Study Session 6 & 7 Flashcards
(36 cards)
How can expenses be grouped?
Expenses can be grouped by:
- The nature of the expense (i.e. group all depreciation costs together)
- The function of the expense (e.g. group all manufacturing costs together)
What are the types of measurement base?
- Historical Cost
- Amortized Cost
- Current Cost
- Net Realizable Value
- Present value
- Fair value
What is historical cost
Historical Cost is the amount originally paid for the asset
What is amortized cost?
Amortized cost is the historical amount (amount originally paid for the asset), adjusted for depreciation, amortization, depletion, and impairment
What is current cost?
The current cost is the amount the firm would have to pay for the same asset
What is net realizable value?
The net realizable value is the estimated selling price of the asset in the normal course of business, minus the selling costs
What is present value?
The present value is the asset’s expected future cash flows
What is the fair value?
The price at which an asset could be sold, or a liability transferred, in an orderly transaction between willing parties
Are footnotes in financial statements audited?
Damn straight/yes, footnotes are audited. Pls remember this thnx.
What 2 characteristics make financial information useful?
Relevance and faithful representation make financial information useful
What 4 characteristics enhance relevance and faithful representation?
Comparability,
Verifiability,
Timeliness,
Understandability
are the 4 characteristics that enhance relevance and faithful representation
What is the income statement equation?
The income statement equation is:
Revenue-Expenses = Net income
When should revenue be recognized?
Revenue should be recognized when the goods/services are transferred, not necessarily when payment is received, but when the revenue is EARNED!
For a non-financial firm, what expenses are considered operating, and which are considered financing?
For a non-financial firm, operating profit is (Revenue - CoGS) –> profit before financing costs, income taxes, and non-operating items. Subtracting interest expense and income taxes from operating profit will give you the bottom line (net inc)
What is an expense?
An expense is a decrease in economic benefits during the account period in the form of outflows, or depletions of assets, or incurrence of liabilities, that result in decreases in equity other than those relating to distributions to equity participants
What is the matching principle?
Expenses incurred to generate revenue are recognized in the same period as the revenue
What’s the formula for straight line depreciation?
(Cost- Residual Value)/Useful Life
What’s the formula for double-declining balance depreciation?
(2/useful life)*(cost-accumulated depreciation)
What happens if the residual value is 0 and the double declining balance depreciation method is used?
The double declining balance will never fully depreciate the asset, so at some point in the asset’s life, the residual value is used.
When is bad debt or warranty expense recognized?
In the period of the sale, in accordance with the matching principle
Why would a firm split its stock?
Allows the price of the stock to go down so that the security becomes more liquid, and then it’s easier to trade
What is the difference between a simple and a complex capital structure?
A complex capital structure contains potentially dilutive securities, while a simple capital structure contains no potentially dilutive securities
Basic EPS formula
WA common shares outstanding
WA common shares outstanding
How does a stock split or stock dividend affect the EPS calculation?
You need to adjust the number of shares outstanding before the stock split or dividend, but not after. This is because after the stock split the adjustment is inherent in (would be doing it twice)
