Chapter 2 - Analyzing Transactions and Their Effects on Financial Statements Flashcards
useful financial information must be both relevant and representationally faithful (Fundamental qualitative characteristics)
define both
relevant: useful financial information must matter to users’ decision-making.
representationally faithful: information in the financial statements should represent events and transactions as they actually took place or are at present
the enhancing qualitative characteristics are
comparability,
verifiability,
timeliness
understandability
define them
comparability: readers are able to compare different sets of financial statements over time and across like companies
verifiability: a third party, with sufficient understanding, would arrive at a similar result to that determined by management
timeliness: financial statements must be timely to be useful
understandability: useful when it is prepared with enough information and in a clear enough format for users to comprehend it.
To be relevant, financial information must matter to users. To assess relevance standard setters consider whether the information has
predictive value or confirmatory value
define these two values
predictive : information that users can use as the basis for developing expectations about the company’s future
confirmatory : Information has a confirmatory value if it provides feedback to users on their previous assessments of the company
To be relevant, financial information must matter to users. To assess relevance standard setters consider whether the information has
materiality
define what it means to be material or immaterial
material: information in financial statements that is critical and relevant to user decision-making
immaterial: information in financial statements that would not affect the user’s decisions.
To be representationally faithful information, it must be
complete,
neutral, and
free from error.
define these
complete: financial statements should provide users with all of the information needed to understand what is being presented in the statements, including any necessary explanations
neutral: financial information should be unbiased
free from error: information should be determined based on the best information available, using the correct process and with an adequate explanation provided
when it comes to preparing a financial statement, what is the cost constraint
Capturing and reporting financial information is costly for companies. This constraint states that, when preparing financial statements, the benefits of reporting financial information must exceed the costs of doing so.
When a company’s financial statements are prepared, they are normally prepared on a going concern basis
what does “going concern basis” mean (aka. Going concern assumption)
it assumes that the company will continue operating for the foreseeable future
define the accounting equation
Assets = Liabilities + Shareholders’ Equity
what is the equation for calculating retained earnings
ending retained earnings =
opening retained earning + net income - dividends declared
Normally, which accounting standard do public Canadian companies have to follow? Which accounting standard do private Canadian companies have to follow?
Public Canadian Companies must follow the International Financial Reporting Standards (IFRS)
Private companies generally follow
Accounting Standards for Private Enterprises (ASPE) but have the option of using IFRS if they wish.
Who Sets the Accounting Standards Used in Canada?
- The Canadian Accounting Standards Board (AcSB) is the body responsible for developing and establishing the accounting standards used by Canadian companies.
- The AcSB is responsible for the accounting standards for both public and private companies.
Under the accrual basis of accounting, when do you record transactions?
Revenues are recorded when they are earned.
Expenses are recorded when they are incurred
Under the cash basis of accounting, when do you record transactions?
- Revenues are recorded when the cash is received.
- Expenses are recorded when the cash is paid
What are the 4 things we need to know to depreciate property, plant, and equipment?
- 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
What is the formula for Straight line depreciation Expense?
(Original Cost - Estimated Residual Value) / (Estimated Useful Life)
