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acc 122 > Chapter 11 Financial Reporting Concepts > Flashcards

Chapter 11 Financial Reporting Concepts Flashcards

1
Q

Explain the importance of having a conceptual framework of accounting.

A
  1. Ensure the existing standards and practises are clear and consistent
  2. Provides guidance in responding to new issues and developing new standards
  3. Assist accountants in the application of accounting standards
  4. Increases financial statement users, understanding of and confidence in the financial statements
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2
Q

List the key component of conceptual framework of accounting.

A
  1. The objective of financial reporting and user needs.
  2. Elements of financial statements
  3. Qualitative characteristics
  4. Recognition and measurement criteria
  5. Foundational concepts, assumptions and constraints
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3
Q

Define conceptual framework of accounting.

A

A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting statements.

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4
Q

What is FASB?

A

Financial Accounting Standards Board

US counterpart of IASB.

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5
Q

What is IASB?

A

The International Accounting Standards Board

The standard-setting body responsible for developing IFRS and was formed to try to reduce areas of difference and unify global standard setting.

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6
Q

What is AcSB?

A

Canadian Accounting Standards Board

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7
Q

Explain the object of financial reporting.

A

The objective of general purpose financial reporting is to provide uses with information that is useful for decision-making purposes.

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8
Q

Define the elements of financial statements.

A

Assets, Liabilities, Equity, Revenues (Income) and Expenses

LEEAR

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9
Q

What information must be part of the financial statement?

A
  1. Economic resources (assets) and claims on economic resources (liabilities and equity).
  2. Changes in economic resources and in claims on the economic resources.
  3. Economic performance.
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10
Q

What formula is used to determine equity?

A

Assets - Liabilities = Equity

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11
Q

Define Assets.

A

An asset is a present resource controlled by a business as a result of past events, and that has a potential to produce economic benefits.

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12
Q

Define liabilities.

A

Liability is a present obligation, arising from past events, the settlement of which will include the transfer of economic benefits.

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13
Q

What is an obligation?

A

An obligation is a duty or responsibility that the entity has no practical ability to avoid.

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14
Q

Define equity.

A

Equity is the residual interest in the assets of the business, after deducting all its liabilities.

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15
Q

Define revenues.

A

Revenues are increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from owners.

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16
Q

Define expenses.

A

Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to owners.

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17
Q

What two fundamental characteristics must financial information have in order to be useful?

A

Relevance and faithful representation

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18
Q

What are the fundamental characteristics?

A

Relevance and faithful representation.

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19
Q

What are the enhancing characteristics?

A

Comparability, verifiability, timelessness, understandability.

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20
Q

What are the qualitative characteristics?

A

Relevance, Faithful representation, Comparability (consistency), Verifiability, Timelessness and Understandability.

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21
Q

Why is materiality an important component of relevance?

A

An item is material when it is likely to influence the decision of a reasonably careful, investor or creditor. Is immaterial, if including it, or leaving it out, has no impact on a decision maker. Materiality is also related to the cost constraint.

22
Q

How to determine if information has faithful representation?

A

Information must be:
1. Complete
2. Neutral
3. Free From Material Error

23
Q

How to determine if information has relevance?

A
  1. Provides a basis for forecasts
  2. Confirms or corrects prior expectations
24
Q

How to determine if information has comparability?

A
  1. Different companies use similar accounting principals.
  2. A company uses the same accounting policies consistently from year to year.
25
Q

What are ways of determining cost of merchandise inventory?

A

FIFO - First in, first out (FIFO) is an inventory method that assumes the first goods purchased are the first goods sold.

Weighted average cost accounting - calculates the average cost of all inventory units available for sale over a respective period, which is then used to determine the cost of goods sold and the value of ending inventory.

Specific identification - The specific identification method relates to inventory valuation, specifically keeping track of each specific item in inventory and assigning costs individually instead of grouping items together.

26
Q

How to determine if information has verifiability?

A

Independent people agree that the economic reality is reported.

27
Q

How to determine if information has timeliness?

A

Information is provided when it is still useful.

28
Q

How to determine if information has understandability?

A

Information is understandable when it is understood by others, who have a reasonable knowledge of accounting concepts and procedures and business and economic conditions.

29
Q

Which characteristics should be applied first that would affect the decisions of investors and creditors and that should be included in the financial report?

A

Qualitative characteristics

30
Q

What is accrual basis of accounting?

A

Transactions affecting a company’s financial statements are recorded in the period in which the events occur, rather than when the company receives cash or pays cash.

