Elements of the Financial Statements

Question 1

What is replacement cost?

Answer 1

The amount, in terms of economic resources, that an entity would be required to give up in order to obtain an asset that is the same or the equivalent to an existing asset. (What would it cost to replace an item e.g. inventory)

Question 2

What is the Net Realizable Value?

Answer 2

Some assets are reported at their net realizable values, which is the proceeds the entity would obtain if the asset were disposed of, net of any costs of disposal. It represents an asset sale or exit price, not the amount that would be required to obtain the same or an equivalent asset, which is the entry price.

Question 3

What are the two primary qualitative characteristics of accounting information?

Answer 3

Relevance

Faithful Representation

Question 4

What is the objective of Relevance?

Answer 4

to maximize the predictive value of the financial of the financial statements

ROGER IS PC

• Predictive Value
• Confirmatory Value

Question 5

What is the objective of Faithful Representation?

Answer 5

to assure that the information is free from errors, neutral and complete.

FENCE

• Free from Error
• Neutral
• Completeness

Question 6

Consistency

Answer 6

same principle each year

Question 7

Conservatism

Answer 7

considering all risks inherent in the business (e.g. accruing a contingent loss)

Question 8

Cost/Benefit

Answer 8

costs don’t exceed benefits

Question 9

Matching

Answer 9

recognize a cost as an expense, in the same period as the benefit is recognized

Question 10

Allocation

Answer 10

spreading a cost over more than one period

Question 11

Full Disclosure

Answer 11

Providing all useful info in the F/S

Question 12

Recognition

Answer 12

Booking an item in the F/S

Question 13

Realization

Answer 13

Converting non-cash resources into cash or a claim to cash

Question 14

Historical Cost

Answer 14

The amount you paid for it (PP&E)

Question 15

Fair Market Value

Answer 15

The price received to sell an asset or paid to transfer a liability (required for investments, derivatives, asset impairments, asset retirement obligations, goodwill, business combinations, troubled debt restructuring)

Question 16

Present Value

Answer 16

Discounted cash flows due to the time value of money (notes/receivables, bonds/payable, Leases)

Question 17

Principal Market

Answer 17

greatest volume and level of activity occurs

Question 18

Most advantageous market

Answer 18

maximizes price received for the asset or minimizes amount paid to transfer the liability (price is adjusted for costs to transport to the market)

Question 19

What the 6 steps to apply the Fair Value measurement?

Answer 19

1. Identify the Asset or liability to be measured
2. Determine the principal or most advantageous market
3. Determine the value premise (assume the highest and best use)
4. Determine the appropriate valuation technique (MIC)
5. Obtain inputs for valuation (Level 1, 2, or 3)
6. Calculate the fair value of the asset.

Question 20

What is the Market Approach for valuation in fair value measurement?

Answer 20

uses prices and relevant information from market transactions for identical or comparable assets/liabilities

Question 21

What is the Income Approach for valuation in fair value measurement?

Answer 21

uses present value techniques to discount cash flows or earnings

Question 22

What is the Cost Approach for valuation in fair value measurement?

Answer 22

uses current replacement cost

Question 23

What is an asset valuation account?

Answer 23

A valuation account is a separate item that reduces or increases the carrying amount of an asset. It is neither an asset nor a liability. (Think allowance for doubtful accounts)

Question 24

What is considered an appropriate means of measuring an element of financial reporting in monetary terms?

Answer 24

Historical Cost, replacement cost, net realizable value, fair market value, and present value.