chapter 2 Flashcards
how are assets and liabilities presented?
as current and non current, based on more to less liquid
how is an asset classified as current?
expected to be realized, sold or consumed within one year, held for trading, cash or cash equivalent
how is a liability classified as current?
it is due within one year, held of trading
what are some common current assets?
- cash
- short term or trading investments (investments in public companies, holding for trading purposes)
- accounts receivable
- inventory
- supplies (office supplies)
- prepaid expenses (insurance, rent, advertising)
what are some common non current assets?
- long term investments
- ppe
- intangible assets
- goodwill
what is goodwill?
A specific type of intangible that arises when one company purchases another. ourchasing a company for more than the amount of assets
what is ppe?
Property, plant and equipment includes physical assets used in ongoing business operations to generate income (land, buildings, vehicles, furniture)
what is depreciation?
a reduction of the value of the asset, any asset that has a limited useful life will be deprecated
what is depreciable amount?
the amount that I spent on an asset that I am expecting to use up, how much I thunk I’m gonna use up of an asset
depreciation expense ? (amortization expense)
amount used up in a given period
accumulated depreciation?
total depreciation expense taken so far
what is carrying amount?
how much potential my asset has left, the difference between an assets cost and accumulated depreciation at a point in time
what are intangible assets?
assets without physical substance that are used to earn business income (patents, copyrights)
what are the three criteria of liabilities?
- has to present obligation of the entity
- arises from past events
- settelemt of which is excepted to result in an outflow of economic resources
what are common current liabilities?
- bank indebtedness (short term loans from the bank)
- accounts payable (amounts owing to supplies )
- deffered revenues/ unearned revenues (payments received from customers for goods not yet delivered )
- notes/ loans payable (represents written promises to pay banks within a year)
- current portion of long term debt (represents the portion of a long term loan due within 12 months )
what are the two categories of shareholders equity?
common shares/ share capital, retained earnings
what is common shares?
amounts received from shareholders when shares were originally issued by the company, every company has at least common shares
what are retained earnings?
the net income that has not been declared to shareholders in the form of dividends
why do users perform financial statements?
- to compare a company to its competitors or to the industry
- to understand the overall health of the company
- to evaluate the company performance over time
- to find trends, insights and correlations
what are the three types of ratios?
liquidity ratios, solvency ratios and profitability ratios
what are liquidity ratios?
measure short term ability of the company to pay its obligations, helps assess a company ability to pay debts. need current assets and current liabilities
how is working capital calculated? (liquidity ratios)
current assets- current liabilities
what does a positive working capital mean? (liquidity ratios)
greater chance that a company will be able to meet its short term obligations
what does a higher ratio mean (liquidity ratios)
better because the risk of not meeting current liabilities decreases
what if working capital is negative? (liquidity ratios)
company will need to borrow funds to meet coming obligations
how to calculate current ratio? (liquidity ratios)
current assets/ current liabilities, higher ratio means company is more liquid
what are solvency ratios?
measure the ability of the company to survive over a long period of time, asses a company ability to pay ling term obligations, higher ratio the higher the risk that the company may not be able to pay interest
debt to assets ratio? (solvency ratio)
total liabilities/ total assets
what are profitability ratios?
measure the operating success of a company for a specific period of time, measure if a company is more profitable than in the past or its competition
how do you calculate basic shares per income?
net income/ weighted average number of common shares
how do you calculate price earnings ratio?
market price per share/ basic earnings per share
what are intracompany comparisons?
comparing two or more period for the same company.
what are intercompany comparisons?
comparisons with a competitor in the same industry.
what is conceptual framework?
Provides the fundation for the detailed accounting standards, helps understand what should be presented in the statements, communicate info
what are the four objectives of financial accounting?
- provide info about the company that will be useful to existing or potential users
- to reduce info asymmetry (the people inside the org have a lot more info than those outside and it helps reduce this)
- provide info about cash flows
- provide info about the entities resources, claims and performance
what are qualitative characteristics?
characteristics that we want out users to have
what are the two types of qualitative characteristics
- fundamental characteristics (must have)
- enhancing characteristics (things that will make our info more useful)
what are the two fundamental characteristics?
relevance and representational faithfulness
what us relevance (fundamental)
info should have the ability to influence the users decisions
info is relevant if it has which two values
confirmatory value ( help confirm past events) or predictive value (if it will help predict future events)
what is materiality in relevances ce?
useful to help us decide if a misstsatment would influence a users decision
what is representational faithfulness?
the info that were presenting should reflect the accuracy of the transactions, resources and any liabilites
what are the three concepts of representational faithfulness?
completeness: statements should have all material items
neutrality: info should be free of bias
freedom from material error: statements should not have errors or omissions
what are the four parts to enhancing qualitative characteristics?
understandability, comparability, verifiability and timeliness
what is understandability (enhancing)
financial statements should be understandable to the users, clear and concise
what is comparability (enhancing)
we should be able to compare financial statemnbts from year to the next to allow us to clearly see what has changed, choose consistent accountant policies, have to be comparable to other companies → so have to be comparable to other companies but also consistent from year to the next
what is verifiability (enhancing)
if we have an independent observer (auditors), someone else should achieve the same results as us, should be able to be verified and those who come and verify should agree with the way we present our financial statemts
what is timeliness (enhancing financial statements)?
the sooner we can provide info to our users, the more useful it will be to them
what is cost constraint?
there’s a limit or boundary on how much a company is willing to spend or invest in obtaining financial informatio. preparing info can be expensive as more info= more time= more time I have ti spend in my staff
what does the conceptual framework say about cost constraint?
we should balance the cost of providing info to the value that it will have to our users
what is the going concern assumption?
We can assume that a company will continue to operate in the future, seems like it
We have to make this assumption for our financial statements to make sense
We don’t see the concept of current vs non current
what are the two ways to measure elements (assets, revenues, liabiltiris, revenue, income, expenses)
historical cost and fair value
what is historical cost?
On the day that i acquire something, i record it as the vbalue i spent on my financial statement
Even in the future if the value incrwases, we dont record that increase of value on the financial statement
what is the exception for historical cost?
if you see a situation where an asset decreases, we may need to record it in the financial statements or else its misleading
what is measuring at fair value?
how much the asset would cost today
what is accounting and the environment?
- Esg accounting
- More interest from our users for more types of info not just financial
- A lot of public companies will prepare their annual report but also a sustainability report that is not in the financial statements
- Standards for esg info are still evolving and growing fast
- not in IRSF or ASPE
