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ACCT1006 > (1) Introduction to GAAP (CF is under GAAP) > Flashcards

(1) Introduction to GAAP (CF is under GAAP) Flashcards

1
Q

What is the Conceptual Framework?

A

The CF consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general purpose financial reports and standard setters. The CF provides general guidance to preparers of financial information by defining who is required to report and who the users are likely to be.

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2
Q

What is the purpose of the CF for financial reporting?

Hint: there are 3 points

A
  • To assist the IASB to develop Standards based on consistent concepts
  • To assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or event
  • To assist all parties to understand and interpret the Standards
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3
Q

What does the CF do?

A

The CF defines each element of financial statements (assets, liabilities, equity, income, expenses) and sets out the criteria for their recognition.

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4
Q

What are the chapters of the CF?

A
  1. The objective of general purpose financial reporting
  2. Qualitative characteristics of useful financial information
  3. Financial statements and the reporting entity
  4. The elements of financial statements
  5. Recognition and derecognition
  6. Measurement
  7. Presentation and disclosure
  8. Concepts of capital and capital maintenance
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5
Q

Describe the Generally Accepted Accounting Principles (GAAP).

A

GAAP consists of accounting standards, the CF and underlying accounting concepts and principles.

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6
Q

What are the accounting concepts and principles?

A
  • Accounting Entity Concept
  • Accounting Period Concept
  • Monetary Principle
  • Going Concern Principle
  • Cost Principle
  • Full Disclosure Principle
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7
Q

What is the Accounting Entity Concept?

A

Every entity can be separately identified and accounted for.

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8
Q

What is the Accounting Period Concept?

A

The life of a business entity can be divided into artificial periods and that useful reports covering those periods can be prepared for the entity.

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9
Q

What is the Monetary Principle?

A

The items included in the accounting records must be able to be expressed in monetary terms.

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10
Q

What is the Going Concern Principle?

A

Financial statements are prepared on a going concern basis unless management either intends to or must liquidate the business or cease trading.

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11
Q

What is the Cost Principle?

A

All assets are intially recorded in the accounts at their pruchase price or cost. This is not only at the time the asset is purchased but also over the time the asset is held.

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12
Q

What is the Full Disclosure Principle?

A

All circumstances and events that could make a difference to the decisions financial statement users might make should be disclosed in the financial statements.

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13
Q

What is the objective of general purpose financial reporting?

A

To provide financial information about the reporting entity useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.

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14
Q

What is the secondary (internal) objective of general purpose financial reporting?

A

Stewardship objective - responsibilities accepted by managers for safeguarding the entity’s economic resources - how efficiently and effectively management looks after the entity’s economic resources.

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15
Q

What is the reporting entity?

A

An entity that is required or chooses to prepare general purpose financial reports that comply with accounting standards.

  • Only applies to for-profit entities and other entities that have public accountability, any publicly traded entities
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16
Q

What are the different tiers of the reporting entity?

A

Tier 1: entities have public accountability and must follow accounting standards

Tier 2: no public accountability and get to have reduced disclosure requirements

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17
Q

What are the qualitative characteristics of accounting information?

A

Fundamental:

  • Relevance
  • Faithful representation

Enhancing:

  • Comparability
  • Verifiability
  • Understandability
  • Timeliness
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18
Q

What are the elements of financial statements?

A

Assets, liabilities, equity, income, expenses

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19
Q

CF definition of asset

A

An asset is a present economic resource controlled by an entity as a result of past events.

An economic resource is defined as a right that has potential to produce economic benefits

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20
Q

CF definition of liability

A

A liability is a present obligation of the entity to transfer an economic resource as a result of past events

An obligation is defined as a duty or responsibility that the entity has no practical ability to avoid

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21
Q

CF definition of equity

A

Equity is the residual interest in the assets of the entity after deducting all its liabilities

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22
Q

CF definition of income

A

Income is defined as the increases in assets or decreases in liabilities that result in increase in equity, other than those relating to contributions from holders of equity claims.

Income includes:

  • Revenue (increases in economic benefits arising the course of ordinary activities)
  • Gains (other increases in economic benefits that do not arise from ordinary course of business)
23
Q

Recognition criteria

A

Recognition is the process of capturing for inclusion in the financial statements an item that meets the definition of an element of financial statements, i.e. asset, liability, equity, income or expenses.

Recognition is appropriate if it results in both:

  • Relevant information about assets, liabilities, equity, income and expenses
  • Faithful representation of those items

Why? Because the aim to provide information that is useful to investors, lenders and other creditors

24
Q

Measurement of the elements of financial reports

A

Measurement basis:

  • Historical cost
  • Current value
25
Q

Statement of Profit or Loss

A

Reports the success or failure of the entity’s operations for a period of time

26
Q

Statement of Financial Position

A

Reports assets and claims on those assets as a specific point in time

27
Q

Statement of Changes in Equity

A

Reports the total comprehensive income for the period and the changes in equity

Main elements: profit, retained earnings, dividends, capital contributions, reserves

28
Q

Statement of Cash Flows

A

Reports the net cash provided or used during the period

29
Q

Ratio analysis

A

Highlights relationships between items of financial statement; expressed as percentages, rates or proportions.

