Chapter 1: Financial statements Flashcards
introduction tbh
Internal users
managers
Accounting
identifies + records + communicates financial information
External users
investors + creditors + shareholders
Three forms of business organizations
proprietorship, partnership + corporation
Proprietorship
one owner + unlimited liability + income tax paid by owner
Partnership
two owners + unlimited liability + income tax paid by owners
Corporation
limited liability
separate legal entity
separate tax obligations
Three types of business activities
operating + investing + financing
Operating as a business activity
daily activities to run business
Investing as a business activity
sale + purchase of long lived assets and investments
Financing as a business activity
obtaining + repaying funds to finance operations
ex. selling shares + borrowing debt
Accrual accounting basis
events recorded when they happen
revenues recorded when earned
expenses recorded when incurred
expenses follow revenues
Cash accounting basis
events recorded during cash transactions
revenues recorded when cash received
expenses recorded when cash paid
GAAP
generally accepted accounting principles
IFRS
publicly traded companies
ASPE
private companies
Historical cost principle
assets valued at price bought
Fair value principle
assets valued at current market value
Fundamental qualitative characteristics: Relevance
Relevance: influences decisions
Predictive value: helps make predictions for future
Confirmatory value: confirms or corrects expectations
Materiality: omission could influence decisions
Fundamental qualitative characteristics: Faithful representaiton
complete, neutral + free from material error
Enhancing qualitative characteristics
comparability, verifiability, timeliness, understandability
Cost constraint
benefit of reporting financial information is greater than the cost
Going concern assumption
business will continue to operate in the foreseeable future
Assets
business owned for future economic benefit
sell or generate cash flows
Current asset
consumed within a year
Non current asset
used for operations or investment
Liabilities
obligation to creditors
Deferred revenue
paid first without earning revenue therefore current liability
Shareholder’s equity
ownership claim on total investments
Common shares
partial ownership by selling and repurchasing shares
Retained earnings
net profit
RE = revenues - expenses - dividends declared
JE: Common shares
DR Cash
CR Common shares
Dividends declared
contra equity account + obligation to pay shareholders
JE: Dividends declared
DR Retained earnings
CR Dividends declared
JE: Dividends paid
DR Dividends declared
CR Cash
Revenues
profit from operations
sale of goods and services
Income
economic benefit not from operations/sale
Expenses
costs incurred to generate revenue
recorded after generating revenue
Two types of expenses + definitions
Cost of goods sold: directly attached to sale of merchandise
Operating expenses: used to generate revenue from operating activities
JE: expenses
DR expense
CR asset
Contra asset
reduces the amount of the account it contras
adjusts account to fair value
Difference between liability and expense
Liability has not been incurred whereas expense has
