Accounting Concepts Flashcards

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Questions and Answers

What is a change in estimates?

Only show current and future effect; do not show prior prospective effect.

What does a change in principle involve?

Restate past retrospective prior period amounts in notes.

What must be disclosed in accounting changes?

Accounting changes are allowed but must be disclosed to readers.

A past accounting error is a __________.

prior-period adjustment Signup and view all the answers

A past accounting error is shown on the income statement.

False Signup and view all the answers

How is the retained earnings balance affected?

It is corrected for errors. Signup and view all the answers

Match the following terms with their definitions:

Deferred Tax = Long term liability Tax Payable = Current liability Signup and view all the answers

If tax payable is greater than tax expense, you have an asset.

True Signup and view all the answers

What is fraud in accounting?

Recognizing revenue too early and expenses too late. Signup and view all the answers

What constitutes extraordinary gains and losses?

An unusual event that is infrequent. Signup and view all the answers

What is most popular with Wall Street?

Net income and quality earnings per share. Signup and view all the answers

Who is responsible for the accuracy of financial statements?

Management. Signup and view all the answers

What is comprehensive income?

Net income plus unrealized gains/losses on available for sale securities and foreign currency transaction adjustments. Signup and view all the answers

What is an auditor's opinion?

It indicates if financial statements appear reliable and follow GAAP rules. Signup and view all the answers

What does an unqualified opinion indicate?

A clean, perfect opinion that financial statements are reliable. Signup and view all the answers

What does a qualified opinion signal?

Reliable except for one or more small exceptions. Signup and view all the answers

What does an adverse opinion mean?

Unreliable. Signup and view all the answers

What does a disclaimer of opinion indicate?

No opinion. Signup and view all the answers

What is income from continuing operations used for?

To predict future earnings. Signup and view all the answers

Gain or loss on disposal of a business is part of __________.

discontinued operations Signup and view all the answers

What is restructuring classified as?

Regular 'other gains and losses' and not extraordinary. Signup and view all the answers

What does selling equipment at a loss indicate?

Regular 'other gains and losses' and not extraordinary. Signup and view all the answers

What must changes in principle report?

Restate prior years' financial statements and report past and current income statement effects. Signup and view all the answers

What do changes in estimates require?

Report current income statement effects; no past period restatement needed. Signup and view all the answers

What is a foreign-currency transaction's impact on the income statement?

Reports the net amount of two accounts as other revenues/gains or other expenses/losses. Signup and view all the answers

What must a US company with a foreign subsidiary do?

Consolidate the subsidiary's financial statements into its own statements. Signup and view all the answers

According to GAAP, when are revenues and expenses to be recognized?

Revenue recognition when shipped or performed; expense matching when asset is used. Signup and view all the answers

What affects both revenue recognition and expense matching?

Changes to the balance sheet. Signup and view all the answers

What is revenue recognition?

It must be shipped or performed, reasonably assured, and measurable. Signup and view all the answers

What does US GAAP state about revenues?

Revenues are considered earned when the entity has substantially accomplished what it must do. Signup and view all the answers

What are all decision models in modern corporate finance based on?

Future cash flows. Signup and view all the answers

What does a multi-step income statement accomplish?

Separates transitory income items from those believed to be sustainable. Signup and view all the answers

What are non-recurring items?

Overestimate future income - gains; underestimate future income - losses. Signup and view all the answers

What are expenses in accounting?

Expired costs. Signup and view all the answers

What does FASB state about financial reporting?

It should provide information to help assess prospective net future cash inflows. Signup and view all the answers

What must be disclosed about discontinued operations?

Operating income/loss from the beginning date to disposal date and gain or loss from this disposal. Signup and view all the answers

What do balance sheets represent?

Capital structure and long-term solvency. Signup and view all the answers

What are deferred income taxes?

Taxes paid by the company to the government, recognized for tax purposes but deferred for financial reporting. Signup and view all the answers

What are three important notes typically found in companies' financial reports?

Summary of significant accounting policies, subsequent events, and related-party transactions. Signup and view all the answers

What is a subsequent events footnote?

Events affecting the company occurring after fiscal year-end but before financial statements are issued. Signup and view all the answers

When a company changes from LIFO to another inventory method, how is the change reported?

As a retroactive adjustment. Signup and view all the answers

Why must adjusting entries be made?

Because certain events will not be recorded in the accounts without them. Signup and view all the answers

Why are income statements classified into sections?

To distinguish between sustainable and transitory income. Signup and view all the answers

If a material event is unusual in nature or an infrequent occurrence, how is it classified on the income statement?

As a special item in continuing operations. Signup and view all the answers

How are current liabilities reported on the balance sheet?

At historical cost. Signup and view all the answers

How is long-term debt reported on the balance sheet?

At discounted present value. Signup and view all the answers

Which equation explains why successive balance sheets can be used to prepare a firm's cash flow statement?

Δcash = Δliabilities - Δnoncash assets + Δstockholders equity. Signup and view all the answers

Under both US GAAP and IFRS, which item is reported separately in the income statement, net of tax?

Discontinued operations. Signup and view all the answers

In a statement of cash flows prepared under IFRS, how is interest paid categorized?

