1.7 Elements of Financial Statements Flashcards
What are “elements of financial statements”?
classes of items in the financial statements
What are financial statements?
the primary means of communicating financial information to external parties
How is additional information provided in the financial statements?
notes & supplementary information
What are “notes” in the financial statements?
- present essential information to amplify or explain financial statement amounts
- Example: describing the accounting policies used and making other disclosures required by GAAP
In what 2 situations would “notes” not be appropriate?
- to correct an improper presentation in the statements
- as a substitute for recognition in the statements
What is supplementary information in the financial statements? Provide an example
- 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)
What should a full set of financial statements report? (5)
- 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
Identify the elements or classes of items on the balance sheet
- assets
- liabilities
- equity (net assets of a not-for-profit entity)
- investments by owners
- distributions to owners
Define assets on the balance sheet
- 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
What are valuation allowances or contra accounts? Provide an example
- apart of the related asset
- offsets the related asset
- Examples: accumulated depreciation, deferred GP on install accounts, uncollectible A/R, premium on bonds receivable
Define “liabilities” on the balance sheet
- 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
Define “equity or net assets” on the balance sheet
the residual interest in the assets of an entity after subtracting liabilities
Define “investments by owners” on the balance sheet
- 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
Define “distributions to owners” on the balance sheet (3)
- decreases in equity during a period
- result from transferring assets, providing services, or incurring liabilities
- distribution to owners decreases ownership interests
Identify the elements of the income statement (4)
- Revenues
- Gains
- Expenses
- Losses
Define “revenues” on the income statement
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.
Define “gains” on the income statement
- increases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except revenues or investments by owners
Are gains classified as operating or nonoperating?
contingent on their relation to the entity’s ongoing major or central operations
Define “expenses” on the income statement
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
Define “losses” on the income statement
decreases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners
How are losses categorized on the income statement?
as operating or nonoperating depending on their relation to the entity’s ongoing major or central operations
What is comprehensive income?
the periodic change in equity of a business entity from non-owner sources
Identify the components included in comprehensive income
It includes earnings (net income) and its components (e.g., gross margin, income or loss from continuing operations and discontinued operations)
Identify the components not included in comprehensive income
it excludes the effects of investments by owners and distributions (e.g., dividends paid) to owners
The full set of financial statements, including comprehensive income, is based on what concept?
Financial Capital Maintenance Concept
True / False:
Comprehensive income is a return OF capital
False - comprehensive income is a return ON capital
Define “financial capital maintenance” concept
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
Define “physical capital maintenance” conept
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
True or False:
The financial maintenance capital concept distinguishes return ON capital from a return OF capital
True
How are recognized price changes on assets and liabilities handled under the financial capital maintenance concept?
- recognized as holding gains and losses
- included in return on capital
Provide 2 examples of holding gains and losses recognized in comprehensive income but not in earnings
- changes in the fair value of available for sale securities
- foreign currency translation adjustments
How are many assets measured under a physical capital concept?
at current (replacement) cost
IFRS Difference:
Identify the elements of financial statements according to International Financial Reporting Standards (5)
- assets
- liabilities
- equity
- income (including revenues & gains)
- expenses (including losses)
Define accrual accounting
records the financial effects of transactions and other events and circumstances on an entity’s economic resources and claims to them when they occur
Identify the 6 concepts accrual accounting is based on
HINT: Accruals Should Always Recognize Real Deferrals
- accruals
- deferrals
- systematic and rational allocation
- amortization
- recognition
- realization
What are accruals?
- accruals anticipate future cash flows
Identify common accruals (3)
- sales or purchases on account
- interest
- taxes
What are deferrals?
Deferrals reflect past cash flows
What do accruals recognize? (6)
- related assets, liabilities, revenues, expenses, gains, or losses
What do deferrals recognize?
They recognize liabilities (for receipts) and assets (for payments), with deferral of the related revenues, expenses, gains, and losses
When do deferrals end?
when the obligation is satisfied or the future economic benefit is used up
Provide an example of a deferral
prepaid insurance
Define systematic and rational allocation
is the assignment or distribution of an amount according to a plan or formula
Provide an example of a systematic and rational allocation (2)
- The apportionment of a lump-sum purchase price among the assets acquired and
- The assignment of manufacturing costs to products
What is amortization?
- a form of allocation
- it decreases an amount by periodic payments or write-downs
Provide an example of amortization
- depreciation and depletion expenses
- recognition of earned subscriptions revenue or rent
Define recognition
the formal incorporation of an item in the financial statements
Define realization
- The terms realized and unrealized identify revenues or gains or losses on assets sold and unsold, respectively
Identify the financial reporting framework used in GAAP
accrual accounting
What are special purpose frameworks?
comprehensive bases of accounting other than GAAP
Identify the elements on the “statement of net position” for state and local governments
- assets
- liabilities
- deferred outflow of resources
- deferred inflow of resources
- net position
Define “assets” on the statement of net position for state and local governments
are resources with current service capacity that are currently controlled
Define “liabilities” on the statement of net position for state and local governments
are present obligations to sacrifice resources that the government has little or no discretion to avoid
Define a “deferred outflow of resources” on the statement of net position for state and local governments
is a consumption of net assets that applies to a future reporting period
Define a “deferred inflow of resources” on the statement of net position for state and local governments
is an acquisition of net assets that applies to a future reporting period
Define “net position” on the statement of net position for state and local governments
is the residual of all other elements in a statement of net financial position (net assets)
Identify the elements contained in the “resource flows statement”
- outflow of resources
- inflow of resources
Define “outflow of resources” on the resource flows statements for state and local governments
is a consumption of net assets that applies to the reporting period
Define “inflow of resources” on the resource flows statements for state and local government
is an acquisition of net assets that applies to the reporting period
Identify the 2 measurement approaches for the financial statements of state and local governments
- initial amount
- remeasured amount
Define “initial amount” as it relates to measurement approaches of the financial statements for states and local governments
- 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)
Define “remeasured amount” as it relates to measurement approaches of the financial statements for states and local governments
- reflects conditions on the financial statement date
- It is a new carrying value not based on prior amounts reported
What are remeasured amounts appropriate for in relation to financial reporting for states and local governments? (2)
- Financial assets (assets to be converted to cash)
- Liabilities for which the timing and amount of payments is uncertain
Identify the 4 elements of measurement attributes in the financial statements of states and local governments
HINT: Real Success Focus Hard
- Replacement Cost
- Settlement Amount
- Fair Value
- Historical Cost
Define historical cost (2)
- the price paid to acquire an asset
- the amount received for the incurrence of a liability in an actual exchange transaction
Define fair value (2)
- 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
Define replacement cost
is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date
Define settlement amount (2)
- 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
