General-Purpose Financial Statements Flashcards
What type of account is accumulated other comprehensive income (AOCI)?
Owner’s Equity
Define “gains.”
Increases in equity or net assets from peripheral or incidental transactions.
What does the multiple-step income statement present?
Includes multiple subtotals of revenues, expenses, gains, and losses.
Sales - COGS = Gross Profit; Gross Profit - Operating Expenses = Income from Operations; Income from Operations + or - Other Income / Expenses = Income before taxes Income before taxes - Taxes = Net Income.
What disclosure is required by firms in hyperinflationary economies under IFRS?
Disclosure of the impact of inflation on the financial statements is required.
What are some examples of cash inflows classified as investing activities?
- Sale of long-term assets
- Collection of loan principal
- Disposal of debt securities classified as held-to-maturity (HTM) and available-to-sale (AFS) and equity securities that will not be sold in the near term
- Sale of productive assets (not inventory)
Define “nominal dollars.”
Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
What is the classification of assets that are in the form of cash, or will be converted into cash, or will be consumed within one year or the operating cycle of the business, whichever is longer?
The classification is current assets.
What is the amount of operating income from a discounted operation that must be disclosed in the income statement?
The actual amount for the period.
What is the management discussion & analysis (MD&A) section?
It is a narrative written by management that is an integral part of the disclosure of the financial statement.
What do liquidity (or solvency) ratios measure?
They measure the ability of the firm to pay its debts as they come due.
Define “general prices.”
The term “general prices” refers to a market basket of items that the typical consumer purchases.
What is the operating cycle?
The period of time form 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 another name for the balance sheet?
The Statement of Financial Position.
What is the indirect method on the statement of cash flows?
It reconciles net income to cash flows from operating activities.
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.
List the common stock yield formula.
Dividend per common share / Market price per common share
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.
How many years of owners’ equity (OE) must be reported by SEC registrants?
Three years of OE statements
What does the single-step income statement present?
Total revenues and gains less total expenses and losses
What are some examples of cash inflows classified as financing activities?
- Sales of own stock
* Proceeds from borrowing
What is the main purpose of disclosing comprehensive income?
To report the net change in equity in a single amount.
List the formula for number of days’ sales in accounts receivable (AR).
365 / AR turnover
What is the cash flow category for purchases of debt securities classified as available-for-sale?
The category is investing.
How are long-term assets and liabilities defined?
By exclusion from current assets and current liabilities
When can refinancing current debt be classified as noncurrent?
When the following are issued:
- Issue stock to extinguish the debt.
- Refinance the current liability with a noncurrent liability.
- Enter into an irrevocable agreement to refinance the current liability with a noncurrent liability.
List the return on total assets formula.
(Net Income + Interest Expense (net of tax)) / Average Total Assets
What represent increases in net assets or settlements of liabilities by providing goods and services?
Revenues
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 inflows 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.
- Noncash investing and financing activities.
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.
Where and how are prior-period adjustments shown?
They are shown on the statement of retained earnings as adjustments to the beginning balance of retained earnings in the year that the error is discovered.
Name the two formats permitted for the statement of cash flows.
- Indirect
2. Direct
A subsequent event that did not exist at the balance sheet date requires what kind of disclosure?
Footnote disclosure
How are current assets listed on the balance sheet?
Declining order of liquidity
What amount of disposal gain from a discounted operation is disclosed in the income statement?
The actual amount for the period
List the cash availability or interval ratio formula.
(Cash + Net Receivables + Marketable Securities) / Average Daily Cash Expenditures
What do equity/investment leverage ratios measure?
Measure relative sources of equity and equity value.
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 that do not involve cash inflows or outflows.
Is the statement of changes in equity required under IFRS?
Yes, it is required
What is another comprehensive income (OCI) reclassification adjustment?
When an OCI item from a previous year is removed from accumulated other comprehensive income (AOCI).
List the formula for times interest earned.
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense
List the owner’s equity ratio formula.
Shareholders’ Equity / Total Assets
What is the cash flow category for purchases of securities that will be sold in the near-term?
The category is operating.
List the book value per common stock ratio formula.
Common Shareholders’ Equity / Number of Outstanding Common Shares
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.
List the accounts receivable turnover ratio formula.
