Final Exam Flashcards
(132 cards)
1
Q
ASSETS
Increase & Decrease
A
Increase: DEBIT
Decrease: CREDIT
2
Q
Liabilities
Increase & Decrease
A
Increase: CREDIT
Decrease: DEBIT
3
Q
Equity
Increase & Decrease
A
Increase: CREDIT
Decrease: DEBIT
4
Q
Revenue
Increase & Decrease
A
Increase: CREDIT
Decrease: DEBIT
5
Q
Expense
Increase & Decrease
A
Increase: DEBIT
Decrease: CREDIT
6
Q
CPA vs. Accountant
Difference
A
CPA has Auditing ability
7
Q
The Four Basic Financial Statements
A
- Balance Sheet
- Income Statement
- Statement of Changes in Owner’s Equity
- Statement of Cash Flow
8
Q
Fundamental Accounting Equation
Three Formulations
A
Equity = Assets - Liabilities Assets = Equity + Liabilities Liabilities = Assets - Equity
9
Q
Assets
Definition & Requirements
A
Ownership or Control of Future Economic Benefits
- Entity Control
- Expected Future Benefit
- Measurability (Usually via a Transaction = Historical Cost)
10
Q
Non-Assets
Three Examples
A
- Employees (without Contracts)
- Managerial Talent
- Goodwill (if not acquired via Transaction)
11
Q
Outside Sources: Liabilities
3 Characteristics
A
- Present Duty
- Obligation
- Measurable
12
Q
Inside Sources: Equity
3 Types of Ownership Equity
A
- Sole Proprietorship: Proprietorship
- Partnership (Unlimited Personal Liability): Partners’ Equity/Capital
- Corporation (Limited Liability): Shareholder’s Equity
13
Q
Balance Sheet Fundamentals
4 Main Points
A
- Total Assets = Sum of Liabilities & Equity
- Snapshot in Time
- Assets = Historical Cost
- Only certain Assets/Liabilities Shown (Meeting Criteria)
14
Q
4 Asset Classifications on the Balance Sheet
A
- Current Assets (Convertible into Cash/Use within 1 Year)
- Long-Term Investments (After 1 Year)
- Fixed Assets (PPE)
- Intangible Assets
15
Q
2 Liability Classifications
A
- Current Liabilities (Due Within 1 Year)
2. Long Term Liabilities (Due Over 1 Year)
16
Q
Income Statement (2 AKAs) 4 Main Features & Note
A
Statement of Earnings or Statement of Operations
- Shows Revenues & Expenses
- Addresses Company’s Ability to Earn Profit
- Covers a PERIOD of Time (Not a Snapshot like the B/S)
- Non-Prospective
Always Prepared Prior the Balance Sheet
17
Q
Revenues vs. Gains
Definition/Distinction
A
Revenues = Activities from Main Operations Resulting in Increase in Assets (or Decrease in Liabilities)
Gains = Perpherial or Subsidiary Increases in Assets (or Decreases in Liabilities)
18
Q
Expenses vs. Losses
Definition/Distinction
A
Expenses: Decreases in Assets (or Increases in Liabilities) from USING Goods or Services to PRODUCE Revenue
Losses: Peripheral or Subsidiary Decreases in Assets (or Increases in Liabilities) that do NOT involve Distributions to Owners
19
Q
Recognition of Revenue Test
Products vs. Services
A
When Earnings are Substantially Complete
- Products = Upon Delivery
- Services = Substantial Completion
20
Q
Statement of Changes in Owner’s Equity (O/E)
Function & 3 Subaccounts
A
Track Changes in Equity (similar to revenues in the I/S)
Typically, Subaccounts for:
- Capital Account
- Drawings Account
- Retained Earnings
21
Q
Owner’s Equity: Capital Account
A
Represents Owners’ Investment into the Enterprise
22
Q
Owner’s Equity: Retained Earnings
A
Represents the Net of Income (or Loss) and Distributions or Dividends to Owners
23
Q
Shareholder’s Equity Overview
3 Categories
(Accounting Nomenclature)
A
- Capitol Stock (Common or Preferred)
- Additional Paid-In Capital
- Retained Earnings (Net Income - Dividends)
24
Q
Shareholder’s Equity Overview
3 Categories
(Legal Nomenclature)
A
- Stated/Legal Capital
- Capital or Donated Surplus
- Earned Surplus (Net Income - Dividends)
25
Shareholder's Equity Comparison
Corresponding Legal Names
1. Capitol Stock
2. Additional Paid-In Capital
3. Retained Earnings
Corresponding Legal Nomenclature:
1. Stated/Legal Capital
2. Capital/Donated Surplus
3. Earned Surplus
26
Shareholder's Equity Comparison
Corresponding Accounting Names
1. Stated/Legal Capital
2. Capital/Donated Surplus
3. Earned Surplus
Corresponding Accounting Nomenclature:
1. Capitol Stock
2. Additional Paid-In Capital
3. Retained Earnings
27
Accrual Definition
Recording a Revenue or Expense during Current Period even though no Payment occurred.
