What is the primary objective of accounting?
To measure income
What is the most authoritative set of accounting pronouncements?
The FASB Codification All pronouncements fall under the Codification umbrella
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus Managerial Accounting is not required to follow GAAP
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited Form 10Q - Quarterly and Reviewed
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company Does not make assessments of the economy
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit Materiality
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year Comparability - Company vs. Company
What are the Qualitative Characteristics of Financial Reporting?
Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Materiality - Could affect User Decisions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions
What are the Enhancing Qualitative Characteristics of Financial Reporting?
Comparability Verifiability Timeliness and Understandability Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
What is recognition in accounting?
When an item is recorded and included in the financial statements
Describe fair value with respect to an asset
The price you would receive if you sold the asset Assumes asset is at its highest and best value Assumes asset is sold at its most advantageous market to get the best price possible
What market assumptions are made in a fair value assessment?
Buyer and Seller are not Related Buyer and Seller are Knowledgeable Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M Buyer and Seller are both motivated to buy/sell
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices For example NYSE or NASDAQ
What items are included in a Level 2 valuation input?
Interest rates Prime rate
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts Lowest priority for valuation
What are acceptable valuation techniques for fair value?
Market approach - uses market transactions and prices to value the asset Income approach - uses present value discounts earnings Cost approach - uses replacement cost to value the asset
What are current assets?
Cash Inventory or Assets expected to be converted or consumed during a business' operating cycle Deferred Gross Profit on Installment Sales (Contra Asset) Receivables expected to be collected in 12 months or less
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
What is an accrued liability?
Expense that has been incurred but not paid Example: rents payable
What is a deferred revenue?
A type of current liability Payments that have been received but cannot be recorded as revenue yet Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens
When are revenues recognized?
When they have been earned; i.e. company has performed
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating
What is an operating cycle?
Average time it takes to turn materials or services into Cash
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
What is historical cost?
How much an asset cost - (net of depreciation and amortization)