WALL STREET PREP EXAM
(ACCOUNTING CRASH COURSE)
QUESTIONS AND CORRECT
ANSWERS 2024/2025.
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m the federal
ations
ompanies
he securities
EC
Financial
1. What is Accounting?: Accounting is the language of business; it is a standard set of rules for measuring a
company's financial perf...
WALL STREET PREP EXAM (ACCOUNTING CRASH COURSE ) QUESTIO NS AND CORRECT ANSWERS 2024/2025. m the federal ations ompanies he securities EC Financial 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 - fro government to non-profit organizations to small businesses to corpor We will discuss accounting rules as they pertain to publicly -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 Financial 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 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 out the function of codifying accounting standards on the behalf of the 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 with making 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 i t 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 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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