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48 Cards in this Set
- Front
- Back
Accounting Principles
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-The Conceptual Framework of Accoutning
-Assumptions -Principles -Constraints in Accounting -Statement Presentation and Analyses |
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The Conceptual Framework of Accounting
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-Objectives of reporting
-Qualitative Characteristsics -Elements of Financial Statements -Operating Guidelines |
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Assumptions
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-Monetary Unit
-Economic Entity -Time Period -Going Concern |
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Principles
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-Revenue Recognition
-Matching -Full Disclosure -Cost |
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Constraints in Accounting
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-Materiality
-Conservatism -Summary of Conceptual Framework |
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Statement Presentation and Analyses
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-Classified Balance Sheet
-Classified Income Statement -Analyzing Financial Statements -An International Perspective |
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GAAP
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Generally Accepted Accounting Principles
-Standards set by the SEC and FASB |
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FASB Conceptual Framework
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-Objectives of Financial Reporting
-Qualitative Characteristics of Accounting Information -Elements of Financial Statements -Operating Guidelines (assumptions, principles and constraints) |
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Objectives of Financial Reporting
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Must be:
-Useful to those making investment and credit decisions -helpful in assessing future cash flows -identifies assets and liabilities and the changes in those resources and claims |
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Qualitative Characteristics of Accounting Information
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-Relevance
-Reliability -Comparability -Consistency |
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Relevance
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to have relevance the information must have:
-predictive value (forecasts future events) -feedback value (confirms or corrects expectations) -timely(must be available before it loses it's value) |
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Reliablility
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-verifiable
-faithful representation -neutral |
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Comparability
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Through the use of the same methods of accounting comparisons are able to be made across companies
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Consistency
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The company uses the same methods (lifo, fifo, average) from year to year
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Elements of Financial Statements
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Assets, Liabilties, Equity, Revenue, Expenses
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Operating Guidelines
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-Assumptions
-Principles -Constraints |
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Assumptions
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-Monetary Unit
-Economic Entity -Time Period -Going Concern |
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Principles
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-Revenue Recognition
-Matching -Full Disclosure -Cost |
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Constraints
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-Materiality
-Conservatism |
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Monetary Unit Assumption
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Only transaction data that can be expressed in terms of money be included in the accounting records
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Economic Entity Assumption
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Activities of the entity be kept separate from the economic activities of the owner and all other economic entities.
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Time Period Assumption
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The economic life of a business can be divided into artificial time periods
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Going Concern Assumption
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The enterprise will continue in operation long enough to carry out its existing objectives
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Revenue Recognition Principle
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Revenue is recognized in the period in which it is earned
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Matching Principle (Expense Recognition)
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Expenses are matched with revenue in the period in which efforts are made to generate revenues
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costs
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source of expenses
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expired costs
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Costs that will generate revenue only in the current accounting period-advertising, sales, salaries and repairs
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unexpired costs
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costs that will generate income in future accounting periods-merchanidise inventory, prepaid expenses, plant assets-assets whose benefits decrease over time
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Full Disclosure Principle
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Circumstances and events that make a difference to financial statement users be disclosed
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Cost Principle
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Assets are recorded at their cost
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Materiality Constraint
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an items impact on a firm's overall financial condition and operations (what is expensed immediately and what depreciates over time) For small amounts GAAP does not have to be followed.
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Conservatisim Constraint
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when in doubt use the method that will be least likely to overstate assets and income (lower of cost or market method, lifo
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Classified Balance Sheet
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Assets
-current assets -long term investment -property, plant and equipment -intangible assets Liabilities and Stockholders Equity -current liabilities -long-term liabilities -stockholder's equity |
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Classified Income Statement
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-Sales Revenue section
-Cost of Goods (merchandise) Sold -Operating Expenses -Other Revenues and Gains -Other Expenses and Losses -Income Tax Expense -Earnings per Share |
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Income Tax Expense
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has own section on the income statement before net income
ledger: Income tax expense 46,800 Income Tax Payable 46,800 (to record income taxes for 2006) income statement: Income before income taxes 156,000 Income Tax Expense 46,800 |
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Earnings per Share
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the net income earned by each share of outstanding common stock
net income ÷ # of common shares outstanding = earnings per share reported below net income on the income statement: net income 109,200 earnings per Share 2.00 |
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Analyzing Financial Statements
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Evaluate:
Liquidity Profitability Solvency |
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Measuring Liquidity
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Current Ratio
Working Capital |
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Current Ratio
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a companies ability to pay obligations and meet unexpected needs
assessed by analyzing the current ratio to determine liquidity: curent assets÷current liabilities=current ratio (ideal 2:1) |
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Working Capital
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indicates the companies ability to meet its existing current obligations
current assets - current liabilities = working capital |
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Profitability
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measures the income or operating success of an enterprise for a given period of time.
measured with: -Profit Margin Percentage -Return on Assets -Return on Common Stockholder's Equity |
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Profit Margin Percentage
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The percentage of each dollar of sales that results in net income
net income ÷ net sales = profit margin percentage |
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Return on Assets
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a tool for investors to determine expectations and risks associated with the investment
net income÷total assets = rate of return |
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Return on Common Stockholder's Equity
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measures profitability from stockholder's perspective
net income÷stockholders equity=return on common stockholder's equity |
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Solvency
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measures the ability of an enterprise to survive over a long period of time with debt to total assets
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Debt to Total Assets Ratio
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total debts÷total assets = debt to total assets ratio
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Multinational Corporation
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A firm that conducts operations in more than one country
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IASB
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International Accounting Standards Board
working towards gloabl standards of accounting principles |