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ACCO 310 > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

conceptual framework

A

coherent system of interrelated objectives and fundamentals

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2
Q

the conceptual framework can lead to

A

consistent standards and prescribe the nature, function and limits of financial accounting statements

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3
Q

Benefits of conceptual framework

A
  1. Standard setters (IASB, AcSB, FASB) can issue more useful and consistent standards in the future
  2. problems should be served more consistently and rapidly with reference to the framework for theory
  3. understanding and confidence in financial reports increased
  4. comparability between financial statements will increase
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4
Q

Framework is used by

A
  1. standard setters to divide new standards

2. people in the industry when applying professional judgement

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5
Q

Pillars of conceptual framework

A
  1. Objectives (take into account reporting environment, regulations)
  2. Qualitative Characteristics (Primary and enhancing)
  3. Elements of financial statements
  4. Foundational principles
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6
Q

IFRS and ASPE have different frameworks because

A

IFRS: more regulations, users
ASPE: smaller companies, framework towards owners and lenders

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7
Q

Objectives

A

influenced by a number of factors: reporting and regulatory environment, competition, stakeholder requirements

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8
Q

Qualitative Characteristics

A

Overriding criterion is that it is useful, must be understandable

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9
Q

Primary qualities

A

Relevance and Representational Faithfulness (reliability)

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10
Q

Relevance

A

Capable of making a difference in a decision.

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11
Q

Relevant if it has:

A
  1. predictive value

2. Feedback value (confirmatory value)

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12
Q

Representational faithfulness

A

information is transparent, reflects economic reality go event or transaction: shows what its supposed to show, no more no less

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13
Q

Representational if it is

A
  1. complete
  2. neutral: can be independently verified, free from material error or bias (if someone came in to verify would get the same amount)
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14
Q

Enhancing qualities

A
  1. Comparability (sometimes sacrificed for consistency)
  2. Verifiability
  3. Timeliness (necessary for relevance)
  4. Understandability (anyone with reasonable understanding would comprehend the statements)
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15
Q

Asset

A

resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

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16
Q

Liability

A

A liability is a present obligation of entity arising from past events, the settlement of which will result in outflow of resources embodying economic benefit

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17
Q

Equity

A

residual interest in assets after deducting liabilities

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18
Q

Elements of statements relating to performance

A
  1. revenues, sales
  2. expenses
  3. gains and losses
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19
Q

Revenues/sales

A

income increased in economic benefit in form of inflows/enhancements of assets or decrease in liabilities
–> increase in equity excluding investment from equity

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20
Q

Expenses

A

decreases in economic benefits in form of outflows or depletion of assets or incurrence of liability –> decrease in equity excluding dividends

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21
Q

Gains and losses

A

revenues and expenses that result from peripheral activities (outside of main line of business)

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22
Q

Recognition of the elements of financial statements

A

process of incorporating in B/S or I/S an item that meets the definition of an element and satisfies criteria for recognition

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23
Q

criteria for recognition

A
  1. it is probable that any future economic benefit associated with item will flow to or from the entity
  2. item’s cost or value can be measured with reliability
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24
Q

An asset is recognized on the B/S when

A

probable that the future economic benefit, controlled by the entity, arising from past transactions

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25
Q

Definition of asset is changing

A
  • asset must be a present economic resource

- company must have a right to access to this resource where others don’t

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26
Q

Impairment of assets

A

assets should be tested for impairment (loss in value) regularly. If the value is less than in the books –> must be written down

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27
Q

A liability is recognized on B/S when

A

probable that outflow of resources embody economic benefit will result from the settlement of a present obligation and amount measured reliably : an unavoidable duty arising from past transaction

28
Q

Definition of liability is changing

A
  • present obligation

- obligation is enforceable (legally or constructively)

29
Q

Income is recognized on I/S when

A

increase in future economic benefit related to an increase in an asset or decrease of liability can be measured reliably (simultaneous with recognition of increase in asset or decrease in liabilities)

