General Purpose Financial Statements Flashcards
Define “current liability”.
A liability expected to be extinguished through the use of current assets or by the incurrence of other current liabilities.
What is the operating cycle?
The period of time from the purchase of inventory, to payment of the payable on inventory purchase, to the sale of goods, to the collection of receivable, and then to purchasing inventory all over again.
What is a valuation account used for?
Used to increase or decrease the book value of an item to a measure of current value.
Define “measurement base”.
The attribute of an account being measured and reported.
Define “net realizable value”.
The amount the firm expects to receive from the sale or collection of an item.
Describe the formula for quick or acid test ratio.
(Cash + short-term investments + Accounts Receivable)/Current Liabilities.
What is another name for the balance sheet?
The statement of financial position.
How are current assets listed on the balance sheet?
Declining order of liquidity.
How are unusual or infrequent items reported?
They must be separately reported if material as a component of income from continuing operations.
Define “gains”.
Increases in equity or net assets from peripheral or incidental transactions.
What is economic income?
The change in the net worth of a business enterprise during an accounting period.
What is operating margin?
The excess of operating revenues over operating expenses.
What represent increases in net assets or settlements of liabilities by providing goods and services?
Revenues
Define “expenses”.
Decreases in net assets or incurrence of liabilities through the provision of goods or services.
What items are not shown on the income statement?
- Prior period adjustments; 2. Foreign currency translation adjustments; 3. Unrealized gains and losses on available for sale (AFS) securities; 4. Unrecognized pension items; 5. Cumulative effect of changes in accounting principle; 6. Unrealized gains and losses on cash flow hedges.
Does accounting income take a transactions-based determination of income or a change in net worth?
Accounting income is transaction based.
What is the order of income statement presentation?
- Income from Continuing Operations; 2. Income from Discontinued Operations (net of tax); 3. Extraordinary Items (net of tax); 4. Net Income.
Define “losses”.
Decreases in equity or net assets from peripheral or incidental transactions.
What does the single-step income statement present?
Total revenues and gains less total expenses and losses.
What does the multiple-step income statement present?
Includes multiple subtotals of revenues, expenses, gains, and losses. (Sales - Cost of Goods Sold = Gross profit; Gross profit - operating expenses = income from operations; Income from operations + or ? other income / expenses= Income B/F Taxes; IBT ? taxes = Net Income.)
What is presented in the related party transaction disclosures?
Nature of relationship, description of all transactions for years presented, dollar amounts of transactions, and receivables to or from parties.
What is the Management Discussion & Analysis (MD&A) section?
Management Discussion & Analysis: a narrative written by management that is an integral part of the disclosure of the financial statements.
Define “nominal dollars”.
Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
Define “purchasing power loss”.
Losses that result from holding monetary assets during inflationary times or having monetary liabilities during deflationary times.
What disclosure is required by firms in hyperinflationary economies under International Financial Reporting Standards (IFRS)?
Disclosure of the impact of inflation on the financial statements is required.
Define “constant dollars”.
Measurements in the general price level as of a specific date.
What is the difference between errors and irregularities?
Errors are unintentional, irregularities are intentional.
What is included in illegal acts for companies?
Illegal contributions and bribes.
Define “inflation”.
It is the increase in general prices for a period of time; deflation is the decrease in general prices.
Under International Financial Reporting Standards (IFRS), what should the Summary of Significant Accounting Policies include?
Judgments and key assumptions made in applying those policies; Measurement bases used for recognition (e.g., historical cost, fair value); Information enabling an assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities, which are point estimates in many cases.
Define “purchasing power gain”.
Gains that result from holding monetary assets during deflationary times or having monetary liabilities during inflationary times.
What are the disclosure requirements for noncurrent liabilities?
Combined aggregate amount of maturities on borrowings 5+ years after balance sheet, sinking fund requirements; the aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services; the fair value of each financial debt instrument in the financial statements or in the notes; the nature of the firm’s liabilities, interest rates and maturity dates, conversion options, assets pledged as collateral, and restrictions.
Define “monetary items”.
The specific price of monetary items cannot change.
Define “purchasing power”.
The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.
Define “nonmonetary items”.
The specific price of nonmonetary items can change.
What is a development stage enterprise?
An enterprise placing substantially all its efforts into the establishment of a new business.
Define “general prices”.
The term general prices refers to a market basket of items that the typical consumer purchases.
What does the first footnote typically cover?
Summary of significant accounting policies.
Define “specific price change”.
The change in the price of a specific good or service over a period of time.
List the other names for Statement of Changes in Equity.
Statement of Changes in Owners’ Equity, Owners’ Equity Statement, Statement of Shareholders’ Equity, and Statement of Owners’ Equity.
Does accumulated other comprehensive income (AOCI) have its own column in the vertical format?
Yes, it has its own column.
In what type of format does the Statement of Changes in Equity appear?
The format is vertical and horizontal.
How are accounts listed in the vertical format?
They are listed in separate columns.
Is the Statement of Changes in Equity required under International Financial Reporting Standards (IFRS)?
Yes, it is required.
What do vertical format statements allow accountants to do?
Check accuracy by comparing total Owner’s Equity (OE) computed as (1) the sum of each transaction affecting OE and (2) the sum of individual OE account balances.
