Intermediate Acct

Accouting information should be understandable to userd who have a reasonable knowledge of business and economic activites who are willing to study the information carefully

is the over all qualitative characteristic to use in judging the quality of accounting information

Accounting information is relevant if it can make a difference in a decision

Accouting information is reliable when it is reasonably free from erroe and bias and faithfully represents what it is intended to represent

of accouting information enables users to identify and explain similarities and differences between two or more sets of economic facts

• The nature of the item
• the relative size rather than the absolute size of an item

The entity assumption assumes that a proprietorship, partnership, or corporation's financial organizations in keeping its own financial records and reports

assumption that the company will continue to operate in the near future unless substantial evidence to the contrary exits. This assumption is also known as going concern

If there is a going concern book value of assets need to equal the fair market value. Recognize the loss when there is a going concern, not when we sell the asset

In accordance with the period of time assumption, a company prepares financial statements at the end of each year and includes them in it's annual report. The period of time assumption is the basis for the adjusting entry process at period end.

This assumption states that there must be some basis for measuring exchange of goods or services

Should the monetary unit not be stable we need to adjust financial statements

The exchange price is used in accounting records as the value of an item

can verify historical cost

the process of copnverting noncash resources and rights into cash or rights to cash

The process of formally recording and reporting an item in the financial statements of a company

Revenues are recognized when they are realized or realizable, or earned and collectibility is reasonably assured

states that to determine the income of a company for an accounting period, the company computes the total expenses involved in obtaining the revenues of the period and relates these total expenses to the total revenues recorded in the period

states that when alternative accounting valuations are equally possible, the accoutant should select the one that is least likely to over state assets and income in the current period

Don't overstate revenues and assets, Don't understate expenses and liabilities

Alwayus want to try to do it correctly but if we have to error we should choose a way that will put us in the worst position possible

Are the probable future economic benefits obtained and controlled by a company as a result of past transactions and events

company must be able to obtain the future benefit and control others access to it

Are the probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past trransactions and events

The owners' residual interest in the assets of a company that remains after deducting it's liabilities

is a financial statement that summarizes the financial position of a company on a particular date

Statement of financial position

a financial statement that summarizes the results of a company's operations for a period of time.

are inflows of assets of a company or settlemet of its liabilities buring a period from delivering or producing goods, rendering services or other activites that are the company's ongoing major or central operations. Revenues increase the equity of a company.

Are outflows of assets of a company or incurances of liabilities during a period from delivering of producing goods, rendering services of carrying out other activities that are teh companys ongoing major or central operations. Expenses decrease the Equity of the company

are increases in the equity of a company from peripheral or incidental transactions and from all other events and circumstances during a period, except those that result from the revenues or investments by owners

are decreases in the equity of a company from peripheral or incidental transactions are froma ll other events and circumstances during a period, except those that result from expenses of distribution to owners.

a financial statement that summarizes the cash inflows and outflows of a company for aperiod of time

always have the same number cash flow statements as income statements

Are the inflows and ouflows of cash from aquiring, selling and delievering goods for sale, as well as providing services

are the inflows and outflows of cash from aquiring and selling investments, property, plant and equipment as well as from lending money and collecting on loans

are the inflows and outflows of cash from obtaining reources from owners and paying them dividends, as well as obtaining and repaying resources from creditors on long term credit

summarizes the changes in a company's eruity for a period of time

ae increases in the equity of a company resulting from transfers of something valuable to the company in order to obtain or increase ownership interests

are decreases in the equity of a company caused by transfering assets, rendering services, or incurring liabilities

• record the daily transactions
• post the journal entries to the accounts in the ledger
• prepare and post adjusting journal entries
• prepare the financial statements
• prepare and post closing entries for revenue expense and dividend accounts

Cash is exchanged before the expense is used of the revenue is earned (prepayments)

Deferrals can be treated two ways, when we pay out the cash we can always credit the expense account as opposed to an asset

revenues are earned or expenses are incurred before the cash is exchanged

Have no initial transaction recorded

these should be made for any adjusting entry that creates a new balance sheet account

adjusting entries that increase a real account may be reversed, with the exception of Taxes payable

of an asset is the net amount of discounted future cash inflows less the discounted future cash outflows relating to the asset

is the price that a comany would recieve to sell an asset(or transfer a liability) in an orderly transaction between market participants on the date of measurement

