Week #1 Flashcards
What is the cost principal?
Assets are valued at their
historical cost
Most aligned with Objectivity ( free from bias)
What are the different types of valuation
- Historical cost
- Sales value
- Replacement cost
- General price-level adjusted costs
What’s a Liability that doesn’t have the word payable in it?
“accrued salaries and related expenses”. Another common liability is referred to as deferred or unearned revenue
Deferred revenue is when a company receives money in advance of providing the goods or services and therefore they have a liability to provide these goods or services.
Explain Retained Earnings that appear in the Equity section of the Balance Sheet
The other component is referred to as retained earnings. This represents the accumulated earnings, that is the earnings that the company has had since its inception, less dividends that have been paid to the stockholders. Dividends are a distribution of earnings, and that only occurs when the board of directors decides to distribute the earnings.
What is Accurual Accounting?
Opposite of cash basis
Revenue is recognized when earned
* Delivery of goods
* Performance of service
Gross Margin
Net Sales - Cost of Goods Sold
What are direct vs indirect methods of calculating cash in the Statement of Cash Flows?
One is called the direct method. That method explicitly states where the cash came from and where the cash went to. It’ll say, “Cash received from customers.” It’ll say, “Cash paid to suppliers, “cash paid to employees for salaries.” However, this method is seldom used by US companies. Instead, a second method is most commonly used. It’s called the indirect method. The indirect method starts off with the company’s net income from the income statement, and it makes some adjustments to get to the cash flow from the operating activities.
Who does the Audits? What opinions can they have
CPA
unqualified opinion, and that just represents a clean opinion. Everything’s okay.
The second opinion is called a modified opinion, and that’s where the auditor takes exception to something.
A third possible opinion is the adverse opinion
Where do dividends payable appear?
Dividends that were declared but not yet paid are reported on the balance sheet under the heading current liabilities. Dividends on common stock are not reported on the income statement since they are not expenses.
What are the two types of businesses?
Proprietorship and Partnership
(owner same as business) unlimited liability, no taxation as a business
Corporation
- limited liability
-taxed as a business
What is Going Concern?
We presume that the company will continue to operate – that it’ll be ongoing
What is Materiality (assumption of business)
The only information that needs to be disclosed in financial statements is information
that will be useful for those who rely on the financial statements to make decisions.