How many years of Owners’ Equity (OE) must be reported by Securities and Exchange Commission (SEC) registrants?
Three years of OE statements.
What is comprehensive income?
Net income + other comprehensive income items.
What are other comprehensive income items?
Unrealized gains and losses on securities available for sale, unrecognized pension gains and losses, foreign currency translation adjustments, certain derivative gains and losses.
What are the types of statements of other comprehensive income?
1) Single statement of net income and comprehensive income; and 2) two separate statements: a statement of net income and a statement of comprehensive income.
What are the forms of the statement of comprehensive income?
Single statement and two statements.
What are the two ways of reporting comprehensive income?
As a separate statement of comprehensive income or as part of the income statement.
What type of account is accumulated other comprehensive income (AOCI)?
Owner’s equity.
What is comprehensive income?
Net income plus or minus unrealized gains and losses on securities available for sale, unrealized pension cost, certain unrealized gains and losses on derivatives, and foreign currency translation adjustments.
What is other comprehensive income (OCI) reclassification adjustment?
When an OCI item from previous year is removed from accumulated other comprehensive income (AOCI).
What is net income plus or minus other components of comprehensive income?
Comprehensive income.
What is the main purpose of disclosing comprehensive income?
To report the net change in equity in a single amount.
What is the indirect method on the statement of cash flows?
Reconciles net income to cash flows from operating activities.
What is reported on the Statement of Cash Flows?
Information about the cash receipts and cash payments for an entity; The difference between net income and net operating cash flows; Information about investing and financing activities which do not involve cash inflows or outflows.
What is the cash flow category for interest paid and received?
This category is Operating Activities.
List the required categories for the Statement of Cash Flows.
Net cash inflow or outflow from Operating Activities; Net cash inflow or outflow from Investing Activities; Net cash inflow or outflow from Financing Activities; Effects of Foreign Currency Translation; Reconciliation of net cash inflows/outflows with the reported change in cash and cash equivalents on the Balance Sheet; Non-cash Investing and Financing Activities.
What is the cash flow category for collections of principal amounts on loans made to other entities?
The category is Investing.
What is the basic purpose of the statement of cash flows?
The basic purpose is to provide information about the cash receipts and cash payments for an entity to help investors, creditors, and others.
What is the direct method on the statement of cash flows?
This method presents actual inflows and outflows from cash operations. Must also disclose the indirect method (reconciliation of net income to cash flows from operations) as a supporting schedule.
What is the reporting basis of the statement of cash flows?
The reporting basis is cash and cash equivalents.
Name the four major sections in the direct method cash flow statement.
Operating cash flows; Investing cash flows; Financing cash flows. Reconciliation of net income and net operating cash flows.
When is a Statement of Cash Flows required?
For all business enterprises that report both financial position (Balance Sheet) and results of operations (Income Statement) for a period.
Name the two formats permitted for the statement of cash flows.
Indirect. Direct.
What is the purpose of the operating section of the statement of cash flows under the direct method?
The purpose is to show all cash inflows and outflows for operating activities.
Using the indirect method for reporting cash flows from operations, should an increase in accounts receivable be added to or subtracted from accrual based net income?
An increase in accounts receivable should be subtracted.
Using the indirect method for reporting cash flows from operations, should a decrease in unearned revenue be added to or subtracted from accrual based net income?
A decrease in unearned revenue should be subtracted.
Using the indirect method for reporting cash flows from operations, should a decrease in inventory be added to or subtracted from accrual based net income?
A decrease in inventory should be added.
Using the indirect method for reporting cash flows from operations, should an increase in accounts payable be added to or subtracted from accrual based net income?
An increase in accounts payable should be added.
What is the purpose of the operating section of the statement of cash flows under the indirect method?
The purpose is to adjust accrual net income to net cash flow from operating activities.
What are some examples of cash inflows classified as Investing Activities?
Sale of long-term assets; Collection of loan principal; Disposal of held to maturity (HTM) and available for sale (AFS) debt and equity securities; Sale of productive assets (not inventory).
What is the cash flow category for principal payments on short-term and long-term loans from suppliers made to acquire inventory for resale?
The category is Operating.
What are some examples of cash outflows classified as Investing Activities?
Purchase of long-term assets; Lending to others; Investment in debt and equity securities held to maturity and available for sale); Purchase of productive assets (not inventory).
What is the cash flow category for principal payments on short-term and long-term loans (from financial institutions or dealers) made to acquire plant assets?
The category is Financing.
What is the cash flow category for purchases of trading securities?
The category is Operating.
Where is the cash effect on foreign currency translation reported?
It is reported as a separate part of the reconciliation of the change in cash and cash equivalents during the period.
What is the cash flow category for dividends paid?
The category is Financing.
What are some examples of cash inflows classified as Financing Activities?
Sale of own stock; Proceeds from borrowing.
What is the cash flow category for loans made to other entities?
The category is Investing.
What is the cash flow category for principal payments on short-term and long-term loans from financial institutions made to acquire inventory for resale?
The category is Financing.
What is the cash flow category for purchases of securities available for sale?
The category is Investing.
What are some examples of cash outflows classified as Financing Activities?
Repurchase of own stock; Paying back lenders (principal only); Payment of dividends.
Where are non-cash investing and financing activities reported?
They are reported on the face of the Statement of Cash Flows or as a separate disclosure.