?

1 adjusting JE first

2 cash JE second

Ex. For A/R, payables, other receivables

29

Accounting Cycle:

Step 4: deferral type adjusting JEs, what are the 2 entries needed?

1 cash JE first

2 adjusting JE second

Ex. For depreciation, prepaid expenses, unearned revenue

30

Adjusting entries do not...

Debit or credit cash

31

Accounting Cycle:

Step 5 for adjusting journal entries

Post adjusting journal entries in general ledger

32

Accounting Cycle:

Step 6 (adjusting journal entries)

Prepare adjusted trial balance

33

Accounting Cycle:

Step 7

Prepare financial statements and footnotes under GAAP

34

Accounting Cycle:

Steps 8-10 closing JEs

8 prepare closing JEs, record them in journal

9 post closing JEs to general ledger

10 prepare post closing trial balance

35

What is optional to prepare at the end of the accounting cycle?

Prepare reversing JEs, record them in journal and post them to
General ledger