Flashcards in General Purpose Financial Statements Deck (102):
What types of information can you get from the Balance Sheet?
Assess the entity's strengths and weaknesses, especially risk and the allocation of assets
What is a measurement base?
The attribute of an account being measured and reported
Current Assets / Current Liabilities
Quick or Acid Test Ratio
(Cash +/- Short Term Investments +/- AR ) / Current Liabilities
What is a contra account?
It has the opposite balance of the associated account. It can be a debit or credit (Subtracted from associated account)
What is an adjunct account?
Has a balance that is the same as the associated account in terms of debit/credit. (Added to associated account)
What is a valuation account?
It is an account that is used to increase or decrease the book value of an item to a measure of current value
What are the three important valuations for a form?
1- Total OE or Net Assets
2 - Market Value of new identifiable assets
3- Total value of the firm
What is the accounting cycle?
1. Analyze relevant source documents and record journal entries in a journal.
2. Post the information from the journal to the accounts in the ledger
3.Record adjusting journal entries at the end of the accounting period.
4. Prepare trial balances.
5. Prepare the income statement, balance sheet and statement of cash flows
6. Close the temporary account balances
What 2 classifications must be presented in the IFRS statement of financial position?
Current and Non-Current
Does IFRS require more detailed note disclosures compared to US GAAP?
Does IFRS require specific formatting of financial position information?
Does US GAAP use the term "reserve"?
No, only IFRS
What is accounting income?
Revenues less expenses plus gains less losses
What is economic income?
The change in net worth of a business enterprise during an accounting period
What is the net worth of a business enterprise described as?
Fair market value of net assets
How do you calculate the Market Value
Beginning Market Value + Net Income + Owner Investments - Dividend and Stock Repurchases = Ending Market Value
What is a revenue?
Revenues represent increases in net assets or settlements of liabilities by providing goods and services. Revenues are related to the company's primary business operations
What is an expense?
Expenses represent decreases in net assets or incurred liabilities through the provision of goods or services. Expenses are related to the company's primary business operations. Expenses provide benefit to the firm. Losses do not.
What is a gain?
Gains represent increases in equity or net assets from peripheral or incidental transactions
What is a loss?
Losses represent decreases in equity or net assets from peripheral or incidental transactions. Losses do not provide value or benefit to the firm.
Which items are not shown on the Income Statement
Prior Period Adjustments, OCI, retrospective changes in accounting principle
What items are found in Other Comprehensive Income?
(1). Foreign currency translation adjustments;
(2). Unrealized holding gains and losses on securities available for sale;
(3). Pension and other postretirement benefit plan cost adjustments;
(4). Certain deferred derivative gains and losses.
Is there GAAP requirements for presentation of the top portion of the Income Statement?
No. Its very loose with the presentation
Is there GAAP requirements for presentation of the bottom portion of the Income Statement?
Yes, its very specific
Which two items show on the bottom portion of the income statement?
Discontinued items and extraordinary items
Basic format for the income statement
- Cost of goods sold
= Gross margin
- Operating expenses
+ Miscellaneous revenues and gains
- Miscellaneous expenses and losses
+ or - Unusual or infrequent items
= Income from continuing operations before tax
- Less income tax expense
= Income from Continuing Operations
+ or - Income from Discontinued Operations (net of tax)
+ or - Extraordinary Items (net of tax)
= Net income
What is intraperiod tax allocation?
when the tax effect is shown with the item itself
Intraperiod tax allocation is applied to which items?
Discontinued operations, extraordinary items, OCI, Adjustments for retroactive accounting principle changes, prior period adjustments
What is interperiod tax allocation?
recording a period's total tax consequences in current taxes payable and deferred tax accounts
Where is an item recorded if it is unusual or infrequent (but not both)?
In continuing operat`ions
What two formats are accepted for the Income Statement?
Single Step and Multistep
Explain the Single Step Income Statement format.
The single-step format involves a presentation of income from continuing operations that is largely based on a single comparison. Total revenues and gains are compared with total expenses and losses in the single-step format
Explain the Multiple Step Income Statement format.
