External Financial Reporting Decisions Flashcards
What is the objective of financial reporting?
The objective of financial reporting is to provide financial information about the entity that is useful for decision-making.
What are direct and indirect users of financial information?
Direct users are those who are directly affected by the results of a company. Direct users include investors and potential investors, employees, management, suppliers, and creditors. Direct users are individuals who stand to lose money financially if the company has financial problems. Indirect users are those people or groups who represent direct users. They include financial analysts and advisors, stock markets, and regulatory bodies.
What are internal and external users of financial information?
Internal users make decisions within the firm whereas external users make decisions from outside of the firm about whether or not to begin a relationship with the firm, continue a relationship with the firm, or change their relationship to the firm.
What are the five financial statements used under US GAAP?
Balance Sheet (also called the Statement of Financial Position). Income Statement. Statement of Cash Flows. Statement of Comprehensive Income. Statement of Changes in Stockholders’ Equity.
What is the purpose of the balance sheet?
The balance sheet, also called a statement of financial position, provides information about an entity’s assets, liabilities, and owners’ equity at a point in time (usually the end of a reporting period). The statement shows the entity’s resource structure, ”the major classes and amounts of assets, ”and its financing structure, ”the major classes and amounts of liabilities and equity.
What are permanent accounts?
Permanent accounts are not closed out at the end of each accounting period but rather their balances are cumulative. They keep on accumulating transactions and changing with each transaction, year after year.
What are assets, liabilities, and equity?
Assets are probable future economic benefits that have been obtained or are controlled by an entity as a result of past transactions or events. Liabilities are probable future sacrifices of economic benefits due to present obligations of an entity to transfer assets or provide services in the future, resulting from past transactions or events. Equity is net assets, or the residual (remaining) interest in the assets of an entity after deducting its liabilities from its assets. For a business entity, equity is the ownership interest.
What are current and noncurrent assets?
Current assets are assets that will be converted into cash or sold or consumed within 12 months or within one operating cycle if the operating cycle is longer than 12 months. Noncurrent assets are assets that will not be converted into cash within one year or during the operating cycle if the operating cycle is longer than one year.
What are fixed assets (property, plant, and equipment)?
Property, plant, and equipment (PP& E) are tangible assets that are used in operations and will be used past the end of the current period. When the fixed assets are purchased they are recorded at their cost, including costs such as installation costs needed to bring the asset to usable condition. The cost is then expensed over the life of the asset through depreciation.
What are intangible assets?
Intangible assets are assets that do not have a physical substance but provide benefit to the firm over a period of time. Intangible assets may be either purchased or developed internally. However, because an asset comes about only as a result of a prior transaction, internally-generated intangible assets are not recorded on the balance sheet.
What are current liabilities?
Current liabilities are obligations that will be settled through the use of current assets or by the creation of other current liabilities.
What are noncurrent liabilities?
Noncurrent liabilities are liabilities that will not be settled within one year or the operating cycle if the operating cycle is longer than one year.
What is equity?
Equity is the remaining balance of assets after the subtraction of all liabilities. Equity is the portion of the company’s assets owned by and owed to the owners. If the company were to be liquidated, equity represents the amount that would theoretically be distributable to the owners.
What are the six categories of equity?
Capital stock, the par or stated value of the shares issued. Additional paid-in capital, or the excess of amounts contributed by owners from the sale of shares over and above the par or stated value of the shares issued. Retained earnings, or profits of the company that have not been distributed as dividends. Accumulated other comprehensive income items, or specific items that are not included in the income statement but are included in equity and do adjust the balance of equity, even though they do not flow to equity by means of the income statement as retained earnings do. Treasury stock, or the amount of shares repurchased (a contra-equity account that reduces equity on the balance sheet). Noncontrolling interest (minority interest), or a portion of the equity of subsidiaries that the reporting entity owns but does not own wholly.
What is liquidity?
Liquidity refers to the time expected to elapse until an asset is converted into cash or until a liability needs to be paid. The greater a company’s liquidity is, the lower its risk of failure.
What is solvency?
Solvency refers to the company’s ability to pay its obligations when they are due. A company with a high level of long-term debt relative to its assets has lower solvency than a company with a lower level of long-term debt.
What is financial flexibility?
Financial flexibility is the ability of a business to take actions to alter the amounts and timing of its cash flows that enable the business to respond to unexpected needs and take advantage of opportunities.
What is risk?
Risk refers to the unpredictability of future events, transactions and circumstances that can affect the company’s cash flows and financial results.
What is the income statement?
The income statement reports on the success of a company’s operations during a given period of time. The income statement provides users with information to help them predict the amounts, timing, and uncertainty of (prospects for) future cash flows.
What are temporary accounts?
The accounts that are used to record revenues, expenses, gains and losses are temporary accounts. They are closed to a permanent account (retained earnings on the balance sheet) at the end of each period (fiscal year). Thus at the beginning of each fiscal year, the balances in the income statement accounts are zero.
What is revenue?
Revenue represents inflows or other enhancements to assets or settlements of liabilities as a result of delivering goods or providing services that are the entity’s main or central operations. Revenues are usually recognized when the earnings process (the provision of goods or services to the customer) is complete and an exchange has taken place. The exchange does not need to include cash but may include a promise to pay in the future (a receivable).
What are expenses?
Expenses are outflows or other using-up of assets or the incurrence of liabilities as a result of delivering goods or providing services that are the entity’s main or central operations.
What are gains?
Gains are increases in equity as a result of transactions that are not part of the company’s main or central operations and that do not result from revenues or investments by the owners of the entity.
What are losses?
Losses are decreases in equity as a result of transactions that are not part of the company’s main or central operations and that do not result from expenses or distributions made to owners of the entity.
