3 chp 2 Measuring and reporting financial position Flashcards
What are the four main characteristics of an asset?
- A probably future economic benefit.
- Exclusive right to control a benefit.
- The benefit must arise from some past transaction or event.
- The asset must be capable of reliable measurement in monetary terms.
Assets that have a real, physical substance is known as?
A tangible asset
What is a ‘tangible asset’?
An asset that has a real physical substance
Inventory, plant and equipment are examples of what type of asset?
A tangible asset
Provide examples of a tangible asset?
Inventory, plant, equipment
What type of asset has no physical substance but still represent potential benefits?
Intangible asset
What is an INTANGIBLE ASSET?
An INTANGIBLE ASSET has no physical substance but still represents potential benefits.
Copyrights, trademarks, patents, franchise, goodwill are examples of?
An INTANGIBLE ASSET
Provide examples of an INTANGIBLE ASSET
Trademarks
Patents
Franchise
Goodwill
What is the opposite of ASSET?
CLAIMS
What is the opposite of a CLAIM?
ASSETS
Those with different interest in ASSETS are said to have a what?
CLAIM
What is a CLAIM?
Represents interests (amounts) that entities have in an asset.
Interests (amounts) that that entities have in an asset are known as what?
a CLAIM
LIABILITIES and OWNER’S EQUITY (CAPITAL) are two types of what?
CLAIM (against an asset)
What are the two types of CLAIMS (against an asset)?
- LIABILITIES
2. OWNER’S EQUITY (or CAPITAL)
The claims of external entities that have arisen from past transactions or events are known as?
LIABILITIES
What is a LIABILITY?
Claims of external entities as a result of past transactions or events?
What sort of transactions could result in a liability?
External entity supplying a good or service,
External entity lending money
a bank overdraft is an example of…..
LIABILITY
accounts payable is an example of….
a LIABILITY
a personal loan is an example of…
a LIABILITY
a provision for warranty is an example of…
a LIABILITY
Staff long service leave and holiday pay is an example of….
a LIABILITY
what characteristics must a LIABILITY have?
The same as an asset;
- probable economic impact
- obligation must have risen from a past transaction or event
- Reliable measurement
An estimated liability with an amount of uncertainty on the amount or timing is known as a what?
a PROVISION
What is a PROVISION
an estimated liability that has an amount of uncertainty on the amount and/or timing.
what type of liability is an income tax and why?
Income tax is a PROVISION (liability) as there is some question over the exact amount that will need to be paid until the taxes completed and submitted.
a potential liability that might arise under certain circumstances are known as what?
CONTINGENT LIABILITY
what is a CONTINGENT LIABILITY
a liability that ‘might’ occur under certain circumstances.
for limited companies, where are CONTINGENT LIABILITIES included within their annual report?
As a NOTE
$1,000 is owed by a customer who will never be able to pay. Should this appear as an asset or liability on the statement of financial position of a business? Explain.
Neither as an asset or liability as the company unlikely to have a future benefit since the customer is unlikely to repay.
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
The purchase of a licence from business B giving business A the right to produce a product designed by business B. Production of this new product is expected to increase profits over the period in which business A holds the licence.
The item should be included as an asset for business A.
- There is an expectation of future value return.
- There is ownership (in the form of a licence)
- It is the result of a transaction or past event (being a purchase)
- The item can be readily measured by the increase in revenue each year it generates.
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
The hiring of a new marketing director by business A who is confidently expected to increase profits by at least 30% over the nest three years?
People are typically not considered assets as a company does not have ‘ownership’ of a person.
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
The purchase by business A of a machine that will save $10k per annum. It is currently being used by the business but was acquired on credit and is not yet paid for.
Yes, the machine would be listed as an asset:
- future economic benefit,
- Business A effectively owns it legally
- A transaction occurred in the form of a credit approval
- The item can be readily measured in monetary terms.
(the amount owing would also be entered as a liability claim)
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
$2,000 owing to Business B for the satisfactory supply of goods during the past month.
Yes, this would show as a liability claim (accounts payable):
- Past transaction or event - (supply of goods)
- Assumed the goods are owned
- Their is reliable form of value measurement
- Assumed potential for future economic benefit
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
Magazine subscriptions worth $27,400 have been received in advance by a publisher from business A.
