Chapter 4 Terms

Question 1

cost principle

Answer 1

IFRS generally does not recognize an increase in land value until the entity actually disposes of the asset. Accountants would continue to value the land at the purchase cost. Changes in market values of assets are generally not recorded.

Question 2

monetary unit principle

Answer 2

Changes in the purchasing power of money (inflation) do not get recorded because this principle assumes that the currency unit is a stable measure. Accountants record transactions in one currency. There is an assumption that monetary currency retains its purchasing power.

Economists would treat this in an opposite way, where they would recognize that purchasing power has increased or decreased. Economic wealth is affected by changes in the purchasing power of the dollar. Accounting wealth is not affected.

Question 3

economic wealth

Answer 3

increase or decrease in the entity’s ability to purchase goods and services

Question 4

accountant’s measurement of wealth

Answer 4

Shaped and limited by the GAAP including cost, monetary unit, business entity, recognition, and going concern. (from MMMRBCCFG)

Also shaped by the characteristic of timeliness. (from RUFCTV)

Question 5

going concern principle

Answer 5

the entity is expected to continue operating into the foreseeable future

Question 6

materiality principle

Answer 6

This principle shows that sometimes costs associated with financial information preparation can become too high if we are reporting things that are very low in cost in a complicated way. So usually things that cost less are treated as expenses rather than using the depreciation of a long-lived asset method in order to consider the cost-benefit.

A business might decide to choose to expense anything purchased under $100 instead of recording it as an asset and they would be able to do so under the materiality principle.

Question 7

classification of financial information

Answer 7

the way accounts are grouped

You will have things grouped into similar categories within “classified financial statements” to help external users understand since they have no access to the entity’s accounting records.

Question 8

common order for the presentation of financial statements

Answer 8

1. Income statement
2. Statement of changes in equity
3. Balance Sheet
4. Statement of cash flows
5. Notes to the financial statements

In addition, these documents should be present:
a) auditor’s report
b) Management’s Responsibility for Financial Statements
c) prior year’s financial statement for comparison

Question 9

classified balance sheet

Answer 9

Organizes the asset and liability accounts into categories.

• current vs. non-current (long-term) assets and liabilities
• for long-term assets these can be classified further into long-term investments; property, plant and equipment; and intangible assets

Question 10

unclassified balance sheet

Answer 10

Three categories on the balance sheet: assets, liabilities, equity, instead of classifying assets and liabilities by categories

Question 11

current assets

Answer 11

resources that are expected to be converted to cash, or be consumed during the next year (or within the operating cycle of the entity, whichever is longer)

• cash
  -short-term investments
• accounts receivable
• notes receivable
• merchandise inventory

And accounts whose future benefits are expected to expire in a short period of time:

• prepaid expenses
• supplies on hand at the end of an accounting year that will be used during the next year

Question 12

cash

Answer 12

paper currency, coins, deposits at banks, cheques, money orders

Question 13

short-term investments

Answer 13

investment of cash that will not be needed immediately (interest-bearing notes that are easily convertible into cash)

Question 14

accounts receivable

Answer 14

due to be collected within one year

Question 15

notes receivable

Answer 15

formalized accounts receivable: written promises to pay specified amounts with interest, and due to be collected within one year

Question 16

merchandise inventory in current asset category

Answer 16

inventory that is expected to be sold within one year

Question 17

prepaid expenses (current asset)

Answer 17

they will expire within the next year

• advance payments for insurance, rent, and other similar items

Question 18

liquidity

Answer 18

ability to be converted into cash

Question 19

order of assets on the classified balance sheet

Answer 19

1. current assets (list by decreasing levels of liquidity, so cash comes first since it is already liquid)
2. non-current assets

Question 20

non-current assets (long-lived assets)

Answer 20

assets that will be useful for more than one year

• property, plant, and equipment
• long-term investments
• intangible assets

Question 21

Property, plant, and equipment

Answer 21

(PPE) items used in the operation of the business such as
a) land
b) buildings
c) equipment
d) motor vehicles

