Fiancial Accountig Flashcards

Question

What’s the relationship between statements

Answer 1

Statements are interrelated - results from some statements are used as data in other statements Examples: - net income from statements of income is reported in statement of changes in equity - ending balances of each shareholders equity account is reported in both statements of financial position and changes in equity. - statements of cash flows is related to statements of financial position

Answer 2

Public corporations must produce an annual report each year, which contains: - financial statements - statements of managements responsibility for the statements - management discussion and analysis - auditors report - notes to financial statements - historical summary of the key financial ratios and indicators

Answer 3

- qualitative characteristics - cost constraint, going concern assumption - elements of financial statements and measurement - conceptual framework

Answer 4

Assets expected to be converted to cash, sold or used in the business within one year of the financial statement date or one operating cycle, whichever is longer - operating cycle is the average time between when a business pays cash to obtain products or services and when it receives cash from customers for these products or services Usually listed in order of liquidity the order in which they expect current assets to be converted to cash, sold or used up. - reverse order of liquidity also possible Examples can be cash, trading investments, accounts receivable, inventory, supplies and prepaid expenses.

Answer 5

Also known as long term assets All assets not considered current Examples can be: - long term investments - property, plant, and equipment - intangible assets and goodwill - other assets

Answer 6

Multi-year investments in : - debt securities: loan, notes, bonds and mortgages - equity securities: share of other companies These assets are normally not intended to be sold(and converted to cash) within one year

Answer 7

Tangible assets with relatively long useful lives Used in operating a business and provide benefits to companies over their useful lives Examples: land, buildings, equipment, furniture, computers and vehicles Usually listed in order of permanency.

Answer 8

Allocation(expense) of the cost of property, plant and equipment over their estimated useful lives: - companies systematically assign a portion of the cost of an asset to expense each year - I F R S recommends use of the term depreciation for depreciable tangible assets and the term amortization for intangible assets with definite lives - under ASPE, amortization is often used instead of depreciation for both tangible and intangible assets with definite lives The cost of long-lived assets with indefinite lives is not depressed(like land)

Answer 9

Account shows the total amount of depreciation expense recorded to date - accumulated depreciation is a contra asset account The difference between the cost of the asset and its accumulated depths referred to as the carrying amount of the asset Depreciable assets are presented at their carrying amount.

Answer 10

Assets that do not have physical substance but have significant value - represent a privilege or a right granted to or held by the company Examples: - patents, copyrights, trademarks and licenses - goodwill: excess price paid on acquisition of another company Generate a future value to the company and amortized if they do not have an indefinite life

Answer 11

Obligations that are to be paid or settled within the (longer of the) one year of the financial statement date or one operating cycle Examples include bank indebtedness, accounts payable, deferred revenue, bank loan/note payable and current portion of long term debt

Answer 12

Obligations expected to be paid or settled after one year Examples: bank loan/notes payable, lease liabilities, pension and benefit obligations, deferred liabilities Usually accompanied by extensive notes to the financial statements

Answer 13

A residual amount equal to the difference between a company’s assets and its liabilities Has two components: - share capital: investment of cash(or other assets) in the company by shareholders in exchange for preferred or common shares Retained earnings: cumulative net income ( or earnings) kept for use in the company

Answer 14

Expresses the relationship between selected financial statement data

Answer 15

Intracompany comparisons: cover two or more periods for the same company Intercompany comparisons: between the company and a competitor Industry average comparison: based on averages for particular industries

Answer 16

1. Profitability ratios 2. Liquidity ratios 3. Solvency ratios

Answer 17

Measures a company’s short term ability of a company to pay its maturing obligations and to meet its unexpected needs for cash’s Working capital = current assets - current liabilities Current ratio = current assets/current liabilities Higher ratio is usually better

Answer 18

Measures a company’s ability to survive over a long period of time - higher the percentage of debt to total assets, the greater the risk that debt cannot be repaid when they are due Debt of total assets = total liabilities/total assets Lower is generally better

Answer 19

Measure the income or operating success of a company for a given period of time, usually one year Basic earnings(loss) per share = income available to common shareholders/weighted average number of common shares Price-earnings ratio = market price per share/basic earnings per share Higher is generally better

