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CMA - Part 1 > A. Financial Reporting > Flashcards

A. Financial Reporting Flashcards

1
Q

What are the 5 Financial Statements Under GAAP?

A

Balance Sheet
Income Statement
Statement of Comprehensive Income
State of Changes In stakeholders Equity
statement of cash flows

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2
Q

What does GAAP stand for?

A

Generally Accepted Accounting Principles

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3
Q

What does IFRS stand for?

A

International Financial Reporting Standards

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4
Q

What is a prospective financial Statement?

A

One based on assumptions, that present projected information about a future period

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5
Q

What is is another name for Balance Sheet?

A

Statement of Financial Position

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6
Q

What information does the balance sheet provide?

A

Information about a company’s assets,liabilities and equity at a point of time, that helps users to assess liquidity, solvency, financial flexibility and risk

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7
Q

What does the balance sheet help users to access?

A

Liquidity, solvency, risk and financial Flexibility

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8
Q

What is liquidity?

A

Liquidity refers to the expected time to elapse until an asset is converted into cash or a liability is paid. The higher the company’s
liquidity the lower the risk of failure

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9
Q

What is financial Flexibility?

A

Financial Flexibity is the ability of a business to take action to alter amounts of timing of its cashflows, that enables them to respond to unexpected needs and take advantage of oppurtuntities.

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10
Q

What is Solvency?

A

Solvency is the companys ability to pay its long term obligations as they become due - high level of long term debt relative to its assets has a lower solvency.

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11
Q

What is risk?

A

Risk refers to unpredictability for future events, transactions and circumstances.

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12
Q

What type of account is the Balance Sheet and what does that mean?

A

The balance sheet is a permanent account meaning that balances are not closed off at the end of year but instead the balances are accumulated.

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13
Q

Name the elements of the Balance Sheet

A

The elements of the balance sheet are assets, liabilities and equity.

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14
Q

What are the main characteristics that Assets and Liabilities must have?

A

The main characteristics of assets are 1. the arose from a past transaction, they are owned by the company and will produce a future benefit. The main characteristics of a liability is that it arose from a past transaction, is owed by the company and will produce a future sacrifice.

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15
Q

What does equity represent on the balance sheet?

A

Equity represents the entity’s net assets, or residual interest in assets after deducting all liabilities, otherwise known and ownership interest.

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16
Q

What is the operating cycle?

A

The operating cycle is the average between the acquisition of materials and services and their final cash realization. (tobacco, distillery and lumber) then to have longer operating cycle

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17
Q

What is a current asset? Give examples

A

Current Assets - cash that will be realized within the normal operating cycle, receivables, marketable securities, inventories, short-term notes receivable, prepayments, funds restricted for a specific purpose.

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18
Q

What is a marketable security classified as a current asset?

A

A marketable security classified as a current asset represent investments of cash available for current operations .

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19
Q

What are cash equivalents?

A

Cash equivalents are short term highly liquid investments that are convertible to known amounts with out significant loss in value and have a maturity of 3 months or less from the date of purchase.

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20
Q

Where should funds that are restricted for current purposes occur on the balance sheet?

A

Funds restricted for other purposes should be recorded on a separate line on the balance sheet under current assets.

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21
Q

What is a non-current asset

A

What is a non-current asse

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22
Q

What are marketable securities?

A

Marketable securities include stock, bonds, long term notes receivables etc. that do not represent investments if cash available for current operations

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23
Q

What does PP&E stand for?

A

Plant Property and Equipment

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24
Q

How are fixed assets handled on the balance sheet?

A

Fixed assets are recorded at their cost plus shipping and installation cost and expensed over its life span through depreciation, amortization or depletion.

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25
Q

Which fixed asset is not depreciated or amortized in its life span?

A

Land

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26
Q

How are lease improvements handled on the balance sheet?

A
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27
Q

What is amortization?

A

Amortization is a technique used to periodically lower the book value of a loan or an intangible assets over a period of time.

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28
Q

What are intangible assets? Give Examples

A

Intangible assets do not have physical substance but provide benefits to the firm - goodwill, copyrights, patents, trademarks and franchises.

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29
Q

What is a current liability?

A

A current liability is one that will be paid within a year or the operating cycle.

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30
Q

What do current liabilities specifically not include?

A

Current liabilities specifically do not include debts to be paid by funds in accounts classified as non-current and the portion of a short-term loan intended to be refinanced by a long term debt obligation.

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31
Q

Under what circumstance may a company reclassify an obligation on the balance sheet as a non-currently liaability?

