MGA 301 Exam 1 Study Guide

Topics: Generally Accepted Accounting Principles, Revenue, Income statement Pages: 10 (2253 words) Published: December 2, 2013
Chapter 2
Conceptual Framework (Constitution for the Profession) - A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements Should enable the FASB to

develop a coherent set of standards and rules
solve new and emerging practical problems
Fundamental Qualities
Relevance – Relevant information is that which is capable of making a difference in a decision. To be relevant, information should have Predictive value: helps users form their own expectations about the future Confirmatory value: helps users confirm or correct prior expectations Materiality: omitting it or misstating it could influence decisions Faithful representation – means that the numbers and descriptions match what really existed or happened. Completeness: all the information that is necessary for faithful representation is provided. An omission leads to false or misleading info. Neutrality: a company cannot select information to favor one set of interested parties over another Free from error: will be a more accurate representation of a financial item Enhancing Qualities

Comparability – Information has been measured and reported in a similar manner for different enterprises. Verifiability – Similar results are obtained even though different people make the measurements. Timeliness – Information is available at the time it is needed. Understandability – information contents and significance should be understandable. Assumptions

Economic Entity – an entity for which you’re making financial disclosure can be identified with a particular unit of accountability Going Concern – an entity for which you’re making financial disclosure will have an indefinite life. Monetary Unit – money is the common denominator of economic activity. Periodicity – the economic activities of an enterprise can be divided into artificial time periods. Principles

Measurement Principle (Historical Cost Principle and Fair Value Principle): Most assets & liabilities are accounted for and reported on the basis of acquisition price. Fair value option Revenue Recognition Principle: Revenue is recognized when it is realized or realizable, and earned: generally at the point of sale  Ch. 18 Expense Recognition Principle (Matching Principle): The recognition of efforts (expenses) should match with their accomplishment (revenues). Full Disclosure Principle: providing any material (sufficiently important to influence the judgment and decisions of an informed user) information. Constraints

Cost Constraint (Cost-Benefit Relationship) – the costs of providing the information must be weighed against the benefits that can be derived from using the information. Conservatism – when in doubt, and when equally acceptable accounting methods are available, the method that is least likely to overstate income and assets should be chosen.   Chapter 3

Basic Equation
Assets = Liabilities + Stockholders’ Equity
Left side represents the financial resources of enterprise
Right side depicts means by which resources were financed

Double-entry Accounting System
It is the system for recording equal debits and credits for every transaction logical method for recording transactions
means of checking the accuracy of recorded amounts
Retained Earnings by Year N (Method 1)
All rev. up to year N – all exp. up to year N – all div. up to year N Basic Terminology
Event
The source/cause of a change in assets, liabilities and equity Events may be external or internal
Transaction
An external event involving a transfer or exchange between two or more entities Account: A summary of the transactions for each type of asset, liability and equity item (e.g. T account) Permanent (real) account

All B/S accounts are permanent accounts except distribution accounts (e.g. Dividend account is a temporary account) Permanent accounts are not closed at year-end. The...
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