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Finance and Accounting > Exam 1 > Flashcards

Exam 1 Flashcards

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1
Q

why does accounting matter

A

accounting is the language of business
global economic systems depend on reliable and accurate financial reporting
it is a technical skill above just typical business knowledge
warren buffet has said it is the most important topic in business schools

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2
Q

what is accounting

A

accounting identifies and records the economic events of an organization and communicates the information to interested users

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3
Q

what are internal users

A

people within the business such as management or employees that use the information to make decisions such as whether or not to pursue a project

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4
Q

what are the primary external users

A

investors and creditors

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5
Q

what are some non primary external users

A

tax authorities, regulatory agencies, customers, labour unions, economic planners, communities, suppliers

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6
Q

what makes accounting behaviour ethical

A

actions need to be legal and responsible
actions should consider the organizations interest

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7
Q

what is a proprietorship

A

you are the sole owner of a business and the income is in your name and included in your own personal income taxes

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8
Q

what are the characteristics of a proprietorship

A

simple to set up
owner has control
unlimited liability
income is included in individuals tax return

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9
Q

what is a partnership

A

similar to proprietorship but owned by more than one person

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10
Q

what is a corporation

A

a company operating as a separate legal entity owned by shareholders

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11
Q

what are the characteristics of a corporation

A

indefinite life
shareholders have limited liability
may be public or private
separate legal entity with it’s own tax return
corporations have their own credit scores

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12
Q

how doe new corporations get loans early on

A

often shareholders give a personal guarantee meaning they are putting up their own assets to secure the loan

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13
Q

what is a manufacturing business

A

uses raw materials, components, and parts to assemble finished goods

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14
Q

what is a merchandise business

A

sells goods to customers

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15
Q

what is a service business

A

performs tasks for the benefit of customers

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16
Q

what are financing activities

A

obtaining and repaying funds to finance the operations of the business through either debt or equity financing

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17
Q

what are investing activities

A

obtaining the resources or equipment needed to operate the business for the longterm

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18
Q

what are operating activities

A

main day to day activities of the business that generate revenues and expenses

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19
Q

what are financial statements

A

the business documents that companies use to report the results of their activities to various groups

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20
Q

what are the statements under ASPE

A

income statement, statement of retained earnings, balance sheet, cash flow statement

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21
Q

what are the statements under IFRS

A

statements of income, statement of changes in equity, statement of financial position, statement of cashflows

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22
Q

what is the statement of income

A

reports the results of operations for a specific period of time by showing revenues and working down through all associated expenses to a final net income after tax

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23
Q

what are revenues and expenses

A

revenues arise from the sale of a product or service in regular operations
expenses are the cost of assets consumed or services used to generate revenue

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24
Q

what are gains and losses

A

extra income or expenses arising from one time events that are not int he course of regular operations

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25
Q

what is the formula for net income

A

revenue + gains - expenses - losses

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26
Q

what is the statement of changes in equity

A

shows changes in each component of shareholders equity for a period

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27
Q

what is share capital and retained earnings

A

share capital is the amount contributed by shareholders and can be common or preferred class
retained earnings is the cumulative profit retained in the company minus any dividends paid to shareholders

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28
Q

what is the statement of financial position

A

shows the resources owned by a business(assets), the obligations a business owes(liabilities), and the shareholders equity in the business

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29
Q

what is the statement of cashflows

A

reports the cash inflows and outflows over a period of time to reconcile net income to the actual change in cash

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30
Q

what is the accounting equation

A

assets = liabilities + shareholders equity
economic resources = claims on economic resources

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31
Q

what are the components of retained earnings

A

previous retained earnings + net income - dividends paid = new retained earnings

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32
Q

what are generally accepted accounting principals

A

rules and practices for the preparation of financial statements

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33
Q

what is the top down pyramid of the conceptual framework for financial reporting

A

objectives of reporting(why we report)
qualities of accounting info and elements of info
principles used to apply the framework

