Summary

Question 1

Financial accounting is the process by which information on the transactions of an organization is ___

Answer 1

captured, analyzed, and reported to external decision makers

Question 2

These decision makers are referred to as ________ and include investors and creditors.

Answer 2

financial statement users

Question 3

What is this a list of?
shareholders, the board of directors, potential investors, creditors (bankers and suppliers), regulators (stock exchanges), taxing authorities (governments), securities analysts, and others.

Answer 3

The main users of financial accounting information

Question 4

Shareholders, the board of directors, and potential investors will use financial accounting information to enable them to

Answer 4

assess how well management has run the company; determine whether they should buy, sell, or continue to hold shares in the company;
assess the company’s share price relative to the financial accounting information; and so on.

Question 5

_________ will use financial accounting information to determine whether they should lend funds to the company, establish credit terms for it, assess a company’s ability to meets its obligations, and so on.

Answer 5

creditors

Question 6

__________will use financial accounting information to determine whether a company has met its listing requirements.

Answer 6

regulators

Question 7

will use financial accounting information in assessing the taxes owed by the organization.

Answer 7

Taxing authorities

Question 8

There are three major forms of business organization

Answer 8

(1) proprietorships, (2) partnerships, and (3) corporations.

Question 9

shares trade on a public stock exchange and are widely held

Answer 9

public corporations

Question 10

shares do not trade on a public exchange and are generally owned by a small number of people

Answer 10

private corporations

Question 11

the major forms of business organization and explain the key distinctions between them.
separate legal entities
personal assets of owners
tax returns

Answer 11

Corporations are separate legal entities, whereas proprietorships and partnerships are not.

This means the personal assets of owners are protected in the event of legal action against corporations, whereas they are at risk in the case of proprietorships and partnerships.

It also means corporations file separate tax returns, whereas the income from proprietorships and partnerships is reported on the personal tax returns of their owners.

Question 12

The three categories of business activities are

Answer 12

(1) operating, (2) investing, and (3) financing activities.

Question 13

Operating activities are related to

Answer 13

the company’s revenues and expenses, such as sales to customers, collections from customers, purchases of inventory, and payments of wages and other expenses.

Question 14

Investing activities include

Answer 14

buying and selling property, plant, and equipment and buying and selling the shares of other companies.

Question 15

Financing activities include

Answer 15

borrowing money, issuing shares, repaying loan principal, and paying dividends.

Question 16

There are four basic financial statements:

Answer 16

(1) the statement of income, (2) the statement of changes in equity, (3) the statement of financial position, and (4) the statement of cash flows.

Question 17

The objective of the statement of income is to

Answer 17

measure the company’s operating performance (its profit) for a period of time.

Question 18

he objective of the statement of changes in equity is to

Answer 18

provide details on how each component of shareholders’ equity changed during the period. The components of shareholders’ equity include share capital (the shares issued by the company) and retained earnings (the company’s earnings that have been kept and not distributed as dividends).

Question 19

The objective of the statement of financial position is to

Answer 19

present information on a company’s assets, liabilities, and shareholders’ equity at a specific date. Assets must be controlled by the company and embody a future benefit. Examples include cash; accounts receivable; inventory; property, plant, and equipment; land; and so on. Liabilities are obligations of a company that will result in an outflow of resources. Examples include accounts payable, deferred revenue, long-term debt, and so on. Shareholders’ equity represents the shareholders’ interest in the assets of the company and is referred to as net assets. Examples include common shares and retained earnings.

Question 20

The objective of the statement of cash flows is to

Answer 20

enable financial statement users to assess the company’s inflows and outflows of cash related to its operating, investing, and financial activities for a period of time.

Question 21

The notes to a company’s financial statements are used to

Answer 21

provide additional detail and context for items in the financial statements. They enable the financial statements themselves to remain uncluttered, while increasing their usefulness.

Question 22

Canadian public companies (those whose shares trade on a public stock exchange) are required to prepare their financial statements using

Answer 22

International Financial Reporting Standards (IFRS).

Question 23

Private companies in Canada generally follow

Answer 23

Accounting Standards for Private Enterprises (ASPE), but have the option of following IFRS.

Question 24

Useful information has two fundamental qualitative characteristics.

Answer 24

It must be relevant (it must matter to users’ decision-making), and it must be representationally faithful (it must represent transactions and balances as they took place or are at present).

Question 25

To be relevant,

Answer 25

the information must be material and have a predictive value or a confirmatory value.

Question 26

To be representationally faithful

Answer 26

the information must be complete, neutral, and free from error.

Question 27

Four other enhancing qualitative characteristics have been identified that can increase the usefulness of financial information.

Answer 27

These are comparability, verifiability, timeliness, and understandability. These characteristics increase usefulness, but they cannot make useless information useful.

Question 28

Under the cash basis of accounting

Answer 28

revenues are recorded when cash is received and expenses are recorded when cash is paid out.

Question 29

Under the accrual basis of accounting

Answer 29

revenues are recorded when they are earned and expenses are recorded when they are incurred.

Question 30

Revenues are earned when

Answer 30

the company has satisfied its performance obligations in the contract by providing the goods or services to its customers.

Question 31

Accounting standard setters have determined that financial information prepared using the accrual basis of accounting is

Answer 31

more useful than that resulting from the use of the cash basis.

Question 32

Explain the accounting equation template approach to recording transactions.

Answer 32

Every transaction must affect at least two accounts when it is recorded.
•The accounting equation must remain in balance as transactions are recorded; total assets must equal the sum of total liabilities plus shareholders’ equity.
•One of the main limitations of the accounting equation template method is that the number of columns that can be used is limited, which means that the number of accounts is also limited. The information resulting from this system may lack the level of detail required by management and other users.
•The other main limitation of the accounting equation template method is the lack of specific accounts for recording revenues, expenses, and dividends declared. Instead, these are recorded in the Retained Earnings account. This makes it difficult and time-consuming for management to quantify revenue and expense information, which is critical for managing any business.

Question 33

Analyze basic transactions and record their effects on the accounting equation. (template method)

Answer 33

Transactions affecting the Retained Earnings account (revenues, expenses, and the declaration of dividends) should be referenced to indicate the nature of the transaction.
•Revenues increase Retained Earnings, while expenses and the declaration of dividends decrease Retained Earnings.

Question 34

is normally the first financial statement prepared. This statement, which includes all revenues and expenses, provides the net income figure that is required for all of the other financial statements.

Answer 34

The statement of income

Question 35

is the next (2nd) financial statement prepared. It illustrates any changes in the number of shares, changes in the dollar value of share capital, and changes to the Retained Earnings account (due to net income or loss or the declaration of dividends).

Answer 35

The statement of changes in equity

Question 36

is a vertical presentation of the accounting equation. It includes all assets, liabilities, and shareholders’ equity accounts. It is often prepared on a classified basis, meaning that asset and liability accounts are presented in order of liquidity. Current assets are presented separately from non-current assets, while current liabilities are presented separately from non-current liabilities.

Answer 36

The statement of financial position

Question 37

All assets expected to be received, realized, or consumed within the next 12 months are considered to be

Answer 37

current assets.

Question 38

All liabilities expected to be settled or paid within the next 12 months are considered

Answer 38

current liabilities.