Net Credit Sales / Average Net Accounts Receivable
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.
In what type of format does the statement of changes in equity appear?
The format is vertical and horizontal
Define “purchasing power gain.”
Gains that result from holding monetary assets during deflationary times or having monetary liabilities during inflationary times.
List the aspects of risk due to use of estimates.
- Estimates are unavoidable in preparing financial statements.
- Estimates are not exact.
- Estimates involve assumptions about the future.
A subsequent event existing at the balance sheet date requires what kind of disclosure?
Recognition in the financial statements
What are some examples of cash outflows classified as financing activities?
- Repurchase of own stock
- Paying back lenders (principal only)
- Payment of dividends
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.
Define “expenses.”
Decreases in net assets or incurrence of liabilities through the provision of goods or services.
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.
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.
Describe the formula for quick or acid test ratio.
(Cash + Short-Term Investments + Accounts Receivable) / Current Liabilities
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.
Define “purchasing power loss.”
Losses that result from holding monetary assets during inflationary times or having monetary liabilities during deflationary times.
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.
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 does the first footnote typically cover?
Summary of significant accounting policies.
What is net income plus or minus other components of comprehensive income?
Comprehensive income
List the formula for working capital.
Current Assets - Current Liabilities
Define “losses.”
Decreases in equity or net assets from peripheral or incidental transactions.
How is owner’s equity presented on the balance sheet?
In order of permanence
What is the order of income statement presentation?
- Income from continuing operations
- Income from discontinued operations (net of tax)
- Net income
List the formula for determining operating cycle length.
Days’ Sales in Accounts Receivable + Days’ Supply in Inventory
List the two values to report for discontinued operations.
- Income from discontinued operations
2. Gain or loss on disposal
Define “specific price change.”
The change in the price of a specific good or service over a period of time.
Define “net realizable value.”
The amount the firm expects to receive from the sale or collection of an item.
What is the reporting basis of the statement of cash flows?
The reporting basis is cash and cash equivalents.
What approach is used when financial statements are prepared?
The all-inclusive approach
How are accounts listed in the vertical format?
They are listed in separate columns
List the debt ratio formula.
Total Liabilities / Total Assets
Name the two different formats of presentation for the balance sheet.
- Account Form
2. Report Form
List the formula for times preferred dividend.
Net Income / Annual Preferred Dividend Obligation
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.
Where is gain/loss on disposal shown?
In a separate line item in the DOP section of the income statement or netted against the discontinued component’s operating income with a footnote disclosure showing both.
Does accumulated other comprehensive income (AOCI) have its own column in the vertical format?
Yes, it has its own column.
What are the types of statements of other comprehensive income?
- Single statement of net income and comprehensive income
* Two separate statements: a statement of net income and a statement of comprehensive income
What is the purpose of the statement of cash flows?
To explain the change in cash and cash equivalents that has occurred during the past accounting year.
List the areas of risks and uncertainties that need to be disclosed.
- Volume of business with a specific customer
- Revenue from a specific product or service
- Source of supply
- Geographical market
- Any information related to the entity’s ability to continue as a going concern
List the book value per preferred share ratio formula.
Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks
What are some examples of cash outflows classified as investing activities?
- Purchase of long-term assets
- Lending to others
- Investment in debt securities classified as held-to-maturity or available-for-sale and equity securities that will not be sold in the near-term
- Purchase of productive assets (not inventory)
What are the two ways of reporting comprehensive income?
- As a separate statement of comprehensive income
2. As part of the income statement
List the formula for the acid test or quick ratio.
(Cash + Net Receivables + Marketable Securities) / Current Liabilities
What are other comprehensive income items?
- Unrealized gains and losses on debt securities available-for-sale
- Unrecognized pension gains and losses
- Foreign currency translation adjustments
- Certain derivative gains and losses
When are disclosures required about certain significant estimates?
What it is reasonable possible an estimate will change within one year of the date the financial statements are issued, and effect of the change will be material.
What do profitability ratios measure?
Aspects of a firm’s operating (income/loss) results on a relative basis.
Under 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
List the working capital ratio formula.
Current Assets / Current Liabilities
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
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 direct method on the statement of cash flows?
This method presents actual inflows and outflows from cash operations. It must also disclose the indirect method (reconciliation of net income to cash flows from operations) as a supporting schedule.
