Module 9A: Basic Theory and Financial Reporting - part 2

Question 1

Economic Entity Assumption

Answer 1

Economic activity can be identified with a particular unit of accountability. Note: However, you can define the entity at a higher level (e.g. Parent) or lower level (e.g. Subsidiary).

Question 2

Going Concern Assumption

Answer 2

The business enterprise will have a long life. The going concern assumption does not apply if liquidation of the business appears imminent.

Question 3

Assets

Answer 3

Probably future economic benefits controlled by a particular entity as a result of past transactions or events.

Question 4

Characteristics of Assets

Answer 4

1) Probably future benefit by contribution to future net cash inflows.
2) Entity can obtain and control access to benefit.
3) Transaction or event leading to control has already occurred.

Question 5

Liabilities

Answer 5

Probably future sacrifices of economic benefits, arising from present obligations of a particular entity that result from past transactions or events.

Question 6

Characterisitics of Liabilities

Answer 6

1) Legal, equitable, or constructive duty to transfer assets in future.
2) Little or no discretion to avoid future sacrifice.
3) Transaction or event obligating enterprise has already occurred.

Question 7

Equity

Answer 7

(Net Assets) is the owner’s residual interest in the assets of an entity that remains after deducting liabilities.

Question 8

Characteristics of Equity

Answer 8

1) The source of distributions by enterprise to its owners
2) No unconditional right to receive future transfer of assets; depends on future profitability
3) Inevitably affected by enterprise’s operations and circumstances affecting enterprise

Question 9

Revenues

Answer 9

Increases in assets or decreases in liabilities during a period from delivering goods, rendering services, or other activities constituting the entity’s major or central operations.

Question 10

Characteristics of Revenues

Answer 10

1) Accomplishments of the earnings process
2) Actual or expected cash inflows resulting from central operations
3) Inflows reported gross

Question 11

Expenses

Answer 11

Decreases in assets or increases in liabilities during a period from delivery of goods, rendering of services, or other activities constituting the entity’s major or central operations.

Question 12

Characterisitics of expenses

Answer 12

1) Sacrifices involved in carrying out earnings process
2) Actual or expected cash inflows resulting from central operations
3) Outflows reported gross

Question 13

Gains (losses)

Answer 13

increases (decreases) in equity from peripheral transactions of entity excluding revenues (expenses) and investment by owners (distribution to owners).

Question 14

Characteristics of gains and losses

Answer 14

1) Result from peripheral transactions and circumstances that may be beyond control
2) May be classified according to sources or as operating and non operating.
3) Change in equity reported net

Question 15

Investment by owners

Answer 15

increases in net assets resulting from transfers by other entities of something of value to obtain ownership.

Question 16

Distributions to owners

Answer 16

decreases in net assets resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners

Question 17

Multiple-Deliverable Revenue Arrangements

Answer 17

If an entity has revenue generating activities to provide multiple products or services at different times, the arrangement should be evaluated to determine if there are separate units being delivered.

Question 18

Milestone Method

Answer 18

used in accounting for research and development arrangements in which revenue (payments) to the vendor is contingent on achieving one or more substantive milestones related to deliverables or units of accounting.