31
Q

How to determine if information has recognition criteria?

A

Recognition criteria help determine when an event should be recorded in the financial statement.

32
Q

How to determine if information has measurement criteria?

A

Measurement criteria provide guidance on what amount should be recorded for the event.

33
Q

Under what circumstances will an item being included in the financial statements?

A

When all of the following criteria met:
1. It meets the definition of an element (asset, liability, equity, revenue, or expense).
2. It is probable that any future economic benefit associated with the item will flow to or from the business. (This generally refers to the receipt or payment of money.)
3. The item has a cost of value that can be measured or estimated with a reasonable amount of reliability. If an item cannot be measured, it cannot be recognized.
4. Recognition of the item, meet the fundamental qualitative characteristics of relevance and faithful representation.

34
Q

What is the five step model for contract-based approach (aka asset-liability approach) to revenue recognition?

A

Step 1 - identify the contract with a customer
Step 2 - identify the performance obligations in the contract
Step 3 - determine the transaction price
Step 4 - I locate the transaction price to separate per performance obligations
Step 5 - recognize revenue, when performance obligations are satisfied

35
Q

What is the perpetual inventory system?

Reference 11-16

A

A system used to track and record stock levels, in which every purchase and sale of stock is logged automatically and immediately

36
Q

How to calculate cash flow?

A

Assets = Liabilities + Owner’s equity

A=L+OE

37
Q

How to calculate allocation of transaction price for multiple performance obligations?

A

% of total stand-alone value x contract price = allocation of contract value

38
Q

How to determine expected value?

A

It is the sum of the probability-weighted amounts in a range of possible amounts.

Amount x (% of probability) = probability weighted amount

Add up total of probability amounts

Reference 11-20

39
Q

What conditions need to be met in order to recognize revenue from the sale of goods with the earnings approach?

A
  1. Performance is complete, and the seller has transferred the significant risks and rewards of ownership to the buyer. The buyer will have the significant risks and rewards of ownership when the buyer starts receiving the benefit (ex. cash flow) of the goods and has the risk of loss (ex. goods decline in value or are damaged).
  2. The seller does not have control over the goods or continuing, managerial involvement.
  3. The amount of the revenue can be reliably measured.
  4. It is probable there will be an increase in economic resources (ex. cash will be collected).
  5. Cost relating to sale of goods can be reliably measured.
40
Q

What is the expense recognize recognition criteria?

A
  1. Cost incurred are directly associated with revenue recognized
  2. Cross incurred benefit only one period
  3. Costa difficult to associate with the new recognized
  4. The cost of an asset is allocated to expense overtime. When the asset is expected to benefit, several accounting periods
  5. Costs do not qualify as an asset.
  6. Previously recognized assets ceased to have future benefit
41
Q

What are the measurement methods for cost?

A
  1. Historical Cost
  2. Fair Value
  3. Current Cost
  4. Realizable Value
  5. Present Value
41
Q

In what way are revenues or expenses misstated in error or intentionally?

A
  1. Recognition of revenue or expense in the incorrect accounting period.
  2. Misstatement of estimates
  3. Failure to record revenue or expense.
  4. Failure to apply the correct measurement.
41
Q

What are the foundational concepts, assumptions and constraints in the conceptual framework or accounting?

A
  1. Reporting Entity
  2. Going concern assumption
  3. Monetary Unit
  4. Periodicity
  5. Full disclosure
  6. Cost constraint
42
Q

Define reporting entity concept.

A

A foundational concept that requires that the accounting, for a reporting entities act activities, be kept separate and distinct from the accounting for the activities of its owner and all reporting entities

43
Q

Define going concern assumption

A

Going concern assumption assumes that the company will continue operating for the foreseeable future: that is, long enough to carry out it’s existing objectives and commitments.

44
Q

Define monetary unit concept

A

The monetary unit concept means that money is the common denominator of economic activity.

45
Q

Define full disclosure concept

A

Full disclosure, concept requires that companies, fully disclosed circumstances and events that make a difference to financial statement users.

46
Q

Define periodicity concept.

A

The curiosity, concept guides businesses, and dividing up their economic activities into distinct time periods.

47
Q

What information is disclosed in the notes on financial statements?

A
  1. gives supplementary detail or explanation
  2. explain unrecorded transactions
  3. supply new information
48
Q

Define cost constraint

A

Cost constraint is a pervasive constraint that ensures the value of the information provided is greater than the cost of providing it.

(Pervasive means the constraint is applied widely throughout the accounting and reporting process process.)

acc 122 (3 decks)

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