Question 22

long-term investments

Answer 22

held for more than one year or the operating cycle and include long-term notes receivable and investments in shares and bonds

Question 23

intangible assets

Answer 23

resources that do not have a physical form and whose value comes from the rights held by the owner

• copyrights
• patents
• trademarks
• franchises

Question 24

current liabilities

Answer 24

obligations that must be paid within the next 12 months or within the entity’s next operating cycle, whichever is longer

Listed in order of their due dates, with any bank loans shown first

• bank loans (or notes payable) that are due on demand or within the next 12 months
• accounts payable
• accrued liabilities such as interest payable and wages payable
• unearned revenue
• the current portion of long-term liabilities
• income taxes payable

Question 25

current portion of a long-term liability

Answer 25

the principal amount of a long-term liability that is to be paid within the next 12 months

(interest is in a separate spot –> accrued liabilities such as interest payable)

Question 26

non-current liabilities (long-term liabilities)

Answer 26

borrowings that do not require repayment for more than one year (long-term portion of a bank loan or a mortgage)

Question 27

mortgage

Answer 27

liability that is secured by real estate

Question 28

account form balance sheet

Answer 28

liabilities and equities are presented to the right of assets

Question 29

report form balance sheet

Answer 29

liabilities and equity are presented below the assets

Question 30

material (adjective), materiality

Answer 30

The quality of being relevant or significative. Materiality is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users.

If items are material, they must be disclosed separately so user will not be misled.

E.g.: office supplies would be a separate amount listed if they were $2,000 a month and the revenues were only $10,000. This is because the ratio or percentage of total revenue is high, so the office supplies are material. 1:5 ratio 0.20 —> 20%

However $2,000 a month in office supplies for revenues of $1 million (1,000,000) per month would not need office supplies listed separately since the ratio is very small. 1 : 500 ratio 0.002 –> 0.2%

Question 31

notes to the financial statements

Answer 31

Provide relevant details that are not included in the body of the financial statements such as:
1. nature of operations
2. general information and statement of compliance with IFRS
3. summary of accounting policies (broken into many subsections)
4. property. plant, and equipment
5. borrowings
6. share capital

See section 4.3 for details on these since it is long and complicated

Question 32

audit

Answer 32

An external examination of a company’s financial statement information and its system of internal controls. Seeks reasonable assurance that the financial statement information is not materially misstated.

Question 33

internal controls

Answer 33

The processes instituted by management of a company to direct, monitor, and measure the accomplishment of its objectives, including the prevention and detection of fraud and error.

Question 34

auditor’s report

Answer 34

A structured statement issued by an independent examiner, usually a professional accountant, who is contracted by the company to report the audit’s findings to the company’s board of directors. It provides some assurance to investors and creditors that the company’s financial statements are trustworthy. It reduces the risk of the investors and creditors financial decisions.

Question 35

unqualified auditor’s report

Answer 35

indicates that the financial statements are truthful

Question 36

qualified auditor’s report

Answer 36

indicates that the financial statements are not or may not be truthful

Question 37

Management’s Responsibility for Financial Statements

Answer 37

Title of a document created by management such as a Chief Financial Officer that shows management’s responsibilities such as:
- presentation of financial statements,
- disclosure of financial matters, !!!
- insuring that internal controls are maintained,
- shows that they are responsible for any estimates,
- states the roles of people such as the board of directors and audit committee, and
- acknowledges they oversee the operation in a legal and ethical manner.

Question 38

Auditor’s Report Contents

Answer 38

• audited info is described
• outlines management’s responsibilities !!!
• outlines auditor’s responsibilities and compliance with audit standards
• states what audit procedures were used
• concludes about the adequacy of audit evidence
• audit opinion is expressed !!!

(addressed to board of directors, and report is signed and dated by the auditor are givens here)