What is Accounting?: Accounting is the language of business; it is a standardset 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 financ...
WALL STREET PREP
(ACCOUNTING CRASH COURSE )
EXAM QUESTIONS AND
CORRECT ANSWERS 2024/2025
GRADED A+.
,1. What is Accounting?: Accounting is the language of business; it is a standardset 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 financialperformance 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 - fro government to non-profit m the federal
organizations to small businesses to corporWe will discuss accounting rules as they pertain to ations
publicly-traded c ompanies
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 FinancialAccounting 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 Congressin 1934
Primary mission is "to protect investors and maintain the integrity of tmarkets"
Division of Corporate Finance oversees FASB he securities
6. An Overview of FASB: Established in 1973 as an independent body to carry outthe function of codifying accounting
standards on the behalf of the S EC
Composed of seven full-time members appointed for five years by theAccount Foundation (FAF) Financial
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 ofinternational 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" forthe foreseeable future; it is assumed
to remain in existence indefinitely
10. Assumption 3: Measurement: Financial statements can only show measurableactivities 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 interimreports
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' resourcesat 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 usehistorical 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
Revenue Recognition: Accrual basis of accounting dictates that revenues mustbe recorded when earned and measurable
2) Matching Principle: Under the matching principle, costs associated
a product must be recorded during the same period as revenue generated from thatproduct
with making
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
, 16. Why shouldn't a company record an expense when it actually buys the item?: According to the matching
principle, costs associated with the production ofthe product should be recorded in the same period as the revenue from the
product'ssale
17. US GAAP vs. IFRS Accrual Accounting:
18. Principle 4: Full Disclosure: Companies must reveal all relevant economicinformation that they determine to
make a difference to its users
Such disclosure should be accomplished in the following sections of companies'reports:
(1) Financial statements
(2) Notes to financial statements
(3) Supplementary information
19. Four Underlying Principles in Accounting: (1) Historical Cost
(2) Accrual Accounting: Revenue Recognition
(3) Accrual Accounting: Matching Principle
(4) Full Disclosure
20. Constraint 1: Estimates & Judgments: Certain measurements cannot be performed completely accurately, and
must therefore utilize conservative estimatesand judgments
21. Constraint 2: Materiality: Inclusion and disclosure of financial transactions in financial statements hinge on their
size and effect on the company performing themNote: Materiality varies across different entities
22. Constraint 3: Consistency: Each company has to prepare financial statementsusing measurement techniques and
assumptions which are consistent from one period to another
23. Constraint 4: Conservatism: Financial statements should be prepared with adownward measurement bias
Assets and revenues should not be overstated, while liabilities and expenses shouldnot be understated
24. Four Underlying Constraints in Accounting: (1) Estimates & judgments
(2) Materiality
(3) Consistency
(4) Conservatism
25. Summary of Accounting Assumptions, Principles, Constrain ts: Most im-
portant are the historical cost, revenue recognition, and matching pri nciples
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