Chapter 1,2 Flashcards
What is the objective of financial reporting?
Provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
▪ Accounting is the language of business.
▪ The objective of financial reporting is to measure and present a true and fair view of financial position and financial performance to interested parties.
What is economic value?
The economic value of the firm is defined as the discounted value of all future net benefits that the firm is expected to generate, which is the higher of the value in exchange and the value in use.
What is value in exchange?
Value in Exchange: The value of a business if it ceases operations and sells everything. If the Value in Exchange is greater, it is more advantageous to sell the business.
What is value in use?
Value in Use: The value of a business if it continues to operate and generates income.
Economic value is easy or hard to determine? And how does FA do to it?
▪ The economic value is difficult to determine in real life.
➢ Financial accounting thus produces an accounting value that approximates the economic value, and
accounting net income that approximates economic net income as closely as possible.
What is the IFRS and what do they do?
The International Financial Reporting Standards (IFRS) are a set of global accounting guidelines that ensure consistency, transparency, and comparability in financial statements across different countries. They provide a common language for companies to follow in preparing their financial reports. IFRS is used to ensure that businesses’ financial performance and position are accurately reported for decision-making by investors and regulators.
Who is interested in the financial information of companies?
Internal and external stakeholders such as:
Human resource
Management
Banks
Suppliers
Investors
What are the Principles of accounting
- Cost/Historical Principle: Stipulates that the company must record its assets at the purchase cost.
- Fair Value Principle: companies should report their assets at the price they would receive, should they sell it at that moment.
- Expense recognition Principle: Expenses are recognized when the expense makes its contribution to revenue. This does not have to be in the same period when the expense is paid.
- Full Disclosure Principle: Providing information that is important or has potential to be important in influencing decisions of informed users through financial statements, notes to the financial statements, and supplementary information.
- Revenue Recognition Principle:
Customer requests
Firm fulfilled its performance Cash received service obligation
What are the twin pillars of quality financial accounting
Relevance and faithful representation are the twin pillars of quality financial reporting under IFRS.
- For information to be relevant, it must help users make informed decisions by offering insights into past, present, or future events.
- Faithful representation means that the information must be complete, neutral, and free from error.
What are the qualitative characteristics of Financial Reporting that affect decision usefulness
- Fundamental qualities
A. Relevance:
(1) Predictive value
(2) Confirmatory value
(3) Materiality
B. Faithful representation
(1) Completeness
(2) Neutrality
(3) Free from error
- Enhancing qualities
(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability
What are enhancing qualities for Financial reporting
- Comparability: If the information is reported in such a way similar to other firms and previous reports such that users can compare reports.
- Verifiability: when independent measurers (e.g. auditors) obtain similar results.
- Timeliness: the information is made available when it is useful and relevant for decision making.
- Understandability: allows reasonably informed users to appreciate the information reported
Cash accounting vs Accrual accounting
Cash accounting:
Revenues recognized when companies receive cash
Expenses recognized when cash is paid
NOT in accordance with IFRS
Accrual accounting:
Revenues recognized when companies perform services
Expenses recognized when incurred
In accordance with IFRS
Give me most common examples of accrual accounting
- Sales on Credit→ Accounts Receivable
- Purchase on Credit→Accounts payable
- Rent Paid in Advance→Prepaid rent
- Customer payment in advance→ Unearned Revenue
- Depreciation
What is an asset
- A resource controlled by the entity
- As a result of past events
- Has the potential to produce economic benefits - Ex: Cash, accounts receivable
What is an liability
- A present obligation of the entity to transfer an economic resource
- As a result of past events
- The transfer of economic resource results in a loss of future economic benefits - Ex: Accounts payable
What is a stock variable
Calculates the quantity of a variable at a specified date (ex: variables in a balance sheet).
What is a flow variable
How a variable’s amount has varied throughout time
Explain the Accrual accounting assumptions (rules)
- Monetary Unit Assumption: Everything is measured in monetary amounts
- Economic Entity Assumption: Only events in which the company is involved are relevant
- Going Concern Assumption: The company is assumed to continue her operating activities in the near future
- Periodicity Assumption: The company periodically reports her financial position
Explain materiality
Explain comparability
Explain relevance
Explain veriafability
Explain faithful represention
Explain timeliness
Explain understndability
