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Acct Theory- Mod 1 Flashcards

1
Q

What is the main concept of Module 1

A

Accounting under ideal conditions

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2
Q

What was the first company with limited liability shares that were transferable and traded?

A

Dutch East India Company

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3
Q

Why do we use the term “Generally Accepted” in GAAP?

A

Because not everyone will agree 100% but in general everyone can get behind them

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4
Q

What is the difference between relevant and reliable?

A

Relevant means that it is more likely to sway a decision. Reliable means that it is more accurate

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5
Q

What is representational faithfullness?

A

Verifiable
Neutral
Faithfully Represented

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6
Q

What is the CBCA act?

A

Canadian Business Corporations Act

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7
Q

Describe in general terms what happened during the 1990’s high tech collapse

A

Financial reporting irregularities

Premature recognition of revenue

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8
Q

Describe in general terms what happened to Enron

A

They used SPE’s to hide debt off balance sheet

Enron didn’t control SPE’s but their senior management did

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9
Q

Describe in general terms what happened to Worldcom

A

Overstated earnings by capitalizing maintenance costs that should have been expensed when incurred

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10
Q

What is the SOX act and what did it do?

A

Sarbanes-Oxley act
Tightened the functions of auditors and what non-audit services that they can perform
Off balance sheet items must be disclosed
SPE’s must be consolidated

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11
Q

What is the CPAB in Canada?

A

Canadian Public Audit Board

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12
Q

Describe in general terms what happened during the 2008 financial meltdown

A

ABS’s were used to package normal mortgages with risky mortgages to hide the risk. These ABS’s were then insured. Once people started to default, they couldn’t figure out a value for the ABS’s and the losses were so large that the insurance companies couldn’t pay out

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13
Q

What is an ABS

A

Asset Backed Security

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14
Q

What is an Expected Loss Note?

A

Essentially the insurance taken out on the ABS’s

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15
Q

What is value in use and when is it used?

A

It is the NPV of cash flows of the item. It is used when there isn’t an available market to determine value

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16
Q

What type of accounting measurement system does Canada currently use? Describe it.

A

Mixed Measurement System
Primarily historical cost but impairment tests are generally done at current value.

So it is basically some historical cost and some fair value

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17
Q

Is historical cost reliable or relevant?

A

Reliable

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18
Q

Is Fair Value reliable or relevant?

A

Relevant

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19
Q

What is another term for Relevant?

A

Representational Faithfullness

20
Q

Describe the current value measurement system

A

Uses value in use and fair value

Usually uses discounted cash flows

21
Q

What is the concept of Fair Value?

A

The amount that would be received or paid if the item was disposed of

22
Q

What is Decision Useful?

A

Information should be useful in decision making

23
Q

What is Efficient Contracting?

A

Contracts that firms enter into that create demand for accounting information. Ex. Debt Covenants

24
Q

Describe the concept of conservatism

A

Recognize unrealized loss immediately

Don’t recognize un-realized gains until realized

25
Which is more rules based: IFRS/ASPE or US GAAP?
US GAAP is more rule based | IFRS/ASPE is more principle based
26
What does AcSB stand for? And what do they do?
The Canadian Accounting Standards Board | The "Canadianize" IASB rules
27
What do we mean by Relevant information?
Information helps users make predictions about the outcome of events Also helps to confirm expectations
28
What are some risks associated with Current Value Accounting?
When markets are not readily available, current values are subject to bias and manipulation from managers
29
What are some examples of compromise between relevance and Representational Faithfulness?
OCI ASPE Pension Accounting in NFP
30
What is information Asymmetry?
Some parties have an information advantage over others or may take actions that are unobservable to others
31
What are the 2 types of Information Asymmetry? Describe each
Adverse Selection Insiders making decisions that will benefit them at the expense of outsiders Moral Hazard One party takes actions that are unobservable to other parties (what happens when no one is looking)
32
What is meant by Ideal Conditions?
Perfect and complete markets No information asymmetry No barriers to fair and effecient market operation
33
What is Estimation Risk?
The difference between the truth and the available truth
34
Under ideal conditions, how many interest rates does an economy have?
One
35
What is an asset worth in Ideal Conditions?
What people will pay for it
36
What is "Ideal Conditions Under UNCertainty"
Given a fixed interest rate All possible states are known Probablilities of states are known Everyone knows which state has occured
37
What must probabilities always add up to?
1
38
What is RRA?
Reserve Recognition Accounting | "How much oil is in the ground"
39
What are the 4 Generally Accepted Frameworks for Accounting?
IFRS ASPE Accounting Standards for NFP Pension Plans
40
Generally speaking, who are the main users of financial statements?
Investors
41
What are investors looking for in financial statements?
They want to see relevant information that allows them to predict future earnings. They want to know when is the best time to sell to earn a profit.
42
Who are the primary users of financial statements using IFRS?
Shareholders
43
Who are the primary users of financial statements using ASPE?
Owners/Managers | Banks (to know if they will get their money back)
44
Under which framework does OCI appear?
It appears in IFRS | It is not used in ASPE
45
What are the 5 main concepts covered in modules 1 to 5?
Accounting Under Ideal Conditions Decision Usefulness Information Approach Measurement Approach Efficient Securities Markets

E-Business (12 decks)

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