As operating cash flow or financing cash flow. Signup and view all the answers

Which item is included in the determination of income from continuing operations?

Unusual loss from a write-down of inventory. Signup and view all the answers

In a multiple-step income statement for a retail company, which item is excluded from the operating section?

Dividend revenue. Signup and view all the answers

How are extraordinary items reported?

Summarized as total gains/losses and then offset to present the net extraordinary gain or loss. Signup and view all the answers

What does operating involve?

Running the business, including losses, gains, and all interest in or out. Signup and view all the answers

What does investing in accounting entail?

Cash from investments, property, plant, equipment, and securities. Signup and view all the answers

What does financing involve?

Raising money, common stock, notes, bonds, loans, and paying dividends. Signup and view all the answers

What does the indirect method focus on?

Differences between net income and net cash flow from operating activities. Signup and view all the answers

What does the direct method show?

Operating cash receipts and payments. Signup and view all the answers

Study Notes

Accounting Terminology and Concepts

Change in Estimates: Affects only current and future financial statements; prior effects are not reported.
Change in Principle: Requires restatement of prior periods' financial statements in notes, impacting reported income.
Accounting Changes: Allowed but must be disclosed to readers to ensure transparency.
Past Accounting Error: Known as a prior-period adjustment, cumulative effects are shown on retained earnings.
Prior Period Adjustment: Not reflected on the income statement, but adjusts retained earnings.
Retained Earnings: Corrected to account for any past errors affecting their balance.
Deferred Taxes: Considered long-term liabilities; tax payable categorizes as current liabilities.
Tax Payable vs. Tax Expense: If tax payable exceeds tax expense, it indicates the presence of an asset.

Fraud and Financial Reporting

Fraud: Involves premature revenue recognition and delayed expense recording leading to misrepresentation of financial health.
Extraordinary Gains and Losses: Must be both unusual and infrequent; they cannot be regular occurrences.

Financial Statement Analysis

Key Financial Metrics: Net income and quality earnings per share are crucial for investors.
Management Responsibility: Management holds the accountability for the accuracy of financial statements.

Comprehensive Income

Comprehensive Income: Includes net income and unrealized gains/losses, with specific adjustments for foreign currency transactions; reported after net income.

Auditor's Opinion Types

Unqualified Opinion: Indicates reliability of financial statements.
Qualified Opinion: Reliable except for specific minor exceptions.
Adverse Opinion: Indicates unreliability of financials.
Disclaim: No opinion is rendered on the financial statements.

Operating Forecasts and Discontinued Operations

Income from Continuing Operations: Useful for predicting future earnings.
Gain or Loss on Disposal of Business: Classified under discontinued operations and reported net of tax effects.

Restructuring and Gains/Losses

Restructuring: Regular gains and losses categorized distinctly, not labeled as extraordinary.
Selling Equipment at a Loss: Treated as regular other gains and losses.

Inventory Changes

Changes in Principle: Must restate previous years' financials and report both past and current income statement effects, particularly for inventory methods like FIFO and LIFO.
Changes in Estimates: Only current income statement effects are reported, without restating past periods.

Currency Transactions and Consolidation

Foreign-Currency Transactions: Reported as other revenues/gains or expenses/losses on the income statement.
Consolidation: US companies with foreign subsidiaries are required to consolidate these financial statements into their own for public reporting.

Revenue and Expense Recognition

Revenue Recognition and Expense Matching: Follow a two-step process ensuring that revenues and expenses are reported accurately and in alignment with related activities.
Revenue Recognition Criteria: Revenues are recognized when shipped or services are performed, with reasonable assurance of collection.

Financial Reporting Standards

US GAAP Guidelines: Emphasizes that revenues are earned once related tasks are completed, and realization occurs when assets can convert to cash.
Important Financial Notes: Include significant accounting policies, subsequent events, and related-party transactions.

Financial Statement Adjustments

Discontinued Operations Disclosure: Requires disclosure of operating income/loss from beginning to disposal and any gains/losses from disposal.
Adjusting Entries Necessity: Essential for recording events that would otherwise go uncounted in financial accounts.

Financial Position and Cash Flow

Balance Sheets: Offer insight into capital structure and long-term solvency.
Deferred Income Taxes: Reflect tax liabilities recognized for prior periods but not yet acknowledged for financial reporting.
Cash Flow Statement Preparation: Successive balance sheets aid in creating cash flow statements through changes in assets, liabilities, and equity.

Income Statement Classifications

Operating Section of Income Statements: Distinguishes sustainable income from transitory items.
Classification of Unusual Items: Materials events that are either unusual or infrequent appear as special items in continuing operations.

Reporting Methods

Direct Method: Reflects actual cash receipts and payments, transitioning cash flow from an accrual basis to a cash basis.
Indirect Method: Focuses on discrepancies between net income and net cash flow from operating activities.

Additional Notes

Long-term Debt Reporting: Reflects discounted present value on balance sheets.
Material Events: Classified as special items if unusual or infrequent in nature.

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Description

Explore essential accounting concepts through our flashcards. This quiz covers critical topics including changes in estimates and principles, as well as how to address past accounting errors. Perfect for accounting students looking to reinforce their understanding.