Ch. 2 Flashcards
Objective of external financial reporting
To provide useful economic information to external users (primarily investors and creditors) for decision making and for assessing future cash flows.
Recognition
Reflecting an item in the financial statements
Measurement
Valuation of an item in the financial statements
Asset recognition
Probable future economic benefit, controlled by the company, as a result of a past transaction. Relevant information (to external users) that can be reliably measured (can be measured with a reasonable degree of precision) and that reliable measure can be verified by an “independent” party (auditor).
Liability recognition
Probable future sacrifice, a current obligation of the company, due to a past transaction or event. Can be measured with a reasonable degree of precision.
Relevancy
Predictive value, confirmatory value, or both.
Representational faithfulness
Complete, neutral, free from material error.
Methods of valuation
Historical cost, market value (current replacement cost, current net selling price).
Historical cost
Cash equivalent cost the basis for initial recording of assets –The cash-equivalent cost is the total of all cash paid plus the current dollar value of any noncash items also given in the exchange.
Revenue recognition
Recognize revenue when measurable, realizable (transaction takes place and collection probable), and earned (substantially accomplished what is necessary to be entitled to benefits).
Matching
Recognize expenses when incurred in earning revenue.
Full disclosure
Provide information sufficiently important
to influence a decision.
Current ratio
Current assets/current liabilities.Measures ability of a company to pay its current obligations.
Recording transactions
- Record journal entry in the journal.
2. Post journal entries to ledger accounts.
