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CIA PT 3 > Basic & Intermediate Concepts of Financial Accounting > Flashcards

Basic & Intermediate Concepts of Financial Accounting Flashcards

1
Q

The objective of general-purpose financial reporting is to

A

Report financial information that is useful in making decisions about providing resources to the reporting entity.

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2
Q

The primary users of financial information are

A

Current or prospective investors and creditors who cannot obtain it directly.

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3
Q

Certain assumptions about the environment in which the reporting entity operates are used in the preparation of the financial statements.
What are those assumptions?

A

1) Going-concern assumption
2) Economic-entity assumptions
3) Monetary-unit assumptions
4) Periodicity assumption

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4
Q

It is assumed that the entity will operate indefinitely and will not be liquidated.

A

Going-concern assumption

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5
Q

The reporting entity is separately identified for the purpose of economic and financial accountability. Thus, the economic affairs of owners and managers are kept separate from those of the reporting entity.

A

Economic-entity assumption

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6
Q

Accounting records are kept in terms of money.

A

Monetary-unity assumption

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7
Q

Financial statements are prepared periodically throughout the life of an entity to ensure the timeliness of information.

A

Periodicity assumption

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8
Q

For financial information to be useful in decision making, it must have the following qualitative characteristics:

A

1) Relevance,
2) Faithful representation,
3) Comparability,
4) Verifiability,
5) Timeliness, and
6) Understandability

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9
Q

Provide guidelines for recording financial information.

A

Accounting principles

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10
Q

The accounting principles are:

A

1) Historical cost principle
2) Full-disclosure principle
3) Revenue recognition principle
4) Matching principle

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11
Q

Transactions are recorded initially at cost because that is the most objective determination of fair value.

A

Historical cost principle

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12
Q

Financial statement users should be able to assume that financial information that could influence users’ judgment is reported in the financial statements.

A

Full-disclosure principle

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13
Q

Revenues and gains should be recognized when realized or realizable and earned.

A

Revenue recognition principle

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14
Q

Expenses should be recognized in the same period as directly related revenues.

A

Matching principle

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15
Q

Are the primary of communicating financial information to external parties.

A

Financial statements

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16
Q

A full set of financial statements includes:

A

1) Statement of financial position,
2) Income statement,
3) Statement of comprehensive income,
4) Statement of changes in equity,
5) Statement of cash flows.

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17
Q

Reports the amounts in the accounting equation at a moment in time, such as at the end of fiscal year. The basic accounting states the following:
Assets = Liabilities + Equity

A

The statement of financial position, also called the balance sheet

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18
Q

Reports the results of an entity’s operations over a period of time, such as a year.
Income (loss) = Revenue + Gains - Expenses - Losses

A

The income statement

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19
Q

Revenue ordinarily is recognized upon the

A

Delivery of goods or services when the earning process is completed.

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20
Q

If one exists, is presented net of tax in separate section of the income statement after income from continuing operations.

A

Discontinued operation

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21
Q

Consists of

1) Net income or loss and
2) Other comprehensive income (OCI)

A

Statement of comprehensive income

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22
Q

Reconciles the beginning balance for each component of equity to the ending balance

A

Statement of changes in equity

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23
Q

The primary purpose of the statement of cash flows is to

A

Provide relevant information about the cash receipts and cash payments of an entity during the period.

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24
Q

Statement of cash flows provides information about cash inflows and outflows from:

A

1) The operating,
2) Investing, and
3) Financing activities of the entity.

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25
Q

Financial statements are prepared under the

A

Accrual basis of accounting

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26
Q

Records the financial effects of transactions and other events and circumstances when they occur rather than when their associated cash is paid or received.

A

Accrual accounting records

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27
Q

Is the accrual-accounting process of distributing an amount according to a plan or formula.

A

Allocation

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28
Q

Assigning a total cost to the accounting periods expected to be benefited is a

A

Common allocation

29
Q

An accounting system consists of:

A

1) A set of accounts,
2) Recorded in a journal and
3) Posted to a ledger

30
Q

It records the effects of the transactions and other events and circumstances that must be recognized by the entity.

A

An accounting system

31
Q

The accounting system:

A

1) Classifies the items,
2) Summarizes their effects, and
3) Reports the results in the form of financial statements.

32
Q

The accounting system is based on the:

A

1) Debit-credit and

2) Double-entry convention

33
Q

In accordance with the convention,

A

1) A debit is an increase (decrease) in a given account, and

2) A credit is a decrease (increase) in the same account.