Question 39

The final financial statement to be prepared is the

Answer 39

statement of cash flows. This statement categorizes all transactions of a business that affect cash into three categories: operating activities, investing activities, and financing activities.

Question 40

The profit margin ratio is calculated by

Answer 40

dividing net income by sales revenue

Question 41

It indicates the percentage of sales revenue that remains after all expenses, including income taxes, have been recorded.

Answer 41

The profit margin ratio

Question 42

The return on equity ratio is calculated by

Answer 42

dividing net income by average shareholders’ equity. It compares profit relative to the amount invested by shareholders. It provides shareholders with a sense of the returns being generated on their equity in the company.

Question 43

The return on assets ratio is calculated by

Answer 43

dividing net income by average total assets. It provides an indication of how effective management has been at generating a return given the assets at their disposal.

Question 44

Explain how the double-entry accounting system works, including how it overcomes the limitations of the template approach.

Answer 44

• Every transaction must be recorded in a way that affects at least two accounts, with the effects of these entries being equal and offsetting.
• The double-entry accounting system enables the use of a huge number of accounts and is not limited to a fixed number of columns as is the case with the template approach. This allows the company to capture information at the level of detail required to manage the business, yet makes it easy to summarize the information for reporting purposes.

Question 45

An account’s normal balance illustrates

Answer 45

what needs to be done to increase that account. The opposite is done to decrease it

Question 46

Because Retained Earnings is a shareholders’ equity account

Answer 46

it normally has a credit balance. Therefore, to increase it, we would credit it, and to decrease it, we would debit it.

Question 47

Explain the normal balance concept and how it is used within the double-entry accounting system.

Answer 47

The normal balance concept is used to determine whether an account normally has a debit or credit balance.
•To determine an account’s normal balance, a “T” is drawn through the middle of the accounting equation. Accounts on the left side of the “T” (assets) normally have a debit (DR) balance, while accounts on the right side of the “T” (liabilities and shareholders’ equity) normally have a credit (CR) balance.

Question 48

Identify and explain the steps in the accounting cycle.

Answer 48

• The steps in the accounting cycle are: (1) start with opening balances, (2) complete transaction analysis, (3) record transactions in the general journal, (4) post transactions to the general ledger, (5) prepare a trial balance, (6) record and post adjusting entries, (7) prepare an adjusted trial balance, (8) prepare financial statements, and (9) prepare closing entries.
• At a minimum, this cycle is repeated annually, but parts of it repeat much more frequently (quarterly, monthly, weekly, or even daily).

Question 49

Explain the significance of a company’s decisions regarding its chart of accounts and the implications of subsequent changes.

Answer 49

• The chart of accounts outlines the type of information management wishes to capture to assist them in managing the business.
• The chart of accounts is dynamic and can be changed when the company enters into new types of operations, opens new locations, requires more detailed information, or requires less detailed information.
• Changes to the chart of accounts are most often introduced at the beginning of a fiscal year

Question 50

5 Explain the difference between permanent and temporary account

Answer 50

• Permanent accounts have balances that are carried over from one accounting period to the next.
• Temporary accounts have balances that are closed to retained earnings at the end of each accounting period. That is, they are reset to zero.
• All of the accounts on the statement of financial position (assets, liabilities, and shareholders’ equity accounts) are permanent accounts.
• All of the accounts on the statement of income (revenues and expenses) and Dividends Declared are temporary accounts.

Question 51

The general journal is a

Answer 51

chronological listing of all transactions. It contains detailed information on each transaction.

Question 52

Each journal entry must affect

Answer 52

two or more accounts and the total dollar amount of debits in the entry must be equal to the total dollar amount of credits. In other words, total DR = total CR.

Question 53

the information recorded in the general journal is posted to the general ledger.

Answer 53

•On a periodic basis (such as daily, weekly, or monthly)

Question 54

additional general ledger info

Answer 54

The general ledger is used to prepare summary information for each account. The detail from each journal entry affecting a specific account is recorded in the general ledger account for that specific account.
•A trial balance is prepared to ensure that the total of all debits posted to the general ledger is equal to the total credits posted.

Question 55

Explain why adjusting entries are necessary and prepare them.

Answer 55

Adjusting entries are required at the end of each accounting period to record transactions that may have been missed.

Question 56

There are two types of adjusting entries

Answer 56

accruals and deferrals.

Question 57

Accrual entries are used to

Answer 57

record revenues or expenses before cash is received or paid.

Question 58

Deferral entries are used to

Answer 58

record revenues or expenses after cash has been received or paid.

Question 59

Depreciation is a type of

Answer 59

deferral entry.

Question 60

Adjusting entries never involve

Answer 60

cash.

Question 61

Explain why closing entries are necessary and prepare them.

Answer 61

•There are four closing entries: (1) close all revenue accounts to the Income Summary account, (2) close all expense accounts to the Income Summary account, (3) close the Income Summary account to Retained Earnings, and (4) close Dividends Declared to Retained Earnings.

Question 62

1 Explain the nature of revenue and why revenue is of significance to users.

Answer 62

• Revenues are inflows of economic benefits from a company’s ordinary operating activities (the transactions a company normally has with its customers in relation to the sale of goods or services).
• Revenues are not tied to the receipt of cash because other economic benefits such as accounts receivable can result.
• For a company to be successful, it must generate revenues in excess of the expenses it incurs doing so.
• Users assess the quantity of revenues (changes in the amount of revenues) and the quality of revenues (the source of any growth and how closely any change in revenues corresponds with changes in cash flows from operating activities).

Question 63

There are two approaches to revenue recognition used in accounting standards:

Answer 63

a contract-based approach, which is required under IFRS, and an earnings-based approach, which is required under ASPE.

Question 64

Under the contract-based approach,

Answer 64

a company recognizes revenue whenever its net position in a contract increases. This occurs when the company’s rights under a contract increase or its obligations under the contract decrease.
•A five-step model is used to determine when revenue should be recognized and what amount that should be. The steps are: (1) identify the contract; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when each performance obligation is satisfied.
•A contract is a legally enforceable agreement that has been approved by the parties and to which they are committed. It specifies the rights and obligations of each party, it has commercial substance, and collection of payment is considered probable.
•Performance obligations relate to distinct goods or services. Goods or services are considered to be distinct if the customer can benefit from them through use, consumption, or by selling it on its own or with other resources the customer has or can access.
•The transaction price is the amount of consideration the seller expects to receive in exchange for providing the goods or services. If the amount is variable, as a result of discounts, refunds, rebates, incentives, and so on, then the transaction price should reflect this, so that it reflects the amount the seller expects to receive after these amounts have been factored in.
•If there are multiple performance obligations, then the transaction prices must be allocated to each of them. This is done using the stand-alone selling price for each obligation and determining the percentage of each relative to the combined total.
•Revenue is recognized when each performance obligation is satisfied through the transfer of goods or the provision of services. A performance obligation is deemed to have been satisfied when control of the goods or services has been transferred to the customer.

Question 65

Explain how revenue recognition is affected by the right of returns, warranties, consignment, and third-party sale arrangements.

