FA Week 1-5 Flashcards
6 characteristics of useful accounting information
- Relevance, incl. materiality
- Faithful representation
3. Comparability
4. Verifiability
5. Timeliness
6. Understandability
7 accounting conventions
- Going concern
- Separate entity assumption
- Historical cost convention
- Monetary unit assumption
- Dual aspect
- Time period assumption
- Matching principle
- recognises income when earned and matches expenses incurred in the period to produce the income, whether cash is paid or not
What is considered a transaction?
An exchange or receipt of cash, goods or services that HAS HAPPENED
3 ways companies motivate sales and payments
- Allowing use of credit cards
- Providing biz. customers direct credit and discounts for early payments
- Allowing returns under certain circumstances
How to calculate the annual interest rate when deciding whether or not to take the sales discount?
Sales discount % * (365 days / difference in no. of days)
2 inventory systems + their differences
- Perpetual - sales record 2 things; the sale & COGS
2. Periodic - COGS calculated only at end of period; sales require only 1 entry
4 inventory valuation methods + advantages
- Specific identification (used for high value things, eg. diamond, house)
- Last-in, First-out (LIFO) method
+ better matches current costs in COGS w/ revenues - First-in, First-out (FIFO) method
+ ending inventory approximates current replacement cost
- perpetual & periodic systems always give the same COGS & inventory - Average cost method
+ smooths out price changes
Ending inventory is reported at…
the lower of cost or net realisable value (sales price - costs to sell)
Why do you suppose accrual accounting is still normally preferred to acct. on a purely cash basis?
[Class 4/Week 5]
Operating earnings are better at predicting future cash flows than current cash flows, provide more insights.
Cash basis doesn’t give full picture of biz.