34
Q

Record the financial effects of transactions, events, and other circumstances in the accounting system.

A

Journal entries

35
Q

Is a schedule comparing the cash balance per books with the balance per bank statement (usually received monthly).

A

Bank reconciliation

36
Q

Items know to the entity but not to the bank are:

A

1) Outstanding checks,
2) Deposits in transit, and
3) Errors made by the bank

37
Q

Items known to the bank but not to the entity are:

A

1) Amounts added (collections and interest) or

2) Subtracted (or not added) by the bank (insufficient funds checks and service charges).

38
Q

Accounts receivable are reported at:

A

Net Realizable Value (NRV)

39
Q

NPV of accounts receivable equals

A

Gross accounts - allowance for uncollectible accounts.

40
Q

The two common methods of measuring bad debt expense and the allowance for uncollectible accounts are:

A

1) The percentage-of-sales method and

2) The percentage-of-receivables method

41
Q

The cost of inventory includes:

A

1) The purchase price (net of allowances and returns),
2) Shipping charges, and
3) Any other costs necessary to bring the inventory to a location and condition ready for use.

42
Q

Tracks every item purchased and sold. This system is generally more suitable for entities that sell relatively expensive and heterogeneous items and require continuous monitoring of inventory and cost of goods sold accounts.

A

Perpetual inventory system

43
Q

In the periodic inventory system,

A

Inventory and cost of goods sold are updated at specific intervals, such as quarterly or annually, based on the results of a physical count.

44
Q

Requires determining which specific items are sold and thus reflects the actual physical flow of goods.

A

Specific identification method

45
Q

When the inventory items purchased/produced are identical and ordinarily interchangeable, the use of:

A

1) Average method,
2) FIFO, or
3) LIFO is more appropriate.

46
Q

Consists of tangible property expected to benefit the entity for more than 1 year that is held for the production or supply of goods or services, rental to others, or administrative purposes

A

Property, plant, and equipment (PPE), also called fixed assets

47
Q

Includes the net purchase price and the directly attributable costs of bringing the asset to the location and condition needed for its intended operation.

A

Historical/initial cost of PPE

48
Q

Is the process of systematically and rationally allocating the depreciable base of a tangible capital asset over its expected useful life.

A

Depreciation

49
Q

The periodic depreciation expense is recognized in:

A

The income statement

50
Q

Depreciation methods include:

A

1) Straight-line depreciation
2) Units-of-production method, and
3) Accelerated depreciation methods, such as declining balance and sum-of-the-years’-digits methods

51
Q

Allocates the depreciable base evenly over the estimated useful life of the asset.

A

Straight-line depreciation

52
Q

Straight-line depreciation

A

Depreciation expense = Depreciable base divided by Estimated useful life

53
Q

Allocates a proportional amount of the asset’s cost based on its level of output.

A

Units-of-production method

54
Q

Units-of-production Method

A

Depreciation expense = Depreciable base x (Units produced during current period divided by Estimated total lifetime units)

55
Q

Result in decreasing depreciation charges over the life of the assets.

A

Accelerated depreciation methods

56
Q

Is an identifiable, nonmonetary asset that lacks physical substance.

A

Intangible asset

57
Q

An intangible asset with finite useful life is

A

Amortized.

58
Q

An intangible asset with an indefinite useful life is

A

Not amortized but tested for impairment at least annually.

59
Q

Is the value today of some future payment.

A

Present value (PV) of an amount

60
Q

Present value (PV) equals

A

The future payment x the present value of 1 (a factor found in a standard table) for the given number of periods and interest rate.

61
Q

Is a series of equal payments at equal intervals of time.

A

An annuity

62
Q

Is a series of payments occurring at the end of each period.

A

An ordinary annuity (annuity of arrears)

63
Q

Is a series of payments occurring at the beginning of each period.

A

An annuity due (annuity in advance)

64
Q

Is the amount available at a specified time in the future based on a single investment (deposit) today.

A

Future value (FV) of an amount

65
Q

Is a formal contract to pay an amount of money (face amount) at the maturity date plus interest at the stated rate at specific intervals.

A

A bond

66
Q

The proceeds received from the investors on the day the bonds are sold equals

A

The present value of the sum of the future cash flows expected to be received from the bonds.

67
Q

Bond premium or discount must be amortized over the life of the bonds using the

A

Effective-interest method

68
Q

Effective-interest method equals

A

Carrying amount of the bond at the beginning of the period x Effective interest rate

CIA PT 3 (28 decks)

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