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MOS 1023 Chapter 2 > Elements of Financial Statements > Flashcards

Elements of Financial Statements Flashcards

1.3

1
Q

Accounting uses many terms that have specific meanings. These terms make up the ________

A

Language of accounting and business

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2
Q

What is consistency?

A

What occurs when a company applies the same accounting treatment to similar events from period to period.

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3
Q

There are many elements that users expect to find on the financial statements, including what main 6?

A
  1. Assets
  2. Liabilities
  3. Equity
  4. Revenues/income
  5. Expenses
  6. Gains/losses
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4
Q

In addition to the main 6 elements (categories), what’s included within each of them?

A

There are many subcategories, such as current and non-current assets, cash, inventory, and so on

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5
Q

Why does the conceptual framework define the basic elements?

A

So that users have a common understanding of the main items presented on the financial statements

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6
Q

What are basic elements?

A

Financial reporting terms that constitute the language of accounting and business, such as “assets,” “liabilities,” and “equity

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7
Q

What are the 6 basic elements?

A
  1. Assets
  2. Liabilities
  3. Equity
  4. Revenues/income
  5. Expenses
  6. Gains/losses
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8
Q

Why are the 6 basic elements important?

A

They are most directly related to measuring an enterprise’s performance and financial status

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9
Q

Just because something meets the definition of an element does not mean that it is ______

A

Recognized!

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10
Q

What are the 3 essential characteristics of assets?

A
  1. They represent a present economic resource—a right that has the potential to produce economic benefits.
  2. The entity has control over that resource.
  3. The resource results from a past transaction or event.
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11
Q

What is an asset?

A

Economic resources which are controlled by the company and result from past transactions or events.

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12
Q

An entity has control over a resource through what means? How does this generate cash flow from the asset?

A

Legal ownership of the property itself (a tangible asset), thus allowing the company to decide whether to sell it or use it to generate cash flows

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13
Q

Give an example of a transaction of a contractual or other right representing an asset.

A

Purchasing sought-after patent for a manufacturing process during the year. In addition, it signed a contract to lease a machine for its useful life of five years.

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14
Q

How does the purchase of a patent (for a manufacturing process) represent an asset?

A

The purchased patent has value because it gives the holder the right to receive future cash flows from the sale of the patented product

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15
Q

How does the purchase of a contract (to lease a machine for its useful life of 5 years) represent an asset?

A

The lease contract gives the company contractual right to use (through possession) the asset even though the company DOESN’T have legal title to the machine

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16
Q

In both cases (patent and lease of machine) what does the purchase and signing of the contract represent?

A

The past event and gives the company control over the rights to potential future economic benefits

Thus they both represent assets

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17
Q

In order to meet the definition of an asset, what does the right only need to have?

A

The potential to produce economic benefits, even if the likelihood of future benefits is uncertain

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18
Q

How is the acquisition of the patent in a business combination giving the holder the right to future cash flows from use of the patent an example of an asset?

A

The criterion for an asset is met even if it is not probable that future benefits will flow to the entity

The next step is to determine if the asset should be recognized and if so, how it should be measured

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19
Q

What is looked at in cases such as legal disputes, where it may not be possible to determine whether an asset exists?

A

Look to the recognition criteria to help decide whether to recognize anything in the financial statements. Consider if the asset has uncertain potential to produce economic benefits

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20
Q

What needs to be reviewed when determining if an economic resource exists?

A
  1. Tangible & intangible properties (inventory, cash, land, and patents)
  2. Contractual and other rights (forward contracts, insurance, and others)
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21
Q

What are the 3 essential characteristics of liabilities?

A
  1. They represent a present duty or responsibility (there is no practical ability to avoid them).
  2. The duty or responsibility obligates the entity to transfer an economic resource.
  3. The obligation results from a past transaction or event.
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22
Q

What are liabilities?

A

Duties or responsibilities (to transfer economic resources) which result from past transactions or events.

23
Q

What are liabilities similar, but opposite to?

A

Assets

24
Q

How is a liability opposite to an asset?

A

Has a negative economic value and requires the entity to give up economic resources to settle the obligation

25
Q

How is a company hiring employees and agreeing to pay them a salary for services provided a liability?

A

One employee accepts the offer of employment, starts to provide services, liability created = both past events

Pay salary according to predetermined employment arrangement services rendered = duty

Must pay salary or else negative consequences (quit, sue for unpaid wages) = no practical ability to avoid paying

26
Q

What are 4 different ways liabilities may arise?

A
  1. Contractual obligations
  2. Statutory requirements (ex: for illegally polluting)
  3. Constructive obligations
  4. Equitable obligation
27
Q

What are constructive obligations?

A

A type of performance obligation that is created through a past practice or by signalling something to potential customers, such as a “100% satisfaction guaranteed” policy.

