ACCT 434- Mod 1 & Mod 2 Flashcards
What are the 5 accounting frameworks? And who uses each?
IFRS- Publicly Traded Companies
ASPE- Private companies
Not for Profit- Not for profit organizations
Accounting standards for pension plans- Pension plans
Pre-Changeover Accounting Standards- Rules prior to 2011, this can no longer be used
What are the two fundamental qualitative characteristics of accounting?
Relevance
Representational faithfulness
What is representational faithfulness?
Complete
Without bias
Neutral
What are the 4 enhancing qualitative characteristics of accounting?
Comparability
Verifiability
Timeleness
Understandability
What is the main constraint on qualitative charecteristics?
COST
The more detailed you get the more it costs. This is a bigger issue for ASPE companies that usually have more limited resources than IFRS companies
What are Undepreciated capital costs (UCC)?
The balance remaining for further depreciation
What is public sector accounting?
Accounting standards for government. They have a separate handbook
What is the main theoretical difference between IFRS and ASPE?
ASPE sometimes allows for a choice between different reporting methods. IFRS is more rigid.
What is the difference between net realizable value and fair value?
NRV= Selling price minus cost to sell
Fair Value= What the item is worth on the market (if there is a market available)
Can anyone other than a public company use IFRS?
Yes, but most don’t due to the cost
How do IFRS and ASPE differ on Disclosure?
IFRS- Extensive, especially for financial instruments
ASPE- Moderate
How do IFRS and ASPE differ on Impaired loans?
IFRS- Discount future cash flow using original discount rate
ASPE- Discount future cash flow using current rate of interest
How do IFRS and ASPE differ on PPE revaluation?
IFRS- Revalued at fair value with adjustment to OCI
ASPE- Measured at cost less accumulated depreciation
How do IFRS and ASPE differ on Income taxes?
IFRS- Setup deferred income taxes
ASPE- Choice between taxes payable or future income tax methods
What is current ratio and how is it calculated?
Measures liquidity
Current assets/Current Liabilities
What is debt to equity and how is it calculated?
Ability to pay debt as it comes due
Total debt/Shareholders Equity
What is return on assets and how is it calculated?
Profitability of assets
Income before interest & taxe/Total assets
What is return on equity and how is it calculated?
Profitability of owners investment
Net income/Shareholders equity
What are the basic objectives of financial reporting?
Communicate information that is useful to investors, creditors and others in making decisions about resource allocation
What do financial statements provide information about?
Economic resources (assets, liabilities and net equity)
Changes in economic resources
Economic performance of the business (Profit & loss)
What is the principle of conservatism?
When you have a choice of different methods, you should choose the one the one that will not overstate net assets or net income
What is materiality?
Information is material if its omission or misstatement would influence or change a decision
Why must we revalue investments each time we issue a financial statement?
Because if we followed the historic cost principle and the investment changed in value, we would not show a gain or loss until the instrument is sold.
When we revalue an investment, where do we show the gain/loss?
Net income or OCI
What is other comprehensive income?
A way to show the potential gains/losses from transactions that haven’t happened yet, or from transactions that would not normally be included in net income
For taxes, what is a temporary difference?
When the accounting rules and the Income Tax Act use different methods for calculations, but they will eventually agree
What are the 6 most common temporary differences for tax?
Unrealized gains and losses CCA Depreciation Share issue costs Warranties Non-capital losses
For taxes, what is a permanent difference?
When the accounting rules and the Income Tax Act use different methods for calculations, and they will NEVER agree
What is the tax base of an asset?
Amount deductible for tax purposes against taxable benefits when entity recovers the asset
What is the tax base of a liability?
Carrying amount less amount deductible for tax purpose in future periods
Can you use your tax assets in Canada to offset tax liabilities in other countries?
No, assets and liabilities must be under the same tax authority
Is the accounting treatment for taxes the same for IFRS and ASPE?
Yes, only the terminology is different.
ASPE uses FUTURE income taxes
IFRS uses DEFERRED income taxes
What is Current Income tax payable?
The amount of the cheque to the government
What is current income tax expense?
Taxes incurred as a result of this year’s transactions. Shown on the income statement.
What is Deferred Income Tax Liability?
An obligation for taxes we will have to pay at some point in the future that arises from this years transactions. (Shown on the balance sheet)
What is Deferred Income Tax Expense?
The amount of taxes we incurred this year, but won’t pay this year. (Shown on the income statement)
What is Deferred Income Tax Asset?
An amount we will be able to use ,at some point in the future, to reduce the total amount of taxes payable. (Shown on the balance sheet)
What is Deferred Income Tax Benefit?
The deductions we will be entitled to at some point in the future arising from this year’s transactions. (Shown on our income statement)
What is the difference between INTER-period and INTRA-period tax allocation?
Inter-period: Allocation of income tax expense to the year that the income was earned (regardless of when the tax is paid)
Intra-period: Allocation of income tax expense to the appropriate financial statement categories in the current year
What is the difference between accounting income and taxable income?
Accounting income: Income before taxes are calculated
Taxable income: Income upon which taxes are calculated
How is accounting income calculated?
Revenue minus expense
How is taxable income calculated?
Accounting income before tax
+
Expenses on financial statement that are NOT deductible for tax purposes
+
Taxable amounts not recorded as revenue (EX: unearned revenue)
-
Expenses on financial statement that ARE deductible for tax purposes
-
Amounts recorded as revenue that are not taxable
= Taxable Income
For the 3 main permanent differences, do we add or deduct them from net income to determine taxable income?
Add
How do we determine current tax expense?
Start with net income, then add/deduct permanent and temp differences The adjusted balance is taxable income x Current income tax rate = Current tax provision
How do we determine deferred tax expense?
Difference between the opening and closing net deferred tax balance on the balance sheet
What are the 4 basic steps for problems asking you to determine the deferred tax balance and the current and deferred tax provision for the year?
Step 1- Read the question and focus on what they want you to do
Step 2- Identify the permanent and temporary differences
Step 3- Calculate the taxable income
Step 4- Match up the temporary differences to the assets or liabilities that they relate to
What are the 3 main examples of permanent differences?
Meals and entertainment
Stock based compensation
Interest and penalties
