chapter 4 - financial reporting and analysis

Question 1

understandability (qualitative)

Answer 1

financial statements are prepared according to accepted practices
decision makers must interpret the accounting information and use it to make decisions

Question 2

usefulness (qualitative)

Answer 2

accounting info must be relevant & reliable - the user must be able to depend on the info
-(must be credible, must be verifiable, must be neutral)

relevance - the info can affect the outcome of a decision
-(be timely, help predict future, provide feedback)

Question 3

comparability (convention)

Answer 3

info is presented in a way where decision makers can recognize similarities/differences/trends

Question 4

consistency (convention)

Answer 4

an accounting procedure must be constantly in use by the company until described otherwise in financial statements

Question 5

materiality (convention)

Answer 5

the importance of the event
- would users have made a different decision if they knew about this event?

Question 6

conservatism

Answer 6

when uncertain about which procedure to use, one must use the one that is least likely to overstate assets + income

Question 7

full disclosure (convention)

Answer 7

all financial statements MUST represent all relevant info to users

Question 8

cost - benefit (convention)

Answer 8

benefits from providing accounting info should be greater than the costs of providing it

Question 9

fraudulent financial reporting

Answer 9

distortion of records
falsified transactions
misapplication of accounting principles (eg treating an asset as an expense)

Question 10

classified balance sheet

Answer 10

breaks assets, liabilities, and owner equity into subcategories (classified financial statements)

Assets - current assets
- investments
- property, plant, equipment
- intangible assets

Liabilities - current
- long term

Owner equity - sole prop. = owner
equity
- partnership =
partner’s equity
- stockholders equity

Question 11

current assets:

Answer 11

cash
accounts receivable
prepaid expenses
supplies inventory
merchandise inventory

Question 12

investements

Answer 12

long term assets that are not used in the normal ops of the business
- securities
- long term notes receivable
- land held for future use
- plant or equipment not used in biz
- special funds for debts/capital purchase
- permanent investments in another company

Question 13

property, plant, equipment

Answer 13

aka fixed, operating, long lived, or tangible assets
long term assets to continue biz operations

Question 14

intangible assets

Answer 14

long term assets that have no physical substance, their value is based on privileges they give to the consumer
- patents
- copyrights
- goodwill
- franchises
- trademarks

Question 15

current liabilities

Answer 15

obligations due to be done within a year/normal operating cycle of the biz, whichever is longer
- notes payable
- accounts payable
- salaries and wages payable
- taxes payable
- customer advances (unearned revenue)

Question 16

long term liabilites

Answer 16

the debts of a biz that are >1 year, or that are paid out of non current assets
- mortgage payable
- long term notes payable
- bonds payable
- long term lease liabilities