Arise through past or present practice that signal that the company acknowledges a potential economic burden

28
Q

How is stating a “100% satisfaction guaranteed” policy with no written warranty or contract create a constructive obligation?

A

Expectation to fix any problems because of statement = duty

Negative economic repercussions if they don’t follow their word = no practical ability to avoid

Sale of the oven to the customer and the satisfaction guarantee = past events

29
Q

What are equitable obligations?

A

Commitments that arise from moral or ethical considerations

30
Q

Does a company downsizing and laying employees off but considering retraining new employees so they’re able to find a job create an obligation?

A

No, desire to retrain not yet communicated = no expectation from employees = may be able to avoid the retraining (assuming it hasn’t promised anything to employees)

31
Q

Care should be taken to ensure that all obligations are……?

A

Identified and properly accounted for

32
Q

What is an example of it being unclear if whether an obligation actually exists?

A

In a lawsuit against the company. The company (or its lawyers) may not yet know if there was any wrongdoing or how the law applies (if at all)

33
Q

What are the 2 ways liabilities can further be categorized by standard setters as?

A
  1. Financial (as defined in IAS 32 regarding contractual obligations to deliver cash or other financial assets)
  2. Non-financial (everything else)
34
Q

What is equity?

A

The residual interest in the assets of a company that remains after deducting its liabilities.

Aka net worth

35
Q

In a business enterprise what is the equity and what 4 things would it consist of?

A

The ownership interest
1. Common or ordinary shares
2. Preferred shares
3. Retained earnings
4. IFRS = accumulated other comprehensive income

36
Q

What are revenues (under ASPE)?

A

Increases in economic resources, either by inflows or other enhancements of a company’s assets or settlement of its liabilities resulting from its ordinary activities.

37
Q

Give an example of revenues under ASPE.

A

Real estate company owns 10 buildings and leases them out under long-term leases. For this company, revenues would include rental income.

38
Q

What is income (under IFRS)?

A

An increase in assets or decrease in liabilities resulting from transactions or events other than those relating to shareholder -contributions

39
Q

What are expenses?

A

Decreases in economic resources, either by outflows or reductions of assets or incurrence of liabilities resulting from a company’s ordinary revenue-generating activities.

40
Q

What is an example of an expense?

A

Real estate company owning 10 buildings and renting: heating and property taxes

41
Q

For expenses, what does IFRS not make a distinction between?

A

Ordinary revenue-generating activities and losses

42
Q

What are gains?

A

Increases in equity (net assets) from a company’s peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the company during a period, except those that result from revenues or investments by -owners.

43
Q

What are losses?

A

Decreases in equity (net assets) from a company’s peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the company during a period, except those that result from expenses or distributions to owners.

44
Q

Give an example of gains and losses for a real estate company owning rental buildings.

A

Gains and losses on the sale of the building

Company’s business model includes purchasing buildings and renting them out on a long-term basis, not buying and selling buildings.

45
Q

What 4 things do the financial statements include?

A
  1. Statement of financial performance
  2. Statement of financial position
  3. Statement of changes in shareholders’ equity
  4. Statement of cash flows

Statement of fnancial perfromance may be two statements (statement of profit or loss and statement of comprehensive income) or combined as one

46
Q

What is comprehensive income?

A

A measure of income under IFRS that includes net income plus other comprehensive income.

Relatively new income concept

47
Q

What is other comprehensive income?

A

Items of revenues, expenses, gains, and losses that are required by IFRS to be included in comprehensive income, but excluded from net income.

All other changes in equity except for owners’ investments and distributions)

48
Q

What is other comprehensive income made up of?

A

Revenues, expenses, gains, and losses that, in accordance with primary sources of GAAP, are recognized in comprehensive income, but excluded from net income

49
Q

Give examples of other comprehensive income in the comprehensive income statement.

A
  • Unrealized holding gains and losses on certain securities (such as fair value-OCI investments)
  • Changes in the revaluation surplus when using the revaluation method to account for capital assets
  • Certain gains and losses related to the translation of foreign operations, and cash flow hedges
  • Certain gains and losses related to remeasurement of defined benefit plans and liabilities measured at fair value
50
Q

T or F: IFRS requires companies to use the terms “comprehensive income” or “other comprehensive income.”

A

False

51
Q

Under ASPE, what is the statement of financial performance and statement of financial position generally called?

A

Income statement and balance sheet

52
Q

Under ASPE, instead of a statement of changes in shareholder’s equity there is….?

A

Statement of retained earnings

53
Q

T or F: The concepts of comprehensive income and other comprehensive income are required under ASPE

A

False, they do not exist under ASPE, instead items would be booked through net income

MOS 1023 Chapter 2 (6 decks)

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