Midterm Review Accounting
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. What would you like to do?
What would cause a company to change their internal accounting practice??
- The changes may have more
- closely matched other industry competitors, better supported new business
- process re-engineering and activity-based costing, or were the result of modernization within the company (conform to new tools/regulations maybe?)
What is the difference between lagging and leading indicators?
- Lagging indicators are the financial performance metrices (ROI, profitability, etc... and are backward facing...)
- Leading indicators are non-financial perforamce measures such as customer/employee satisfaction, brand loyalty, staff turnover, etc.
Explain the key issues in corporate governance as they relate to governance?
- Corporate governance
- essentially boils down to the system that keeps a company honest to (yet
- separately liable from) the shareholders.
- Accounting is one measure of how a board/company is doing.
· Measure financial performance.
· Compensation for executives/board often tied to financial performance (so becomes a question of how things are accounted for in some cases).
- · Compliance with external governing bodies (SOX or C-SOX) and the financial statements that are required
- (that now need to be personally certified by the executive)
Who are the groups involved in developing the accounting standards in the US (Enron)?
Accountants, FASBI, SCC, Senate, Congress, Lobbyists
Who is Joseph Berrindeno?
Managing partner of Arthur Anderson
Who is arthur levitt
Former chair of the SEC
Who is the whistle blower in the enron saga?
Sherron Watkins, former VP of corporate Development, worked for Arther Anderson Prior to Enron
Who appoints the chair of SEC? What is SEC?
SEC is the security and exchange commission.
The president of the united states of america appoints SEC.
Why would accountings firms be against the expensing of stock options, since it would not impact their own firms ( most accounting firms are partnerships and hence cannot grant stock options)?
- difficult to value for accurage records
- clients against it, lobbying on behalf of the clients
- calculating fair value can be difficult.
What is an audit of financial statements?
- Performed by an external
- organization/person (day-to-day accounting is usually done by someone within the company, no point in checking your own work)
· Strictest form of reporting.
- · Doesn’t look at every
- transaction, selects a representative sample.
- ·Does not guarantee no fraud due
- to above point.
- 4 outcomes: clean (or unqualified),
- denial (can’t trust these, bad news), subject-to (mostly fine except for these
- subjects), and auditor cannot express an opinion (records were destroyed)
Owner contributes cash... (record transaction)
Debit cash, credit liabilities
Busy equipment on credit... ... (record transaction)
Debit assets, credit accounts payable
What happens when there is an increase in revenue?
An increase in profit and increase equity
Buys equipment on credit ... (record transaction)
Asset would be debited; accounts payable credited
Takes out a loan from the bank ... (record transaction)
Cash be debited; liability (loan, or AP) credited
Sells goods on credit ... (record transaction)
Debit AR and credit Revenues not Received
Sell goods for cash ... (record transaction)
Debit Cash; credit revenue
Receive cash from goods that we sold on credit?
Cash debited; AR would be credited; Revenue not received would be credited, revenue would be debited
Pay cash for expenses
Credit cash; debit expenses
Pay cash to suppliers ... (record transaction)
Credit cash; Debiting AP
Receives cash from customers
Debit cash; credit revenue
Depreciate equipment ... (record transaction)
Equipment credited; debit accumulated appreciation;
What is a business entity?
- Business activities are
- separate from personal activities (eg sole proprietorship; accounting activities are separate from personal even though they’re legally the same in a sole proprietorship). Corporations exist to limit liabilities for investors, give the company indefinite life, allow managers to act on behalf of entity without assuming personal liability when
- signing contracts.
What is the accrual principle?
- · (as opposed to cash flow-based accounting which
- can distort results as accounting items are only recorded when the cash is
- spent/received). Recognizes that things
- like buildings are valuable over a long period of time and depreciate. Estimate the value of what gets created or
- used up whether it is cash or not. Cash
- may happen before (pre-paying insurance), during (sales), or after (cash on an
- account receivable). When should we
- recognize a revenue? Lots of accounting
- discussion around this question. In
- general: revenue recognition is:
- Goods or
- service received
- can be measured or estimated reasonably accurately (final price may depend on
- factors like performance of completed product)
- can be measured or estimated and have been incurred (need to remember to
- account for expenses like warranty)
- Cash or a
- reasonable promise of payment has been received
- = GREC
What is the matching principle?
- Match revenues with
- expenses incurred in the same period so that you can make economic decisions.
what is a going concern
- Not accounting’s job to
- figure out whether the company can continue to run, we just assume it will. Can have implications for things
- like accounts receivable (who would pay up if you were going bankrupt).
Consistency/comparability - what is meant by this?
Consistency is your policies are the same year over year; accounting policies don’t change willy-nilly. Comparability means that you use accepted methods of presenting information to competitors in the industry; auditors would question why you would be doing something different.
What is the Confirmative value?
- that helps determine whether expectations have been met. For example, the income statement provides
- information about whether the company met earnings expectations.
What is the predictive value?
Information that helps capital providers make decisions about the future. For example, the statement of cash flows can provide information about whether the company has sufficient funds to expand or if it needs to raisefunds from capital providers.
What is materiality?
- amount/information matters to decision makers; it is of sufficient magnitude
- that knowing or not knowing the information would (potentially) change the
- decision. For example, a $1mil
- estimation error may be material to a $10mil company, but not a $100bil
What happens when you record cost of goods sold?
COGS are debited; Inventory is credited
How do you calculate retained earnings?
Subtract all expenses from revenues; the balance is added to your retained earnings.
What would you like to do?
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