28
Deferral Definition
Delays an Event Involving Cash or Cash's Worth in the Current Period until a Subsequent Accounting Period.
29
Accrual Accounting: Revenues
| Recognition & 2 Notes
Recognized when Done or Substantially Completed
- Regardless of Cash Receipt
- Requires an Event or Transaction
30
Accrual Accounting: Expenses
Recognized when Incurred
31
Accrual Accounting
| The 4 Assumptions
1. Economic Entity (Separate Activities of Business from Owners)
2. Monetary Unit (Valuation is Best Method for Communicating Economic Info)
3. Periodicity (Economic Activity can be Subdivided into Periods)
4. Going Concern (Business Continues Indefinitely)
32
7 Basic Principles of Accrual Accounting
1. Historical Cost
2. Objectivity/Verifiability
3. Revenue Recognition
4. Matching (Revenues-Expenses)
5. Consistency (Over Periods)
6. Full Disclosure
7. Emerging Fair Value or Relevance (FMV for Some Assets, but Not All)
33
3 Modifying Conventions & Their Effect
1. Materiality (Quantitative & Qualitative): Disregard Qualifying Data
2. Conservatism: Recognize Potential Losses, Anticipate No Gains
3. Industry Practices (Variable)
34
Materiality & Full Disclosure
| Definition & Requirement
Any fact important enough to influence an informed reader's judgment
If Material --> Disclose
35
Deferral: Occurrence (Cash) & Definition
Follows Cash Transaction
Cash Spent or Received is Recorded in a Subsequent Period
36
Deferral: Resulting Effect
Expenses & Revenues
(Corresponding Debit/Credit)
Expenses: Prepaid Expenses = Assets
-Credit to Create
Revenues: Prepaid Revenues = Liabilities
-Debit to Create
37
Accrual: Occurrence (Cash) & Definition
Precedes Cash Transaction
Allocates Expense or Revenues to Period in which they Occur (Regardless of Cash Receipt or Expenditure)
38
Accruals: Resulting Effect
Expenses & Revenues
(Corresponding Debit/Credit)
Expenses: Account Payable = Liability
-Debit to Create
Revenue: Account Receivable = Asset
-Credit to Create
39
Depreciation Accounting
Allocating an Asset's Useful Life (less its Salvage Value) over Time.
Fixed Assets: Depreciation
Intangibles: Amortization
40
Depreciation Expense
| Calculation & Accounts
(Cost - Salvage Value) ÷ Use Life
```
Depreciation: Credit
Accumulated Depreciation ("Contra Asset"): Debit
```
41
Inventory
Goods held for the Re/Sale in the Ordinary Course of Business
42
Inventory: Profit Analysis
| 2 Stages & 2 "Profits"
(Net) Sales
Less: Cost of Goods
= Subtotal (Gross Profit)
Gross Profit
Less: Operating Expense
= Total (Profit)
43
The Four Sales Accounts
1. Sales Returns
2. Sales Allowances (Discounts)
3. Sales Revenue
4. Net Sales (3 - 1&2)
44
Calculating Gross Profit
Net Sales - Cost of Goods = Gross Profit
45
Cost of Goods Sold (COGS)
| Two Methods
1. Perpetual Inventory System: Continuously Records Quantity and Cost of Goods Sold
2. Periodic Inventory System: Takes Inventory at End of Period
46
Inventory Accounting Methods
| 3 Types
1. First In First Out (FIFO)
2. Last In First Out (LIFO)
3. Weighted Average
47
Statement of Cash Flow
| Function
Provides information about an Enterprise's in/out flow of cash and current (cash) position.
