Chapter 2 Flashcards
(22 cards)
What is the primary objective of financial reporting ?
Provide financial information about the reporting entity that is useful to external users (e.g., existing and potential investors, lenders, and other creditors) in making decisions about providing resources to the entity.
What are the 2 fundamental qualitative characteristics ?
- Relevance:
- Faithful Representation:
What are the 4 enhancing qualitative characteristics ?
- Comparability
- Verifiability
- Timeliness
- Understandability
The adoption of International Financial Reporting Standards (IFRS) can be viewed as an application of which of the following quality enhancing characteristics?
Comparability
What are the 4 financial reporting assumptions ?
- Separate-entity assumption: Activities of each business must be accounted for separately from the activities of its owners, all other persons, and other entities
- Stable monetary unit: Accounting information should be measured and reported in the national monetary unit (i.e., $ in Canada) without any adjustments for changes in purchasing power (i.e., inflation)
- Going concern/Continuity: Businesses are assumed to continue to operate into the foreseeable future
- Periodicity: The long life of a company can be reported in shorter periods (months, quarters, and years)
Jack is the sole owner and manager of Jack Auto Repair Shop. In 2022, Jack purchased a new automobile for personal use and continued to use an old truck in the business. Which of the following fundamentals prevents Jack from recording the cost of the new automobile as an asset to the business?
Separate-entity assumption
The continuity assumption is inappropriate when :
A. the business is just starting up
B. liquidation appears likely
C. fair values are higher than costs
liquidation appears likely
What are the 3 financial reporting principles ?
- Historical cost principle : Most elements of the statement of financial position are recorded at their cash-equivalent value on the date of the transaction
- Revenue recognition
- Full disclosure
What is the cost constraint ?
Information should be produced only if the perceived benefits of increased decision usefulness exceed the expected costs of providing that information.
What are the most common assets ? (10)
Current assets (short-term):
Cash (the most liquid)
Short-term investments (i.e., certificates of deposit with banks)
Accounts receivable (amounts owed by customers who purchased products/services on credit)
Inventories (goods ready for sale or used to produce goods/services for sale in normal course of business)
Prepaid expenses (i.e., expenses paid in advance of use; prepaid rent; prepaid bills)
Other current assets
Non-current assets (long-term):
Property, plant, and equipment (i.e., land, buildings, machinery and equipment)
Financial assets (i.e., derivatives, long-term receivables)
Intangible assets (patents, brands, trademarks, copyrights, computer software, goodwill)
Other (miscellaneous) assets
What are common liabilities ? (8)
Current liabilities (short-term):
- Accounts payable
- Short-term debt
- Income taxes payable
- Accrued liabilities (wages, utilities, etc.)
- Provisions (estimated liabilities)
- Other current liabilities
Non-current liabilities (long-term):
- Long-term debt (or borrowings)
- Other liabilities
What are common shareholder’s equity accounts?
- Contributed capital
- Retained earnings
- Common shares
- Preferred shares
Truth or False: A dividend payment will reduce net income for the period.
False
Where would changes in shareholders’ equity caused by operating activities be reported?
In the retained earnings account
What is a chart of accounts ?
A list of accounts and their unique numeric codes.
What is the accounting equation ?
A = L + SE
What is the double-entry accounting system ?
Each transaction affects at least two accounts, and the sum of the debits should always equal the sum of the credits.
Truth or False? “Debit” is the designation for the left side of an account, and “credit” is the designation for the right side of an account.
True
What is the equation of share holder’s equity ?
Shareholder’s equity = Contributed capital + Retained earnings
What is a journal entry ?
Journal entries express the effects of a transaction on accounts by using the debit-credit framework.
After the journal entries have been recorded, the bookkeeper posts transactions effects from the journal to the ledger
What does the current ratio measure ?
Measure the ability of the company to pay its short-term obligations with current assets.
Generally, the higher the ratio, the more cushion a company has to pay its current obligations if future economic conditions take a downturn.
What is the current ratio equation ?
Current ratio = Current Assets / Current Liabilities
