4.1: Performance Flashcards
What are the different names for the income statement under ASPE and IFRS?
Under ASPE, it is called the income statement.
Under IFRS, it can be called the statement of profit or loss or the statement of comprehensive income.
What is the statement of financial performance?
Another name for the income statement, which can show both profit or loss and comprehensive income together under IFRS.
What does the income statement measure?
It measures the success of a company’s operations over a specific time period, providing insight into how well the company generates income.
What are the three types of activities that make up a business model?
Financing: Obtaining funds through loans, issuing shares, or retaining profits.
Investing: Using funds to buy assets or invest in people.
Operating: Using assets to generate profits.
What is risk management in a business model?
The process of identifying, assessing, and managing risks to minimize their impact on a business, often through employee education, insurance, or safety measures.
What is the risk/return trade-off?
The balance a company must strike between taking risks to increase returns and managing those risks to ensure profits remain stable.
What is Underlying Concept 4.1 about representational faithfulness?
It requires financial statements to reflect the economic reality of running a business, showing how value is created and sustained.
What is the role of cost of sales in a retail business like Walmart?
It includes all costs directly related to producing goods sold, such as inventory purchase costs, and represents the largest expense for the company.
Why is an understanding of a company’s business model important for auditors?
Auditors need to understand a company’s business model to determine whether financial statements accurately present the entity’s financial position and performance.
What are three ways the income statement helps investors and creditors evaluate a company’s performance?
Evaluate past performance and profitability: By comparing revenues, expenses, gains, and losses, users can assess how the company performed relative to its competitors.
Predict future performance: Past performance can reveal important trends that may help forecast future success, although changes in strategy or industry conditions can affect this.
Assess risk of not achieving future net cash inflows: By analyzing the income components, users can identify risks that may impact future cash flow, especially when separating recurring operating income from nonrecurring sources.
What is Underlying Concept 4.2 about?
A useful statement of income has both feedback and predictive value, helping investors, creditors, and other stakeholders make decisions about resource allocation and stewardship.
Why is it important to segregate a company’s recurring operating income from nonrecurring sources?
Recurring operating income is typically the primary way a company generates revenue and cash.
It has greater significance for predicting future performance than results from nonrecurring activities.
