Chapter 1: Financial statements

Question 1

Internal users

Answer 1

managers

Question 1

Accounting

Answer 1

identifies + records + communicates financial information

Question 2

External users

Answer 2

investors + creditors + shareholders

Question 3

Three forms of business organizations

Answer 3

proprietorship, partnership + corporation

Question 4

Proprietorship

Answer 4

one owner + unlimited liability + income tax paid by owner

Question 5

Partnership

Answer 5

two owners + unlimited liability + income tax paid by owners

Question 6

Corporation

Answer 6

limited liability
separate legal entity
separate tax obligations

Question 7

Three types of business activities

Answer 7

operating + investing + financing

Question 8

Operating as a business activity

Answer 8

daily activities to run business

Question 9

Investing as a business activity

Answer 9

sale + purchase of long lived assets and investments

Question 10

Financing as a business activity

Answer 10

obtaining + repaying funds to finance operations
ex. selling shares + borrowing debt

Question 11

Accrual accounting basis

Answer 11

events recorded when they happen
revenues recorded when earned
expenses recorded when incurred
expenses follow revenues

Question 12

Cash accounting basis

Answer 12

events recorded during cash transactions
revenues recorded when cash received
expenses recorded when cash paid

Question 13

GAAP

Answer 13

generally accepted accounting principles

Question 14

IFRS

Answer 14

publicly traded companies

Question 15

ASPE

Answer 15

private companies

Question 16

Historical cost principle

Answer 16

assets valued at price bought

Question 16

Fair value principle

Answer 16

assets valued at current market value

Question 17

Fundamental qualitative characteristics: Relevance

Answer 17

Relevance: influences decisions
Predictive value: helps make predictions for future
Confirmatory value: confirms or corrects expectations
Materiality: omission could influence decisions

Question 18

Fundamental qualitative characteristics: Faithful representaiton

Answer 18

complete, neutral + free from material error

Question 19

Enhancing qualitative characteristics

Answer 19

comparability, verifiability, timeliness, understandability

Question 20

Cost constraint

Answer 20

benefit of reporting financial information is greater than the cost

Question 21

Going concern assumption

Answer 21

business will continue to operate in the foreseeable future

Question 22

Assets

Answer 22

business owned for future economic benefit
sell or generate cash flows

Question 23

Current asset

Answer 23

consumed within a year

Question 24

Non current asset

Answer 24

used for operations or investment

Question 25

Liabilities

Answer 25

obligation to creditors

Question 26

Deferred revenue

Answer 26

paid first without earning revenue therefore current liability

Question 27

Shareholder’s equity

Answer 27

ownership claim on total investments

Question 27

Common shares

Answer 27

partial ownership by selling and repurchasing shares

Question 28

Retained earnings

Answer 28

net profit
RE = revenues - expenses - dividends declared

Question 29

JE: Common shares

Answer 29

DR Cash
CR Common shares

Question 30

Dividends declared

Answer 30

contra equity account + obligation to pay shareholders

Question 31

JE: Dividends declared

Answer 31

DR Retained earnings
CR Dividends declared

Question 32

JE: Dividends paid

Answer 32

DR Dividends declared
CR Cash

Question 33

Revenues

Answer 33

profit from operations
sale of goods and services

Question 34

Income

Answer 34

economic benefit not from operations/sale

Question 35

Expenses

Answer 35

costs incurred to generate revenue
recorded after generating revenue

Question 36

Two types of expenses + definitions

Answer 36

Cost of goods sold: directly attached to sale of merchandise
Operating expenses: used to generate revenue from operating activities

Question 37

JE: expenses

Answer 37

DR expense
CR asset

Question 38

Contra asset

Answer 38

reduces the amount of the account it contras
adjusts account to fair value

Question 39

Difference between liability and expense

Answer 39

Liability has not been incurred whereas expense has