A

If a company demonstrates that it has the intent and ability to finance the obilgation that is coming due in months- that is, having a commitment from the bank for long term financing

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32
Q

What is a bank overdraft and how does it occur?

A

When a company writes checks for more than whats in its account

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33
Q

Under what circumstance can a company report a bank overdraft as a current asset?

A

When a bank has a positive amount on another account on the same bank it can be netted.

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34
Q

What are non-currently liabilities? Give 4 examples

A

Non current liabilities are those that will not be paid 12 months

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35
Q

What is equity and what does it represent when a business is liquidated

A

Equity is the remaining balance of assets after the subtraction of liabilities. The portion owned by shareholders/owners. If the company were to be liquidated, equity is the amount that would spread amongst the owner.

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36
Q

Equity is split into six categories what are they?

A

The six categories that equity is split into are:
* Capital Stock
* Paid-in Capital
*Retained Earnings
*Accumulated Other Comprehensive Income Items
*Non-controlling Interest
*Treasury Stock

37
Q

What is capital stock?

A

Capital Stock is the par value or stated value of shares issued

38
Q

What is additonal paid in capital?

A

Additional Paid in capital the excess of amounts contributed by owners from the sale of shares over and above the par value of shares issued.

39
Q

What are retained earnings?

A

Retained Earnings, net income of a company that has not been distributed in dividends

40
Q

What are accumulated other comprehensive income items?

A

Accumulated other comprehensive income items is the name given to balance sheet account in the equity section where certain items not reported in net income.

41
Q

What is non-controlling interest?

A

Non-controlling interest is the portion of equity of subsidiaries that the reporting entity owns but does not own wholly.

42
Q

What are treasury stocks?

A

Treasury Stocks are either the amount paid for shares that have been repurchased or the par value of shares that have been repurchased.

43
Q

Do Treasury shares increase or decrease owners equity and why?

A

Its a contra-equity account and reduces equity on the balance sheet.

44
Q

What are the main benefits of the balance sheet?

A

The main benefits of the balance sheet are:
- It provides information of the company’s assets, liabilities, and equity
- It provides a basis for computing rates of return, evaluating capital structure and future cash flows
- It also helps to assess liquidity, solvency, financial flexibility and risk

45
Q

What are some of the limitations of the balance sheet?

A

The limitations of the balance sheet are as follows:
- it reports the company’s financial position at a point in time, but does not report the company’s true value
- many assets are reported at historical cost , using judgements and estimates

46
Q

What is the disadvantage of measuring items at historical cost on the balance sheet?

A

In a period of rising prices, the use of historical cost will cause the value of assets to be understated, since the current market fair value will be more that what was paid for them. Selling prices of inventory items will go up but the inventory cost will remain the same on the balance sheet while they are inventory. COGS is under adjusted and profits are understated.

47
Q

How does a company counter the limitations related to valuation?

A

To counter the limitations related to valuation, the fair value is used.

47
Q

What is fair value?

A

This is the price that would be received to sell an asset or paid to transfer a liability between market participants.

48
Q

What does the income statement report?

A

The income statement reports the results of a company’s operations during a given period of time, providing users with the information to help predict the amounts, timing and uncertainty of future cash flows.

49
Q

What does the income statement report?

A

The income statement records revenues, expenses, gains and losses

50
Q

What method of accounting is the income statement created with, and what type of transactions is it applied to?

A

The income statement uses the accrual method of accounting as applied to historical transactions.

51
Q

How is the income statement different from the balance sheet?

A

The income statement is different in that it shows transactions for a period of time, while the balance shows information from a point in time.

52
Q

Which permeant account is the income statement account closed off to?

A

The income statement is closed off to retained earnings

53
Q

What is the order that the income statement takes?(Multi-step format)

A

Revenues/Sales
Less: COGS
= Gross profit/Gross Margin
- Selling and General Administrative Expenses
= Operating Income
- interest expense
+ Dividend Income
= Income from continuing operations before tax
Less: Tax
= Income from continuing operations
Discontinued Operation
+/(-) Gain or (loss) on disposal
+/(-) Tax benefit or (tax loss)
= Net Income

54
Q

Is EPS recordded on the face of the income statement?

A

Yes in a separate line

55
Q

What does operation income include?

A

Operating Income = Gross Profit - SG&A expenses

56
Q

What does operating income not include?

A

Operating income does not include financial income (interest and dividend income) or financial expense such as interest expense or gains or loss

57
Q

What does income from continuing operations include?

