FINAL EXAM Flashcards
Objective of financial reporting
To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity.
Advantages of accrual accounting
Using accrual basis accounting means that revenues and expenses are recorded when incurred, not when cash or goods are received.
Advantage: over the long-run, trends in revenues and expenses are generally more meaningful than trends in cash receipts and disbursements
Development and purpose of conceptual framework
Est. the concepts that underlie financial reporting;
1 identifies boundaries of financial reporting
2 selecting transactions, events, and circumstances to be represented
3 how they should be recognized and measured
4 how the should be summarized and reported
Purpose: for a coherent set of standards that increases financial statement users’ understanding of and confidence in financial reporting! Enhances comparability among companies’ financial statements
Decision usefulness
Investors are interested in assessing:
The company’s ability to generate net cash flows and management’s ability to protect and enhance the capital providers’ investments
This concept is used when determining which accounting method should be used by a company in order to get the most useful information for decision-making purposes
Assumptions
Economic entity, going concern, monetary unit, and periodicity
— assumption dictates that Panera bread co. Record the company’s financial activities separate from those of its owners and managers
Economic entity
Assumes that the company will have a long life
Going concern assumption
— assumption assumes money($ in US) as a monetary unit and does not account for inflation or deflation
Monetary unit
— assumption assumes that companies must provide information at certain intervals(monthly, quarterly, yearly) and that the quicker a co. Releases information, the more likely there are errors. It’s a trade-off between timeliness and accuracy
Periodicity
4 principles of accounting
Measurement
Revenue recognition
Expense recognition
Full disclosure
The measurement principle has what two parts?
Historical cost principle
Fair value
Principle: Puts the actual selling price amount(cash paid or received) as the value for an item in the books instead of whatever the average selling price is for that item at the time.
Historical cost principle
Market-based measurement(whatever item is selling for at the time is what goes in books): generally used in industries such as brokerage houses and mutual funds
At initial acquisition, historical cost and — are =. But as life goes on, historical cost stays the same and — changes with the market in order to give a more accurate picture of its worth
Fair value
The — principle:
Klinke Cleaners cleans clothing on June 30 but customers don’t claim and pay for their clothes until the first week of July. Klinke should record revenue in June when it performed the service.
Revenue recognition principle
The — principle:
Companies recognize expenses not when they pay wages or make a product, but when the work or the product actually contributes to revenue…let the expense follow the revenue
Expense recognition principle
— principle:
Recognizes that the nature and amount of info. Included in financial reports reflects a series of judgmental trade-offs which strive for sufficient detail to disclose matters that make a difference to users, her sufficient condensation to make the information understandable
Full disclosure principle
Companies must weigh the costs of providing the info. Against the benefits that can be derived from using it
Cost constraint
What accounts make up SE?
Common stock, RE, dividends, revenues, expenses
A company should record all — no matter how small?
Cash sales or purchases
