Exam 1 Flashcards
why does accounting matter
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
what is accounting
accounting identifies and records the economic events of an organization and communicates the information to interested users
what are internal users
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
what are the primary external users
investors and creditors
what are some non primary external users
tax authorities, regulatory agencies, customers, labour unions, economic planners, communities, suppliers
what makes accounting behaviour ethical
actions need to be legal and responsible
actions should consider the organizations interest
what is a proprietorship
you are the sole owner of a business and the income is in your name and included in your own personal income taxes
what are the characteristics of a proprietorship
simple to set up
owner has control
unlimited liability
income is included in individuals tax return
what is a partnership
similar to proprietorship but owned by more than one person
what is a corporation
a company operating as a separate legal entity owned by shareholders
what are the characteristics of a corporation
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
how doe new corporations get loans early on
often shareholders give a personal guarantee meaning they are putting up their own assets to secure the loan
what is a manufacturing business
uses raw materials, components, and parts to assemble finished goods
what is a merchandise business
sells goods to customers
what is a service business
performs tasks for the benefit of customers
what are financing activities
obtaining and repaying funds to finance the operations of the business through either debt or equity financing
what are investing activities
obtaining the resources or equipment needed to operate the business for the longterm
what are operating activities
main day to day activities of the business that generate revenues and expenses
what are financial statements
the business documents that companies use to report the results of their activities to various groups
what are the statements under ASPE
income statement, statement of retained earnings, balance sheet, cash flow statement
what are the statements under IFRS
statements of income, statement of changes in equity, statement of financial position, statement of cashflows
what is the statement of income
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
what are revenues and expenses
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
what are gains and losses
extra income or expenses arising from one time events that are not int he course of regular operations
what is the formula for net income
revenue + gains - expenses - losses
what is the statement of changes in equity
shows changes in each component of shareholders equity for a period
what is share capital and retained earnings
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
what is the statement of financial position
shows the resources owned by a business(assets), the obligations a business owes(liabilities), and the shareholders equity in the business
what is the statement of cashflows
reports the cash inflows and outflows over a period of time to reconcile net income to the actual change in cash
what is the accounting equation
assets = liabilities + shareholders equity
economic resources = claims on economic resources
what are the components of retained earnings
previous retained earnings + net income - dividends paid = new retained earnings
what are generally accepted accounting principals
rules and practices for the preparation of financial statements
what is the top down pyramid of the conceptual framework for financial reporting
objectives of reporting(why we report)
qualities of accounting info and elements of info
principles used to apply the framework
what is the objective of financial reporting
providing info that is both useful and decision relevant for allocation of resources
allow people to determine how managers are performing(management stewardship)
what are the fundamental qualitative characteristics of accounting information
info must be both relevant and representationally faithful
what is relevance
the info makes a difference in decision making, has predictive and confirmatory value, includes all material info
what is representational faithfulness
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
what are the enhancing characteristics
comparability, verifiability, timeliness, understandability
what are the elements of financial statments
assets, liabilities, equity, revenues, expenses, gains, losses
what are the characteristics of assets
involve some economic benefit to the entity
entity has control over that benefit
result from a past transaction or event
what are the characteristics of liabilties
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
what is equity
represents the residual interest in assets after all liabilities are deducted
what are the foundational principles in the recognition or derecognition category
economic entity assumption, control assumption, revenue recognition principle, matching principle
what are the foundational principles in the measurement category
periodicity, monetary unit assumption, going concern assumption, historical cost principle, fair value principle
what is the foundational principle in the presentation or disclosure category
full disclosure principle
what is recognition and derecognition
including or removing an item from a financial statement
what is the economic entity assumption
you have to separate business and personal activity in reporting
what is the control assumption
if two firms are controlled by the same party then their statements are consolidated
what is the revenue recognition principle
revenue is recognized when earned and risks or rewards have been transferred to purchaser
what is the matching principle
expenses need to be recorded in the same period as the revenue they helped to earn
what is the periodicity assumption
economic activity can be divided into artificial time periods
what is the monetary unit assumption
money is used to measure economic transactions as it is assumed currency is stable year over year meaning inflation can be ignored
what is the going concern asumption
we have to assume the business is going to continue to operate into the foreseeable future
what is the historical cost assumption
certain elements are recorded at the cost of purchase
what is the fair value assumption
certain assets are recorded at market value
what is the full disclosure principle
anything relevant to users decisions should be disclosed in the financial statements, the notes to the statements, or the MD&A
what is accrual accounting
recording both cash and non cash transactions such as recording revenue as they are earned not as cash is exchanged
what are the main profitability ratios
EPS, P/E, gross profit
what are the main liquidity ratios
working capital, current ratio
what are the main solvency ratios
debt to total assets
what are the main classifications of financial ratios
profitability, liquidity, solvency
what are the main intangible assets
goodwill, patents, copyrights, trademarks, trade names, licenses
what are the steps in the accounting cycle
analyze transaction, journalize, post, trial balance, adjusting entries, adjusted trial balance, financial statements, closing entries, post closing trial balance
what are debits and credits
the left and right side of T accounts
what is included in a journal entry
date, account being debited, account being credited, description of transaction, column for debits and credits, a reference number
what is a compound entry
a transaction affecting three or more accounts
what order are accounts listed on the chart of accounts
assets, liabilities, equity, revenues, expenses
what is the numbering system for accounts
1000-2999 for assets, 3000-3999 for liabilities, 4000-4999 for equity, 500-6999 for revenues, 7000-9999 for expenses
what are some mistakes that will still let the trial balance balance
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
what is outlined in a partnership agreement
formation, partner contributions, distribution of income and losses, provisions for withdrawal of assets, dispute resolution, partnership liquidation,
where can the financial info for public corps be found`
system for electronic data analysis and retrieval(SEDAR)
what are some reasons a private corp would choose to use IFRS
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
when was the first conceptual framework issued
1976
what is fraudulent financial reporting
accountants are using the statements to portray something that is not there
what is financial engineering
legally restructuring a business arrangement or transaction so it meets the company’s reporting objective
what is a cost constraint
when the cost of developing proper financial statements outweighs the benefits to users
what are the six main entities businesses exchanges with
customers, government agencies, sources of equity capital, sources of debt capital, suppliers or vendors, employees
what is the reporting entity concept
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
what is external vs internal financing
external financing is borrowing money or issuing shares
internal financing is reinvesting retained earnings into the business
what is an operating line of credit
a predetermined amount of money a business can borrow from and repay as they need. using this creates bank indebtness
how is the statement of changes in equity and the statement of retained earnings different
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
what are the non-financial sections of an annual report
companies mission, goals and objectives, products, people
what are the financial sections of an annual report
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
what is adverse selection
when sellers have info that buyers do not have
what is a moral hazard
when a party gets involved in a risky event knowing they are protected against the risk and the other party will incur the loss
what are tradeoffs in qualitative characteristics
when one characteristic must be given up to achieve another
what are constructive and equitable obligations
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
what factors lead something to be recognized on the statements
the info meets the definition of an element
the event or transaction is probable
the info is reliably measurable
what concepts define control under IFRS
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
how is control defined under ASPE
the continuing power to determine strategic decisions without the co-operation of others
what are product and period costs
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
what are the 5 IFRS steps for recognizing a transaction has occured
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
what is the main issue with GAAP
principles can be too flexible allowing for differences in accounting methods across companies and over time
what is an operating cycle
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
