BURNLEY 1e: Chapter 2 Review

Question 1

Accounting Standards for Private Enterprises (ASPE)

Answer 1

Accounting standards that Canadian private companies may follow, unless they elect to use International Financial Reporting Standards.

Question 2

Accounts

Answer 2

Elements of a company’s financial records that group transactions of a similar nature and are given a title, such as Cash, or Equipment, or Retained Earnings.

Question 3

Accrual basis of accounting

Answer 3

The accounting basis, used by almost all companies, that recognizes revenues in the period when they are earned and expenses in the period in which they are incurred, and not necessarily in the period when the related cash inflows and outflows occur.

Question 4

Carrying amount

Answer 4

A statement of financial position in which the assets and liabilities are listed in liquidity order and are categorized into current (or short-term) and non-current (or long-term) sections.

Question 5

Cash basis of accounting

Answer 5

The accounting basis, used by some entities, that recognizes revenues whenever cash is received and expenses when cash is paid, regardless of whether the revenues have been earned or expenses incurred.

Question 6

Classified statement of financial position

Answer 6

A statement of financial position in which the assets and liabilities are listed in liquidity order and are categorized into current (or short-term) and non-current (or long-term) sections.

Question 7

Comparability

Answer 7

An enhancing qualitative characteristic that states that accounting information has when financial statement readers are able to compare different sets of financial statements over time and across like companies.

Question 8

Complete

Answer 8

An element of the fundamental qualitative characteristic of faithful representation that states that financial statements should provide users with all of the information needed to understand what is being presented in the statements, including any necessary explanations.

Question 9

Conceptual frameworks

Answer 9

A framework that provides the underlying set of objectives and concepts that guide accounting standard-setting bodies and assists accountants in determining how to account for items for which no specific standards have been developed.

Question 10

Confirmatory value

Answer 10

An element of the fundamental qualitative characteristic of relevance that states that accounting information is relevant to decision makers if it provides feedback on their previous decisions.

Question 11

Cost constraint

Answer 11

A constraint within the conceptual framework that states that, when preparing financial statements, the benefits of reporting financial information must exceed the costs of doing so.

Question 12

Cost of goods sold

Answer 12

The expense that records the cost to the selling company of the inventory that was sold during the period.

Question 13

Credit sale

Answer 13

A transaction to purchase goods or services to be paid for at a later date, which creates an account receivable on the seller’s books and an account payable on the purchaser’s books. Synonym for a sale on account.

Question 14

Depreciation

Answer 14

The allocation of the cost of capital assets to expense over their estimated useful lives.

Question 15

Double-entry accounting system

Answer 15

An accounting system that maintains the equality of the basic accounting equation by requiring that each entry have equal amounts of debits and credits.

Question 16

Earned

Answer 16

What occurs when a company has provided goods or services to customers and it is probable that measurable economic benefits will flow to a company.

Question 17

Enhancing qualitative characteristics

Answer 17

Qualitative characteristics of financial statements that enhance the usefulness of information.

Question 18

Estimated residual value

Answer 18

The amount a company estimates it may be able to recover from the disposal of an asset when the company is finished using it. The amount is equal to the estimate of the amount that the company would receive today if it disposed of the asset in the age and condition it is expected to be in at the time of disposal.

Question 19

Estimated useful life

Answer 19

The amount of time a company estimates an asset will be used to generate revenue.

Question 20

Free from error

Answer 20

An element of the fundamental qualitative characteristic of faithful representation that states that financial information should be determined based on the best information available, using the correct process and with an adequate explanation provided.

Question 21

Fundamental qualitative characteristics

Answer 21

Qualitative characteristics of financial statements that are essential if financial information is to be considered useful and, without them, the information is useless. Relevance and representational faithfulness are both fundamental qualitative characteristics.

Question 22

Immaterial

Answer 22

The characteristic of information in financial statements that would not affect the user’s decisions.

Question 23

Incorporation

Answer 23

The process of organizing a business as a separate legal entity having ownership divided into transferable shares held by shareholders.

Question 24

Incurred

Answer 24

What occurs when an expense needs to be recorded in the period in which it has helped to generate revenue.

Question 25

International Financial Reporting Standards (IFRS)

Answer 25

The accounting standards that must be followed by Canadian public companies and that private companies may elect to adopt.

Question 26

Material

Answer 26

The characteristic of information in financial statements that is relevant to the user’s decisions.

Question 27

Materiality

Answer 27

An element of the fundamental qualitative characteristic of relevance that states that information is material, if it would affect the decision-making of financial statement users.

Question 28

Net book value

Answer 28

The full value of all of a company’s accounts receivable less the allowance for doubtful accounts. In the context of long-term assets, carrying amount or carrying value is equal to the asset’s cost, less accumulated depreciation, less accumulated impairment losses. It represents the portion of the asset’s cost that has yet to be expensed. Synonym for. Synonym forcarrying amount.

Question 29

Neutral

Answer 29

An element of the fundamental qualitative characteristic of faithful representation that states that financial information should be unbiased: neither optimistic nor overly conservative.

Question 30

On account

Answer 30

A transaction to purchase goods or services to be paid for at a later date, which creates an account receivable on the seller’s books and an account payable on the purchaser’s books. Synonym forcredit sale.

Question 31

Predictive value

Answer 31

An element of the fundamental qualitative characteristic of relevance that states that accounting information is relevant to decision makers when it helps predict future outcomes.

Question 32

Profit margin ratio

Answer 32

A ratio that compares the net income (or profit or earnings) during an accounting period with the related revenues. Synonym fornet profit margin.

Question 33

Relevant

Answer 33

A fundamental qualitative characteristic of useful financial information that states that useful financial information must matter to users’ decision-making.

Question 34

Representationally faithful

Answer 34

A fundamental qualitative characteristic of useful financial information, stating that the information in the financial statements should represent events and transactions as they actually took place or are at present.

Question 35

Return on assets

Answer 35

A measure of profitability that measures the return on the investment in assets. It is calculated by dividing net income by the average total assets.

Question 36

Return on equity

Answer 36

A measure of profitability that measures the return on the investment made by common shareholders. It is calculated by dividing net income by the average common shareholders’ equity.

Question 37

Revenue recognition criteria

Answer 37

Conditions that must be satisfied for revenues to be recognized according to accrual accounting.

Question 38

Straight-line depreciation

Answer 38

A method of calculating depreciation in which the amount of expense for each period is found by dividing an asset’s depreciable amount (equal to cost less estimated residual value) by its estimated useful life. Synonym forstraight-line method.

Question 39

Synoptic approach

Answer 39

Synonym fortemplate approach.

Question 40

Template approach

Answer 40

The most basic of accounting systems, which uses the accounting equation for transaction analysis and recording. Synonym forsynoptic approach.

Question 41

Timeliness

Answer 41

An enhancing qualitative characteristic that states that the information in financial statements must be timely to be useful.

Question 42

Understandability

Answer 42

An enhancing qualitative characteristic that states that accounting information is useful when it is prepared with enough information and in a clear enough format for users to comprehend it.

Question 43

Useful life

Answer 43

The period of time that management estimates a capital asset (such as equipment) is expected to be used.

Question 44

Verifiability

Answer 44

An enhancing qualitative characteristic that states that useful financial information is such that a third party, with sufficient understanding, would arrive at a similar result to that determined by management.