The multiple-step format involves a presentation of income from continuing operations that includes multiple comparisons of revenues, expenses, gains, and losses. In doing so, the reader is provided with the operating margin of the company, which is the excess of operating revenues over operating expenses.
Is the statement of comprehensive income a required statement under IFRS?
What are the two formats of the Statement of Comprehensive income under IFRS?
Single statement or two statements.
This alternative presents the components of both profit or loss and other comprehensive income within a single statement leading to total comprehensive income as the bottom line total. Profit or loss is shown as a subtotal within this statement format.
Two statements-A separate income statement is presented along with a statement of comprehensive income. Essentially the single statement format is divided into two parts: income statement and statement of comprehensive income with the first line being "Profit or Loss for the Period," the ending line of the income statement. The bottom line of the statement of comprehensive income is total comprehensive income, the same bottom line using the single statement format.
Does IFRS allow extraordinary items?
How does IFRS analyze expenses?
by Function or by Nature.
If the functional nature is used, the firm must disclose the nature
(Nature focuses on the type of expenses)
How does the SEC report expenses?
By function (reporting focuses on the activity to which the expenses relate)
What is comprehensive income?
Is the sum of (1) net income, and (2) other comprehensive income. CI = NI + OCI
What is the purpose of reporting comprehensive income?
to report the net change in equity (other than from transactions with owners) in a single amount and to provide a more complete picture of the total earnings of the firm for a period
Which items are included in OCI?
1. Unrealized gains and losses on securities available for sale (AFS);
2. Unrecognized pension and postretirement benefit cost and gains. Currently, GAAP does not recognize all changes in these liabilities and assets immediately in income. Rather, some are recognized in other comprehensive income;
3. Foreign currency translation adjustments are changes in the value of foreign currency and accounts measured in foreign currency;
4. Certain deferred gains and losses from derivatives.
Are OCI items reported net of tax?
Are Prior period adjustments and retrospective changes included in comprehensive income?
Are items removed from Accumulated OCI?
Yes, otherwise they will be double counted in OE
Are firms required to report the changes in OE for a period under GAAP?
Are firms required to report the changes in OE for a period under IFRS?
What is the basic purpose of the Statement of Cash Flows?
to provide information about the cash receipts and cash payments for an entity to help investors, creditors, and others assess:
a. Past ability to generate and control cash inflows and cash outflows;
b. Probable future ability to generate cash inflows sufficient to meet future obligations and pay dividends;
c. The likely need for external borrowing.
What are some of the major cash in and out flows classified as operating activites?
Inflows (Cash Received)
Dividends (from Investment)
Outflows (Cash Paid)
To Suppliers (Goods/Services)
To Employees (Payroll)
What does the direct method of the Cash flow Statement show?
the operating cash flows by classes of sources and uses and the reconciliation of net income and net operating cash flow.
What does the indirect method of the Cash flow Statement show?
The indirect method shows only the reconciliation of net income and net operating cash flow. The indirect method therefore does not report the actual operating cash flows.
What are some of the major cash in and out flows classified as investing activites?
Inflows (Cash Received)
Sale of Long-term Assets
Collection of Loan Principal
Disposal of Debt and Equity Securities (of others) (Held-to-Maturity and Available-for-Sale Classifications)
Sale of Other Productive Assets (e.g., Patent; but not Inventory)
Outflows (Cash Paid)
Purchase of Long-term Assets
Lending (to others)
Investment in Debt and Equity Securities (of others) (Held-to-Maturity and Available-for-Sale Classifications)
Purchase of Other Productive Assets (e.g., Patent; but not Inventory)
If the firm plans to hold the securities only for a short time, how is it classified?
What are some of the major cash in and out flows classified as financing activites?
Inflows (Cash Received)
Sale of (Own) Stock
Proceeds from Borrowing (Bonds, Notes, etc.)
Outflows (Cash Paid)
Repurchase Own (Treasury) Stock
Paying Back Lenders (Principal Only)
Payment of Dividends
Are cash changes due to changes in exchange rates required to be shown on teh statemetn of Cash Flows?