Answer 65

• If goods are sold with a right of return, management must estimate the extent of expected refunds and reduce the estimated transaction price by this amount. A refund liability is established for the expected refund amount.
• There are two types of warranties: assurance warranties and service warranties. Service warranties are sold separate from the warrantied goods and typically have a longer warranty coverage period. Service warranties are considered to be a separate performance obligation, so a portion of the transaction price must be allocated to it. Assurance warranties are not considered to be a separate performance obligation.
• Consignment arrangements involve the consignor transferring their goods to a consignee who, in turn, sells them to the customer. The goods remain in the control of the consignor and the consignee is only entitled to a commission upon sale of the goods. The consignee only recognizes the amount of the commission, rather than the total selling price of the goods, as revenue.
• Third-party sales involve an agent arranging sales on behalf of a principal. The principal is responsible for providing the goods or services to customers, and the agent receives a commission or fee for arranging the sale. The agent only recognizes as revenue the commission or fee, rather than the gross amount of the sale.

Question 66

• If goods are sold with a right of return, management must estimate the extent of expected refunds and reduce the estimated transaction price by this amount. A refund liability is established for the expected refund amount.
• There are two types of warranties: assurance warranties and service warranties. Service warranties are sold separate from the warrantied goods and typically have a longer warranty coverage period. Service warranties are considered to be a separate performance obligation, so a portion of the transaction price must be allocated to it. Assurance warranties are not considered to be a separate performance obligation.
• Consignment arrangements involve the consignor transferring their goods to a consignee who, in turn, sells them to the customer. The goods remain in the control of the consignor and the consignee is only entitled to a commission upon sale of the goods. The consignee only recognizes the amount of the commission, rather than the total selling price of the goods, as revenue.
• Third-party sales involve an agent arranging sales on behalf of a principal. The principal is responsible for providing the goods or services to customers, and the agent receives a commission or fee for arranging the sale. The agent only recognizes as revenue the commission or fee, rather than the gross amount of the sale.

Answer 66

• A single-step statement of income has two parts. All revenues are reported together in one section and all expenses are reported together in another section. The source of the revenues and the nature of the expenses are not considered.
• On a multi-step statement of income, the revenues earned from operations are presented separately from incidental revenues such as interest or dividends. Some expenses, such as cost of goods sold, are presented separately from other expenses. Multi-step statements of income also provide users with key measures such as gross profit and income from operations.
• Users of a single-step statement of income can determine measures such as gross margin and income from operations, but they are not presented on the statement itself.

Question 67

Understand the difference between comprehensive income and net income.

Answer 67

• Companies are required to report net income and comprehensive income.
• Comprehensive income is equal to net income plus other comprehensive income.
• Other comprehensive income includes gains and losses resulting from the revaluation of certain financial statement items to fair value or as a result of changes in foreign currency exchange rates. Because these revaluation transactions are not transactions with third parties, they are not included in net income but are included in other comprehensive income.

Question 68

6 Understand the difference between presenting expenses by function or by nature of the item on the statement of income.

Answer 68

• Companies can present their expenses by function or by nature on the statement of income. Function refers to the functional area of the business (such as sales, distribution, and administration), while nature refers to the type of expense (such as wages, rent, and insurance).
• Management can choose which method to use. If they choose to present expenses by function, then they must disclose information on the nature of the expenses in the notes to the company’s financial statements

Question 69

7 Calculate and interpret a company’s basic earnings per share.

Answer 69

• The earnings per share ratio can be determined by dividing net income less preferred dividends by the weighted average number of common shares outstanding.
• EPS expresses net income, after preferred dividends, on a per-share basis.
• EPS is one of the most commonly cited financial measures and companies are required to report their EPS on the statement of income or disclose it in the notes to their financial statements.

Question 70

1 Explain why cash and accounts receivable are of significance to users.

Answer 70

• As a company’s most liquid assets, cash and accounts receivable provide the resources necessary to meet immediate, short-term financial obligations.
• Knowing a company’s cash and receivables balances enables users to assess a company’s liquidity (its ability to meet its obligations in the short term).

Question 71

2 Describe the valuation methods for cash.

Answer 71

• Cash includes the cash physically on hand, on deposit at financial institutions, and any cash equivalents.
• Cash equivalents are amounts that can be converted into known amounts of cash and must be maturing within three months of the acquisition date.
• Cash is measured at its face value at the reporting date, with any foreign currency translated into Canadian dollars using the rate of exchange at the statement of financial position date.

Question 72

3 Explain the main principles of internal control and their limitations.

Answer 72

• The board of directors is ultimately responsible for an organization’s internal controls. The board establishes the tone at the top regarding the importance of internal controls. Management are delegated the responsibility for establishing and operating the internal control system, and their performance is monitored by the board.
• An internal control system includes (1) physical controls (locks, alarms, cash registers); (2) assignment of responsibilities (making one person responsible for each task); (3) separation of duties (separation of transaction authorization, recording, and asset custody); (4) independent verification (either internal or external); and (5) documentation (receipts, invoices, and so on).
• The effectiveness of internal controls is limited by factors including: (1) cost/benefit considerations; (2) human error; (3) collusion; (4) management override; and (5) changing circumstances.

Question 73

4 Explain the purpose of bank reconciliations, including their preparation and the treatment of related adjustments.

Answer 73

• A bank reconciliation ensures that any differences between the accounting records for cash and the bank statement are identified and explained.
• The reconciliation adjusts the bank balance for items that the company is aware of but the bank is not (outstanding cheques and outstanding deposits). It also adjusts the company’s cash balance for items that appear on the bank statement that have not yet been reflected in the company’s records (such as bank charges, interest, and cheque returns due to non-sufficient funds).
• Journal entries must be made for each adjustment required to the company’s cash balance in order to adjust the cash balance in the general ledger.

Question 74

5 Explain why companies sell on account and identify the additional costs that result from this decision.

Answer 74

• Companies sell on account to increase total sales, remain competitive, and generate additional revenue (interest).
• When selling on account, companies incur additional costs, including wages for the credit-granting function, wages for the collections function, and bad debts expense.

Question 75

6 Describe the valuation methods for accounts receivable.

Answer 75

• Accounts receivable are reflected on the statement of financial position at their carrying amount, which is equal to the full amount of all receivables less the allowance for doubtful accounts.
• The allowance for doubtful accounts represents management’s best estimate of the total accounts receivable that it expects it will be unable to collect.

Question 76

7 Explain the allowance method of accounting for bad debts

Answer 76

• The allowance method involves management estimating the amount of receivables that it expects it will be unable to collect. The estimated bad debts expense is recorded in the same period in which the credit sales were reported rather than waiting to record the bad debt until the customers fail to pay.
• Since the specific customers who will not pay are unknown at the time the bad debts expense is estimated, no adjustment can be made to the Accounts Receivable account. Instead, the amount is recorded in Allowance for Doubtful Accounts, a contra-asset account.
• Under the allowance method, journal entries are required to initially record the bad debts expense, to record the writeoff of specific receivables once they are known, and to record the recovery of any receivables that have previously been written off.

Question 77

8 Identify the two methods of estimating bad debts under the allowance method and describe the circumstances for using each method.

Answer 77

• The two methods of estimating bad debts under the allowance method are the percentage of credit sales method and the aging of accounts receivable method.
• With the percentage of credit sales, the estimated bad debts expense is determined using a percentage (historical or industry average) of credit sales revenue. No analysis of the allowance for doubtful accounts is required to determine bad debts expense.
• With the aging of accounts receivable method, an estimate of uncollectible accounts is made using a percentage (historical or industry average), with bad debts expense equal to the amount required to adjust the Allowance for Doubtful Accounts balance to this estimated total. An analysis of allowance for doubtful accounts is required to determine bad debts expense.