Define “nonmonetary items.”
The specific price of nonmonetary items can change
What is a valuation account used for?
Used to increase or decrease the book value of an item to a measure of current value.
Which items should be included in disclosures about risk due to certain significant estimates?
- Estimate affected
- Nature of uncertainty
- Effect of change in estimate on financial statements
List the profit margin formula.
Net Income / Net Sales
Using the indirect method of 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
Define “loss on disposal.”
Actual losses and estimated losses when book value > fair value less cost to sell
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.
Define “inflation.”
It is the increase in general prices for a period of time; deflation is the decrease in general prices.
List the price in earnings ratio formula.
Market Price for a Common Share / Earnings Per Share (EPS)
Define “constant dollars.”
Measurements in the general price level as of a specific date.
What is financial statement ratio analysis?
The development of quantitative relationships between various elements of a firm’s financial statements.
Define “current liability.”
A liability expected to be extinguished through the use of current assets or by the incurrence of other current liabilities.
What are current liabilities?
Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer, and which will be met through the transfer of a current asset or the creation of another current liability.
What is the cash flow category for collections of principal amounts on loans made to other entities?
The category is investing.
List the formula for number of days’ supply in inventory.
365 / Inventory Turnover
What are the general types of ratios?
- Liquidity / Solvency
- Operational Activity
- Profitability
- Equity / Investment Leverage
What is the cash flow category for interest paid and received?
This category is operating activities.
What is the difference between errors and irregularities?
Errors are unintentional. Irregularities are intentional.
List the return on common stockholders’ equity formula.
(Net Income - Current Period Preferred Dividend Obligation) / Average Common Stockholders’ Equity
List the total common stock dividend payout rate formula.
Cash Dividends to Common Shareholders / Net Income to Common Shareholders
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 are the forms of the statement of comprehensive income?
- Single Statement
* Two Statements
Where are noncash investing and financing activities reported?
They are reported on the face of the statement of cash flows or as a separate disclosure.
How are assets presented on the balance sheet?
Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment).
What items are not shown on the income statement?
- Prior-period adjustments
- Foreign currency translation adjustments
- Unrealized gains and losses on available for sale (AFS) securities
- Unrecognized pension items
- Cumulative effect of changes in accounting principle
- Unrealized gains and losses on cash flow hedges
List the formula for inventory turnover.
Cost of Goods Sold (COGS) / Average Inventory
What are cash equivalents?
Short-term investments that are convertible into a known and fixed amount of cash and have an original maturity to the purchaser of three months or less.
What is presented in the related party transaction disclosures?
- Nature of relationship
- Description of all transaction for years presented
- Dollar amounts of transactions
- Receivables to or from parties
Under IFRS, How are discontinued operations identified?
A component with operations that are a separate major line of business or geographical area, part of a coordinated plan to sell or and subsidiaries acquired with the intent to resell.
List the aspects of risk due to a firm’s operations.
- Products and Services
- Geographical locations
- Principal markets
What is included in illegal acts for companies?
Illegal contributions and bribes
What is the cash flow category for dividends paid?
The category is financing.
How are liabilities presented on the balance sheet?
Liabilities are shown in order of maturity. Current liabilities are presented first, and then long-term liabilities are presented.
Define “severe impact.”
Significant financial disruption due to vulnerability to significant concentration.
What are the two categories of subsequent events?
- Existed at the balance sheet date
2. Did not exist at the balance sheet date
What is the cash flow category for loans made to other entities?
The category is investing.
Define “monetary items.”
The specific price of monetary items cannot change.
List the other names for statement of changes in equity.
- Statement of changes in owners’ equity
- Owners’ equity statement
- Statement of shareholders’ equity
- Statement of owners’ equity
What is operating margin?
The excess of operating revenues over operating expenses.
List the debt to equity ratio formula.
Total Liabilities / Total Shareholders’ Equity
What do operational activity ratios measure?
They measure the efficiency with which a firm carries out its operating activities.
List the per share common stock dividend pay out rate formula.
Cash Dividends per Common Share / Earnings Per Share (EPS)
What are the items in other comprehensive income?
Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities.
What are the categories that are listed on the statement of cash flows?
- Operating
- Investing
- Financing