Business A will record the advance payments relating to the subscription as a liability until such time as the magazines have been delivered and the contract completed.
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
Business A has guaranteed a manager’s personal loan of $100,000. The manager has maintained the account in good order and $79,000 is currently owing.
Given the manager is unlikely to default, the loan guarantee would not be recorded as a liability claim.
Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.
There is a legal claim against business A for negligence over faulty workmanship. It is likely that they will settle out of court for $50,000.
Given the payout is likely, the settlement amount should be recorded as a contingent liability claim.
What is the term for the claim of the owner(s) against a business?
The OWNER’S CAPITAL
What is meant by the OWNER’S CAPITAL?
the OWNER’S CAPITAL represents the claim of the owner against the business.
Residual interest in the assets of the entity after deducting all of its liabilities is known as…..
EQUITY
What is EQUITY?
Residual interest in the assets of an entity after deducting all liabilities.
What is the ACCOUNTING EQUATION (short version)?
ASSETS = OWNER EQUITY + LIABILITIES
what is the following equation often referred as:
ASSETS = OWNER EQUITY + LIABILITIES
ACCOUNTING EQUATION (short version)
if a company buys something on say 30 days credit, how will it be recorded on a financial statement and what is the common name of the line item?
it will be recorded on the claims liability side as ACCOUNTS PAYABLE
What is ACCOUNTS PAYABLE?
money owed to someone else like 30-day credit and such.
what is the EXTENDED ACCOUNTING EQUATION?
ASSETS AT END OF PERIOD = OWNERS EQUITY AT BEGINNING OF PERIOD + PROFIT (OR - LOSS) +/- OTHER OWNERS EQUITY CHANGES + LIABILITIES AT END OF PERIOD
assets that are held for the short term are called….
CURRENT ASSETS
what is a current asset?
a CURRENT ASSET are assets that are held for the short term.
cash and other assets that are expected to be consumed or converted to cash, usually within the next 12 months or within the operating cycle are called…
CURRENT ASSETS
tangible non-current assets are usually put into what general category?
PROPERTY, PLANT and EQUIPMENT
what general type of items are kept under the general heading PROPERTY, PLANT AND EQUIPMENT
tangible non-current assets
Three classifications of OWNER’S EQUITY?
OWNER’S EQUITY CONTRIBUTED
RETAINED PROFIT
OTHER RESERVES
A sole trader injects $100 into his company, where and under what category is this shown on the balance sheet?
Claim liabilities, OWNERS EQUITY CONTRIBUTED
a sole trader company makes $100 profit and decides to keep this within the company for future use. Where and under what category is this shown on the balance sheet within the claim liabilities?
RETAINED PROFITS (retained earnings)
What are the three types of OWNERS EQUITY
OWNER'S EQUITY CONTRIBUTED RETAINED PROFITS (RETAINED EARNINGS)
describe the display of information within a horizontal statement of financial position?
On the left - current assets and non current assets
On the right - liabilities (further broken down into current and non-current) and owner’s equity
What is the formula for the horizontal statement of finacial position?
CURRENT ASSETS + NON-CURRENT ASSETS = CURRENT LIABILITIES + NON-CURRENT LIABILITITES + OWNERS EQUITY
when entering individual items under a categories (e.g. non-current assets) what order are they usually put in?
Order of liquidity (ascending or descending depends on country)
what are the two types of statement of financial position FORMATS?
HORIZONTAL format and VERTICAL (NARRATIVE) FORMAT.
HORIZONTAL format relates to…..
STATEMENT OF FINANCIAL POSITION
VERTICAL format relates to….
STATEMENT OF FINANCIAL POSITION
what are the two types of VERTICAL format statement of financial position?
- ENTITY APPROACH
2. PROPRIETARY APPROACH
(statement of financial position, vertical format); what is the underlying formula for the ENTITY APPROACH?
(same as horizontal) CURRENT ASSETS + NON-CURRENT ASSETS = CURRENT LIABILITIES + NON-CURRENT LIABILITIES + OWNER’S EQUITY
(statement of financial position format) which vertical format is the same as the horizontal format?
ENTITY APPROACH
which format focusses on the owner’s equity rather than the entity itself?