Answer 20

The foundation for the accrual basis of accounting. Guides decisions about - what to present in financial statements - alternative ways of reporting economic events - appropriate ways of communicating this info Some key items include: - objective of general purpose financial reporting - qualitative characteristics of useful financial information - cost constraint - elements of financial statements - measurement of the elements of financial statements

Answer 21

To provide financial info that is useful to existing and potential investors, lenders and other creditors Who are making decisions about providing resources to a company - buying, selling, holding equity and debt - providing or settling loans or other credits Financial info is provided by general purpose financial statements

Answer 22

Relevance: - information has relevance if it makes a difference in users decision - may have predictive value and or confirmatory value - materiality is important: will information if omitted or misstated influence the decisions of users Faithful representation: - information should reflect economic reality - it must be complete, neutral and free from error

Answer 23

Comparability: - when different companies use the same accounting principles and apply them consistently each year Verifiability: - independent consensus that information is faithfully represented Timeliness: - Available before it loses its usefulness in decision-making Understandability: - classified, characterized and presented clearly and concisely.

Answer 24

Ensures that the value of the information provided by financial reporting is greater than the cost of providing it The benefits of financial reporting should justify the costs of providing and using it.

Answer 25

- The business will continue operating in the foreseeable future - the key assumption- provides a foundation for accounting and justification for using cost as the value of certain assets

Answer 26

- Recognized - Measured - Reported

Answer 27

The system used to collect and process transaction data and communicate financial information Can vary widely based on factors such as: - type of business and its transactions - size of company - amount of data - information needed by management and others Most businesses use computerised accounting systems which handle all the steps involved in the recording process

Answer 28

In order: Analyse transactions - journalise - post - trial balance - adjusting entries - adjusted trial balance - financial statements - closing entries - post closing trial balance

Answer 29

Step 1: analyze each transaction to determine its effect on accounts - evidence comes from a source document Step 2: record transaction as a journal entry in the general journal Step 3: transfer journal entries recorder to appropriate accounts in the general ledger Step 4: prepare a trial balance

Answer 30

Transactions are economic events that must be recorded in the financial statements Not all events are recorded and reported as accounting transactions: - only those that effect or change assets, liabilities or shareholders equity accounts

Answer 31

Assets = liability + shareholders equity The accounting equation must always balance Therefore each transaction has a dual (double sided) effect on the equation

Answer 32

They describe where entries are made in the T accounts: Debiting: entering an amount on the left side Crediting: entering an amount on the right side If debit amounts exceed credit amount, account has a debit balance If credit amounts exceed debit amounts, account has a credit balance

Answer 33

Assets = debit Liabilities = credit Common shares = credit Retained earnings = credit Revenues = credit Expenses = debit Dividends declared = debit

Answer 34

General Journal

Answer 35

Journalising

Answer 36

1. Disclose complete effect of a transaction in one place, including a brief explanation of the transaction 2. Provides a chronological record of transactions. 3. Helps to prevent and locate errors

Answer 37

Contains all the asset, liability, shareholders equity’s dividends declared, revenue and expense accounts

Answer 38

Chart of accounts Each account has a number, so it’s easy to identify

Answer 39

Is the process of transferring journal entries from the general journal to the general ledger accounts

Answer 40

List of the general ledger accounts and their balances at a specific time - usually the end of an accounting period Also serves to prove that debits equal credit after postings - sum of debits = sum of credits Aids in preparation of financial statements Subject to limitations - doesn’t prove that the general ledger is correct - examples: missing transactions, incorrect accounts, duplicate postings.

Answer 41

1. Analyse business transactions 2. Journalise the transactions 3. Post to the ledger accounts 4. Prepare a trial balance 5. Journalise and post adjusting entries 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalise and post closing entries 9. Prepare a post closing trial balance

Answer 42

Transactions affecting a companies financial statements are recorded in the period the events occur. Rather than when cash is received or paid - Revenue is recorded when earned, even if cash has not been received - Expenses are recorded when goods and services are consumed or used, rather than when cash is paid

Answer 43

Year, quarter(three months), month - one year period is known as the fiscal year - shorter periods are known as interim periods - many transactions affect more than one time period

