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External Financial Statements & Revenue Recognition Flashcards

1
Q

What is the purpose of financial reporting?

A

To report financial information that is useful in decision making about providing resources to the entity. This information includes the entity resources, claims against those resources, and changes in the resources and claims

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2
Q

What does financial information help external users evaluate?

A

Liquidity, solvency, financing needs and the probability of obtaining financing

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3
Q

What standard must US financial reports comply with

A

G.A.A.P

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4
Q

How does management accounting differ from financial accounting?

A

Management accounting is useful for internal users and assists management with decision making, planning and controls. It does not need to follow G.A.A.P.

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5
Q

What type of users have a direct interest in the financial statements

A 
Investors & Managers which includes:
Investors or potential investors
creditors & suppliers
employees
management
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6
Q

What type of users have an indirect interest in the financial statements?

A

Users with indirect interest advise, influence or represent users with direct interest which includes:
financial advisors & analysts
stock markets or exchanges
regulaory authorities

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7
Q

Why are the financial statements important?

A

Primary means of communicating financial info to external parties

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8
Q

What is the importance of the notes to the financial statement?

A

They are considered a part of the financial statements and amplify and/or explain info in the financial statement

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9
Q

What is included in a full set of financial statements?

A 
Statement of Financial Position ( Balance Sheet)
Income Statement
Statement of Comprehensive Income
Statement of changes in equity
Statement of Cash flows
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10
Q

How must information in the Financials be presented to be useful?

A

Relevant and Faithfully Represented. Comparability enhances the usefulness of the Financials

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11
Q

Financial statements are prepared with what assumption?

A

The going concern assumption

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12
Q

What are the relationship between financial statements?

A

Net income/loss (income statement) is closed off and accumulated in retained earnings (balance sheet)

  • Components of cash & equivalents in the Balance sheet is reconciled with corresponding items in the cash flow
  • Equity section of the balance is reconciled to the beginning balance on the statement of changes in equity
  • Ending inventory reported on the balance sheet is reported in the cost of goods sold on the income statement
  • Amortization and depreciation reported in the income statement is reflected in the asset and liability section of the balance sheet
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13
Q

What basis of accounting are the financials prepared?

A

Accrual basis

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14
Q

When is revenue recognized?

A

Revenue is recognized when realize or realizable and earned

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15
Q

When are expenses recognized?

A

Expenses are recognized with incurred

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16
Q

What are the elements of a balance sheet?

A

Asset, liability and equity

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17
Q

Define an asset?

A

Probable future economic benefit controlled by an entity as a result of past transactions or events

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18
Q

Define liability

A

Probable future sacrifices of economic benefit. Present obligations of an entity arising from past transactions or event

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19
Q

Define equity

A

Equity is the residual interest in the company after subtracting its liabilities

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20
Q

What is a current asset?

A

An asset which benefit will expire within a year or the operating cycle of the entity whichever is longer. e.g. cash & cash equivalent, prepaid expenses, receivable, inventory, certain individual trading, available for sale, and held to maturity securities.

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21
Q

What is a non current asset?

A

An asset whose benefit will last longer than a year. e.g.

investments and funds, property plant and equipment, intangible assets

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22
Q

What are current liabilities?

A

Obligations expected to be settled or liquidated in the ordinary course of business within a year or the business operating cycle whichever is longer. eg. payable, unearned revenue, other obligation

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23
Q

What are non current liabilities?

A

Obligations with a life span of longer than a year.

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24
Q

What are the elements of equity?

A

Tresury Stock, other comprehensive income, retained earning, capital contributed by owners

