Format
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Exam 1 Review
27 questions
Multiple choice
True/False
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http://fates.cns.muskingum.edu/~
plaube/acct301/default.htm
InvestmentInvestment-Credit Decisions
A Cash Flow Perspective
Accounting information should
help investors evaluate the
amount,
amount, timing,
timing, and uncertainty
of the enterprise’s future cash
flows.
Qualitative Characteristics Understandability
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Bring your own calculator!
The Conceptual Framework
(The key component)
n Maintain consistency
among standards.
n Resolve new accounting
problems.
n Provide user benefits.
Practical Constraints to Achieving
Desired Qualitative Characteristics
Decision Usefulness
Relevance
Predictive
Value
Feedback
Value
Comparability
Conservatism
Conservatism
Reliability
Timeliness
Verifiability
Neutrality
Representational
Faithfulness
Cost
Cost
Effectiveness
Effectiveness
Materiality
Materiality
Consistency
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Recognition and Measurement Concepts
Assumptions
Economic entity
Description
All economic events identified with a particular
economic entity.
Going concern
Business entity will continue to operate indefinitely.
Perodicity
Life of company is divided into time periods to provide
timely information.
Monetary unit
Financial statements are measured in U. S. Dollars.
Principles
Historical cost
Measurement based on exchange transaction amounts.
Realization
Revenue recognized when earnings process is complete
and reasonable certainty of collection exists.
Matching
Expenses recognized in same period as related revenue.
Full disclosure
Information that could change user decisions should be
included.
Ethics in Accounting
The Realization Principle
Two
Two conditions
conditions must
must be
be met
met ifif the
the
realization
realization principle
principle is
is to
to be
be satisfied.
satisfied.
Reasonable
Assurance of
Collection
Substantial
Completion of
Transaction
Or…Think of the Balance sheet
n To be useful, accounting
information must be objective
and reliable.
reliable.
n Management may be under
pressure to report desired
results and ignore or bend
existing rules.
CREDIT
DEBIT
Liabilities
Assets
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Remaining is Equity:
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(Expenses subtract from
Equity, so they are a
debit)
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Paid in Capital
(investment)
Retained Earnings
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Revenues – Expenses
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Gains/losses
Dividends
(left)
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Or…Think which Statement it’s on
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Balance Sheet – Snapshot in time
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Permanent accounts
n
n
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n
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Adjusting Entries
Assets
Liabilities
Paid in capital
Retained Earnings
Income Statement – Score sheet for
the period
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Temporary accounts
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n
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Revenues
Expenses
Gain/losses
Dividends, too
At the end of the period,
some transactions or
events remain
unrecorded.
Because of this, several
accounts in the ledger
need adjustments
before their balances
appear in the financial
statements.
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Temporary and Permanent
Accounts
Adjusting Entries
Revenues
Temporary
Accounts
Income
Summary
Transactions where
cash is paid or received
after a related expense
or revenue is
recognized.
Balance Sheet
Limitations:
Limitations:
nn Assets
Assets are
are
recorded
recorded at
at
historical
historicalcost,
cost,
NOT
at
market
NOT at market
value.
value.
nn Resources
Resources such
such
as
as employee
employee skills
skills
and
and reputation
reputation are
are
not
not recorded
recorded on
on
the
the balance
balancesheet.
sheet.
Will
Will be
be converted
converted
to
to cash
cash or
or
consumed
consumed within
within
one
year
or
one year orthe
the
operating
operating cycle,
cycle,
whichever
is
whichever is
longer.
longer.
Permanent
Accounts
The closing process applies
only to temporary accounts.
Balance Sheet forms
Usefulness:
Usefulness:
nn Provides
Provides aa
description
descriptionof
of
available
available
productive
productive
resources.
resources.
nn Liquidity
Liquidity
information.
information.
nn Long-term
Long
Long-term
solvency
solvency
information.
information.
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Classified
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Assets
Current
Current
Assets
Assets
Dividends
Transactions where
cash is paid or received
before a related
expense or revenue is
recognized.
Assets
Liabilities
Estimates
Expenses
Accruals
Shareholders’
Equity
Prepayments
(Deferrals)
Separates current and nonnon-current
assets and liabilities
NonNon-classified
Liabilities
Cash
Cash
Receivables
Receivables
Inventories
Inventories
Prepayments
Prepayments
Current
Current
Liabilities
Liabilities
Accounts
Accounts Payable
Payable
Notes
Notes Payable
Payable
Accrued
Liabilities
Accrued Liabilities
Current
Current Maturities
Maturities
of
of Long-Term
Long-Term Debt
Debt
Obligations
Obligations
expected
expected to
to be
be
satisfied
satisfied through
through
current
assets
current assets or
or
creation
creation of
of other
other
current
liabilities
current liabilities
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Shareholders’ Equity
Capital
Capital
Stock
Stock
Other
Other
Contributed
Contributed
Capital
Capital
Retained
Retained
Earnings
Earnings
Treasury
Treasury
Stock
Stock
Now, let’s look
at some ratios!
Accumulated
Accumulated Other
OtherComprehensive
Comprehensive Income
Income
Liquidity Ratios
Current assets
Current ratio =
Current liabilities
Measures a company’s ability to satisfy its
short-term liabilities
Financing Ratios
Total liabilities
Debt to equity
=
ratio
Shareholders’ equity
Indicates the extent of reliance on
creditors, rather than owners, in providing
resources
Quick assets
Acid-test ratio =
Current liabilities
Provides a more stringent indication of a
company’s ability to pay its current
liabilities
Times interest
=
earned ratio
Net income + Interest
expense + Taxes
Interest expense
Indicates the margin of safety provided to
creditors
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