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Financial Accounting > Advanced Pre-Reading > Flashcards

Advanced Pre-Reading Flashcards

1
Q

What is a Strategic Activity?

A

Strategic activities encompass activities associated with determining the entity’s overall mission and focus.

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2
Q

What is a Report Activity?

A

A Reporting Activity is an activity associated with generating and communicating information about the company.

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3
Q

What is Accounting?

A

Accounting is the process of gathering, organising, and reporting the financial effects resulting from a company’s operating, investing and financing activies to a variety of individuals, who then use the information in a variety of ways.

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4
Q

What are the 3 major types of Accounting?

A

Financial, Managerial and Tax

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5
Q

Does GAAP filter how accounts measure economic wealth and economic income?

A

Yes - this results in financial statements generally not reporting economic wealth and income. Instead, they report accounting wealth and accounting income.

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6
Q

Who is responsible for setting the accounting regulation in Australia?

A

Australian Accounting Standards Board (AASB)

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7
Q

True or False: if a company wishes to list on different stock exchanges it can use the same accounting principles?

A

False - it must use the GAAP for each country it is listed in.

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8
Q

What happens if entity’s do not disclose financial information?

A

Asymmetry occurs, which increase the risk profile of the entity and hence investors demand a higher RoE.

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9
Q

What are the 4 general costs incurred by a company in issuing financial information?

A

Information Collection/Processing
Competitive Disadvantage Costs
Legal Liability Costs
Political Costs

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10
Q

What are the 3 broad roles for Financial Accounting?

A

1 - Stewardship
2 - Decision Making
3 - Contracting

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11
Q

What would a creditor use accounting information for?

A

To assess whether to grant a loan or determine the terms of a loan. They would also use the information in their bankruptcy models.

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12
Q

What is Asset Substitution?

A

An entity borrows money funds from a lender for a low-risk project, but the company then uses it on a higher risk project. Whilst the return for the lender remains the same, and their risk profile is raised. The return for the equity holders is increased, and so to is their risk.

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13
Q

What is a Debt Covenant?

A

A debt covenant is a provision or clause in a debt contract between lenders and the company designed to reduce default risk. It may restrict how the funding is to be used.

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14
Q

What is an Asset?

A

A resource that the company currently controls

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15
Q

What is a Liability?

A

An obligation that a company has to other external individuals

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16
Q

What is Share Holder Equity?

A

Essentially the Net Worth of the company

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17
Q

What is used to understand why a Balance Sheet has varied?

A

The period specific operating, investing, and financing activities a company has engaged in.

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18
Q

What information type(s) is used to understand why a Balance Sheet has changed?

A

Cash Flow Statement, Share Holder Equity Statement, Comprehensive Income Statement, and Income Statement.

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19
Q

What are the 3 types of classifications on a Shareholder Equity Statement?

A

1 - investments by owners
2 - disbursements to owners
3 - comprehensive income

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20
Q

True of False: the Net Income represents the Net Wealth a company has generated over a specific period?

A

True

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21
Q

What is the purpose of an Income Statement?

A 
Decompose Net Income into its components:
1 - revenues
2 - gains
3 - expenses
4 - losses
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22
Q

What Statement doesn’t report Wealth?

A

Cash Flow Statement - reports cash flows not wealth

The other statements (Shareholder Equity, Comprehensive Income, and Income) report changes to wealth.

23
Q

What is Articulation?

A

It refers to how the various financial statements link together.

24
Q

What is Explicit Articulation?

A

It refers to the situations where the dollar amount of an time reported on one financial statement is explicitly reported on a different statement.

25
Q

What is Implicit Articulation?

A

It refers to reconciling the end-of-period balance of a specific balance sheet line item (eg. other assets) to its beginning-of-period balance.

It requires knowledge of which specific line items from the various financial statements implicitly link together.

26
Q

What is the Basic Reconciliation Formula?

A

End of Period Stock = Beginning of Period Stock + Net Flows during period.

27
Q

True or False: Liabilities and Shareholder Equity represent the claims of creditors and shareholders respectively

A

True

28
Q

What are the two major forms of Share Holder Equity?

A

Contributions from the Shareholders or Resources funded by the shareholders via the company retaining resources generated through its operations.

29
Q

What is the key definition of an Asset?

A

The item is an economic resource and the company has the right to receive benefits from the item,

Simple terms: the company currently controls and gains economic value from the item.