Question 78

9 Explain the direct writeoff method of accounting for bad debts and when it is acceptable to use it.

Answer 78

• Under the direct writeoff method, there is no accounting for bad debts expense until a specific customer’s account is written off. As such, an allowance for doubtful accounts is not needed.
• This method is not acceptable under accounting standards in Canada, but it is sometimes used by companies with an insignificant amount of bad debts because the difference between it and the allowance method would not result in material differences.

Question 79

10 Explain alternative ways in which companies shorten their cash-to-cash cycle.

Answer 79

• One way that companies shorten their cash-to-cash cycle is to accept credit cards rather than offering their customers credit directly. The company is able to collect much more quickly from the credit card companies than it would from customers.
• Another way that companies shorten the cash-to-cash cycle is to offer sales discounts to encourage customers who have purchased on account to pay their accounts early. A common sales discount is “2/10, n/30,” which entitles customers to a 2% discount if they pay their account within 10 days; otherwise, the net amount is due within 30 days.
• Some companies also factor (sell) their accounts receivable to a financial institution (known as a factor) in order to shorten their cash-to-cash cycle. The receivables may be sold with recourse (the company remains responsible for their ultimate collection) or without recourse (the factor assumes collection responsibility).

Question 80

11 Explain the concept of liquidity. Calculate the current ratio, quick ratio, accounts receivable turnover ratio, and average collection period ratio, and assess the results.

Answer 80

• Liquidity is a company’s ability to convert assets into cash so that liabilities can be paid.
• The current ratio is equal to current assets divided by current liabilities and is a measure of the amount of current assets the company has relative to each dollar of current liabilities.
• The quick ratio is a stricter measure of liquidity than the current ratio. This is because it is determined without including inventory and prepaid expenses. Specifically, the ratio is equal to current assets excluding inventory and prepaids divided by current liabilities.
• The accounts receivable turnover ratio is equal to credit sales divided by average accounts receivable. It measures how often accounts receivable are collected in full during the period.
• The average collection period is the average length of time, in days, that it takes a company to collect its receivables. It is calculated by dividing 365 by the accounts receivable turnover ratio.

Question 81

The process of organizing a business as a separate legal entity having ownership divided into transferable shares held by shareholders.

Answer 81

Incorporation

Question 82

Wages that will be paid to employees after source deductions.

Answer 82

Net wages

Question 83

Payments made by a company to shareholders that represent a portion of a company’s net income. Dividends are paid only after they are declared by the board of directors.

Answer 83

Dividends

Question 84

The accounting basis, used by some entities, that recognizes revenues whenever cash is received and expenses when cash is paid, regardless of whether the revenues have been earned or expenses incurred.

Answer 84

Cash basis of accounting

Question 85

A short-term loan, often on a demand basis, that is arranged with a bank to cover a company’s short-term cash shortages.

Answer 85

Working capital loan

Question 86

Inflows of resources to a company that result from its ordinary activities, such as the sale of goods and/or services.

Answer 86

Revenues

Question 87

Goods or services from which the customer can benefit and that are separate from other goods and services to be delivered under the contract.

Answer 87

Distinct goods or services

Question 88

An accounting system that maintains the equality of the basic accounting equation by requiring that each entry have equal amounts of debits and credits.

Answer 88

Double-entry accounting system

Question 89

The expense that records the cost to the selling company of the inventory that was sold during the period.

Answer 89

Cost of goods sold

Question 90

The liquid funds available for use in a company, calculated as current assets minus current liabilities.

Answer 90

Working capital

Question 91

The accounting basis, used by almost all companies, that recognizes revenues in the period when they are earned and expenses in the period in which they are incurred, and not necessarily in the period when the related cash inflows and outflows occur.

Answer 91

Accrual basis of accounting

Question 92

An element of the fundamental qualitative characteristic of relevance that states that accounting information is relevant to decision makers if it provides feedback on their previous decisions.

Answer 92

Confirmatory value

Question 93

The portion of long-term debt that is due within one year (or one operating cycle).

Answer 93

Current portion of long-term debt

Question 94

The right to be paid by customers, as outlined in a contract.

Answer 94

Right to receive consideration

Question 95

What results when expenses for a period exceed the income earned.

Answer 95

Net loss

Question 96

The left side of a T (asset) account, or an entry made to the left side of a T account.

Answer 96

Debit

Question 97

A decrease in income resulting from the sale of investments; property, plant, and equipment; or intangible assets at amounts less than their carrying amounts.

Answer 97

Losses

Question 98

The balance (debit or credit) that an account is normally expected to have. Assets, expenses, and losses normally have debit balances. Liabilities, shareholders’ equity, revenues, and gains normally have credit balances. It is also used to indicate how the account is increased in a journal entry. The opposite of an account’s normal balance is used to record a decrease to the account.

Answer 98

Normal balance

Question 99

Synonym for Deferred revenue.

Answer 99

Unearned revenue

Question 100

Accounts whose balances carry over from one period to the next. All statement of financial position accounts are permanent accounts.

Answer 100

Permanent accounts

Question 101

The transfer of a good or service to a customer, often indicated by physical possession, legal title, the risks and rewards of ownership, the acceptance of goods or receipt of services, or an obligation to pay.

Answer 101

Control

Question 102

The shares issued by a company to its owners. Shares represent the ownership interest in the company.

Answer 102

Share capital

Question 103

The reinstatement and collection of an account receivable that was previously written off.

Answer 103

Recovery

Question 104

A fundamental qualitative characteristic of useful financial information that states that useful financial information must matter to users’ decision-making.

Answer 104

Relevant

Question 105

The most basic of accounting systems, which uses the accounting equation for transaction analysis and recording. Synonym for synoptic approach.

Answer 105

Template approach

Question 106

Liabilities where there is uncertainty about the timing or the amount of the future expenditures.

Answer 106

Provision

Question 107

An asset that has been pledged as security for a debt. If the borrower defaults on the debt, the lender can have the collateral seized and sold, with the proceeds used to repay the debt.

Answer 107

Collateral

Question 108

A measure of a company’s performance, calculated by dividing the net income for the period, less preferred dividends, by the weighted average number of common shares that were outstanding during the period. This ratio determines the profit earned on each common share.

Answer 108

Basic earnings per share

Question 109

The process by which information on the transactions of an organization is captured, analyzed, and used to report to decision makers outside of the organization’s management team.

Answer 109

Financial accounting

Question 110

Adjusting journal entries required when a company needs to recognize a revenue in an accounting period after the cash has been received or an expense in an accounting period after the cash has been paid.

Answer 110

Deferrals

Question 111

A ratio calculated by dividing the earnings for the period by the average number of shares outstanding during the period.

Answer 111

Earnings per share

Question 112

The individuals responsible for running (managing) a company.

Answer 112

Management

Question 113

A company’s activities that involve raising funds to support other activities or that represent a return of these funds. The two major ways to raise funds are to issue new shares or borrow money. Funds can be returned via debt repayment, dividend payments, or the repurchase of shares.