48
Statement of Cash Flow
| The 3 Sections
1. Operating
2. Investing Activities (Fixed Assets & Marketable Securities)
3. Financing Activities (Borrowings & Paid-In/Draws)
49
Statement of Cash Flow
| 2 Methods
1. Direct (Uncommon)
| 2. Indirect
50
Statement of Cash Flow
| Indirect Method
Reconcile Net Income to Net Cash Operations
51
Statement of Cash Flow
| 3 Disclosures
1. Interest Paid
2. Taxes Paid
3. Non-Cash Transactions
52
Statement of Cash Flow
| 3 Areas of Manipulation
1. Net Income Modifications
2. Vendor Financing
3. Prepays: Treating Loans as Cash (Enron and Tyco)
53
Non-Cash Investing & Financing Activities
| 3 Examples
1. Converting Debt to Equity
2. Acquiring Assets by Assuming Liabilities
3. Entering a Lease to Acquire Capital Asset
54
3 Functional Differences between Lawyers & CPAs
1. CPA = Independent (Lawyer = Client's Advocate/Loyalty Duty)
2. CPA = Duties to Public (Lawyer = Duties only to Client)
3. CPA = No Work Product Immunity (Lawyers = Privileges)
55
AICPA
American Institute of Certified Public Accountants
- Administer the CPA Exam
- Functionally Similar to ABA
56
Sarbanes Oxley Act
1. Pertains Only to Publicly Traded Companies
2. Creates PCAOB (Public Company Accountant Oversight Board)
3. Expanded Financial Controls (extending even to Lawyers)
57
Auditor Permissions under Sarbanes Oxley
| 2 Permitted Services
1. Auditing Financial Statements
| 2. Preparing Tax Returns
58
Auditor Prohibitions under Sarbanes Oxley
| 8 Prohibited Services
1. Bookkeeping Services
2. Designing Financial Info Systems
3. Appraisal or Valuing Services, Fairness Opinions, Etc.
4. Actuarial Services
5. Internal Audit Outsourcing Services
6. Management or HR Functions
7. Broker/Dealer or Investment Advising
8. Legal Services
59
FASB
| Name/Status & 3 Functions
Financial Accounting Standards Board (Non-Governmental)
- Assists in Developing GAAP with AICPA
- Typically Reactive in Nature
- Serves a Broader Financial Community (e.g., Banks)
60
ASC
| Definition & Function
Account Standards Codification
| Source of GAAP Rules
61
GAAP vs. GAAS
Generally Accepted ACCOUNTING Procedures
Generally Accepted AUDITING Standards
62
APB
| Name & Function
Accounting Procedures Board
| -Precursor to FASB
63
GASB
| Name & Function
Government Accounting Standards Board
| -Priority Set of Standards for Governmental Entities
64
SEC & SAB
| 2 Points
Securities and Exchange Commission
- Publishes Staff Accounting Bulletins (SABs) (SEC's Standards)
- Addresses ACCOUNTING Standards
65
PCAOB
| 3 Points
Public Company Accounting Oversight Board
- Created by Sarbanes Oxley
- Concerns AUDITING Standards
- All CPAs Must Register with Board
66
Attorney Liability under Sarbanes Oxley
1. May Not Mislead CPA in a way that would render Statements Materially Misleading
2. Must Report Evidence of Material Violations of Securities Laws
67
Three Phases of Auditing
1. Planning
2. Implementation
3. Reporting
68
Phase 1 of Auditing
| 3 Planning Activities
1. Assess Internal Controls
2. Vouching (Determine if Data supports a randomly selected Transaction)
3. Tracing (Determine if Properly Procedure was Followed)
69
Phase 2 of Auditing
| 3 Implementation Activities
1. Establishing Auditing Plan (involves Statistical Sampling)
2. Develop Working Papers
3. Preliminary Materiality Judgment & Risk Assessment
70
Phase 3 of Auditing
| 2 Reporting Activities
1. Prepare Audit Report
| 2. Express Opinion in Report
71
Audited Financial Statements
| 5 Asserted Representations
1. Existence (of Assets & Liabilities)