A

Operating income does + financial income (interest and dividend income) - financial expense such as interest expense or gains or loss

58
Q

Do you subtract or add gains and losses on the income statement?

A

Gains = Added
Losses = Substracted

59
Q

How do you account for a tax benefit or tax expense?

A

Tax benefits are generated from a loss on disposal and is therefore added
Tax expenses are generated from gains on disposal and are therefore subtracted as taxes need to be paid on the gain

60
Q

What is another word for net income?

A

Net Profit is another name for net income - closed off to retained earnings

61
Q

Name the four elements of the income statement?

A

The four elements of the income statement at revenues, expenses, gains and losses

62
Q

What are revenues and what are they a result of?

A

What are revenues and what are they a result of?

63
Q

What is the revenue recognition principle?

A

Revenue recognition principle requires revenues to be recognized in the period in which the performance obligation is satisfied.

64
Q

What are gains?

A

Gains are increases in equity that result from transactions that are not part of the company’s main operations.

65
Q

What are unusual gains and losses?

A

Unusual gains and losses as those deemed as unusual in nature and infrequent such as damages from a fire and restructuring charges.

66
Q

What are expenses and when are they realised?

A

When they occur

67
Q

What is another name for the expense recognition principle

A

The Matching Principle

68
Q

Who are direct users offinancial statements?

A

Direct users are directly affected by a company’s financial results and stand to lose money if the company has financial problems.
Direct users include investors and potential investors, employees, management, suppliers, and creditors.

69
Q

Who are indirect users of financial statements?

A

Indirect users are people or groups who represent direct users.
Indirect users include financial analysts and advisors, stock markets, and regulatory bodies.

70
Q

What are unsual gains and losses? Give Examples

A

Unusual gains and losses are those that are infrequent such as loss of inventory by Fire, Natural disasters

71
Q

What is a discontinued operation? Give an example of a strategic shift

A

This is the disposal of a component or group of components either disposed of or held for the sale the represents a strategic shift eg. disposing of an entire geographical location

72
Q

How are gains and losses incurred by a discountinued component reported on the income statement?

A

All gains or losses incurred by the discontinued component are reported net of tax in the period in which the gain or loss occurred.

73
Q

Is a tax benefit a gain or a loss?

A

A tax benefit occurs from a loss on disposal

74
Q

Is a tax expense a gain or a loss?

A

A tax expense occurs from a gain on disposal

75
Q

This disposal of a component or group of components represents a strategic shift when what three events occur?

A
  1. The component or group of components meets the criteria to be classified as held for sale
  2. The component is sold
  3. The component is disposed of by abandonment or by distribution to owners via a spin off
76
Q

What requirements must be met for a component to be classified as held-for-sale?

A
  1. Management commits to plan to sell the entity and it is ready for immediate sale.
  2. There is an active program to locate a buyer
  3. The sale is probable within one year
  4. The price marketed is reasonable
77
Q

How is tax allocated on the income statement?

A

Taxes must be allocated on the income statement between income from continuing operations and income from discontinues operations.

78
Q

Define intra-tax allocation.

A

This is allocation from tax amount income from continuing operations, discontinued operations and allocated other comprehensive income.

79
Q

What are the benefits of the income statement?

A

The income statement helps to predict future cash flows, as follows:
• It helps users to evaluate the company’s past performance and to compare it to the performance of
its competitors.
• It provides a basis for predicting future performance.
• It helps users assess the risk or uncertainty of achieving future cash flows.

80
Q

What are some of the limitations of the income statement - give reasons.

A

Most of the limitations of the income statement are caused by the periodic nature of the income statement
1. Net income is an estimate based on assumptions
2. Income numbers are affected by the methods used (depreciation for example)
3. Income measurement requires judgement

81
Q

What accounting principle is based on comprehensive income?

A

Generally Accepted Accounting Principles (GAAP) are based on comprehensive income

82
Q

Comprehensive Income includes what types of transactions?

A

Comprehensive income includes all transactions of the company except for transactions made with the owners of the company (such as distribution of dividends or the sale or repurchase of shares).

83
Q

Give an example of the types of transactions not included in comprehensive income.

A
84
Q

What is a change in equity?

A
85
Q

What is other comprehensive income?

A
86
Q

What is accumulated other comprehensive income?

A
87
Q

Of the specific items in ither comprehensive income how are 1. increases and 2, decreases to net income treated in AOCI? (debited or credited)

A
88
Q

What is the formula for total comprehensive income for one period?

A

CMA - Part 1 (1 decks)

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