• level 1: quoted price for an identical asset in active market
• level 2: adjusted quoted price (exit value) for similar asset
• level 3: unobservable inputs (present value of expected cash flows) - the company must also include the valuation method used listed below
• - market approach (identical or comparable assets or liabilities)
• - Income approach (present value)
• - cost approach (replacement cost) - company must use the

are cash and other assets that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer

• Include:
• cash
• cash equivalents - are risk free securities such as money market funds and treasury bills that will mature in 3 months or less from the date aquried by the holder
• Temporary investments in marketable securities - include debt and equity securities that are classified as "trading securites", "available for sale", and "held to maturity" securities
• receivables - accouts receivable and notes receiveable with short term maturity dates
• inventories - include goods held for resale in the normal couse of business plus in the case of a manufacturing company, raw materials and work in process inventory
• prepaid items - such as insurance, rent, office supplies, and taxes will not be converted in to cash but will be consumed

the average time taken by a company to spend cash for inventory... process and sell the inventory and collect the receiveables, converting them back into cash

• Accounts receivable - allowance for doubtful accounts
• amount that we think we can collect

are obligations of a company that it expects to liquidate by using current assets, or creating other current liabilities within one year or the normal operating cycle

current assets - current liabilities

investment items that management expects to hold for more than one year or the operating cycle

PPE that is not being used is reclassified to long term investments

intent to hold for greater than one year

Operational assets

tangible assets used in the firms operation

those noncurrent economic assets that a company uses in its operations but have no physical existence

patents, copyrights, franchises, trademarks, computer software costs, good will

If it has finite life, these will be amortized

Always as if it is still useful to the company, if not we write it off

What you pay extra over the fair value of the company

intangible assets that are not reported on the books

Deferred charges

occasionaly is used to report miscellaneous assets that may not be readily classiffied within one of the previous sections

ex: 5 years of insurance in advance

thos obligations of a company whose liquidations is not expected to require the use of current assets of not expected to create liabilities within one year of the normal operating cycle

is the residual interest of the stockholders in the assets of the corporation

• Components:
• Contributed capital
• Retained earnings
• Accumulated other comprehensive income (AOIC)

• unrealized increases or decreases in the fair value of investments in available for sale securities
• transaction adjustments from converting the financial statements of a company;s foreign operations in us dolars
• certain gains and losses on derivative financial instruments
• certain pension plan gains, losses, and prior service cost adjustments

the minimum amount of stockholders' equity that the corporation may not distribute dividends

par value*issued shares

cannot pay divedends on par value

The total amount of corporate net income that has not been distributed to stockholders as dividends

is one that occurs between a company's balance sheet date and the date of issuance of the annual report

If the subsequent even provides additional evidence about an estimate used ont he balance sheet date tgeb we want to restate and disclose in notes

If the subsequent event is a condition that did not exist on the balance sheet date, we leave it as it is and disclose

under this concept, a company records net assets at their historical cost and it does not record changess in the assets and liabilities unless a transaction, event or circumstance has occured that provides reliable evidence of a change in value

Net income = revenues - expenses +gains - losses

• 1. To help evaluate managements's past performance
• 2. to help predict the company's future income and cash flows
• 3. To help asses the company's "creditworthiness
• 4. to help in comparisons with other companies

1. Info about operating preformance reported seperately from other aspects

2. Presenting the results of significant activities or events that predict the amounts, timing, and uncertianty of its future income and cash flows

3. Providing information useful for assessing the return on investment

4. Providing feedback that enables users to assess their previous predictions of income and its components

5. Providing information about how effectively management has discharged its stewardship responsibilities regaurding the company's resources

1. Those items that are judged to be unusual in amount based on past experience should be reported seperately (helps us predict)

2. Revenues, expenses, gains and losses that are affected in different ways by changes in economic conditions should be distinguished from one another.