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34
Q

what is the objective of financial reporting

A

providing info that is both useful and decision relevant for allocation of resources
allow people to determine how managers are performing(management stewardship)

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35
Q

what are the fundamental qualitative characteristics of accounting information

A

info must be both relevant and representationally faithful

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36
Q

what is relevance

A

the info makes a difference in decision making, has predictive and confirmatory value, includes all material info

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37
Q

what is representational faithfulness

A

the info is complete, neutral, free from material error, substance over form meaning it shows the economic side of a transaction not the legal side

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38
Q

what are the enhancing characteristics

A

comparability, verifiability, timeliness, understandability

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39
Q

what are the elements of financial statments

A

assets, liabilities, equity, revenues, expenses, gains, losses

40
Q

what are the characteristics of assets

A

involve some economic benefit to the entity
entity has control over that benefit
result from a past transaction or event

41
Q

what are the characteristics of liabilties

A

represent a present duty or responsibility
entity is obligated and has little to no discretion to avoid the duty or responsibility
obligation results from a past transaction or event

42
Q

what is equity

A

represents the residual interest in assets after all liabilities are deducted

43
Q

what are the foundational principles in the recognition or derecognition category

A

economic entity assumption, control assumption, revenue recognition principle, matching principle

44
Q

what are the foundational principles in the measurement category

A

periodicity, monetary unit assumption, going concern assumption, historical cost principle, fair value principle

45
Q

what is the foundational principle in the presentation or disclosure category

A

full disclosure principle

46
Q

what is recognition and derecognition

A

including or removing an item from a financial statement

47
Q

what is the economic entity assumption

A

you have to separate business and personal activity in reporting

48
Q

what is the control assumption

A

if two firms are controlled by the same party then their statements are consolidated

49
Q

what is the revenue recognition principle

A

revenue is recognized when earned and risks or rewards have been transferred to purchaser

50
Q

what is the matching principle

A

expenses need to be recorded in the same period as the revenue they helped to earn

51
Q

what is the periodicity assumption

A

economic activity can be divided into artificial time periods

52
Q

what is the monetary unit assumption

A

money is used to measure economic transactions as it is assumed currency is stable year over year meaning inflation can be ignored

53
Q

what is the going concern asumption

A

we have to assume the business is going to continue to operate into the foreseeable future

54
Q

what is the historical cost assumption

A

certain elements are recorded at the cost of purchase

55
Q

what is the fair value assumption

A

certain assets are recorded at market value

56
Q

what is the full disclosure principle

A

anything relevant to users decisions should be disclosed in the financial statements, the notes to the statements, or the MD&A

57
Q

what is accrual accounting

A

recording both cash and non cash transactions such as recording revenue as they are earned not as cash is exchanged

58
Q

what are the main profitability ratios

A

EPS, P/E, gross profit

59
Q

what are the main liquidity ratios

A

working capital, current ratio

60
Q

what are the main solvency ratios

A

debt to total assets

61
Q

what are the main classifications of financial ratios

A

profitability, liquidity, solvency

62
Q

what are the main intangible assets

A

goodwill, patents, copyrights, trademarks, trade names, licenses

63
Q

what are the steps in the accounting cycle

A

analyze transaction, journalize, post, trial balance, adjusting entries, adjusted trial balance, financial statements, closing entries, post closing trial balance

64
Q

what are debits and credits

A

the left and right side of T accounts

65
Q

what is included in a journal entry

A

date, account being debited, account being credited, description of transaction, column for debits and credits, a reference number

66
Q

what is a compound entry

A

a transaction affecting three or more accounts

67
Q

what order are accounts listed on the chart of accounts

A

assets, liabilities, equity, revenues, expenses

68
Q

what is the numbering system for accounts

A

1000-2999 for assets, 3000-3999 for liabilities, 4000-4999 for equity, 500-6999 for revenues, 7000-9999 for expenses

