Chapter 2 Flashcards
What are the fundamental qualitative characteristics of useful information
Relevance
- predictive value
- confirmatory value
- materiality
Faithful representation
- completeness,
- neutrality
- freedom from error
What is cash basis accounting
–Revenues are recorded when the cash is received –expenses are recorded when cash is paid
-in basic terms everything is recorded when the particular in flow or outflow of cash happens
Accrual Basis accounting
-revenues are recorded when they are earned
– expenses are recorded when they are incurred
not necessarily when the inflows and outflows of cash occur
most commonly used
What are the two types of values that make financial information matter to the users
Predictive values or confirmatory values
what are predictive values
Info users can use to develop expectations on the company’s future
what are confirmatory values
values that provide feedback on users previous assessments of the company
What is the concept of materiality
info is considered material if it would affect the decision making of financial users
information that would not affect the user’s decisions is considered to be __________
immaterial
The concept of materiality is company-specific (TUE or FALSE)
True -something may be material to the users of one company that is immaterial to the users of another company.
Materiality can be viewed in a qualitative and quantitative context (TRUE or FALSE)
true -
what are the three components required to be considered faithfully represented information?
Complete
neutral
free form error
Explain “cost constraint” when capturing and reporting financial information
the benefits of reporting financial information must exceed the costs of doing so.
IFRS Conceptual framework: “Fundamental Qualitative characteristics”
Relevance:
- Predictive value
- confirmatory value
- materiality
faithful representation: -
Completeness -
neutrality
-freedom from error
IFRS Conceptual framework: “Enhancing qualitative characteristics”
comparability
verifiability
timeliness
understandability
IFRS Conceptual framework: “Constraints”
Cost constraints
What are considered the two categories of Qualitative characteristics?
Fundamental and Enhancing
Explain this image
if you cannot, refer to EXHIBIT 2.2How the Qualitative Characteristics Create a Flow of Useful Financial Information video in textbook
Information that users can use as the basis for developing expectations about the company’s future
Predictive value
Information has this quality if omitting it or misstating it would impact the decisions of financial statement users make about a specific company.
materiality
Users are provided with all of the information needed to understand what is being presented in the financial statements, including any necessary explanations
completeness
if financial information is unbiased it is considered
neutrality
The benefits of reporting financial information must exceed the costs of capturing and reporting that information.
cost constraint
Information that has been measured and reported in a similar way.
comparability
Having information available to decision-makers in time to be capable of influencing their decisions.
timeliness
Different knowledgeable and independent users reach consensus regarding the accounting for a particular transaction.
verifiability
Which method is consdifered more useful: Cash basis accounting or Accrual basis accounting
accrual
KEY POINTS
Under the cash basis of accounting:
- Revenues are recorded when the cash is received.
- Expenses are recorded when the cash is paid.
KEY POINTS
Under the accrual basis of accounting:
- Revenues are recorded when they are earned.
- Expenses are recorded when they are incurred
KEY POINTS
When using the accounting equation to analyze and record transactions:
Every transaction must affect at least two accounts.
- Each line must balance (the effects to the asset side must be equal to the effects on the liabilities and shareholders’ equity side).
- Each entry in the retained earnings column must be accompanied with an entry in the final column indicating whether it results from a revenue, an expense, or the declaration of a dividend.
what does R/E/DD stand for when using the template approach of recording transactions?
Revenue, Expense, Declared Dividends
KEY POINTS
When analyzing transactions involving the sale of goods, think “two parts.
- Part 1 accounts for the sales revenue and cash/accounts receivable.
- Part 2 accounts for the inventory that has become cost of goods sold.
KEY POINTS
To depreciate property, plant, and equipment, we need to know four things:
- the pattern in which the asset’s economic benefits will be consumed
- the asset’s cost
- the asset’s estimated residual value
- the asset’s estimated useful life
Define depreciation
The allocation of the cost of capital assets to expense over their estimated useful lives
The amount the company estimates it may be able to recover from the disposal of the asset when the company is finished using it is known as the
estimated residual value.
The period of time a company estimates an asset will be used to help generate revenue is its
estimated useful life.
What is straight line depreciation
- A method of calculating depreciation
- the amount of expense for each period is found by dividing an assets depreciable amount by its estimated useful life
Straightline depreciation expense equation
=(origionalcost - est. residual value)/(estimated useful life)
-this calculated depretiation annually (can divide the answer by 12 for monthly)
Fundamental qualitative characteristics
Relevance
Representational faithfulness
Enhancing qualitative characteristics
Comparability
Verifibility
Timeliness
Understandability
Cash flows from operating activities normally generate a _______________
net inflow of cash
-(a positive effect on cash).
Cash flows from investing activities normally generate a _________
net outflow of cash (a negative effect on cash).
The profit margin ratio is calculated by __________
dividing the net income by the revenues that produced the profit
return on equity =
net income/avg total shareholders equity
The return on assets is another measure of profitability. It is calculated by dividing
company’s profit (or net income) by its average total assets
profit margin generally represents what
every dollar in sales earned a profit of ____ cents
return on equity generally represents what
S/H earned a return of ____% on their investment in company
or
Company earned a return of ___ cents for every $ invested by shareholders
(these mean the same thing)
return on assets generally represents what
Company earned a profit of __% for every $ invested in assets
or
company was able to generate a profit of __% from its assets
