Definitions

Question 1

Incurred

Answer 1

The moment that a transaction has taking place & it must be recorded.

Question 2

Equity

Answer 2

Total Assets minus Total Liabilities

Question 3

Revenue

Answer 3

Are inflows of economic resources. Ex. Sales

Question 4

Net Income

Answer 4

Revenue minus Expenses

Question 5

Recognition

Answer 5

The process of formally recording and reporting an item on the F/S

Question 6

Interim financial statements

Answer 6

Is a financial report covering a period for less than a year.
Used to get an idea of the performance of a company before the end of the year

Question 7

What are the Accounting Assumptions?

Answer 7

• Entity Assumption - it is assumed that there is a separate entity for each business organization
• Going- Concern Assumption (continuity) - A business is assumed to have infinity life.
• Time Period Assumption- business are broken into small time frames for evaluation & reporting processes.
• Unit of Measure Assumption(monetary) - Assets, Liabilities, equity, gains, losses, revenues, expenses and cash flows are all measured in terms of monetary

Question 8

What are the Accounting Principles?

Answer 8

• Revenue- Recognition Principle- Entity completes its performance obligation, the revenue is earned and realized
• Full disclosure Principle - F/S should present all info needed by an informed reader to make an economic decision
• Expense - recognition principle (Matching) - Recognize expenses only when expenditures help to produce revenue.
• Measurement Principle (Historical Cost)- The origination value, Assets & Liabilities are recorded at market value of the item on the date of acquisition

Question 9

Replacement Cost

Answer 9

The amount to be paid in current time

Question 10

Net Realizable Cost

Answer 10

The net value cost to be received after the cost of getting the asset ready for sale are deducted when a company is liquidating

Question 11

Net Present Value

Answer 11

The value determined from discounting the expected future cash flows

Question 12

Conservatism

Answer 12

Suppresses + info under conditions of uncertainty but requires to report negative info when the negative infor in likely to occur.

Question 13

What is an example of Conservatism

Answer 13

Gain Contingencies

Question 14

What is cost benefit Constraint?

Answer 14

The cost it takes to provide info shoudnt outweigh the benefit to the user of that info.

Question 15

When is the appropriate basis for determining the fair value of an asset or Liability ? (entry or exit price)

Answer 15

Exit price - The amount that would be received to sell an asset or paid to transfer a liability.

Question 16

If a company intends to report and measure its investment at fair value what date would the company elect to implement the fair value option?

Answer 16

On the date of it first recognizes the investment which is day of.

Question 17

What are the different approaches in Fair Value ?

Answer 17

Income approach - converts future amounts into a single present amount ( cash flows)
Cost approach - uses the amount that currently would be required to replace the service capacity of an asset (Current replacement cost)
Market approach - Uses relevant information generated by market transaction involving items that are almost the same to those being valued in determining fair value

Question 18

What are the different Approaches/ Valuation Technique in Fair Value ?

Answer 18

Income approach - converts future amounts into a single present amount ( cash flows)
Cost approach - uses the amount that currently would be required to replace the service capacity of an asset (Current replacement cost)
Market approach - Uses prices or relevant information generated by market transaction involving A/L that are almost the same to those being valued in FV

Question 19

What is entry price ?

Answer 19

The price paid to acquire the asset or the price received to assume the liability (transaction price)

Question 20

What is the fair value of an asset/Liability measured as ?

Answer 20

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants

Question 21

Royalty

Answer 21

an amount to be paid based on the sales of a commodity / product.

Question 22

Accrual

Answer 22

Revenue earned but not collected yet

Question 23

Deferral

Answer 23

cash collected but revenue not earned

Question 24

Bond Discount

Answer 24

The difference between the amount borrowed & face value

Question 25

Amortization discount

Answer 25

The difference between the reduction of earnings & reduction in operating cash flows

Question 26

Subsequent events

Answer 26

Event/ Transaction that has a material effect on the F/S.

Question 27

When do subsequent events occur?

Answer 27

After the F/S date but before the F/S is issued

Question 28

Nature of Operations (source of risk and uncertainties)

Answer 28

Knowledge of the firms - products & services, geographical locations, principal markets

Question 29

Uses of Estimates (source of risk and uncertainties)

Answer 29

Must communicated that F/S have to use estimates, use of estimates is not certain but results in approximate amounts, estimates involved assumptions about future events

Question 30

Why are materially risks & uncertainties required to be disclosed ?

Answer 30

Information about risk and uncertainties faced by the firm enhances the ability for F/S users to predict the future cash flows and operations

Question 31

Certain Significant Estimates (source of risk and uncertainties)

Answer 31

Estimates on assets, liabilities, or contingencies that are possible to have a material change or going to change in the near term disclosures may be required.

Question 32

Significant Concentrations (source of risk and uncertainties)

Answer 32

Diversity is lacking in the firm.
Examples- concentrations include excessive reliance on one customer, having one product or service account for most of the firm’s revenues, and reliance on one or a small number of suppliers.

Question 33

Management Going Concern Assessment (source of risk and uncertainties)

Answer 33

Management have to assess the entity ability as a going concern by the date the F/S is issued

Question 34

Why is Multi- Step income Statement more meaningful presentation of Revenues & Expenses ?

Answer 34

It shows Gross Profit(margin),Operating Profit(margin) & Pre Tax income from continuing operations are determined.

Question 35

When are contingencies accrued & recognized as a liability ?

Answer 35

When the occurrence of the liability is probable and the amount can be reasonably estimated. if not it is disclosed but not accrued

Question 36

One thing to know about Treasury Stock

Answer 36

A Firm cannot own its own stock therefore it is not included in the firms assets

Question 37

What type of material related-party don’t require disclosure?

Answer 37

Compensation arrangements, Expense Allowances, & other routine transactions in the ordinary course of business