69
Q

what are some mistakes that will still let the trial balance balance

A

a transaction is not journalized, a correct journal entry is not posted, a journal entry is posted twice, incorrect amounts used in journalizing or posting, errors that cancel each others effects are made during recording

70
Q

what is outlined in a partnership agreement

A

formation, partner contributions, distribution of income and losses, provisions for withdrawal of assets, dispute resolution, partnership liquidation,

71
Q

where can the financial info for public corps be found`

A

system for electronic data analysis and retrieval(SEDAR)

72
Q

what are some reasons a private corp would choose to use IFRS

A

it is considering using public debt or equity markets in the future, it wants to be able to compare financial results with competitors that use IFRS, it has foreign subsidiaries using IFRS and wants common acccounting standards

73
Q

when was the first conceptual framework issued

A

1976

74
Q

what is fraudulent financial reporting

A

accountants are using the statements to portray something that is not there

75
Q

what is financial engineering

A

legally restructuring a business arrangement or transaction so it meets the company’s reporting objective

76
Q

what is a cost constraint

A

when the cost of developing proper financial statements outweighs the benefits to users

77
Q

what are the six main entities businesses exchanges with

A

customers, government agencies, sources of equity capital, sources of debt capital, suppliers or vendors, employees

78
Q

what is the reporting entity concept

A

similar to the economic entity assumption is means that business and personal activities must be separate in financial reporting. personal transactions should not be on business reports

79
Q

what is external vs internal financing

A

external financing is borrowing money or issuing shares
internal financing is reinvesting retained earnings into the business

80
Q

what is an operating line of credit

A

a predetermined amount of money a business can borrow from and repay as they need. using this creates bank indebtness

81
Q

how is the statement of changes in equity and the statement of retained earnings different

A

statement of changes in equity is required under IFRS and shows all elements of shareholders equity where SRE is required under ASPE and just shows changes in retained earnings

82
Q

what are the non-financial sections of an annual report

A

companies mission, goals and objectives, products, people

83
Q

what are the financial sections of an annual report

A

MD&A, financial statements, notes to the financial statements, auditors report, statement of management responsibility for financial statements, historical summary of key ratios and indicators

84
Q

what is adverse selection

A

when sellers have info that buyers do not have

85
Q

what is a moral hazard

A

when a party gets involved in a risky event knowing they are protected against the risk and the other party will incur the loss

86
Q

what are tradeoffs in qualitative characteristics

A

when one characteristic must be given up to achieve another

87
Q

what are constructive and equitable obligations

A

constructive obligations arise from past or present practices that signal the company acknowledge a potential economic burden
equitable obligations arise due to moral or ethical considerations

88
Q

what factors lead something to be recognized on the statements

A

the info meets the definition of an element
the event or transaction is probable
the info is reliably measurable

89
Q

what concepts define control under IFRS

A

parent must have power over invested
parent must have exposure or right to variable returns from involvement with investee
must be able to use the power over investee to affect amount of investors returns

90
Q

how is control defined under ASPE

A

the continuing power to determine strategic decisions without the co-operation of others

91
Q

what are product and period costs

A

product costs are things like material or freight in that are carried into the future as inventory if the product is not sold
period costs are things like salaries and admin expenses that are recognized immediately as they are not seen as part of the production process

92
Q

what are the 5 IFRS steps for recognizing a transaction has occured

A

identify the contract with the customer
identify the performance obligations in the contract
determine the transaction price
allocate the transaction price to each performance obligation
recognize revenue when each performance obligation is satisfied

93
Q

what is the main issue with GAAP

A

principles can be too flexible allowing for differences in accounting methods across companies and over time

94
Q

what is an operating cycle

A

average amount of time it takes a company to pay cash for products or services then receive cash from customers for their products or services

95
Q
A

Finance and Accounting (3 decks)

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