30
Q

Expenses are recognized on I/S when

A

decrease in future economic benefit relating to a decrease in asset or increase in liabilities and measured reliably. (simultaneous with recognition of decrease in asset or increase in liabilities)

31
Q

obligations may be

A

financial or non-financial

32
Q

i.e. financial obligations

A

accounts payable

33
Q

i.e. non-financial obligations

A

conditional pending lawsuit; result of performance obligations

34
Q

Conditional obligations

A

may or may not become liabilities

35
Q

Under IFRS, another obligations is added

A

constructive obligations

36
Q

Constructive obligations

A

not legally enforceable, seen as a moral obligation, when past practice has created expectation from customer that certain obligations will be honoured (warranty)

37
Q

Comprehensive Income and Accumulated other comprehensive income IFRS

A

Income statement + OCI

38
Q

OCI

A

unrealized gains and losses on certain items that bypass the income statement on available for sale securities, when sold they get reclassified as income

39
Q

Net income from I/S goes to

A

retained earnings on B/S on IFRS and ASPE

40
Q

OCI elements go to

A

AOCI section of shareholder equity on B/S

41
Q

Foundational principles

A
  1. Economic entity
  2. Control
  3. Revenue recognition
  4. matching
  5. Periodicity
  6. Monetary unit
  7. Going concern
  8. Historical cost
  9. Fair value
  10. Full disclosure principle
42
Q

Control

A

assets not controlled by entity not recognized since company may not have access to the benefits

43
Q

Revenue recognition

A

generally recognized when 1) risks and rewards were passed on or earnings process is complete, 2) measurement is reasonably certain and 3) collectability is reasonably assured

44
Q

Matching

A

efforts (expenses) should be matched with the revenues

45
Q

Practical rules for expense matching

A
  1. when direct association, costs expenses against related revenues
  2. When association exists but difficult to determine, rational and systematic allocation
  3. when little or any association –> expense
  4. when a cost does not meet definition of asset –> expense
46
Q

Periodicity

A

activities of an enterprise can be divided into artificial time periods

47
Q

Monetary unit

A

money is common denominator = appropriate accounting measurement

48
Q

Going concern

A

assumption that business will continue in operations for foreseeable future and use assets and pay off liabilities in a normal manner

49
Q

If a company has going concern issues

A

bring assets to their fair values at the balance sheet date

50
Q

Accruals and deferrals are justified on basis of

A

the going concern approach

51
Q

Historical cost

A

recognized at amount paid when received (verifiable)

52
Q

Fair value

A

today’s adjusted value.. slowly more prevalent now when it is more relevant

53
Q

Full disclosure

A

revealing everything in financial statements, if sufficient importance to influence the judgement and decision of informed reader –> use of notes and supplementary information

54
Q

Some tradeoffs when applying the conceptual framework

A
  1. reliability and relevance (historical value)
  2. relevance for conservatism (value lower than fair value)
  3. timeliness for verifiability: accruals are not verifiable but made on time
  4. comparability for consistency
55
Q

Auditor focus on

A

verifiability

56
Q

balance between benefit and cost

A

benefits derived from information should exceed cost of providing it

57
Q

balance between qualitative characteristics

A

aim is to achieve proper balance to meet objective of financial statements

58
Q

Accrual accounting is application of

A

matching principle

59
Q

Depreciation expense is application of

A

matching principle and justified by going concern

60
Q

deferrals like prepaid expenses and unearned revenues are justified by

A

the going concern principle

61
Q

bad debt expense based on

A

matching principle

62
Q

adjusting entries based on

A

matching principle

63
Q

closing entries justified on

A

periodicity concept

64
Q

information must be timely to be relevant but

A

timeliness does not imply relevant

65
Q

accruals are said to be

A

matched but not paid/collected

66
Q

prepaid expenses are said to be

A

paid but not matched to a given period

67
Q

Measurement bases

A
  1. historical cost
  2. current cost (to replace it)
  3. Net realizable (settlement)value
  4. Present value (discounted)

ACCO 310 (7 decks)

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