2. Complete
3. Ownership (Represent Actual Rights or Liabilities)
4. Valuation (Correct Recordation)
5. Classification (Proper Categorization and Disclosure)
72
Independent Auditor
| SCOTUS Case
US v. Arthur Young: Auditors lack confidentiality privileges (unlike lawyers)
1. Auditors hold a position of Public Responsibility & Trust (Watchdogs)
2. Honest in Appearance
73
Four Types of Auditor Opinions
1. Clear or Unqualified Opinion (Nothing Amiss)
2. Qualified Opinion (Acceptable, Except X)
3. Adverse Opinion (Co. is Wrong)
4. Disclaimer (Lack of Info)
74
Degree of Audit Assurance
```
Reasonable Assurances (Not Absolute) that Statements are Free of Material Misstatements
-Designed to Close Expectation Gap
```
75
Auditor Liability to Shareholders
| 2 Possibilities
1. Complicit in Misstatements
| 2. Failure to Follow GAAS
76
```
Auditing Standards (10)
Three Basic Groups
```
1. General Standards
2. Standards of Fieldwork
3. Standards of Reporting
77
Auditing Standards
| 3 General Standards
1. Proficiency (Training/Skill)
2. Independence
3. Professional Care (& Skepticism)
78
Auditing Standards
| 3 Standards of Fieldwork
1. Plan & Supervise
2. Study & Evaluate
3. Obtain Competent Evidence
79
Auditing Standards
| 4 Standards of Reporting
1. Compliance with GAAP
2. Consistent
3. Informative Disclosures
4. Wholistic
80
6 Interest Rate Factors
1. Pure Rate of Interest
2. Inflation Risk
3. Inflation Premium
4. Maturity Premium
5. Default Premium
6. Illiquidity Premium
81
Compounding Interest Rate Formula
(1 + R)^n
R = Rate of Interest
N = Number of Periods
82
Annuity
| Definition & 2 Types
Sequence of Periodic and EQUAL Amounts
1. Ordinary Annuity (Annuity in Arrears): Payments made at End of Each Period
2. Annuity Due (Annuity in Advance): Payments made at Beginning of Each Period
83
Future Value
Determines how much an Amount today is worth in the future
84
Present Value
Determines the value of a future amount in present day dollars
85
Perpetual Annuity
Annuity Continues Indefinitely
| -Withdrawals from Earned Interest (Not Principal)
86
Calculating Market Value of Bonds
| 2 Rights & Calculation
1. Right to Periodic Interest Payments (Annuity)
2. Right to Repayment of Principal upon Maturity (Single Amount)
Value = PV of Interest Payments + PV of Principal
87
Bond Premium vs. Bond Discount
Market Rate < Stated Interest Rate = Premium
Stated Interest Rate < Market Rate = Discount
88
Three Analytical Procedures
1. Trend Analysis
2. Common-Sized Analysis
3. Financial Ratios (4)
89
Trend Analysis
Compares F/Ss for an Enterprise over Several Periods
90
Common-Sized Analysis
Reduces a F/S (eg, I/S or C/F) to a Series of Percentages
Then, Compare Base Percentages
91
Four Financial Ratios
| Purpose & 4 Ratio Types
Used to Assess Financial Health
1. Liquidity Ratio
2. Leverage Ratio
3. Activity Ratio
4. Profitability Ratio
92
Liquidity Ratios
| 3 Methods
1. Current Ratio = Capital Assets / Capital Liabilities
2. Working Capital = Capital Assets -- Capital Liabilities
3. Acid Test (Quick Assets: Short Term Analysis) = Cash + (Short Term) Investments + AR/Capital Liabilities
93
Leverage Ratios
| 3 Methods
1. Debt to Equity
2. Debt to Assets
3. Net Book Value (Owner's Equity to Common Shares Outstanding)
94
Activity Ratios
| 2 Methods
1. Receivable Turnover
| 2. Inventory Turnover
95
Working Capital
Excess of Current Assets Less Current Liabilities
96
Legal Capital System vs. Solvency Based System
| Relevance & Prevalence
Relates to Shareholder Equity and affects Distributions & Lending.
