FInancial accounting cours 3 Flashcards
Give examples of cash.
Immediately available cash such as:
- Bank accounts.
- Cash register
- Cheques received but not yet deposited
- Credit card slips
Give examples of cash equivalents.
Short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value:
- Maturity < 3 months
- Can not be equity investments
What appears in the statement if the cash balance is negative?
The balance is reported as a “bank overdraft” on the liabilities side.
What’s an account receivable?
They represent a short-term receivable related to the sale of goods and/or provision of services on credit.
What is the allowance for doubtful accounts (AFDA)?
This is an estimate of the number of receivables (accounts receivable) that will probably not be collected. It helps the user to better estimate the account receivable that will be collected. It is a contra-asset account.
What are prepaid expenses (prepaid charges)?
It is an asset that represents the number of services to be received. The company has paid for services without having received them or has received them only partially.
What happens at year-end for the prepaid expenses?
An adjustment is required to recognize the expense related to the portion of services received during the year.
Give examples of prepaid expenses.
- Prepaid insurance premiums.
- Prepaid rent.
What are inventories?
Inventories are assets:
- Held for sale in the normal course of business.
- In production for such a sale.
- In the form of raw materials or supplies to be consumed in the production process or provision of services.
What are other debtors? Give examples.
They are amounts receivable from transactions that are not necessarily related to the sale of goods or the provision of services. Examples: loan receivable, taxes receivable, interest receivables, etc.
What are non-current assets?
- They include all assets held for more than one period.
- They are durable.
- They are resources that will be useful to the company for many years.
What are the different types of current assets?
- They are expected to be realized, or intended for sale or consumption, in the normal course of the entity’s operation.
Or - They are held primarily for trading purposes.
Or - They are expected to be completed within 12 months after the closing date.
Or - They are cash or equivalents.
What are investments (as financial assets)?
- Temporary excess cash that is invested to earn a higher return than if the cash were left in the company’s checking account.
- Stocks or bonds of companies owned by the company (if stock, it means that the company owns part of another company (and is, therefore, a shareholder).
Are investments presented as current or non-current assets?
It depends on the length of time the company expects to hold them or it depends on their maturity date.
What are the 2 types of non-current investments? Give examples for each type.
- Non-strategic investments held for the purpose of generating income and/or long-term capital appreciation. (term deposits, saving bonds, equity investments).
- Strategic investments –> Financial assets (shares) held with intention of creating a business relationship (investment in a subsidiary, investment in an associate, investment in a joint venture). Strategic investments are always equity investments.
What is a subsidiary?
It is an entity controlled by another entity, either as a result of the ownership of shares in that entity or of its capacity to influence financial decisions and operations with the purpose of generating economic benefits from its activities.
How do investments in subsidiaries work?
- An entity that holds control is called a Parent.
- Parent usually owns more than 50% of the ordinary shares in a subsidiary.
- To reflect ownership and control, we prepare consolidated financial statements of the parent and all the subsidiaries that it controls.
How do investments in associates work?
- An entity that has a significant influence on another entity.
- It owns between 20 and 50% of ordinary shares in that entity.
- It records the investment as an associate in its Financial Statements using the Equity method.
How do investments in joint ventures work?
- An arrangement through which two or more companies exercise joint control over the economic activities of an enterprise.
- Unanimous consent for strategic and operational decisions (without necessarily having an equal share in the assets and results of the joint ventures).
- The joint venture is recorded in the Financial Statements of the controlling companies following the Equity method.
What are fixed assets?
- Tangible assets (physical existence).
- They are used in the long-term operation of the business.
- They are not intended to be sold in the ordinary course of business.
- They are expected to be used over more than one period.
What are fixed assets used for?
- To provide goods or services.
- To be leased.
- For administrative purposes.
How do we calculate the acquisition cost of fixed assets?
The purchase price + all costs incurred to enable the asset to be used.
What is depreciation?
- It is an expense in the Income Statement.
- This expense corresponds to the company’s use of the asset during the fiscal year.
- Its objective is to spread the initial cost of the asset over its estimated useful life.
