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FAR > 1.7 Elements of Financial Statements > Flashcards

1.7 Elements of Financial Statements Flashcards

1
Q

What are “elements of financial statements”?

A

classes of items in the financial statements

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2
Q

What are financial statements?

A

the primary means of communicating financial information to external parties

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3
Q

How is additional information provided in the financial statements?

A

notes & supplementary information

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4
Q

What are “notes” in the financial statements?

A
  • present essential information to amplify or explain financial statement amounts
  • Example: describing the accounting policies used and making other disclosures required by GAAP
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5
Q

In what 2 situations would “notes” not be appropriate?

A
  • to correct an improper presentation in the statements

- as a substitute for recognition in the statements

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6
Q

What is supplementary information in the financial statements? Provide an example

A
  • provides information additional to that in the statements and notes
  • may include relevant information that does not meet all recognition criteria
  • Example: management’s discussion and analysis (MD&A)
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7
Q

What should a full set of financial statements report? (5)

A
  • Financial position at the end of the period (BS)
  • Earnings for the period (P&L)
  • Comprehensive income for the period
  • Cash flows during the period
  • Investments by and distributions to owners during the period
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8
Q

Identify the elements or classes of items on the balance sheet

A
  • assets
  • liabilities
  • equity (net assets of a not-for-profit entity)
  • investments by owners
  • distributions to owners
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9
Q

Define assets on the balance sheet

A
  • probable future economic benefits
  • owned or controlled by an entity as a result of past transactions or events.
  • an entity can control other’s access to the asset and can obtain the benefits of that asset
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10
Q

What are valuation allowances or contra accounts? Provide an example

A
  • apart of the related asset
  • offsets the related asset
  • Examples: accumulated depreciation, deferred GP on install accounts, uncollectible A/R, premium on bonds receivable
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11
Q

Define “liabilities” on the balance sheet

A
  • probable future sacrifices of economic benefits
  • existing obligations of a specific entity to transfer assets or provide services to other entities as a result of previous transactions or events
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12
Q

Define “equity or net assets” on the balance sheet

A

the residual interest in the assets of an entity after subtracting liabilities

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13
Q

Define “investments by owners” on the balance sheet

A
  • increases in equity of a business entity during a period
  • They result from transfers by other entities of something of value to increase ownership interests
  • services also can be exchanged for equity interests
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14
Q

Define “distributions to owners” on the balance sheet (3)

A
  • decreases in equity during a period
  • result from transferring assets, providing services, or incurring liabilities
  • distribution to owners decreases ownership interests
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15
Q

Identify the elements of the income statement (4)

A
  • Revenues
  • Gains
  • Expenses
  • Losses
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16
Q

Define “revenues” on the income statement

A

inflows or other enhancements of assets or settlements of liabilities (or both) from

  • Delivering or producing goods,
  • Providing services, or
  • Other activities that qualify as ongoing major or central operations.
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17
Q

Define “gains” on the income statement

A
  • increases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except revenues or investments by owners
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18
Q

Are gains classified as operating or nonoperating?

A

contingent on their relation to the entity’s ongoing major or central operations

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19
Q

Define “expenses” on the income statement

A

outflows or other uses of assets or incurrences of liabilities (or both) from

  • Delivering or producing goods,
  • Providing services, or
  • Other activities that qualify as ongoing major or central operations
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20
Q

Define “losses” on the income statement

A

decreases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners

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21
Q

How are losses categorized on the income statement?

A

as operating or nonoperating depending on their relation to the entity’s ongoing major or central operations

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22
Q

What is comprehensive income?

A

the periodic change in equity of a business entity from non-owner sources

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23
Q

Identify the components included in comprehensive income

A

It includes earnings (net income) and its components (e.g., gross margin, income or loss from continuing operations and discontinued operations)

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24
Q

Identify the components not included in comprehensive income

A

it excludes the effects of investments by owners and distributions (e.g., dividends paid) to owners

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25
Q

The full set of financial statements, including comprehensive income, is based on what concept?

A

Financial Capital Maintenance Concept

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26
Q

True / False:

Comprehensive income is a return OF capital

A

False - comprehensive income is a return ON capital

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27
Q

Define “financial capital maintenance” concept

A

the capital of a company is only maintained if the financial or monetary amount of its net assets at the end of a financial period is equal to or exceeds the financial or monetary amount of its net assets at the beginning of the period, excluding any distributions to, or contributions from, the owners

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28
Q

Define “physical capital maintenance” conept

A

the physical capital is only maintained if the physical productive or operating capacity, or the funds or resources required to achieve this capacity, is equal to or exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, or contributions from, owners during the financial period

29
Q

True or False:

The financial maintenance capital concept distinguishes return ON capital from a return OF capital

A

True

30
Q

How are recognized price changes on assets and liabilities handled under the financial capital maintenance concept?

A
  • recognized as holding gains and losses

- included in return on capital

31
Q

Provide 2 examples of holding gains and losses recognized in comprehensive income but not in earnings

A
  • changes in the fair value of available for sale securities

- foreign currency translation adjustments

32
Q

How are many assets measured under a physical capital concept?

