FA Chapter 2 Flashcards
Define: Financial Reporting
To provide useful economic information to external users for decision making and for assessing future cash flows.
Relevancy
predictive value,
feedback value, and timeliness.
Reliability
verifiability,
representational faithfulness,
and neutrality
Comparability
across companies.
Consistency
over time.
Asset
economic resource with
probable future benefits.
Liability
probable future sacrifices of
economic resources.
Stockholders’ Equity
financing
provided by owners and business operations.
Revenue
increase in assets or
settlement of liabilities from ongoing operations.
Expense
decrease in assets or
increase in liabilities from ongoing operations.
Gain
increase in assets or settlement
of liabilities from peripheral activities.
Loss
decrease in assets or
increase in liabilities from peripheral activities.
Historical Cost
cost is measured on the date of the transaction as the cash paid plus the dollar value of all non cash considerations.
UNEARNED REVENUE IS A
Liability
PREPAID EXPENSE IS ALWAYS AN
Asset
Separate Entity
each business’s activities must be accounted for separately from the activities of its owners
Unit of measure
each business entity accounts for and reports its financial results primarily in terms of the national monetary unit
continuity
business normally is assumed to continue operating long enough to meet its contractual commitments and plans
Nature of a business transaction
Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return.
Accounts
An organized format used by companies to accumulate the dollar effects of transactions.
Every transaction affects at least
two accounts
How to Identify and Classify Accounts (4 steps)
§Identify the accounts (by title) affected and make sure at least two accounts change.
§Classify them by type of account. Was each account an asset (A), a liability (L), or a stockholders’ equity (SE)?
§Determine the direction of the effect. Did the account increase [+] or decrease [-]?
§Verify that the accounting equation (A = L + SE) remains in balance.
Signing a contract…
does not indicate a transaction
ordering without paying….
requires no entry