Yes, converted to dollars
How are noncash activities presented on the cash flow statement?
in a schedule, footnote or on the fast of the SCF
How is an entry treated on the cash flow statement if it is both cash/noncash?
the cash portion should be a part of (on the face of) the SCF; the noncash portion should be disclosed in Noncash Investing and Financing Activities.
What must be done to derive the cash flow from net income?
The effects of accrual accounting (e.g., Receivables, Payables) used to measure net income have to be reversed out to get cash flows
Using the indirect method of Operating Cash Flows, how do you determine the cash collected from customers?
Deduct: Increase in Receivables
Add: Increase in Unearned Revenue
Cash Collected from Customers
Using the indirect method of Operating Cash Flows, how do you determine the cash payments to suppliers?
Cost of Goods Sold - 20X2
Add: Increase in Inventory
Deduct: Increase in Accts. Payable
Cash Payments to Suppliers
Using the indirect method of Operating Cash Flows, how do you determine the cash payments for operating expenses?
Operating Expense - 200X
Deduct: Decrease in Prepaid Expense
Deduct: Increase in Expenses Payable
Cash Payments for Operating Expenses
Using the indirect method of cash flows, how do you derive the cash flow from operating activites?
1. Adding back non-cash charges (reductions) included in deriving Net Income; and
2. Subtracting out non-cash credits (increases) included in deriving Net Income.
Which items are added back to net income to derive the indirect cash flow from operating activities?
Losses (from sale of assets, etc.);
Loss under equity method of accounting for Investments;
Amortization of Premium on Bond Investment;
Amortization of Discount on Bonds Payable;
Decreases in current assets (accounts receivable, inventory, prepaid assets, etc.);
Increases in Current Liabilities (accounts payable, deferred taxes, etc.);
Increase in Unearned Revenue.
Which items are subtracted out of net income to derive the indirect cash flow from operating activities?
Gains (from sale of assets, etc.);
Amortization of Discount on Bond Investment;
Amortization of Premium on Bond Payable;
Undistributed income under equity method of accounting for Investments;
Increases in Current Assets (accounts receivable, inventory, prepaid assets, etc.);
Decreases in Current Liabilities (accounts payable, deferred taxes, etc.);
Decrease in Unearned Revenue.
Which method is preferred by FASB, the direct or indirect method of the Cash Flow Statement
The direct method
What is the concentration of credit risk?
related to the receivables that are all in the same industry
What is usually included in the first footnote
The summary of significant accounting policies
What is inflation?
The increase in general prices for a period of time
What is deflation?
the decrease in general prices
What are General Prices?
A market basket of items that the typical consumer purchases
What are Nominal Dollars?
Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
What are Constant Dollars
Measurements in the general price level as of a specific date. Constant dollar measurements reflect an adjustment for inflation and allow comparisons using dollars with the same purchasing power.
What is a Specific Price Change?
The change in the price of a specific good or service over a period of time
What is Purchasing Power?
The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.
What doe Liquidity Ratios do?
Measure the ability of the firm to pay its obligations as they become due.
What does Working Capital Measure?
the extent to which current assets exceed current liabilities and, thus, are uncommitted in the short term
Current Assets - Current Liabilities
Acid Test Ratio (quick Ratio)
(Cash + (Net) Receivables + Marketable Securities) / Current Liabilities
Measures the quantitative relationship between highly liquid assets and current liabilities in terms of the "number of times" that cash and assets that can be converted quickly to cash cover current liabilities.
Securities Defensive-Interval Ratios
(Cash + (Net) Receivables + Marketable Securities) / Average Daily Cash Expenditures
Measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs.
Times Interest Earned Ratios
= (Net Income + Interest Expense + Income Tax) / Interest Expense
Measures the ability of current earnings to cover interest payments for a period.
Times Preferred Dividend Earned Ratio
= Net Income / Annual Preferred Dividend Obligation
Measures the ability of current earnings to cover preferred dividends for a period.
