Chapter 2

Question 1

What are the fundamental qualitative characteristics of useful information

Answer 1

Relevance

• predictive value
• confirmatory value
• materiality

Faithful representation

• completeness,
• neutrality
• freedom from error

Question 2

What is cash basis accounting

Answer 2

–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

Question 3

Accrual Basis accounting

Answer 3

-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

Question 4

What are the two types of values that make financial information matter to the users

Answer 4

Predictive values or confirmatory values

Question 5

what are predictive values

Answer 5

Info users can use to develop expectations on the company’s future

Question 6

what are confirmatory values

Answer 6

values that provide feedback on users previous assessments of the company

Question 7

What is the concept of materiality

Answer 7

info is considered material if it would affect the decision making of financial users

Question 8

information that would not affect the user’s decisions is considered to be __________

Answer 8

immaterial

Question 9

The concept of materiality is company-specific (TUE or FALSE)

Answer 9

True -something may be material to the users of one company that is immaterial to the users of another company.

Question 10

Materiality can be viewed in a qualitative and quantitative context (TRUE or FALSE)

Answer 10

true -

Question 11

what are the three components required to be considered faithfully represented information?

Answer 11

Complete

neutral

free form error

Question 12

Explain “cost constraint” when capturing and reporting financial information

Answer 12

the benefits of reporting financial information must exceed the costs of doing so.

Question 13

IFRS Conceptual framework: “Fundamental Qualitative characteristics”

Answer 13

Relevance:

• Predictive value
• confirmatory value
• materiality

faithful representation: -

Completeness -

neutrality

-freedom from error

Question 14

IFRS Conceptual framework: “Enhancing qualitative characteristics”

Answer 14

comparability

verifiability

timeliness

understandability

Question 15

IFRS Conceptual framework: “Constraints”

Answer 15

Cost constraints

Question 16

What are considered the two categories of Qualitative characteristics?

Answer 16

Fundamental and Enhancing

Question 17

Explain this image

Answer 17

if you cannot, refer to EXHIBIT 2.2How the Qualitative Characteristics Create a Flow of Useful Financial Information video in textbook

Question 18

Information that users can use as the basis for developing expectations about the company’s future

Answer 18

Predictive value

Question 19

Information has this quality if omitting it or misstating it would impact the decisions of financial statement users make about a specific company.

Answer 19

materiality

Question 20

Users are provided with all of the information needed to understand what is being presented in the financial statements, including any necessary explanations

Answer 20

completeness

Question 21

if financial information is unbiased it is considered

Answer 21

neutrality

Question 22

The benefits of reporting financial information must exceed the costs of capturing and reporting that information.

Answer 22

cost constraint

Question 23

Information that has been measured and reported in a similar way.

Answer 23

comparability

Question 24

Having information available to decision-makers in time to be capable of influencing their decisions.

Answer 24

timeliness

Question 25

Different knowledgeable and independent users reach consensus regarding the accounting for a particular transaction.

Answer 25

verifiability

Question 26

Which method is consdifered more useful: Cash basis accounting or Accrual basis accounting

Answer 26

accrual

Question 27

KEY POINTS

Under the cash basis of accounting:

Answer 27

• Revenues are recorded when the cash is received.
• Expenses are recorded when the cash is paid.

Question 28

KEY POINTS

Under the accrual basis of accounting:

Answer 28

• Revenues are recorded when they are earned.
• Expenses are recorded when they are incurred

Question 29

KEY POINTS

When using the accounting equation to analyze and record transactions:

Answer 29

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.

Question 30

what does R/E/DD stand for when using the template approach of recording transactions?

Answer 30

Revenue, Expense, Declared Dividends

Question 31

KEY POINTS

When analyzing transactions involving the sale of goods, think “two parts.

Answer 31

• Part 1 accounts for the sales revenue and cash/accounts receivable.
• Part 2 accounts for the inventory that has become cost of goods sold.

Question 32

KEY POINTS

To depreciate property, plant, and equipment, we need to know four things:

Answer 32

1. the pattern in which the asset’s economic benefits will be consumed
2. the asset’s cost
3. the asset’s estimated residual value
4. the asset’s estimated useful life

Question 33

Define depreciation

Answer 33

The allocation of the cost of capital assets to expense over their estimated useful lives

Question 34

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

Answer 34

estimated residual value.

Question 35

The period of time a company estimates an asset will be used to help generate revenue is its

Answer 35

estimated useful life.

Question 36

What is straight line depreciation

Answer 36

• 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

Question 37

Straightline depreciation expense equation

Answer 37

=(origionalcost - est. residual value)/(estimated useful life)

-this calculated depretiation annually (can divide the answer by 12 for monthly)

Question 38

Fundamental qualitative characteristics

Answer 38

Relevance

Representational faithfulness

Question 39

Enhancing qualitative characteristics

Answer 39

Comparability

Verifibility

Timeliness

Understandability

Question 40

Cash flows from operating activities normally generate a _______________

Answer 40

net inflow of cash

-(a positive effect on cash).

Question 41

Cash flows from investing activities normally generate a _________

Answer 41

net outflow of cash (a negative effect on cash).

Question 42

The profit margin ratio is calculated by __________

Answer 42

dividing the net income by the revenues that produced the profit

Question 43

return on equity =

Answer 43

net income/avg total shareholders equity

Question 44

The return on assets is another measure of profitability. It is calculated by dividing

Answer 44

company’s profit (or net income) by its average total assets

Question 45

profit margin generally represents what

Answer 45

every dollar in sales earned a profit of ____ cents

Question 46

return on equity generally represents what

Answer 46

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)

Question 47

return on assets generally represents what

Answer 47

Company earned a profit of __% for every $ invested in assets

or

company was able to generate a profit of __% from its assets