A

at current (replacement) cost

33
Q

IFRS Difference:

Identify the elements of financial statements according to International Financial Reporting Standards (5)

A
  • assets
  • liabilities
  • equity
  • income (including revenues & gains)
  • expenses (including losses)
34
Q

Define accrual accounting

A

records the financial effects of transactions and other events and circumstances on an entity’s economic resources and claims to them when they occur

35
Q

Identify the 6 concepts accrual accounting is based on

HINT: Accruals Should Always Recognize Real Deferrals

A
  • accruals
  • deferrals
  • systematic and rational allocation
  • amortization
  • recognition
  • realization
36
Q

What are accruals?

A
  • accruals anticipate future cash flows
37
Q

Identify common accruals (3)

A
  • sales or purchases on account
  • interest
  • taxes
38
Q

What are deferrals?

A

Deferrals reflect past cash flows

39
Q

What do accruals recognize? (6)

A
  • related assets, liabilities, revenues, expenses, gains, or losses
40
Q

What do deferrals recognize?

A

They recognize liabilities (for receipts) and assets (for payments), with deferral of the related revenues, expenses, gains, and losses

41
Q

When do deferrals end?

A

when the obligation is satisfied or the future economic benefit is used up

42
Q

Provide an example of a deferral

A

prepaid insurance

43
Q

Define systematic and rational allocation

A

is the assignment or distribution of an amount according to a plan or formula

44
Q

Provide an example of a systematic and rational allocation (2)

A
  • The apportionment of a lump-sum purchase price among the assets acquired and
  • The assignment of manufacturing costs to products
45
Q

What is amortization?

A
  • a form of allocation

- it decreases an amount by periodic payments or write-downs

46
Q

Provide an example of amortization

A
  • depreciation and depletion expenses

- recognition of earned subscriptions revenue or rent

47
Q

Define recognition

A

the formal incorporation of an item in the financial statements

48
Q

Define realization

A
  • The terms realized and unrealized identify revenues or gains or losses on assets sold and unsold, respectively
49
Q

Identify the financial reporting framework used in GAAP

A

accrual accounting

50
Q

What are special purpose frameworks?

A

comprehensive bases of accounting other than GAAP

51
Q

Identify the elements on the “statement of net position” for state and local governments

A
  • assets
  • liabilities
  • deferred outflow of resources
  • deferred inflow of resources
  • net position
52
Q

Define “assets” on the statement of net position for state and local governments

A

are resources with current service capacity that are currently controlled

53
Q

Define “liabilities” on the statement of net position for state and local governments

A

are present obligations to sacrifice resources that the government has little or no discretion to avoid

54
Q

Define a “deferred outflow of resources” on the statement of net position for state and local governments

A

is a consumption of net assets that applies to a future reporting period

55
Q

Define a “deferred inflow of resources” on the statement of net position for state and local governments

A

is an acquisition of net assets that applies to a future reporting period

56
Q

Define “net position” on the statement of net position for state and local governments

A

is the residual of all other elements in a statement of net financial position (net assets)

57
Q

Identify the elements contained in the “resource flows statement”

A
  • outflow of resources

- inflow of resources

58
Q

Define “outflow of resources” on the resource flows statements for state and local governments

A

is a consumption of net assets that applies to the reporting period

59
Q

Define “inflow of resources” on the resource flows statements for state and local government

A

is an acquisition of net assets that applies to the reporting period

60
Q

Identify the 2 measurement approaches for the financial statements of state and local governments

A
  • initial amount

- remeasured amount

61
Q

Define “initial amount” as it relates to measurement approaches of the financial statements for states and local governments

A
  • reflects a transaction date
  • price or amount assigned when an asset was acquired or a liability was incurred, including later modifications derived from the initial amount (e.g., depreciation or impairment)
62
Q

Define “remeasured amount” as it relates to measurement approaches of the financial statements for states and local governments

A
  • reflects conditions on the financial statement date

- It is a new carrying value not based on prior amounts reported

63
Q

What are remeasured amounts appropriate for in relation to financial reporting for states and local governments? (2)

A
  • Financial assets (assets to be converted to cash)

- Liabilities for which the timing and amount of payments is uncertain

64
Q

Identify the 4 elements of measurement attributes in the financial statements of states and local governments

HINT: Real Success Focus Hard

A
  • Replacement Cost
  • Settlement Amount
  • Fair Value
  • Historical Cost
65
Q

Define historical cost (2)

A
  • the price paid to acquire an asset

- the amount received for the incurrence of a liability in an actual exchange transaction

66
Q

Define fair value (2)

A
  • the price paid that would be received to sell an asset or

- the price paid to transfer a liability in an orderly transaction between market participants at the measurement date

67
Q

Define replacement cost

A

is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date

68
Q

Define settlement amount (2)

A
  • the amount at which an asset could be realized

- the amount at which a liability could be liquidated with the counterparty, other than in an active market

FAR (23 decks)

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