Legal Capital: Increasingly Uncommon
Solvency Based System: Growing Majority (Based on Model Business Corporation Act)
97
Legal Capital System
| 2 Features
1. Issued Shares Must Equal/Exceed Par Value
| 2. Restricts Ability to Distribute Assets to SHs
98
Restrictions on Distributions
| 5 Applicable Tests (Summary)
1. Surplus Test
2. Earned Surplus Test
3. Retained Earnings Test
4. Equity Insolvency Test
5. Balance Sheet Test
99
Distributions to Shareholders
Surplus Test
(Permissible Distribution)
Capital Surplus + Earned Surplus > Distribution
100
Distributions to Shareholders
Earned Surplus Test
(Permissible Distribution)
Earned Surplus > Distribution
*Earned Surplus = Retained Earnings
101
Distributions to Shareholders
Retained Earnings Test
(Permissible Distribution)
Retained Earnings > Distribution
*Retained Earnings = Earned Surplus
102
Distributions to Shareholders
Equity Insolvency Test
(Permissible Distribution)
Liquidity Based: Corporation must be able to pay its obligations as they become due.
Inability to Pay = Insolvent (Ineligible for Distribution)
103
Distributions to Shareholders
Balance Sheet Insolvency
(Permissible Distribution)
Assets >/= Liabilities
Eliminates the "Cushion" (Part of the Stated Capital Test)
104
Distributions to Shareholders
Asset Value Consideration
(Historical vs. Present Value Case)
For Distribution purposes, a court permitted using the current value of assets, but held that it had to be consistently applied.
Write Ups/Downs Were Permitted upon Distribution
(Randall v. Bailey)
105
Legal Document Drafting
Top Line vs. Bottom Line
Manipulatability
Bottom Line = More Susceptible to Manipulation
(Good for Controller)
Top Line = Less Susceptible to Manipulation
(Good for Non-Controller)
106
Revenue Recognition
| Requirement vs. 5 Improper Recognitions
Bona Fide transaction with an Outsider.
1. Fraudulent Transfers (No Intent to Re/Pay) (Lincoln Savings & American Solar King Cases)
2. Premature Delivery
3. Delivery to Warehouses
4. Retroactive Modifications (Backdating)
5. Consignment (Deceptive Deliveries)
107
The Five Illusions in Revenue Recognition
1. The Big Bath
2. Merger Madness
3. Cookie Jar Reserves
4. Immateriality (Individually Immaterial --> Collectively Material)
5. Premature Revenue Recognition
108
Exception to Bona Fide Transaction Requirement in Revenue Recognition
Two Circumstances
1. Passive Investments
| 2. Other Than Temporary Decline in Value (May or May Not be Permanent)
109
Contingent Liability vs. Unliquidated Liability
Possibility of Loss vs. Amount of Loss
CL: Uncertainty = Whether Loss Will Occur
UL: Loss Has Occurred, but Amount = Uncertain
110
Gain vs. Loss Contingencies
Gain: Unrecorded until Realized (Disclosure Permissible)
Loss Contingencies: Disclosure & Accrual (Where Applicable)