Proprietary Approach
What is the formula for the PROPRIETARY APPROACH (vertical format, statement of financial position)
Current Assets + Non-Current Assets - Current Liabilities - Non-Current Liabilities = Owner’s Equity
An entity with users who rely on general-purpose financial statements for their information relating to that entity is known as…..
REPORTING ENTITY
what is a REPORTING ENTITY?
an entity with users who rely on general-purpose financial statements for their information relating to that entity.
rules that have been devised over time in order to deal with practical problems experienced by preparers and users of financial reports are known as?
CONVENTIONS
what are CONVENTIONS?
CONVENTIONS are rules that have been devised over time in order to dearl with practical problems experienced by preparers and users of financial reports.
What does GAAP stand for?
GAAP stands for ‘GENERALLY ACCEPTED ACCOUNTING PRACTICE’
accounting conventions (or principles, assumptions or accepted ideas) on which accounting rules, records and reports were or are based are known as ….
GAAP
What is meant by GAAP?
GAAP are accounting conventions (or principles, assumptions or accepted ideas) on which accounting rules, records and reports were or are based
the convention that states the business and its owner(s) are treated separate and distinct for the purposes of accounting is known as …….
THE BUSINESS ENTITY CONVENTION
what is THE BUSINESS ENTITY CONVENTION?
THE BUSINESS ENTITY CONVENTION is the convention that the business and its owner(s) are treated separately as distinct entities for the purpose of accounting.
the convention that caution should be exercised when making accounting judgements is known as ……
THE PRUDENCE CONVENTION holds that caution should be exercised when making accounting judgements.
what is the PRUDENCE CONVENTION?
THE PRUDENCE CONVENTION holds that caution should be exercicsed when making accounting judgements.
Using the PRUDENCE CONVENTION, how should losses be recorded?
Under the PRUDENCE CONVENTION, all losses should be recorded at once and in full; both actual losses and expected losses.
Using the PRUDENCE CONVENTION, how should profits be recorded?
Profits are only recognised when they arise.
the accounting convention that assets should be recorded at their historic (acquisition) cost is known as…
The HISTORIC COST CONVENTION
What is the HISTORIC COST CONVENTION
The HISTORIC COST CONVENTION holds that the value of assets should be recorded at their historic (acquisition) cost.
The convention that financial statements should be prepared on the assumption that a business will continue operations for the foreseeable future; unless there is evidence to the contrary is known as …
The GOING CONCERN CONVENTION
what is the GOING CONCERN CONVENTION?
The GOING CONCERN CONVENTION holds that financial statements should be prepared on the basis that the organisation will continue operating into the foreseeable future; unless their is evidence to the contrary.
The convention that each trasanction has two aspects and the each aspect must be recorded in financial statements is known as …
the DUAL ASPECT CONVENTION
what is the DUAL ASPECT CONVENTION
the DUAL ASPECT CONVENTION holds that every transaction has two aspects and both aspects must be recorded in financial statements.
the formal system of recording using ledger accounts with reflect the dual aspect of financial transactions is known as …
DOUBLE-ENTRY BOOK-KEEPING/ACCOUNTING
what is DOUBLE-ENTRY BOOK-KEEPING/ACCOUNTING?
DOUBLE-ENTRY BOOK-KEEPING/ACCOUNTING is the formal system of recording using ledger accounts which reflect the dual aspect of financial transactions.
the accounting convention that accounting should only deal with those items which are capable of being expressed in monetary terms is known as ….
THE MONEY MEASUREMENT CONVENTION
what is the MONEY MEASUREMENT CONVENTION ?
the MONEY MEASUREMENT CONVENTION states accounting should only deal with items capable of being expresssed in monetary terms.
the accounting convention that money will not change in value over times is known as …
the STABLE MONETARY UNIT CONVENTION
What is the STABLE MONETARY UNIT CONVENTION?
the STABLE MONETARY UNIT CONVENTION holds that money will not change in value over time.
The amount of loss that must be wriiten-off for an asset where the carrying amount is more than the recoverable amount is known as ….
an IMPAIRMENT
what is an IMPAIRMENT?
an IMPAIRMENT is the amount of loss that must be writtent-off for an asset where the carrying cost is higher than the recoverable amount.