Answer 113

Financing activities

Question 114

Reports prepared by the management of a company for its shareholders, creditors, and others summarizing how the company performed during a particular period. Includes the statement of financial position, the statement of income, the statement of changes in equity, the statement of cash flows, and the notes to the financial statements.

Answer 114

Financial statements

Question 115

The net assets of a company (its assets less its liabilities), representing the interest of shareholders in the company. It is the sum of a company’s share capital and retained earnings. It is also sometimes used to refer simply to the shareholders’ equity section of the statement of financial position.

Answer 115

Equity

Question 116

The gain or increase in value in a company’s share price.

Answer 116

Capital appreciation

Question 117

An entry made in the general journal to record a transaction or event.

Answer 117

Journal entry

Question 118

The characteristic of information in financial statements that would not affect the user’s decisions.

Answer 118

Material

Question 119

The total change in the shareholders’ equity (net assets) of the entity from non-owner sources. Includes net income as well as other components, which generally represent unrealized gains and losses.

Answer 119

The total change in the shareholders’ equity (net assets) of the entity from non-owner sources. Includes net income as well as other components, which generally represent unrealized gains and losses.

Question 120

A company that owns and controls other companies, known as subsidiaries.

Answer 120

Parent company

Question 121

The owner of goods sold on consignment by a consignee.

Answer 121

Consignor

Question 122

The allocation of the cost of capital assets to expense over their estimated useful lives.

Answer 122

The allocation of the cost of capital assets to expense over their estimated useful lives.

Question 123

The shareholders’ claim on total assets, represented by the investment of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company. Synonym for net assets.

Answer 123

Shareholders’ equity

Question 124

The accounting standards that must be followed by Canadian public companies and that private companies may elect to adopt.

Answer 124

International Financial Reporting Standards (IFRS)

Question 125

The set of policies and procedures established by an enterprise to safeguard its assets and ensure the integrity of its accounting system.

Answer 125

Internal control system

Question 126

The initial amount lent or borrowed.

Answer 126

Principal

Question 127

An asset or a liability that will be received, realized, or consumed, or else settled or paid within 12 months from the year end.

Answer 127

Current

Question 128

A ratio that compares the net income (or profit or earnings) during an accounting period with the related revenues. Synonym for net profit margin.

Answer 128

Profit margin ratio

Question 129

Adjusting journal entries required when a company needs to recognize a revenue before the receipt of cash or an expense prior to the payment of cash.

Answer 129

Accruals

Question 130

Characteristic of a company’s receivables purchased by a factor whereby the factor can go back to the seller for payment if it is unable to collect the receivable.

Answer 130

With recourse

Question 131

A method of organizing expenses on the statement of income by way of their natural classification (such as salaries, transportation, depreciation, and advertising).

Answer 131

Nature

Question 132

The amount a company estimates it may be able to recover from the disposal of an asset when the company is finished using it. The amount is equal to the estimate of the amount that the company would receive today if it disposed of the asset in the age and condition it is expected to be in at the time of disposal.

Answer 132

Estimated residual value

Question 133

Characteristic of a company’s receivables purchased by a factor whereby the factor will bear the loss of any receivable it is unable to collect.

Answer 133

Without recourse

Question 134

Ledger that contains the details of information included in a general ledger account; for example, with accounts receivable, all of the account details for each customer are specified in the accounts receivable subledger. The total of all accounts in the subledger must equal the total in the related general ledger account, which is known as the control account. Synonym for subsidiary ledger.

Answer 134

Subledger (subsidiary ledger)

Question 135

The process of analyzing customers’ accounts and categorizing them by how long they have been outstanding. Usually done as a basis for estimating what amounts may be uncollectible. Also known as the statement of financial position method.

Answer 135

Aging of accounts receivable method

Question 136

Certificates that represent portions of ownership in a corporation. These shares usually carry a right to vote.

Answer 136

Common shares

Question 137

Financial statement showing net income plus other components of other comprehensive income, combined to produce the total comprehensive income.

Answer 137

Statement of comprehensive income

Question 138

Synonym for quick ratio.

Answer 138

Acid test ratio

Question 139

What occurs when a company has provided goods or services to customers and it is probable that measurable economic benefits will flow to a company.

Answer 139

Earned

Question 140

A company whose shares do not trade on a public stock exchange.

Answer 140

Private company

Question 141

The amount of time a company estimates an asset will be used to generate revenue.

Answer 141

Estimated useful life

Question 142

A warranty that provides customers with assurance beyond basic product performance and may provide protection related to wear and tear occurring subsequent to purchase or provide some additional level of service.

Answer 142

Service-type warranty

Question 143

Financial statement showing a company’s revenues and expenses, indicating the operating performance over a period of time. Also known as the income statement, statement of operations, statement of earnings, and statement of profit or loss.

Answer 143

Statement of income

Question 144

Synonym for earnings, net income, and profit.

Answer 144

Net earnings

Question 145

The amount reflected in the transaction price of a contract resulting from discounts, refunds, rebates, price concessions, incentives, performance bonuses, penalties, or the like, which affect the customer’s consideration of the contract.

Answer 145

Variable consideration

Question 146

Loan payments that consist of both interest and principal, with the total amount remaining constant but the portion for interest becoming smaller as each payment is made and the outstanding loan principal is reduced.

Answer 146

Blended instalment payments

Question 147

The Quebec government program providing retirement benefits to retired workers based on the premiums they and their employers paid into the plan when they were working.

Answer 147

Quebec Pension Plan (QPP)

Question 148

Accounts receivable that are deemed to be bad debts. The point at which they are deemed uncollectible is generally established by company policy.

Answer 148

Uncollectible accounts

Question 149

The federal taxing authority in Canada, which is responsible for federal tax collection.

Answer 149

Canada Revenue Agency (CRA

Question 150

A fundamental qualitative characteristic of useful financial information, stating that the information in the financial statements should represent events and transactions as they actually took place or are at present.

Answer 150

Representationally faithful

Question 151

The average number of days that a company takes to pay for its credit purchases.

Answer 151

Average payment period

Question 152

A current liability arising when a company has loyalty programs that enable customers to accumulate points or other credits when making purchases and redeem them for free goods or services. Companies off ering such programs must estimate the value of the outstanding loyalty points and establish a liability for them.

Answer 152

Customer loyalty provision

Question 153

Bad debts resulting from customers who fail to pay their accounts, as a result of selling on account.

Answer 153

Bad debts expense

Question 154

A liability representing cash receipts from customers that have not yet met the criteria for revenue recognition. Synonym for Unearned revenue.

Answer 154

Deferred revenue

Question 155

The characteristic of a contract in which the risk, timing, or amount of a company’s future cash flows is expected to change as a result of a contract.

Answer 155

Commercial substance

Question 156

Section of a company’s annual report where management provides their perspective and analysis of the financial statements. The information is meant to complement or supplement the financial statements and be forward-looking.

Answer 156

Management discussion and analysis (MD&A)

Question 157

A statement of income in which all revenues are listed in one section and all expenses (except income tax, perhaps) are listed in a second section.

Answer 157

Single-step statement of income

Question 158

A process used by organizations using the accrual basis of accounting to determine when revenue should be recorded, or recognized.

Answer 158

Five-step process for revenue recognition

Question 159

Individuals or entities that acquire shares of a company as an investment.

Answer 159

Investors

Question 160

Separate warranty coverage that customers can purchase; it is considered a separate performance obligation.

Answer 160

Service warranty

Question 161

Synonym for gross margin.

Answer 161

Gross profit

Question 162

Synonym for Provision for warranty claims.

Answer 162

Warranty provision

Question 163

The process whereby a company sells its accounts receivable to another company, typically a financial institution (known as the factor). Often done to shorten the cash-tocash cycle.

Answer 163

Factoring

Question 164

The payment of employee source deductions, together with the employer’s share, to the federal or other government.

Answer 164

Remittance

Question 165

A company’s requirement to provide goods or services to a customer, as outlined in a contract.

Answer 165

Performance obligation

Question 166

A listing of the names of the accounts used in a particular accounting system.

Answer 166

Chart of accounts

Question 167

A method that only recognizes bad debts when the accounts receivable of specific customers are written off. No estimates of future writeoffs are made, and the allowance for doubtful accounts is not required.

Answer 167

Direct writeoff method

Question 168

An organization’s short-term ability to convert its assets into cash to be able to meet its obligations and pay its liabilities.

Answer 168

Liquidity

Question 169

The corporate tax return document required to be filed by corporations with the federal government to indicate the amount of corporate income tax owed. Synonym for Corporate tax return.

Answer 169

T2

Question 170

An enhancing qualitative characteristic that accounting information has when financial statement readers are able to compare different sets of financial statements over time and across like companies.

Answer 170

Comparability

Question 171

The federal government program that provides benefits to unemployed individuals looking for work or undergoing retraining, maternity and paternity benefits to parents, and payments to workers who are sick or who have to leave their job to care for a seriously ill family member.

Answer 171

Employment Insurance (EI)

Question 172

Employment Insurance (EI)

Answer 172

Purchase on account

Question 173

The number of times per year that a company settles (pays) its accounts payable. It is calculated as the credit purchases divided by the average accounts payable.

Answer 173

Accounts payable turnover

Question 174

Warranty insurance that is included in the price of the product; it is not considered to be a separate performance obligation.

Answer 174

Assurance warranty

Question 175

Elements of the statement of financial position that have probable future benefits that can be measured, are owned or controlled by a company, and are the result of a past transaction.

Answer 175

Assets

Question 176

Synonym for carrying amount.

Answer 176

Net book value

Question 177

The process of removing an account receivable from a company’s books when the account is deemed uncollectible.

Answer 177

Writeoff

Question 178

A company’s current assets less inventory and prepaid expenses.

Answer 178

Quick assets

Question 179

hat occurs when two or more employees work together to commit theft, fraud, or another crime, and conceal it.

Answer 179

collusion

Question 180

An asset or liability presented in financial statements that will not be received, realized, consumed, or settled or paid within 12 months from the fiscal year end.

Answer 180

Non-current

Question 181

A method of estimating bad debts expense by using a percentage of the credit sales for the period. Also known as the statement of income method.

Answer 181

Percentage of credit sales method

Question 182

A contract between two entities in which one or both of the parties has performed a portion of its part of the agreement.

Answer 182

Partially executed contract

Question 183

The time frames for which employees are paid. Normally these are two weeks in duration, with employees being paid 26 times each calendar year.

Answer 183

Pay periods

Question 184

A measure of a company’s short-term liquidity, calculated by dividing the most liquid current assets (primarily cash, short-term investments, and accounts receivable) by the total current liabilities. Synonym for acid test ratio.

Answer 184

Quick ratio

Question 185

Financial statement that summarizes the cash flows of a company during the accounting period, categorized into operating, investing, and financing activities. Also called the cash flow statement.

Answer 185

Statement of cash flows

Question 186

A listing of the accounts and their balances after the adjusting entries have been made, but before the closing entries have been made

Answer 186

Adjusted trial balance

Question 187

The practice of choosing revenue and expense methods so that earnings are increased or decreased in particular accounting periods, or smoothed over time.

Answer 187

Earnings management

Question 188

The right side of a T (asset) account, or an entry made to the right side of a T account.

Answer 188

Credit

Question 189

An element of the statement of financial position that leads to a probable future sacrifice of a company’s resources.

Answer 189

Liabilities

Question 190

A listing of all the general ledger accounts and their balances. Used to check whether the total of the debit balances is equal to the total of the credit balances.

Answer 190

Trial balance

Question 191

Fees or interest charged by financial institutions for any unused portion of revolving credit facilities such as a line of credit, as the cost of having funds available when needed.

Answer 191

Standby fees

Question 192

Fee charged by credit card companies to merchants making sales. Also known as a swipe fee or processing fee.

Answer 192

Credit card discount

Question 193

The procedure that is used to identify the differences between the cash balance recorded in a company’s accounting records and the balance per its bank statement. This enables the company to ensure that everything is correctly recorded and to determine the correct amount of cash available.

Answer 193

Bank reconciliation

Question 194

The activities of a company that are related to developing, producing, marketing, and selling the company’s goods and/or services to customers, and other basic day-to-day activities related to operating the business.

Answer 194

Operating activities

Question 195

Characteristic of loans or other debts for which specific assets have been pledged to guarantee repayment of the debt.

Answer 195

Secured

Question 196

The financial records containing details on a company’s asset, liability, and shareholders’ equity, revenue, and expense accounts.

Answer 196

G/L

Question 197

A ratio calculated by dividing the earnings for the period by the average number of shares outstanding during the period.

Answer 197

Earnings per share (EPS)

Question 198

Qualitative characteristics of financial statements that are essential if financial information is to be considered useful and, without them, the information is useless. Relevance and representational faithfulness are both fundamental qualitative characteristics.

Answer 198

Fundamental qualitative characteristics

Question 199

A company that is owned and controlled by a parent company

Answer 199

Subsidiary companies

Question 200

Characteristic of loans or other debts when no specific assets have been pledged to guarantee repayment of the debt.

Answer 200

Unsecured

Question 201

External decision makers who utilize a company’s financial statements. This includes the owners (shareholders) and those who have lent money to the organization.

Answer 201

Financial statement users

Question 202

An annual document prepared and published by a corporation in which it reports on its business activities during the year. The report includes the corporation’s annual financial statements and is made available to the company’s owners, but many other parties, such as lenders, financial analysts, credit-rating agencies, securities regulators, and taxing authorities, also use it.

Answer 202

Annual report

Question 203

The study of the preparation and uses of accounting information by a company’s management, including information that is never shared with those outside of the organization.

Answer 203

Managerial accounting

Question 204

An entity’s position in a contract that it is party to. Determined by comparing the entity’s rights under the contract with its performance obligations under the contract. May result in a contract asset, contract liability, or net nil position.

Answer 204

Net position in a contract

Question 205

A method used to value accounts receivable by estimating the amount of accounts receivable that will not be collected in the future. Makes it possible to recognize bad debts expense in the period of the sale rather than waiting until specific non-paying customers can be identified.

Answer 205

Allowance method

Question 206

Individuals or entities that lend money or otherwise extend credit to a company, rather than invest in it directly.

Answer 206

Creditors

Question 207

An arrangement with a financial institution that allows a company to overdraw its bank account. The overdrawn amounts become a loan that must be repaid.

Answer 207

Line of credit

Question 208

A statement of financial position in which the assets and liabilities are listed in liquidity order and are categorized into current (or short-term) and non-current (or longterm) sections.

Answer 208

Classified statement of financial position

Question 209

The period of time that management estimates a capital asset (such as equipment) is expected to be used.

Answer 209

Useful life

Question 210

Qualitative characteristics of financial statements that enhance the usefulness of information.

Answer 210

Enhancing qualitative characteristics

Question 211

The sequence of steps that occurs in the measuring, recording, summarizing, and reporting of events in the accounting system.

Answer 211

Accounting cycle

Question 212

A method of calculating depreciation in which the amount of expense for each period is found by dividing an asset’s depreciable amount (equal to cost less estimated residual value) by its estimated useful life. Synonym for straight-line method.

Answer 212

Straight-line depreciation

Question 213

A measure of profitability that measures the return on the investment in assets. It is calculated by dividing net income by the average total assets.

Answer 213

Return on assets

Question 214

Increases in income resulting from sales outside of the company’s normal course of operations, such as the sale of investments; property, plant, and equipment; or intangible assets at amounts in excess of their carrying amounts.

Answer 214

Gains

Question 215

The amount that a company has borrowed on its line of credit from its bank.

Answer 215

Bank indebtedness

Question 216

An account used to record reductions in a related asset account. An example is accumulated depreciation.

Answer 216

Contra-asset account

Question 217

An element of the fundamental qualitative characteristic of relevance that states that information is material if it would affect the decision-making of financial statement users.

Answer 217

Materiality

Question 218

Synonym for template approach.

Answer 218

Synoptic approach

Question 219

The amount that an item would generate if it were sold in a transaction between independent parties. The price at which shares are trading in the stock market.

Answer 219

Market value

Question 220

A company that arranges for a third party to provide a good or service to its customer. Agents receive a commission or fee for arranging the sale.

Answer 220

Agent

Question 221

A warranty that provides customers with assurance that the product will perform as expected and protects them against any defects with the product that existed at the time of sale.

Answer 221

Assurance-type warranty

Question 222

An expense on money borrowed from creditors that is incurred with the passage of time.

Answer 222

Interest

Question 223

Conditions or restrictions placed on a company that borrows money. The covenants usually require the company to maintain certain minimum ratios and may restrict its ability to pay dividends.

Answer 223

Covenant

Question 224

An agreement a company enters into with its bank, enabling it to borrow up to a negotiated limit. The company can use the credit facility as needed and repay it as funds are available.

Answer 224

Revolving credit facilities

Question 225

The individuals or entities that own shares in a company.

Answer 225

Shareholders

Question 226

An enhancing qualitative characteristic that states that useful financial information is such that a third party, with sufficient understanding, would arrive at a similar result to that determined by management.

Answer 226

Verifiability

Question 227

Synonym for current ratio.

Answer 227

Working capital ratio

Question 228

A framework that provides the underlying set of objectives and concepts that guide accounting standard-setting bodies and assists accountants in determining how to account for items for which no specific standards have been developed.

Answer 228

Conceptual frameworks

Question 229

Accounts used to keep track of information temporarily during each accounting period. The balances in these accounts are eventually transferred to a permanent account (Retained Earnings) at the end of the period by making closing entries.

Answer 229

Temporary accounts

Question 230

An optional temporary account that is often used when closing the books to summarize all the temporary statement of income accounts (revenues and expenses) before transferring the net income to retained earnings.

Answer 230

Income Summary account

Question 231

A professionally trained accountant who examines a company’s accounting records and financial statements and provides an opinion regarding whether they fairly present the company’s financial position and operating results in accordance with accounting standards.

Answer 231

Auditor

Question 232

Amounts withheld from employee wages and remitted to the government by the employer to pay for such things as income taxes, Employment Insurance, and government pension premiums.

Answer 232

Source deductions

Question 233

The governing body of a company elected by the shareholders to represent their ownership interests.

Answer 233

Board of directors

Question 234

The federal government program providing retirement benefits to retired workers based on the premiums they and their employers paid into the plan when they were working.

Answer 234

Canada Pension Plan (CPP)

Question 235

A current liability representing the amount of wages earned by employees since they were last paid.

Answer 235

Wages payable

Question 236

The number of times that accounts receivable are turned over, or how often they are collected in full and replaced by new accounts. It is calculated as the credit sales divided by the average accounts receivable.

Answer 236

Accounts receivable turnover ratio

Question 237

Emphasis established by the board of directors meant to control and guide the company’s focus regarding the importance of internal controls.

Answer 237

Tone at the top

Question 238

An account that contains the overall amounts related to a particular item in the financial statements, with the details recorded in a subledger. For example, Accounts Receivable is a control account, containing the total balance for all of a company’s receivables, while the Accounts Receivable subledger would contain the balances for each of the individual customers. The balance in the control account should equal the sum of all the balances in the related subledger.

Answer 238

Control account

Question 239

A contra-asset account whose normal balance is a credit.

Answer 239

Accumulated Depreciation account

Question 240

A liability representing the estimated cost of providing warranty services on goods sold in each period. Synonym for Warranty provision.

Answer 240

Provision for warranty claims

Question 241

Costs for medical insurance, pensions, vacation pay, and other benefits provided by the employer to employees in addition to wages. These benefit are recognized as an expense in the period in which they are incurred and a corresponding liability is established.

Answer 241

Benefits

Question 242

The concept that a specified sum of money is worth more if it is paid or received now rather than later (because money received now can be invested to grow to a larger amount later). More generally stated, the value of a specified amount of money decreases with time until it is paid.

Answer 242

Time value of money

Question 243

Sequence of transactions and events as traced by an auditor or company official back to source documents.

Answer 243

Audit trail

Question 244

Amounts of money a company has on hand, plus balances in chequing and savings accounts, plus cash equivalents.

Answer 244

Cash

Question 245

A company purchasing the accounts receivable of another company.

Answer 245

Factor

Question 246

The liability recorded at the time of sale of a service-type warranty.

Answer 246

Unearned warranty revenue

Question 247

Synonym for earnings, net earnings, and net income.

Answer 247

Profit

Question 248

An element of the fundamental qualitative characteristic of faithful representation that states that financial information should be unbiased: neither optimistic nor overly conservative.

Answer 248

Neutral

Question 249

A journal entry with more than two parts (that is, multiple debits and/or multiple credits) that affects more than two accounts. As with any journal entry, the total amount debited must equal the total amount credited.

Answer 249

Compound journal entry

Question 250

The amount of assets that would remain after all of the company’s liabilities were settled. Synonym for shareholders’ equity.

Answer 250

Net assets

Question 251

A company’s normal, ongoing major business activities.

Answer 251

Ordinary activities

Question 252

A ratio that is calculated by dividing the total current assets by the total current liabilities and is a measure of shortterm liquidity. Synonym for working capital ratio.

Answer 252

Current ratio

Question 253

Company activities involving long-term investments, primarily investments in property, plant, and equipment, and in the shares of other companies.

Answer 253

Investing activities

Question 254

Amount of goods or services a company has purchased on credit from suppliers. Also referred to as trade accounts payable.

Answer 254

Trade payables

Question 255

A constraint within the conceptual framework that states that, when preparing financial statements, the benefits of reporting financial information must exceed the costs of doing so.

Answer 255

Cost constraint

Question 256

Earnings that are kept within a company and reinvested, rather than being paid out to shareholders in the form of dividends.