30
Q

Can investments be recorded as a current asset?

A

Yes - if the company indents to dispose of the asset within the time frame of a current asset (ie 12 months)

31
Q

What is a Deferred Tax Asset?

A

A deferred tax asset represents expected future income tax savings assoicated with an event hat the company already has recognized in its financial statements, but not yet recognised on its tax return.

32
Q

What are the main 2 ways to define the dollar value of an asset?

A

1 - The measure of expected future service potential is a based on the asset’s fair value as of the balance sheet date.
2 - The measure of expected future service potential is based on the cost inputs that the company incurred to put the asset into service.

33
Q

What is a Provision?

A

A provision is similar to a Payable i nthat hey represent the amount the company owers other entities, due to events that already have occurred, and (2) typically arise from operating activities.

34
Q

What is the critical difference between a Payable and a Provision?

A

There is uncertainty about the dollar amount that will ultimately be needed to settle the obligation.

For example, 5 year warranty on Toyota cars. Exactly maintenance obligation unknown.

35
Q

What is Unearned Revenue?

A

Goods or services that customers have already paid the company for, but the company has not yet provided.

36
Q

What are Deferred Tax Liabilities?

A

Deferred Tax Liabilities represent expect future income tax obligations (not savings) assoicated with an event the company has recognised in its financial statements.

37
Q

True or False: companies that have different stock options will separate these options in the Shareholder Equity section of a Balance Sheet

A

True

38
Q

What does Comprehensive Income Represent?

A

The Net Wealth generatede during the period from all operating, investing, and financing activities, EXCEPT FOR the financing activities assocaited with investments by onwers and disbursements to owners.

39
Q

Where are Dividends recorded, Contributed Capital or Retained Earnings?

A

Retained Earnings

40
Q

Where is Other Comprehensive Income recorded on a Balance Sheet?

A

Miscellaneous Earned Capital

41
Q

Net Income is what?

A

Revenue - Expenses + Standard Gains - Standard Losses

42
Q

Comprehensive Income is defined by?

A

Net Income + Other Comprehensive Income

43
Q

What is the difference between Revenues and Gains?

A

A company has a revenue when there is an inflow of wealth that arises in the course of the company’s ordinary activities. A company has a gain when there is an inflow of wealth that arises from an activity that is incidental to the company’s ordinary activities.

44
Q

Are Revenues and Expenses defined in terms of gross wealth flows or net wealth flows?

A

Gross Wealth Flows - this is to do with the audience of a financial statement. Users of the statement are more interested in the ordinary operations of the company, and hence Gross Wealth Flows, because they are the primary generating activities of the company.

45
Q

What is the difference between Standard Gains and Losses and Special Gains and Losses

A

Conceptually standard gains and losses, and special gains and losses represent wealth flows from activities that are incidental to the companies ordinary activities.

The difference is accounting standards have designated a few gains and losses that companies are required to exclude from net income, and instead report them in their own special category.

46
Q

List 3 examples of Special Gains or Losses

A

1 - holding grains or losses on certain investments
2 - holding gains and losses on certain hedging activities
3 - gains or losses from translating the financial statements of those equity investments whose financial statements are denominated in a foreign currency and the company controls enough of the investee to company’s equity to exert significant influence over the investee company

47
Q

Intuitively, what can one think of special gains and losses?

A

1 - the gains and losses are unrealised holding gains and losses. That is, the company has not yet sold the underlying item and its value has either increased or decreased during the period.
2 - standard setters have essentially deemed that the underlying item is very incidental to the company’s ordinary activities.

48
Q

What does an Articulation Table have?

A

1 - Balance Sheet (in the middle)
2 - cash flow statement (top)
3 - shareholder equity flows (bottom)

49
Q

Can an Articulation Table have an entry in the first column that isn’t in the Balance Sheet Section

A

No

50
Q

What is the purpose of the first column of an Articulation Table?

A

The purpose of the first column is to indicate how the event affects the basic accounting equation, and thus the balance sheet line items.

51
Q

What is the purpose of the second column of an Articulation Table?

A

To state the financial statements that result from the event.

52
Q

True of False: the shareholder equity statement reports all wealth flows that have occurred since the last balance sheet?

A

True

53
Q

On the Balance Sheet, if an event affects Miscellaneous Earned Capital, where does the company explain this wealth flow?

A

Other Comprehensive Income line item

Financial Accounting (11 decks)

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