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Financial Accounting > Class 2 - Accrual Accounting > Flashcards

Class 2 - Accrual Accounting Flashcards

1
Q

What does the Accounting Conceptual Framework provide?

A

Firstly, it sets the standards of the theoretical framework to rely upon when setting accounting standards. (Eg. Australian Tax Office relies upon it when changing ATO standards)

Secondly, provides a theoretical basis for accountants to fall back on when faced with deciding to account for something that isn’t explicitly covered in their specific accounting standards.

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2
Q

Decision Usefulness quantifies what?

A

It quantifies that the information used in accounting should be useful for making investment and credit decisions.

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3
Q

For information to be useful for decision making purposes, the information must have (2 terms).

A

Relevance and Representational Faithfulness

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4
Q

Relevance:

A

Information to be useful for making a decision; the information must be relevant to the decision being made.

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5
Q

Financial Accounting is considered relevant if it holds one of two what characteristics?

A

Predictive Value - useful for assessing future cashflows

Confirmatory value - useful in confirming whether prior assessments were correct

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6
Q

Faithful Representation:

A

Information must faithfully represent what it purports to represent.

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7
Q

Completeness:

A

All information necessary must be presented so the user (description of line item, value, and an explanation to how it was determined)

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8
Q

Neutrality:

A

Free of bias

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9
Q

Free of Error:

A

Does not mean all information needs to be accurate. It means it there can be no errors or omissions in the description of the item or in the process to produce it.

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10
Q

Faithful Representation is characterised by what 3 terms?

A

Completeness, Neutrality and Free of Error

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11
Q

Faithful Representation is characterised by what 3 terms?

A

Completeness, Neutrality and Free of Error

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12
Q

T or F: Often a trade-off is made between relevance and faithful representation?

A

True - rarely can both be 100% of both.

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13
Q

Materiality refers to what?

A

Where information is relevant in general to a company

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14
Q

How can an immaterial expense be accounted?

A

It can be recorded as an expense upfront, and then the book keepers do not have to depreciate it over its intended lifetime.

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15
Q

What four characteristics enhance the usefulness of financial information?

A

Comparability
Understandability
Timeliness
Verifiability

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16
Q

Comparability:

A

Financial information is more useful if it is comparable, either to prior financial information or financial information of other companies

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17
Q

Understandability:

A

Classifying, characterizing, and presenting information clearly and concisely makes it understandable

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18
Q

Timeliness:

A

Information will be useful for making decision only if it is available at the time the person is making the decision. Older information will be less useful for making decisions.

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19
Q

Verifiability:

A

The information can be verified by knowledgeable, independent people.

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20
Q

Economic Entity Assumption:

A

Financial Statements report financial information about one economic entity. Accounts define boundaries around which the entity operates.

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21
Q

Fiscal Period Assumption:

A

The assumption to the time periods the company’s life is broken into.

22
Q

Fiscal Period Assumption:

A

The assumption to the time periods the company’s life is broken into.

23
Q

Stable Monetary Unit Assumption:

A

Accountants measure each line item using a quantitative unit of measure. (AUD/USD etc).

It also assumes there is never inflation or deflation (which limits the usefulness of a Financial Statement)

24
Q

True or False: The Stable Monetary Unit Assumption allows accountants to add the original cost of land bought in 1970 to the cost of land bought in 2012.

A

True

25
Q

Going Concern:

A

Assumes companies will continue to operate in the future.

26
Q

Going Concern:

A

Assumes companies will continue to operate in the future.

27
Q

Recognition addresses what?

A

whether a company should capture the financial effects of a particular event into its financial accounting records.

28
Q

Substance over form:

A

Accountants will account for contracts or events that have the same underlying ecomonics in the same way, even if the contracts or events appear to be different on the surface.

29
Q

Cash accounting is based on what:

A

Cash flows

30
Q

Accrual accounting is based on what:

A

Wealth flows

31
Q

What are the 3 common Revenue situations

A

Cash sale
Credit Sale
Unearned Revenue

32
Q

Accrual Accounting recognises revenue/expenses when?

A

The transfer of ownership has occurred.

33
Q

Operating Assets are defined typically by:

A

Accounts Receivable, Inventory, and Prepayments.

34
Q

Operating Liabilities are defined typically by:

A

Accounts Payable, Wages Payable, and Unearned Revenue.

35
Q

Operating Liabilities are defined typically by:

A

Accounts Payable, Wages Payable, and Unearned Revenue.

36
Q

What is the Accounting Cycle?

A

The general process that accountants use to generate financial statements.

37
Q

Which 4 steps make up the accounting cycle?

A

Transaction process, Adjustment Process, Closing Process, and Reporting Process.

38
Q

What are the 4 types of Adjustments?

A

Accruals, Expiration, Revaluations, and Reclassifications.

39
Q

What is an Accrual?

A

It records receivables or payables that exist of the balance sheet date but have not yet been reflected in a transaction.

An example is Wages

40
Q

What line item typically captures Accruals?

A

Accrued receivable and accrued liability

41
Q

What is an Expiration Adjustment?

A

It records the financial effect of assets or liabilities that have expired as of the balance sheet date.

42
Q

What is the General Recognition Criteria?

A

1 - the event creates an item that can be categorised by a balance sheet or income statement.
2 - the value of the event is recognisable at a cost or fair value with a sufficient degree of reliability

43
Q

What is a Type 1 accrual adjustments?

A

An adjustment for income items that have no associated operating cash flow

  • Type 1 accrual adjustments affect the amount reported for net income, but do not involve any operating cash flows
  • A common example is depreciation
44
Q

What is a Type 2 accrual adjustment?

A

Adjustment for income items that have an associated operating cash flow, but the timing of the two effects differ.
- For these items, accrual adjustments represent the dollar amount of the timing difference between the income effect and its associated operating cash flow.

45
Q

What is a Type 2 accrual adjustment?

A

Adjustment for income items that have an associated operating cash flow, but the timing of the two effects differ.
- For these items, accrual adjustments represent the dollar amount of the timing difference between the income effect and its associated operating cash flow.

46
Q

What is the proper term for a Cost that a company benefits from in the future?

A

Capitalise - A company will Capitalise a cost if it believes it will benefit from it in the future.

47
Q

What is the proper term for a Cost that a company does not benefit from in the future?

A

Expense

48
Q

What is the proper term for a Cost that a company does not benefit from in the future?

A

Expense

49
Q

Definition of an Impaired Asset?

A

A company’s asset that is worth less on the market than the value listed on the company’s balance sheet. This will result in a write-down of that same asset account to the stated market price.

Accounts that are likely to be written down are the company’s goodwill, accounts receivable and long-term assets.

50
Q

Definition of an Impaired Asset?

A

A company’s asset that is worth less on the market than the value listed on the company’s balance sheet. This will result in a write-down of that same asset account to the stated market price.

Accounts that are likely to be written down are the company’s goodwill, accounts receivable and long-term assets.

51
Q

What does a Balance Sheet reflect when a cost is Capitalised?

A

An asset will be increased.

Prepayment, Inventory etc.

52
Q

What does the Balance Sheet reflect when a cost is Expensed?

A

The retained earnings will reflect this, the expenses are captured in the Income Statement.

Financial Accounting (11 decks)

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