Financial Accounting Midterm Review
What should you know about Financial Accounting? 1. How to measure assets? How to present assets?
*Assets are economic resources owned or controlled by the company and can be measured by dollars.
*Measure assets by the Principle of Historical Cost.
*The cost of asset includes all expenditures that make that asset in place and ready for use. * Present assets in the Balance Sheet by the rank of liquidity.
2. How to measure profits? How to present profits?
* Operating Profit = Revenue - Expenses
* Revenue Recognition principle and Expense Matching Principle help us determine the (operating) profit (or, be more specific, the operating profit of each reporting period).
* Profits are reported in the Income Statement, structured as a multi-layered cake.
* There are at least three different kinds of profits: (core) operating profit; gains/losses; and extraordinary items.
3. The accounting assumptions involved in asset measuring and profit recognition.
(1) Separate Entity; (2) Monetary-unit; (3) Time-period; (4) Going concern
4. Who determines the accounting principles? Who has the final say on them?
* The Financial Accounting Standards Board (FASB) determines the accounting principles.
* The Securities and Exchange Commission (SEC) has the final authority over these principles.
5. What are accruals? What are deferrals?
* Accruals: transactions in which action occurs before the cash movement (Payables, Receivables)
* Deferrals: : transactions in which cash movement occurs before the action ( Prepaid items; Unearned Revenue)
6. When should some expenditure be capitalized, expensed?
* An expenditure will be capitalized (being treated as an asset) if it can benefit the business for multiple periods.
* A capitalized expenditure will be amortized into future expenses.
Exercise 1: Analyzing Transactions and Preparing Financial Statements
Transaction Description of Tom’s Wear in 2008 January:
T1:
*Assets are economic resources owned or controlled by the company and can be measured by dollars.
*Measure assets by the Principle of Historical Cost.
*The cost of asset includes all expenditures that make that asset in place and ready for use. * Present assets in the Balance Sheet by the rank of liquidity.
2. How to measure profits? How to present profits?
* Operating Profit = Revenue - Expenses
* Revenue Recognition principle and Expense Matching Principle help us determine the (operating) profit (or, be more specific, the operating profit of each reporting period).
* Profits are reported in the Income Statement, structured as a multi-layered cake.
* There are at least three different kinds of profits: (core) operating profit; gains/losses; and extraordinary items.
3. The accounting assumptions involved in asset measuring and profit recognition.
(1) Separate Entity; (2) Monetary-unit; (3) Time-period; (4) Going concern
4. Who determines the accounting principles? Who has the final say on them?
* The Financial Accounting Standards Board (FASB) determines the accounting principles.
* The Securities and Exchange Commission (SEC) has the final authority over these principles.
5. What are accruals? What are deferrals?
* Accruals: transactions in which action occurs before the cash movement (Payables, Receivables)
* Deferrals: : transactions in which cash movement occurs before the action ( Prepaid items; Unearned Revenue)
6. When should some expenditure be capitalized, expensed?
* An expenditure will be capitalized (being treated as an asset) if it can benefit the business for multiple periods.
* A capitalized expenditure will be amortized into future expenses.
Exercise 1: Analyzing Transactions and Preparing Financial Statements
Transaction Description of Tom’s Wear in 2008 January:
T1: