1 - Basic Concepts & Financial Statements Flashcards
Financial reporting frameworks (FRFs) may be what 2 types of frameworks? (GS)
- General purpose frameworks
2. Special purpose frameworks
Publicly held entities are required to submit their Financial Statement (F/S) in accordance with what type of framework?
General purpose framework, either GAAP or IFRS
Nonpublic entities are required to submit their Financial Statement (F/S) in accordance with what type of framework?
Any framework that fairly balances needs of their F/S users and the cost of providing information (GAAP, IFRS, special purpose framework)
What are the four criteria included in a financial reporting framework? (RMPD)
- Recognition criteria to determine what appears on F/S and when it will appear
- Measurement criteria to determine the amount at which to be reported
- Presentation criteria to determine where it will appear on the F/S
- Disclosure criteria to determine what and how much information to provide
What are the two general purpose frameworks? (GI)
- GAAP
2. IFRS
Statements prepared under a special purpose framework must have modified titles showing ______
Basis of accounting (e.g., “Consolidated Statements of Assets, Liabilities and Equity (FRF for SMEs Basis)”)
What are some major special purpose frameworks? (5) (CTCRF)
- Cash Basis
- Tax Basis
- Contractual Basis
- Regulatory Basis
- FRF for SMEs (Financial Reporting Framework for Small- and Medium-Sized Entities)
What is a Cash Basis (special purpose framework) (4) (REFM)?
- Revenues recognized when received, regardless when they are earned
- Expenses recognized when paid, regardless of when they are incurred
- Fixed assets are expensed and not capitalized
- Modified cash basis is a hybrid approach between cash and accrual (assets may be capitalized, tax & inventory may accrue)
What is a Tax Basis (special purpose framework) (2) (RT)?
- Revenues and expenses recognized for financial reporting purposes in the same period and same amount as they are recognized when preparing income tax return
- Tax basis could be cash- or accrual-basis
What is a Contractual Basis (special purpose framework) (MG) (2)?
- May be required to be used by a party to a contract
2. Generally designed to assist users to determine whether or not terms/requirements are being followed
What is a Regulatory Basis (special purpose framework)?
May be imposed by government agency to whom reporting is required
Generally, what basis of accounting do purpose frameworks apply?
Accrual basis of accounting
Under accrual basis, revenues are recognized in _____
Periods in which they are earned, regardless of when they are received (expenses recognized when incurred, regardless of when paid)
What are the objectives of financial reporting? (6) (PICFFC)
- Primary objective - Provide information useful to existing and potential investors, lenders, and creditors in making decisions about providing resources
- Information on the entity’s economic resources (Balance Sheet (B/S))
- Changes in economic resources and claims
- Financial performance (w/ accrual accounting) (Income Statement (I/S))
- Financial performance reflected by past cash flow (S of Cash Flow)
- Changes in economic resources/claims NOT resulting from financial performance (e.g., issuing additional stock) (Statement of Changes in Owners’ Equity)
Primary qualitative characteristics make information useful when they have _____
Relevance and faithful representation
Relevance is ____
Information is relevant when it has ____ (PC)
Information capable of making a difference in a user’s decision-making process if it has:
- Predictive value - Helps decision makers predict or forecast future results
- Confirmatory value (Feedback value) - Confirms/corrects prior predictions
Faithful representation is comprised of: (3) (FNC)
- Free from Error - No errors/omissions in the information
- Neutrality (w/o bias) - Information is free from bias
- Completeness - Adequate or full disclosure of all necessary information
What are some enhancing qualitative characteristics for relevance/faithful representation? (CUTV)
- Comparability - Same principles used in similar industry
- Understandability - Same accounting methods in different periods
- Timeliness - Information is available to a decision maker when it is useful to make the decision
- Verifiability - Different sources agree on an amount through direct/indirect verification
Some constraints that override usefulness of information are: (2) (CM)
- Cost/benefit - Cost of obtaining/presenting information shouldn’t exist benefits
- Materiality - Capable of making a difference in the user’s decision-making process if omitted or misstated (auditor’s judgment)
How many statements are in a full set of financial statements? (4) (PECC)
- Statement of Position (Balance Sheet)
- Statement of Earnings Financial & Comprehensive Income (Income Statement)
- Statement of Cash Flows
- Statement of Changes in Owners’ Equity (Statement of Investments by and Distributions to Owners)
F/S elements must be _____
Useful
What are the key elements are in all F/S?
- Assets
- Liabilities
- Equity
- Investments by owners
- Distributions to owners (dividends)
- Comprehensive income
- Revenues
- Expenses
- Gains
- Losses
What are the 3 basic elements of all F/S?
- Assets
- Liabilities
- Equity or Net Assets
An asset is an _____
Economic resource with probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred