Definitions Flashcards
Incurred
The moment that a transaction has taking place & it must be recorded.
Equity
Total Assets minus Total Liabilities
Revenue
Are inflows of economic resources. Ex. Sales
Net Income
Revenue minus Expenses
Recognition
The process of formally recording and reporting an item on the F/S
Interim financial statements
Is a financial report covering a period for less than a year.
Used to get an idea of the performance of a company before the end of the year
What are the Accounting Assumptions?
- Entity Assumption - it is assumed that there is a separate entity for each business organization
- Going- Concern Assumption (continuity) - A business is assumed to have infinity life.
- Time Period Assumption- business are broken into small time frames for evaluation & reporting processes.
- Unit of Measure Assumption(monetary) - Assets, Liabilities, equity, gains, losses, revenues, expenses and cash flows are all measured in terms of monetary
What are the Accounting Principles?
- Revenue- Recognition Principle- Entity completes its performance obligation, the revenue is earned and realized
- Full disclosure Principle - F/S should present all info needed by an informed reader to make an economic decision
- Expense - recognition principle (Matching) - Recognize expenses only when expenditures help to produce revenue.
- Measurement Principle (Historical Cost)- The origination value, Assets & Liabilities are recorded at market value of the item on the date of acquisition
Replacement Cost
The amount to be paid in current time
Net Realizable Cost
The net value cost to be received after the cost of getting the asset ready for sale are deducted when a company is liquidating
Net Present Value
The value determined from discounting the expected future cash flows
Conservatism
Suppresses + info under conditions of uncertainty but requires to report negative info when the negative infor in likely to occur.
What is an example of Conservatism
Gain Contingencies
What is cost benefit Constraint?
The cost it takes to provide info shoudnt outweigh the benefit to the user of that info.
When is the appropriate basis for determining the fair value of an asset or Liability ? (entry or exit price)
Exit price - The amount that would be received to sell an asset or paid to transfer a liability.
If a company intends to report and measure its investment at fair value what date would the company elect to implement the fair value option?
On the date of it first recognizes the investment which is day of.
What are the different approaches in Fair Value ?
Income approach - converts future amounts into a single present amount ( cash flows)
Cost approach - uses the amount that currently would be required to replace the service capacity of an asset (Current replacement cost)
Market approach - Uses relevant information generated by market transaction involving items that are almost the same to those being valued in determining fair value
What are the different Approaches/ Valuation Technique in Fair Value ?
Income approach - converts future amounts into a single present amount ( cash flows)
Cost approach - uses the amount that currently would be required to replace the service capacity of an asset (Current replacement cost)
Market approach - Uses prices or relevant information generated by market transaction involving A/L that are almost the same to those being valued in FV
What is entry price ?
The price paid to acquire the asset or the price received to assume the liability (transaction price)
What is the fair value of an asset/Liability measured as ?
The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants
Royalty
an amount to be paid based on the sales of a commodity / product.
Accrual
Revenue earned but not collected yet
Deferral
cash collected but revenue not earned
Bond Discount
The difference between the amount borrowed & face value
Amortization discount
The difference between the reduction of earnings & reduction in operating cash flows
Subsequent events
Event/ Transaction that has a material effect on the F/S.
When do subsequent events occur?
After the F/S date but before the F/S is issued
Nature of Operations (source of risk and uncertainties)
Knowledge of the firms - products & services, geographical locations, principal markets
Uses of Estimates (source of risk and uncertainties)
Must communicated that F/S have to use estimates, use of estimates is not certain but results in approximate amounts, estimates involved assumptions about future events
Why are materially risks & uncertainties required to be disclosed ?
Information about risk and uncertainties faced by the firm enhances the ability for F/S users to predict the future cash flows and operations
Certain Significant Estimates (source of risk and uncertainties)
Estimates on assets, liabilities, or contingencies that are possible to have a material change or going to change in the near term disclosures may be required.
Significant Concentrations (source of risk and uncertainties)
Diversity is lacking in the firm.
Examples- concentrations include excessive reliance on one customer, having one product or service account for most of the firm’s revenues, and reliance on one or a small number of suppliers.
Management Going Concern Assessment (source of risk and uncertainties)
Management have to assess the entity ability as a going concern by the date the F/S is issued
Why is Multi- Step income Statement more meaningful presentation of Revenues & Expenses ?
It shows Gross Profit(margin),Operating Profit(margin) & Pre Tax income from continuing operations are determined.
When are contingencies accrued & recognized as a liability ?
When the occurrence of the liability is probable and the amount can be reasonably estimated. if not it is disclosed but not accrued
One thing to know about Treasury Stock
A Firm cannot own its own stock therefore it is not included in the firms assets
What type of material related-party don’t require disclosure?
Compensation arrangements, Expense Allowances, & other routine transactions in the ordinary course of business
