Chapter 9 - Financial Statements Flashcards
ASPE, which is based on the
traditional Canadian accounting standards, is often referred to as
GAAP.
Private enterprises are allowed to choose between ASPE or IFRS, but most tend to favour ___ standards and practices
ASPE
excess of current assets over current liabilities represents the company’s ___
working capital
Deferred charges represent ___ that are considered assets
previously incurred costs
deferred charges examples (4):
- Research and development expenses
- Software development expenses
- Process redesign project costs
- Start-up costs
Retained earnings may be earmarked for special purposes, in which event they cannot be distributed as dividends.
A ___ is then created, representing that portion of retained earnings set aside temporarily or permanently for specific use.
reserve
foreign currency Gains are presented directly under ___ , and losses from foreign
currency translations are presented under___
shareholders’ equity
other assets
Net income for corporations always takes income taxes into account because ___
the corporation is responsible for its own tax liability
For proprietorships and partnerships, on the other hand, net income is always presented before taxes, because
The proprietor or partners are responsible for paying taxes individually.
cash assets must mature within ___ and
their value at maturity must be known
three months
Income tax cash flows are classified as
operating activities
Cash flows related to operating activities may be presented ___ or ___
directly
indirectly
Presentation using the direct method
transforms each income statement item calculated on the accrual basis into
an amount calculated on the cash basis
the indirect method illustrates
net income, as presented in the income statement
The main financing activities are as follows: (6)
- Short- and long-term loans
- Loan repayments
- Share issues
- Purchases or redemptions of company stock
- Amounts paid under capital leases
- Dividends paid to shareholders
The main investment activities include: (4)
- The acquisition and sale of fixed assets
- The capitalization of development and other similar expenses
- The acquisition and sale of investments (other than those considered cash equivalents)
- Cash advances and loans, and the repayment of same
The limitations inherent in financial statements are due mainly to the choices made with respect to various underlying principles: (5)
the historical cost convention
conservatism
substance over form
materiality
measurement
historical cost convention
The firm’s assets must be recorded on the balance sheet at their original cost, and this figure should not be modified thereafter
conservatism principle
avoid overly optimistic financial statement estimates
substance over form
Company operations as presented in the financial statements reflect economic and financial reality rather than legal form (example, company leasing building. does not own it but since financing it, include value in balance sheet)
Materiality
An item is material if it is probable that its omission or misstatement would influence or change a decision of the user of the financial statements
Materiality comes into play at three distinct levels:
- The precision or accuracy of the data presented
- The amount of detail in the financial statements
- The nature and extent of supplementary disclosures
The financial statements and notes contain a significant amount of information. Responsibility for this information falls primarily to ___
the firm’s managers
___, ___, ___ constitute three distinct engagements
Auditing, review, and compilation
Auditing
produces the highest degree of assurance: the auditor’s report is made following systematic data gathering conducted in accordance with rigorous standards and procedures, with a view to substantiating each major item in the financial statements.
Review
- iInvolves a lesser degree of certainty. Accountants obtain and examine information from management and, unless such information appears implausible, it is accepted.
- Compilation
aimed at making data accessible to readers in the appropriate form.
The ___ has been created in an effort to ensure that the most relevant information is
conveyed to the users of the auditor report
enhanced auditor’s report
objective in an audit
to express an opinion on the financial
statements
Objective of a review,
to determine whether the financial statements are plausible in the
circumstances.
Deferred taxes result from temporary timing differences, the most common of which arise from differences between ___ and ___ for tax purposes
fixed-asset book depreciation
capital cost allowances
The contributed surplus is generally related to operations on shareholders’ equity, in particular the ___
redemption by the firm of its own shares
allocating ___ to a reserve has no impact on cash assets or
income.
retained earnings
The following amounts result from transactions and other events that enter into the calculation of net income: (3)
- Cash inflows from the sale of assets and delivery of services
- Cash outflows for the payment of goods and services from suppliers and wages and other forms of compensation to employees
- Cash flows related to income taxes (unless the latter can be specifically associated with financing or investment activities)
Valuation of assets at their fair value, although less objective, may be an appropriate solution in certain cases: (3)
- Finished-product inventories: estimated selling price, less sales-related costs.
- Raw-material inventories, machinery, and equipment valued at replacement cost.
- Value of fixed assets determined by appraisal.
