LO1: Describe the objective of financial reporting and identify the qualitative characteristics, conventions, and ethical considerations of accounting information. The objective of financial reporting is: To provide financial information that is useful in making decisions in assessing; Cash flow prospects, Stewardship. * Cash flow prospects: the information needed to make judgments about the entity's ability to generate cash flows. * Stewardship: the information about the company's assets, liabilities, owner's equity and any possible claims against these. To facilitate interpretation of accounting information, the FASB has established standards, or qualitative characteristics, by which to judge the information. * Relevance: the information has direct bearing on a decision.
Predictive Value: helps current and potential investors make future decisions.
Confirmative Value: determines if expectations have been met. * Faithful representation: report must be a reliable depiction of what it purports to represent.
Complete: all information necessary for a reliable decision.
Neutral: the absence of bias intended to attain a predetermined result or behavior.
Free from material error: meets a minimum level of accuracy. * Complimentary qualities:
Comparability: the quality that enables users to identify similarities and differences between 2 sets of economic phenomena.
Verifiability: the quality that helps assure users that the information faithfully represents what it purports to depict.
Timeliness: the quality that enables users to receive information in time to influencea decision.
Understandability: the quality that enables users to comprehend the meaning of the information they receive. LO2: Define and describe the conventions of consistency, full disclosure, materiality, conservatism and cost-benefit. * Consistency: once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs the users of a change in procedure. * Full disclosure: requires that financial statements present all the information relevant to users' understanding of the statements. * Materiality: refers to the relative importance of an item or event. (long term asset/expense) * Conservatism: when faced with choosing between 2 equally acceptable procedures, or estimates, accountants should choose the one that is least likely to overstate assets and income. * Cost-benefit: the benefits to be gained from providing accounting information should be greater than the costs of providing it.
LO3: Identify and describe the basic components of a classified balance sheet. Assets
1. Current assets: cash and other assets that can be converted to cash/sold within 1 year. 2. Investments: assets not used in normal business operations. 3. Property, plant, and equipment: tangible long-term assets used in business operations. 4. Intangible assets: long-term assets with no physical substance. Liabilities
1. Current liabilities: obligations that must be satisfied within one year. 2. Long-term liabilities: debts that fall due more than one year in the future. Owner's Equity
Owner's Equity, Capital and Net Worth are used interchangeably; has 3 forms. 1. Sole Proprietorship (M Cruz Capital)
2. Partnership (R Hay Capital; M Cruz Capital)
3. Corporation (Contributed Capital; Common Stock)
LO4: Describe the features of multistep and single-step classified income statements.
Multistep Income Statement
Net Sales: consists of the gross proceeds from sales less sales returns and allowances and discounts. (Sales - Sales ROA - Discounts)
Cost of Goods Sold: the amount a merchandiser paid for the merchandise it sold during an accounting period. (Beginning Inventory + (Net) Purchases - End Inventory)
Net Purchases: Purchases - Purchases ROA + Freight In
Gross Margin: also gross profit.
(Net Sales - COGS)...