111
Reporting Contingencies on Statements
| 4 Part Overview
1. Qualifies as a Contingency?
2. Material?
3. Timing? (Affects Disclosure vs. Accrual)
4. Probability (Affects Disclosure vs. Accrual)
112
Accrual of a Contingency
| Two Pre-Conditions
1. Probable Impairment of an Asset
| 2. Reasonable Estimation of Loss
113
Disclosures
| 2 Occasions & 2 Elements in Disclosure
1. Prevent Misleading F/S
2. If either Probable Impairment or Reasonable Estimation is Unavailable (No Accrual, but Disclosure)
1. Nature of Contingency
2. Some Estimation of Loss
114
Unasserted Legal Claims or Assessments
| Disclosure 2 Part Requirement Analysis
Unnecessary, Unless:
1. Probable that Claim WILL Be Asserted, and
2. Reasonable Possibility of Unfavorable Outcome
115
Disclosure of Guarantees
Always
116
Asserted Legal Claims
Reporting Requirements Overview
(2 Prerequisites, 3 2-Part Outcomes)
1. Material
2. Timing (Or or Before Balance Sheet Date)
Unfavorable Outcome Possibilities
1. Probable (Estimate vs. None)
2. Reasonably Possible (Estimate v. None)
3. Remote (Estimate v. None)
117
Asserted Legal Claims
Probable Likelihood of Unfavorable Outcome
(2 Options)
1. Reasonable Estimate of Loss: Accrue & Disclose
| 2. No Reasonable Estimate: Disclose Contingency & Range of Possible Loss
118
Asserted Legal Claims
Reasonable Possibility Likelihood of Unfavorable Outcome
(2 Options)
1. Reasonable Estimate of Loss: Disclose
- No Accrual
2. No Reasonable Estimate: Disclose (including Range of Loss)
119
Asserted Legal Claims
Remote Likelihood of Unfavorable Outcome
(2 Options)
1. Reasonable Estimate of Loss: NEITHER
- Unless Guarantee (Recorded as a Liability)
2. No Reasonable Estimate: NEITHER
- Unless Guarantee (Above)
120
Auditor Inquiry Letters
| Lawyer's Opinion & Failure to Respond
Judgment of Outcome: If Unfavorable Outcome is Probable or Remote (EXTREME Doubt or Certainty Instances)
Failure to Respond --> Qualified Opinion
121
ABA v. Auditing Terminology
| Difference in Meaning: Remote & Probable
ABA = Smaller Extremes (More Middle Ground)
Auditing: Evenly Distributed (Thirds)
122
Accountant-Client Privilege
Federal: Non-Existent
States: Varies
Attorney Work Product Privilege may attach if Accountant prepares documents in preparation for Litigation (Deloitte Case)
123
Long Lived Assets
| Definition & 2 Types
Asset Benefiting Multiple Periods
1. Tangible Fixed Assets (PPE)
2. Intangibles (Patents, etc.)
124
Amortization vs. Depreciation
| Function & Distinction
Systematic and Rational Allocation of Cost over Periods
```
Amortization = Intangibles
Depreciation = Tangible
```
125
Asset or Expense?
| Five Considerations
1. Create a New Asset?
2. Restore Existing Asset to Original Condition?
3. Expense Yields Greater Productivity (Quality or Quantity)?
4. Extend Useful Life of an Asset?
5. Frequency of Recurrence?
126
Repairs vs. Capital Expenditures
Repairs: Maintain Existing Operations/Expectations
Capital Expenditure: Additions (Increases), Improvements (Substitutes), Replacements (Supplants)
127
3 Depreciation Methods
1. Straight Line
2. Group Method (Treating Multiple Items as a Collective Unit)
3. Accelerated Methods (Sum of the Years Digits or Declining Balance Methods)
128
Depreciation: Straight Line Method (& Modified Version)
Most Common Method
(Cost - Salvage Value)/Useful Life
If Values Change:
((Cost - Depreciation*) - Salvage)/Useful Life
*Depreciation Already Used (Previous Periods)
129
Sum of the Years' Digits
(Useful Life x (Useful Life + 1)/2)
----------------------------
(Years of Remaining Useful Life*)
*Inclusive (of Current Year)
Remaining Balance = Salvage
130
Declining & Double Declining Balance Methods
Cost/(Useful Life x %)
131
Intangibles: Expense vs. Capitalize
| Identifiable: Definite vs. Indefinite Life
Definite Life
- If Purchased: Capitalize & Amortize
- If Internally Developed: C&A OR Expense
Indefinite Life
- If Purchased: Capitalize & No Amortize
- If Internally Developed: Expense
132
Intangibles: Expense vs. Capitalize
| Unidentifiable Intangibles
If Purchased: Capitalize & NO Amortize
If Internally Developed: Expense