Answer 44

Revenue is recorded only when cash is received Expenses are recorded only when cash is paid Can lead to misleading information for decision making: - timing differences between the occurrence of the actual event and its related cash flows - revenue and expenses can be manipulated by timing the receipt and payment of cash

Answer 45

Revenue is when increase in assets or settlement of liabilities - results from a company’s ordinary activities In general, revenue is recognised - in a merchandising company when merchandise is sold and delivered(point of scale) - in a service company when the service is performed Under ASPE, revenue can be recognised when: - Services have been provided or the risks and rewards of ownership of the goods have been transferred to the buyer - Revenue can be reliably measured - collection is reasonably certain

Answer 46

When a company satisfies a performance obligation

Answer 47

1. Identify the contract with the client or customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognised revenue when the company satisfies the performance obligation

Answer 48

Expenses are recognised or recorded when a decrease in economic recourses occurs - assets consumed(they decrease) or liabilities are incurred(increase) Tied to changes in assets and liabilities Often coincides with revenue recognition Recognised, whenever possible, in the period in which efforts is made to generate revenue, which sometimes is known as matching

Answer 49

Entires made at the end of the accounting period to update accounts and produce up to date and relevant financial information

Answer 50

Required because the trial balances may not be complete and up to date - some events are not recorded daily - some costs are not recorded during the accounting period as they expire due to the passage of time - some items may be unrecorded because their amounts are not known

Answer 51

Prepayments - prepaid expenses - deferred revenues Accruals - accrued expenses - Accrued revenues

Answer 52

When expenses are paid before they are used or consumed, an asset is recorded - when expenses are prepaid, an asset(prepaid expense) is increased (debited) to show the future service or benefit, and cash is decreased(credited) Expire with the passage of time or through use - not practical to record this expiration on a daily basis, so done periodically, usually when statements are prepared Adjusting entry increases(debits) an expense account and decreases( credits) the asset (prepaid) account.

Answer 53

1. Statement of income is prepared first using revenue and expense accounts 2. Statement of changes in equity is prepared next, using equity accounts and net income from the statement of income 3. Statement of financial position is prepared third, using asset, liability and equity accounts

Answer 54

Revenues, expenses and dividends declared accounts are components of retained earnings - considered to be temporary accounts Statement of financial position accounts carry forward into the future - considered to be permanent accounts Closing entries - temporary account balances are transferred to retained earnings - produce a zero balance in the temporary accounts to prepare them for the next periods activity

Answer 55

Temporary - all revenue accounts - all expenses accounts Permanent accounts - all asset accounts - all liability accounts - shareholders equity accounts

Answer 56

1. Close all revenue accounts - debit each revenue account for its balance and credit income summary for total revenue amount 2. Close all expense accounts - debit income summary for the total expenses amount and credit each expense account for its balance 3. Close income summary - debit(or credit) income summary for the balance in the account and credit(debit) retained earnings 4. Close dividends declared accounts: - debit retained earnings and credit dividends declared account for the balance

Answer 57

1. Revenue accounts for income summary 2. Expense accounts for income summary 3. Income summary for retained earnings 4. Dividends declared for retained earnings

Answer 58

List all permanent accounts and their balances after all closing entries are journalized and posted Proves that total debit balances and total credit balances are equal after the closing entries have been journalized and posted

Answer 59

Service companies perform services as their primary source of revenue Merchandising companies buy and sell inventory like Loblaws Retailers sell to consumers Wholesalers sell to retailers Manufacturers produce goods for sale to wholesalers or others

Answer 60

The period that elapses from when cash is spent to buy inventory or provide a service to the time when cash is collated from customers Longer for a merchandising company than for a service company: - merchandise must first be purchased - then it is held in stores or warehouses - finally sold to customers Adds additional steps to the operating cycle

Answer 61

For revenue: - revenue from the sale of merchandise is the main source. - simply referred to as sales For examples, they’re divided into two categories: - cost of goods sold: total cost of merchandise sold in a period - operating expenses: incurred in the process of earning sales Gross profit = sales less cost of goods sold

Answer 62

Sales - cogs = gross profit Gross profit - operating expenses = income(loss) before income tax Income(loss) before income tax - income tax expense = net income(loss)