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25
What are some of the note disclosures related to the Balance Sheet?
Investment securities, maturity patterns of bond issues, significant uncertainties, details of capital stock issues
26
What are the elements of an Income Statement?
Revenue, Expenses, Gains, Loses
27
What elements are not included in income?
transactions with owners, prior period adjustments, retained earning, items reported initially in other comprehensive income
28
What is the Matching principle?
The matching principle is when expenses are matched to the same period as the related revenue
29
What is the formula for cost of goods sold for a retailer
Beginning inventory+purchases+freight in - ending Inventory
30
What is the formula for cost of goods sold for a manufacturer?
Beginning Raw Materials + purchases of raw materials - ending raw materials = direct materials used in productions + direct labour cost + manufacturing overhead = total manufacturing costs + beginning work in process inventory - ending work in process inventory = cost of good manufactured + beginning finished goods inventory - ending finished goods inventory = cost of goods sold
31
Where and how are irregular items reported on the income statement?
They are reported after income from continuing operations, and they are also reported net of tax
32
What are limitations of the balance sheet?
BS shows financial position at a single point in time, BS items are valued at historical cost as oppose to fair value, preparation of the BS requires estimates and mgmt. judgement
33
How many components could discontinued operations have?
- income or lose from operations of a component classified as held for sale or has been disposed of from the first day of the reporting period to the date of disposal - Gain/loss on the disposal of the component
34
What are the two components of extra-ordinary items?
-unusual in nature -infrequent in occurrence If only one of the criteria is meet the item is reported separately as a component of income from continuing operations
35
How does IFRS handle extraordinary items
No items are reported as extraordinary on the income statement, comprehensive income and notes
36
What are the major notes disclosure of the income statement?
earnings per share, depreciation schedule, components of income tax expense, components of pension expense
37
What are the limitations of the income statement?
- does not show all items of income & expense. For example those transaction captured by Other Comprehensive Income - Net Income may not be a true picture of cash and liquidity of the business as revenue is recognized on an accrual basis - requires estimates and mgmt. judgement
38
What is comprehensive income?
All changes in equity (net assets) of a business except those from investments by and distributions to owners
39
What is included in the calculation of other comprehensive income?
- the effective portion on the gain/loss on a hedging instrument in a cash flow hedge - unrealized holding gains/losses in the fair market value of available for sale securities - translation gains/losses on financial statement for foreign operations - Certain amounts associated with accounting for defined benefit postretirement plan
40
What is a statement of changes of equity?
It shows a reconciliation for the accounting period the beginning balance for each component of equity to the ending balance. Each component is disclosed separately in the statement
41
What are common changes in equity components?
- Net income (loss) for the period which increases or decreases retained earning - Distributions to owners which decreases retained earnings - Issuance of common stock - Total change in other comprehensive income - Repurchase of common stock (treasury stock) which decreases the total shareholders equity
42
What is the formula to reconcile retain earnings?
Beginning retained income + net income(loss) for the period-dividend distributed during the period + positive or negative prior period adjustment = retained earnings ending balance
43
What are prior period adjustments?
Prior period adjustment includes the cumulative effect of a change in accounting principle and also the correction of prior period error/s on the Financial Statements
44
How does prior period adjustments affect the financial statements?
They affect the financial statements retroactively that is the cumulative effect of the change or error is shown and the accounts of the first reported affected accounting period are adjusted as necessary
45
How do changes in accounting estimate affect the financial statements
They are reported prospectively so no adjustment is necessary
46
Can retained earnings be restricted?
Yes for special purposes or legal action etc. this restriction is limited to cash and not assets of the business. Retained earnings be restricted does not affect net income
47
What does stock authorized mean?
The maximum amount of stock a company is legally allowed to issue
48
What does stock issue mean?
The amount of authorized stock that the company has issued (decided) to sell
49
What does outstanding stock mean?
The amount of issued stock that has been sold and are held by shareholders
50
What is the entry to record issuance of stock
Dr Cash Cr - Stock account (common stock @ par value) CR - Additional paid in capital
51
How are direct cost of issuing stocks handled?
They are not expensed, instead they reduce the net proceeds and additional pain in capital
52
When is a cash dividend recorded?
A cash dividend is recorded on the date of declaration
53
What is the entry to record a cash dividend on the date of declaration
DR Retained Earnings | CR Dividends Payable
54
What is the entry to record a cash dividend on the date of payment
DR Dividends Payable | CR Cash
55
What happens when a property dividend is declared instead of a cash dividend?
- the property is remeasured for Fair Value - Retained earnings is reduced (DR) for the amount of the Fair Value of the property - The property is distributed as a dividend
56
What is the entry of the date of declaration of a property dividend
DR Property (land eg) CR Gain on assessment of FV DR Retained Earnings CR Property Dividends Payable
57
What is the entry of the date of payment of the property dividend?
DR Property Dividend Payable | CR Land
58
What is the entry for a stock dividend less than 20-25%
- recognize entry as a stock dividend DR Retained Earnings CR Common Stock (par value) CR Additional Paid-in Capital
59
What is the entry for a stock dividend more than 20-25%
Recognize entry as a stock split DR. Retained Earnings CR Common Stock
60
What is the primary purpose of the cash flow statement?
To provide relevant information about an organization cash receipt and expenses of an entity in a given period. It helps users determine the liquidity of a business, financial flexibility and the ability to generate positive future net cash flows
61
What are the components of a cash flow statement
Operating, investing and financial activities
62
What are operating activities?
Operating activities are all transactions and event nor derived from investing and financial activities, usually derived from main revenue producing activities of the organization
63
What are investing activities?
The extent to which expenditures have been made to for resources to generate future income and cash flows
64
What are financing activities?
The cash effects of transactions and other events that relate to the issuance, settlement and reacquisition of a companies debt and equity instruments
65
How are noncash investing and financing activities handled?
They are disclosed in the notes to the FS

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