Wall Street Prep Accounting Crash Course Exam
1. What is Accounting?: Accounting is the language of business; it is a
standard set of rules for measuring a company's financial performance.
Assessing a company's financial performance is important for:
The firm's officers (managers and employees)...
1. What is Accounting?: Accounting is the language of business; it is a
standard set of rules for measuring a company's financial performance.
Assessing a company's financial performance is important for:
The firm's officers (managers and employees)
Investors
Lenders
General public
Standard financial statements serve as a "yardstick" of communicating
financial performance to the general public.
2. Why is Accounting Important?: Enables managers to make corporate
deci- sions
Enables the general public to make investment decisions
3. Who Uses Accounting?: Used by a variety of organizations - from the
federal
government to non-profit organizations to small businesses to ations
corpor We will discuss accounting rules as they pertain to publicly- ompanies
traded c
4. Accounting Regulations: Accounting attempts to standardize financial
informa- tion and follows rules and regulations
These rules are called Generally Accepted Accounting Principles (GAAP)
In the US, the Securities and Exchange Commision (SEC) authorizes the Financia
Accounting Standards Board (FASB) to determine accounting rules
,GAAP comes from the Statements of Financial Accounting Standards
(SFAS) issued by the FASB
5. An Overview of the SEC: A US federal agency established by the US
Congress in 1934 he securities
Primary mission is "to protect investors and maintain the integrity of t
markets"
Division of Corporate Finance oversees FASB
6. An Overview of FASB: Established in 1973 as an independent body to carry
EC
out the function of codifying accounting standards on the behalf of the Financial
S
Composed of seven full-time members appointed for five years by
the Account Foundation (FAF)
Decisions are influenced by:
7. International Financial Reporting Standards (IFRS): Over 100 countries, in-
cluding the EU, UK, Canada, Australia, and Russia, have adopted a unified set
of international accounting standards (IFRS)
Although we have seen unprecedented convergence over the last few years
be- tween US GAAP and IFRS, some differences remain
,8. Assumption 1: Accounting Entity: A company is considered a separate
"living" enterprise, apart from its owners
In other words, a corporation is a "fictional" being
9. Assumption 2: Going Concern: A company is considered a "going concern"
for the foreseeable future; it is assumed to remain in existence indefinitely
10. Assumption 3: Measurement: Financial statements can only show
measurable activities of a corporation such as its quantifiable resources, its
liability, amount of taxes it is facing, etc.
11. Assumption 4: Periodicity: Companies are required to file annual and
interim reports
In the US, quarterly and annual financial reports are required
An accounting year (fiscal year) is frequently aligned with the calendar year
12. Four Underlying Assumptions of Accounting: (1) Accounting Entity
(2) Going Concern
(3) Measurement
(4) Periodicity
13. Principle 1: Historical Cost: Financial statements report companies'
resources at an initial historical cost
Why?
Represents the easiest measurement method without a need for appraisal and
revaluation
Marking resources up to fair value allows for management discretion and
subjectivity, which US GAAP attempts to minimize by using historical cost
Note: IFRS allows you to write up the asset to fair value, but most companies
use historical value anyways
, 14. Principles 2 and 3: Accrual Accounting (Revenue Recognition and
Match- ing Principle): Governs the company's timing in recording its revenues
(i.e. sales) and associated expenses
2) Revenue Recognition: Accrual basis of accounting dictates that revenues
must be recorded when earned and measurable with making
3) Matching Principle: Under the matching principle, costs associated
a product must be recorded during the same period as revenue generated from
that product
Exercise Answer: 1) 1/4/15; 2) 1/4/15
15. Why can't companies immediately record these revenues and expenses?
: According to the revenue recognition principle, a company cannot record
revenue until that order is shipped to a customer (only then, is the revenue
actually earned) and collection from that customer is reasonably assured
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