Chapter 3: financial statements Flashcards Preview

FN1 corporate finance > Chapter 3: financial statements > Flashcards

Flashcards in Chapter 3: financial statements Deck (83)
Loading flashcards...
1

what is accounting

an organized way of summarizing the activities of a business

2

why do internal and external users of accounting rely on accounting information

to make decisions

3

why do fiancial managers require a strong understanding of accounting

they use that information to make significant decisions that will affect the firm

4

why is it important to report financial performance in a consistent manner between firms

it enhances the usefulness of those reports, allowing comparative analysis

5

what does IFRS stand for

international financial reporting standards

6

what is IFRS

a new set of accounting principles

7

who must use IFRS

publicly accountable companies in Canada

8

does IFRS replace GAAP

yes

9

How can private companies report?

they can use IFRS or ASPE

10

What is ASPE

accounting standards for private enterprises

11

which private companies are more likely to use IFRS

larger private companies

12

Which private companies are more likely to use ASPE

small to mid-size companies

13

has USA adopted IFRS

no, they use US GAAP

14

can any Canadian company use US GAAP

public companies who stock is listed on both Canadian and US stock Exchanges can use IFRS or US GAAP

15

Why was Sarbane-Oxley act (SOX) passed

due to scandals involving companies like Enron and worldcom
- was passed in an attempt to restore investor's confidence by imposing new requirements for financial disclosure and oversight

16

What are the main provisions of Sarbanes Oxley (2002)

1. A new public company accounting oversight board
- register and inspect accounting firms
- establish audit standards

2. separation of the audit function from other services provided by auditing firms
4. improved standards for corporate governance
- separate board committees for finance and audit
- require external auditors to report to the audit committee
- require audit committee independence and financial expertise with membership dominated by external directors
5. new requirement that annual reports indicate the state of a firm's internal controls and asses their effectiveness
6. the CEO and CFO must certify that the firm's financial statements "fairly present in all material respect the operations and financial conditions of the issuer)

17

what is bookkeeping

the mechanical act of managing and recording transactions

18

what is accounting

the application of GAAp and conventions to bookkeeping data to produce financial statements that fairly represent the financial condition and operations of the economic entity

19

what are the most basic accounting principles

1. the entity concept
2. going concern principle
3. A period of analysis
4. a monetary value
5. matching principle
6. Revenue recognition

20

what is the entity concept

accounting is for a specific economic entity

21

what is the going concern principle

statements are prepared on the basis that the entity will continue to operate into the future; therefore liquidation of values are irrelevant

22

what is a period of analysis

usually a fiscal year
- although quarterly and monthly f.s. are also produced

23

what is monetary value

historical costs are usually used because of the objectivity inherent in arms length transactions

24

what is the matching principle

revenue must be matched to expenses in the same period (period they are incurred or earned)

25

What is revenue recognition

revenue is recognized in the period it is earned, even though the cash may not yet have been received

26

what should financial information have

1. relevance
2. faith representation

27

what is relevance

information is relevant if it could potentially affect a user's decisions and has a predictive and/or confirmatory power

28

what is faithful representation

the information provided should be free from bias and free form error

29

to enhance relevance and faithful representation information should have the following characteristics

1. comparability
2. verifiability
3. timeliness
4. understandability

30

what is comparability

consistent comparisons can be made across entities and across time (one year to the next)