3. Sufficient detail should be given to help understand the primary relationships among revenues, expenses, gains, and losses

4. When the measurements of revenues, expenses, gains and losses are subject to different levels of reliability, they should be reported seperately

5. Items whose amounts must be known for the calculations of summary indicators(ex. rate of return) should be reported seperately

1. Association of Cause and Effect - cost of products sold and cales commissions

2. Systematic and Rational Allocation - depreciation and amortization

3. Immediate Recognition - period costs - salaries, utilities, loss contingency (warrenty expense)

• 1. Income from continuing operations
• - a. Sales Revenue (net)
• - b. Cost of Goods Sold
• - c. Gross Profit
• - d. Operating Expenses
• - e. Income from operations
• - f. other items
• - g. Income from continuing operations before tax
• - h. Income Tax expense related to continued operations
• - i. income from continuing operations

• 2. Results from discontinued operations
• - a. Income(loss) from operations of discontinued components (net of income taxes)
• - b. gain(loss) from disposals of discomtinued components (net of income taxes)

3. Extraoridinary items (net of Income taxes)

4. Net Income

5. Earnings per share

involves allocating a corporation's income tax obligation as an expense to various accounting periods because of temporary(timing) differences between its taxable income and pretax financial income

inbetween periods

deffered taxes are seperated from current taxes

involves allocation a corporation's total income tax expense for a period to the carious compnents of its net income, retained earnings, and other comprehensive income, if any

within the period

seperate out some tax numbers

The following have an effect on tax expense

1. Income from continuing operations

2. income from discontinued operations

3. Gain/loss on sale of discontinued component

4. Extraoridnary items

5. any items of comprehensive income

6. Prior period adjustments for retained earnings

A Company may decide to discontinue some of its operations and sell a component of these operations

may be a subsidiary and operating segment or an asset group

a component of a company involes operations and cash flows that can be clearly distinguished, opeationally and for financial repoting purposes from the rest of the company

the component has to be exiting the busniess

Connection with the component have to completely disappear

Gaap requires the following 6 criteria

• 1. Management has committed to a plan to sell the component
• 2. The component is available for immerdiate sale in itr present condition
• 3. Management has begun an active progam to locate a buyer
• 4. The ssale is probable within one year
• 5. The component is being offered for sale at a price that is reasonable in relation to components fair market value
• 6. It is unlikely that management will make significant changes to the plan

is an event or transactio that is both unusual in nature and infrequent occurance

Take off any insurance reimbursements on extrordinary items

The underlying event or transaction possesses a high degree of abnormality and is of a type clearly unrelated to or only incidentally related to, the ordinary and ypical activities of the company

the underlying event or transaction is of a type that is not reasonably expected to recur in the foreseeable future

the unusual nature criterion dpends upon the environment in which a company operates. An event may be inusual in nature for one company but not another

• 1. the write-off of receivables, inventories, equipment leased to others or intangible assets
• 2. gains or losses from exchanges or translation of foreign currencies
• 3. Gains or losses from te disposal of business components
• 4. Other gains or losses from the sale or abandonment of property plant or equipment
• 5. The effects of a strike
• 6. the adjustment of accruals on long-term contracts
• 7. the effects of a terrorist attack

• 1. Income from continuing operations
• 2. Results from dicontinued operations
• 3. Exraordinary items
• 4. Net income

• Will either have one, three, or four EPS reported
• 1 and 4 will be the same if there is no 2 or 3

Can be reported under three different alternatives

• - On the face of it's income statement
• - In a seperate statement of comprehensive income
• - in its statement of changes in stockholders equity

This includes Net income and Accumulated Other Comprehensive income

take the tax out seperately

• contributed capital
• retained earnings
• accumulate other comprehensive income

We had a sale of 100,000 that we ren't sure we are gonna collect, the goods cost 60,000 so we had a gross profit of 40,000

• The payees are going to make payments
• yr1 30,000 - record no revenue, becasuse we are still covering the COGS
• yr2 35,000 - record 5000 in revenue
• yr3 35,000 - record all in revenue

if the job is 20% complete and 20% of the costs have been incurred then we can recognize 20% of revenues

cannot do this if collectibility is not reasonably assured

benefits > costs

sold a car and you're not a car dealer

usually results in a gain or loss

If we haven't sold a component by the end of the yeat we need to do a test to see if the components assets are impaired

if BV >= fair market value - there is no impairment, report nothing beyond the results of the operations

• if BV<= fair market value - the components assets are impaired, and we can estimate the loss
• we need to recognize it net of tax

• reported as:
• impairment loss on held for sale component -net of tax benefit

• journal entry
• d: impairment loss 100,000
• c:assets 100,000

This only accounts for the change in the current year and in future years if the change affects both