It provides insights into underlying conditions / helps in evaluations that may not be apparent from simply viewing financial statements.

Main analyses: profitability, liquidity, solvency

30
Q

Profitability

A

Measures the operating success of an entity for a given period of time

E.g. profit margin - measures percentage each sales dollar that results in profit

31
Q

Liquidity

A

Measures the entity’s short-term ability to meet current obligations

E.g. current ratio = current assets / current liabilities

32
Q

Solvency

A

Measures the entity’s ability to survive over a long period of time

E.g. debt to total assets ratio = total liabilities / total assets

33
Q

Interrelationship between the financial statements

A

The Statement of Financial Position depends on the results of the Statement of Profit or Loss and the Statement of Changes in Equity.

Profit is added to the beginning balance of retained earnings

34
Q

Interrelationship between the Statement of Cash Flows and the Statement of Financial Position

A

The CFS shows how the cash amount changes during the period. The ending amount shown on the CFS is reported on the Statement of Financial Position

35
Q

Limitations of financial ratios

A
  • Ratios can inherit limitations of financial statements they are based on
  • Ratios based on the Statement of Financial Position will not be representative of the whole period
  • Financial strengths and weaknesses are highlighted but not explained
  • Hard to compare as no two businesses are identical
  • Ratios provide a restricted view of relative performance and position
36
Q

Recognition criteria

A

Recognition is the process of capturing for inclusion in the financial statements an item that meets the definition of an element of financial statements, i.e. asset, liability, equity, income or expenses.

Recognition is appropriate if it results in both:

  • Relevant information about assets, liabilities, equity, income and expenses
  • Faithful representation of those items

Why? Because the aim to provide information that is useful to investors, lenders and other creditors

37
Q

Measurement of the elements of financial reports

A

Measurement basis:

  • Historical cost
  • Current value
38
Q

Statement of Profit or Loss

A

Reports the success or failure of the entity’s operations for a period of time

39
Q

Statement of Financial Position

A

Reports assets and claims on those assets as a specific point in time

40
Q

Statement of Changes in Equity

A

Reports the total comprehensive income for the period and the changes in equity

Main elements: profit, retained earnings, dividends, capital contributions, reserves

41
Q

Statement of Cash Flows

A

Reports the net cash provided or used during the period

42
Q

Ratio analysis

A

Highlights relationships between items of financial statement; expressed as percentages, rates or proportions.

It provides insights into underlying conditions / helps in evaluations that may not be apparent from simply viewing financial statements.

Main analyses: profitability, liquidity, solvency

43
Q

Profitability

A

Measures the operating success of an entity for a given period of time

E.g. profit margin - measures percentage each sales dollar that results in profit

44
Q

Liquidity

A

Measures the entity’s short-term ability to meet current obligations

E.g. current ratio = current assets / current liabilities

45
Q

Solvency

A

Measures the entity’s ability to survive over a long period of time

E.g. debt to total assets ratio = total liabilities / total assets

46
Q

Interrelationship between the financial statements

A

The Statement of Financial Position depends on the results of the Statement of Profit or Loss and the Statement of Changes in Equity.

Profit is added to the beginning balance of retained earnings

47
Q

Interrelationship between the Statement of Cash Flows and the Statement of Financial Position

A

The CFS shows how the cash amount changes during the period. The ending amount shown on the CFS is reported on the Statement of Financial Position

48
Q

Limitations of financial ratios

A
  • Ratios can inherit limitations of financial statements they are based on
  • Ratios based on the Statement of Financial Position will not be representative of the whole period
  • Financial strengths and weaknesses are highlighted but not explained
  • Hard to compare as no two businesses are identical
  • Ratios provide a restricted view of relative performance and position
49
Q

What is accounting?

A

Accounting is the process of identifying, measuring, recording and communicating.

50
Q

What are the formulas for these profitability ratios:

  1. Return on assets
  2. Profit margin
A
  1. ROA = Profit / Average total assets

2. Profit margin = Profit / Net sales

51
Q

What are the formulas for these liquidity ratios:

  1. Current ratio
  2. Current cash debt coverage
A
  1. Current ratio = current assets / current liabilities

2. Current cash debt coverage = net cash provided by operating activities / average current liabilities

52
Q

What are the formulas for these solvency ratios:

  1. Debt to total assets ratio
  2. Cash debt coverage
A
  1. Debts to total assets = total liabilities / total assets

2. Cash debt coverage = net cash provided by operating activities / average total liabilities

53
Q

What is the Financial Reporting Council (FRC) responsible to the government for?

A

The FRC is responsible to the government for the broad oversight of the accounting standard-setting process.

ACCT1006 (11 decks)

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