Chapter 1 & 2 Flashcards
(27 cards)
Three categories of business activities
Financing
Investing
Operating
5 Components of a set of financial statements
Income Changes in equity Financial position Cash flows Notes
Statement of income
Measures company performance by results of operating activities
Gains and losses are a result of the income statement
Profit=
Income - expenses
Gross profit =
Revenue from sales of goods - cost of goods
Common statement of earnings items
Revenues, cost of goods sold, expenses, depreciation, amortization
Share capital/retained earnings
Earnings that have not been distributed as dividends
Retained earnings=
Opening retained earnings + net income - dividends declared
Working capital =
Current assets - current liabilities
Accounting equation
Assets = liabilities + shareholders equity
3 characteristics of an asset
Controlled by the company
Future economic benefit
Event that gave company control has already happened
3 characteristics of a liability
Current obligation on the company
Expected outflow of resources
Obligation resulted from event that has already occurred
Starting point of the cash flow statement
Net earnings from income statement
Equation of statement of income
Even use - expenses = net income
International financial reporting standards must be followed by:
Public companies
Accounting standards for private enterprises ASPE are followed by:
Private enterprises, but they may use IFRS if they wish
Conceptual framework
An underlying set of objectives and concepts that guide accounting standard-setting bodies in justifying new standards and revisit old ones
2 fundamental qualitative characteristics
Relevant
Representationally faithful
4 enhancing qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability
To be relevant it must have 3 things
Predictive value
Confirmatory value
Materiality
To be representationally faithful it must have 3 things
Completeness
Neutral
Free from error
Accrual basis
Transactions recorded in the period they occur in, no matter when the cash flows
Revenues are recorded when earned and expenses are recorded when incurred
Cash basis
Transactions recorded when cash is received or paid
Straight line depreciation=
(Original cost - estimated residual value) / estimated useful life
