Chapter 4 Terms Flashcards
cost principle
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.
monetary unit principle
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.
economic wealth
increase or decrease in the entity’s ability to purchase goods and services
accountant’s measurement of wealth
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)
going concern principle
the entity is expected to continue operating into the foreseeable future
materiality principle
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.
classification of financial information
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.
common order for the presentation of financial statements
- Income statement
- Statement of changes in equity
- Balance Sheet
- Statement of cash flows
- 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
classified balance sheet
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
unclassified balance sheet
Three categories on the balance sheet: assets, liabilities, equity, instead of classifying assets and liabilities by categories
current assets
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
cash
paper currency, coins, deposits at banks, cheques, money orders
short-term investments
investment of cash that will not be needed immediately (interest-bearing notes that are easily convertible into cash)
accounts receivable
due to be collected within one year
notes receivable
formalized accounts receivable: written promises to pay specified amounts with interest, and due to be collected within one year
merchandise inventory in current asset category
inventory that is expected to be sold within one year
prepaid expenses (current asset)
they will expire within the next year
- advance payments for insurance, rent, and other similar items
liquidity
ability to be converted into cash
order of assets on the classified balance sheet
- current assets (list by decreasing levels of liquidity, so cash comes first since it is already liquid)
- non-current assets
non-current assets (long-lived assets)
assets that will be useful for more than one year
- property, plant, and equipment
- long-term investments
- intangible assets
Property, plant, and equipment
(PPE) items used in the operation of the business such as
a) land
b) buildings
c) equipment
d) motor vehicles
long-term investments
held for more than one year or the operating cycle and include long-term notes receivable and investments in shares and bonds
intangible assets
resources that do not have a physical form and whose value comes from the rights held by the owner
- copyrights
- patents
- trademarks
- franchises
current liabilities
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
current portion of a long-term liability
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)
non-current liabilities (long-term liabilities)
borrowings that do not require repayment for more than one year (long-term portion of a bank loan or a mortgage)
mortgage
liability that is secured by real estate
account form balance sheet
liabilities and equities are presented to the right of assets
report form balance sheet
liabilities and equity are presented below the assets
material (adjective), materiality
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%
notes to the financial statements
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
audit
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.
internal controls
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.
auditor’s report
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.
unqualified auditor’s report
indicates that the financial statements are truthful
qualified auditor’s report
indicates that the financial statements are not or may not be truthful
Management’s Responsibility for Financial Statements
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.
Auditor’s Report Contents
- 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)