Accounts Receivable Turnover
Accounts Receivable Turnover = (Net) Credit Sales / Average (Net) Accounts Receivable (e.g. (Beginning + Ending)/2)
A. Measures the number of times that accounts receivable turnover (are incurred and collected) during a period. Indicates the quality of credit policies (and the resulting receivables) and the efficiency of collection procedures.
Number of Days' Sales in Average Receivables
Number of Days' Sales in Average Receivables = (300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover (computed above)
B. Measures the average number of days required to collect receivables; it is a measure of the average age or receivables.
Inventory Turnover = Cost of Goods Sold / Average Inventory (e.g. (Beginning + Ending)/2)
C. Measures the number of times that inventory turns over (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory.
Number of Days' Supply in Inventory
Number of Days' Supply in Inventory = (300 or 360 or 365 (or other measure of business days in a year)) / Inventory Turnover (computed above)
D. Measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management.
Operating Number of Cycle = Days in Operating
Operating Number of Cycle = Days in Operating = Number of Days' Sale in A/R + Length Cycle Number of Days' Supply in Inventory
E. Measures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables; it measures the time to go from cash back to cash.
Profit Margin (on Sales)
Profit Margin (on Sales) = Net Income / (Net) Sales
A. Measures the net profitability on sales (revenue).
Return on Total Assets
Return on Total Assets = (Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets
B. Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.
Return on Common Stockholders' Equity
Return on Common Stockholders' Equity = (Net Income - Preferred Dividend (obligation for the period only)) / Average Common Stockholders' Equity (e.g. Beginning + Ending/2)
C. Measures the rate of return (earnings) on common stockholders' investment.
Return on Owners' (all Stockholders') Equity
Return on Owners' (all Stockholders') Equity = Net Income / Average Stockholders' Equity (e.g. Beginning + Ending/2)
D. Measures the rate of return (earnings) on all stockholders' investment.
Earnings Per Share (EPS -- Basic Formula)
Earnings Per Share (EPS -- Basic Formula) = (Net Income - Preferred Dividends (obligation for the period only)) / Weighted Average Number of Shares Outstanding
E. Measures the income earned per (average) share of common stock. Indicates ability to pay dividends to common shareholders.
Price-Earnings Ratio (P/E Ratio)
Price-Earnings Ratio (P/E Ratio) = Market Price for a Common Share / Earnings per (Common) Share (EPS)
F. Measures the price of a share of common stock relative to its latest earnings per share. Indicates a measure of how the market values the stock, especially when compared with other stocks.
Common Stock Dividends Pay Out Ratio - Total Basis
Total Basis = Cash Dividends to Common Shareholders / Net Income to Common Shareholder
Common Stock Dividends Pay Out Ratio = Per Share Basis
Per Share Basis = Cash Dividends per Common Share / Earnings per Common Share
Common Stock Yield
Common Stock Yield = Dividend per Common Share / Market Price per Common Share
I. Measures the rate of return (yield) per share of common stock.
Debt to Equity Ratio
Debt to Equity Ratio = Total Liabilities / Total Shareholders' Equity
A. Measures relative amounts of assets provided by creditors and shareholders.
Owners' Equity Ratio
Owners' Equity Ratio = Shareholders' Equity / Total Assets
B. Measures the proportion of assets provided by shareholders.
Debt Ratio = Total Liabilities / Total Assets
C. Measures the proportion of assets provided by creditors. Indicates the extent of leverage in funding the entity.
Book Value per Common Stock
Book Value per Common Stock = Common Shareholders' Equity / Number of Outstanding Common Shares
D. Measures the per share amount of common shareholders' claim to assets. (See the section on this ratio in the owner's equity module for more details.)
Book Value per Preferred Share
Book Value per Preferred Share = Preferred Shareholders' Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks
E. Measures the per share amount of preferred shareholders' claim to assets.
What ruling governs the first time adoption of IFRS?
what is the "first reporting date" under IFRS 1
The "first reporting date" is the year-end date for the period for which IFRS is first applied.