Answer 256

Retained earnings

Question 257

An element of the fundamental qualitative characteristic of faithful representation that states that financial information should be determined based on the best information available, using the correct process and with an adequate explanation provided.

Answer 257

Free from error

Question 258

The process of transferring the information from the journal entries in the general journal to the ledger accounts in the general ledger.

Answer 258

Posting

Question 259

A price reduction that is based on the invoice price less any returns and allowances and is given by a seller for early payment of a credit sale (for example, 2/10; n/30

Answer 259

Sales discounts

Question 260

The decrease in economic benefit that results from resources that flow out of the company in the course of it generating its revenues.

Answer 260

Expenses

Question 261

The full value of all of a company’s accounts receivable less the allowance for doubtful accounts. In the context of long-term assets, carrying amount or carrying value is equal to the asset’s cost, less accumulated depreciation, less accumulated impairment losses. It represents the portion of the asset’s cost that has yet to be expensed. Synonym for net book value.

Answer 261

Carrying amount

Question 262

The one-year period that represents a company’s operating year.

Answer 262

Fiscal year

Question 263

Entries made at the end of the accounting period to transfer the balances from the temporary revenue, expense, and dividend declared accounts into the retained earnings account. Resets the balance of all temporary accounts to zero.

Answer 263

Closing entries

Question 264

Journal entry to reclassify an item, such as a non-current item becoming current.

Answer 264

Reclassification entry

Question 265

An account in the general ledger.

Answer 265

General ledger account

Question 266

A section of a company’s financial statements where management provides more details about specific items, such as significant accounting policies, the types of inventory and assets held, and so on.

Answer 266

Notes to the financial statements

Question 267

A purchase of goods made under the agreement that the cost will be paid at a later date, creating a liability on the company’s records. Synonym for purchase on account.

Answer 267

Credit purchase

Question 268

A statement of income in which revenues and expenses from different sources are shown in separate sections.

Answer 268

Multi-step statement of income

Question 269

Financial statement that indicates the resources controlled by a company (assets) and the claims on those resources (by creditors and investors) at a given point in time. Also known as the balance sheet.

Answer 269

Statement of financial position

Question 270

Wages earned by employees before source deductions.

Answer 270

Gross wages

Question 271

Changes in net asset values representing unrealized gains and losses, which are not included in net earnings but are included in comprehensive income.

Answer 271

Other comprehensive income

Question 272

The selling of goods on behalf of another party, usually for a commission.

Answer 272

Consignment

Question 273

Elements of a company’s financial records that group transactions of a similar nature and are given a title, such as Cash, Equipment, or Retained Earnings.

Answer 273

Accounts

Question 274

A price reduction that is based on the invoice price less any returns and allowances and is given by a seller for early payment of a credit sale (for example, 2/10; n/30).

Answer 274

Sales discount

Question 275

A liability that will require the use of cash or the rendering of a service, or will be replaced by another current liability, within the next year or operating cycle of the company

Answer 275

Current liabilities

Question 276

The equation that provides structure to the statement of financial position, in which assets are the sum of liabilities and shareholders’ equity.

Answer 276

Accounting equation

Question 277

Conditions that must be satisfied for revenues to be recognized according to accrual accounting.

Answer 277

Revenue recognition criteria

Question 278

A contraasset account to accounts receivable, reflecting the estimated amount of accounts receivable that will be uncollectible and eventually have to be written off.

Answer 278

Allowance for doubtful accounts

Question 279

Synonym for earnings, net earnings, and profit.

Answer 279

Net income

Question 280

An enhancing qualitative characteristic that states that the information in financial statements must be timely to be useful.

Answer 280

Timeliness

Question 281

An element of the fundamental qualitative characteristic of faithful representation that states that financial statements should provide users with all of the information needed to understand what is being presented in the statements, including any necessary explanations.

Answer 281

Complete

Question 282

A method of organizing expenses on the statement of income by way of the activity (business function) for which they were incurred (such as cost of goods sold, administrative, and selling).

Answer 282

Function

Question 283

Financial information showing the results of both the current period and preceding period.

Answer 283

Comparative information

Question 284

An asset that will be turned into cash or consumed in the next year or operating cycle of a company.

Answer 284

Current assets

Question 285

An element of the fundamental qualitative characteristic of relevance that states that accounting information is relevant to decision makers when it helps predict future outcomes.

Answer 285

Predictive value

Question 286

Accounting standards that Canadian private companies may follow, unless they elect to use International Financial Reporting Standards (IFRS).

Answer 286

Accounting Standards for Private Enterprises (ASPE)

Question 287

Assets of a seller that represent the promise made by buyers to pay the seller at some date in the future.

Answer 287

Accounts receivable

Question 288

The inflow of resources that increase shareholders’ equity but are not the result of shareholder activities. Income includes revenues and gains.

Answer 288

Income

Question 289

Financial statements that represent the combined financial results of a parent company and its subsidiaries.

Answer 289

Consolidated financial statement

Question 290

An annual filing required of corporations by the federal government to determine the amount of corporate income tax owed. Synonym for T2.

Answer 290

Corporate tax return

Question 291

What occurs when an expense needs to be recorded in the period in which it has helped to generate revenue.

Answer 291

Incurred

Question 292

A current liability arising when customers purchase gift cards (or gift certificates) from a company. Until such time as the gift card is used, the company has a liability.

Answer 292

Gift card liability

Question 293

Average length of time, in days, that it takes a company to collect its receivables, calculated as 365 days divided by the accounts receivable turnover.

Answer 293

Average collection period

Question 294

A chronological listing of all the events that are recorded in a company’s accounting system.

Answer 294

General journal

Question 295

Financial statement that measures the changes in the equity of a company over a period of time, differentiating between changes resulting from transactions with shareholders and those resulting from the company’s operations. Also known as the statement of changes in shareholders’ equity, statement of shareholders’ equity, and statement of equity

Answer 295

Statement of changes in equity

Question 296

The characteristic of information in financial statements that would not affect the user’s decisions.

Answer 296

Immaterial

Question 297

Receipts or payments made directly between two bank accounts through computer networks.

Answer 297

Electronic funds transfer (EFT)

Question 298

The estimate of the amount of gift cards that will not be redeemed by their holders.

Answer 298

Breakage

Question 299

A company whose shares trade on a public stock exchange.

Answer 299

Public company

Question 300

The sum of a company’s operating activities, which is determined by subtracting expenses incurred from income earned during the same time period. It is a standard measure for corporate performance. Synonym for net income, net earnings, and profit.

Answer 300

Earnings

Question 301

Current assets that are very liquid and readily convertible into cash, or current liabilities that may require the immediate use of cash. Examples are short-term investments and bank overdrafts or lines of credit.

Answer 301

Cash equivalent

Question 302

A measure of profitability that measures the return on the investment made by common shareholders. It is calculated by dividing net income by the average common shareholders’ equity.

Answer 302

Return on equity

Question 303

Journal entries made at the end of the accounting period to record an event or transaction that was not recorded during the period. Events or transactions that are not signalled in any other way are recorded through adjusting entries. The entries do not involve the Cash account.

Answer 303

Adjusting entries

Question 304

An enhancing qualitative characteristic that states that accounting information is useful when it is prepared with enough information and in a clear enough format for users to comprehend it.

Answer 304

Understandability