Accounting Concepts Flashcards

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.

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.