Chapter 1: Intro to Financial Accounting Flashcards Preview

Financial Accounting Part 1 > Chapter 1: Intro to Financial Accounting > Flashcards

Flashcards in Chapter 1: Intro to Financial Accounting Deck (26)
Loading flashcards...
1

Financial statements

Reports accountants prepare, showing how well an organisation performed over a certain period

2

Accounting

Production and transfer of information within an organisation

3

Financial accounting

Info to people outside the organisation, usually to obtain external capital

4

IFRS vs GAAP

IFRS in EU, GAAP in US
IFRS principle based less strict, GAAP rule based more strict

5

Conceptual framework - Objective

Provide financial info about reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions

6

Conceptual framework - Qualitative characteristics

Fundamental - Relevance and faithful representation
Enhancing - Comparability, timeliness, verifiability and understandability

7

Conceptual framework - Constraints

Balance between characteristics
Costs vs benefits

8

Conceptual framework - Assumptions

Accrual accounting
Going concern

9

Conceptual framework - Elements

Assets
Liabilities
Equity
Income
Expenses

10

Qualitative characteristics - Relevance

Info should hold levity in decision making process.
Future outcomes - predictive value
Criticise prior evaluations - confirmative value

11

Qualitative characteristics - Faithful representation

Financial statements should be complete, neutral and free from error

12

1. Comparability
2. Timeliness
3. Verifiability
4. Understandability

1. Comparability - reports should be comparable to previous reports
2. Timeliness - info should be made available in timely fashion
3. Verifiability - Should be transparent, understood by all accountants
4. Understandability - classified characterised and presented in a clear and concise manner

13

Constraints with provision of info to users

1. Balance between qualitative characteristics - hold onto past for comparability or change to improve relevancy
2. Costs vs Benefits - Prep of financial statements time consuming and costly

14

Accrual accounting

Financial events should be recognised the moment they occur, regardless when the cash transaction of an event occurs

15

Going concern

Assumes that the business will remain in existence long enough for all assets to be fully utilised - no reason for liquidate or reduce activities

16

Assets

Economic resources controlled, expected to have inflow of economic benefits

17

Liabilities

Present obligations to a third party that arose from past events, expected outflow of economic benefits

18

Equity

Assets - Liabilities
Share capital - amount of shareholders invested
Retained earnings - net income not distributed among shareholders as dividends

19

Income

Increase in economic benefits over period of time
Revenue - main activities
Gains - incidental benefits

20

Expenses

Decrease in economic benefits over time
Expenses - main activities
Losses - non primary operations

21

Two types Information Assymetry

1. Adverse selection
2. Moral hazard

22

Adverse selection

One party has info advantage over another. e.g. buying used car
Costly signalling can overcome not cheap talk

23

Moral hazard

One party cannot observe actions relating to fulfilment of contractual terms by other party

24

Proprietorship

One owner, responsible for all losses and debts

25

Partnership

Two or more person, personally liable
LLP - only liable for investment (however 1 partner responsible)

26

Corporation

Organisation owned by shareholders, separated by law from their owners