intra

Question 1

Going concern assumption (accounting principles)

Answer 1

When preparing financial statements, it is assumed that the business will continue in operation for the foreseeable future and has no intention or need to cease operations or reduce the level of operations.

Question 2

Business entity concept

Answer 2

• You can’t use the company money for your own benefit
• EXCLUDE from the financial statements all assets, liabilities, income and expenses of the owner of the business.
• The firm’s financial statements should contain only the assets, liabilities, income and expenses of the firm.

Question 3

Monetary unit assumption

Answer 3

Financial statements are presented without taking into account changes in the purchasing power of money over time.

Question 4

The reporting period (Time period or Separation of accounting periods)

Answer 4

We separate accounting periods over independent time

It is the division of time into exercises.

Financials periods are independent from one another.

Question 5

Accrual accounting

Answer 5

When do we report financial transaction (we report it when it happens not when we spend money tied to the transaction)
Ex: we sold 5 boxes of chocolate; we report the transaction when the sales takes place not when we receive money

Describes the effects of transactions in the periods in which the effects occur (even if inflows and outflows of money ($$) take place in different periods).

The various financial transactions are not taken into account during payment or collection but when they take place.

Question 6

Relevance

Answer 6

To be useful, information must have the ability to influence the decisions of a user of the financial statements.

Relevance is influenced by:

Question 7

Materiality

Answer 7

Information is material if its omission or inaccuracy is likely to influence the decisions made by users.

Question 8

Predictive value and/or Confirmatory value

Answer 8

Information allows you to make forecasts (predict future results; examples: level of sales for the next few years)

It makes it possible to confirm (or invalidate) previous evaluations or estimates (e.g. growth in net income achieved by the company during the last financial year)

Question 9

Comparability

Answer 9

We have to use the same base to compare compagnies

Information is more useful if it allows users to identify similarities and differences between items presented by different entities.

Question 10

Related concept: permanence of methods

Answer 10

The use of the same methods for the same elements, from one period to another in the same accounting entity.

Question 11

Verifiability

Answer 11

Knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.

Question 12

Timeliness

Answer 12

Information should be available to decision makers in time to be capable of influencing their decisions

Question 13

Understandability

Answer 13

Information should be understandable by users (assumed to have a reasonable knowledge of business and economic activities).

Question 14

Pre-eminence of substance over form

Answer 14

In assessing whether an item meets the definition of an asset, liability or equity, attention must be paid to the underlying substance and economic reality, not just the legal form

Ex: Leased equipment does not legally belong to the company, but the company has permanent economic use of it: it is therefore legitimate to restate this transaction by recording the asset as if the equipment belonged to the company

Question 15

Cost constraint

Answer 15

It is really worth it ?
The benefits obtained from the information must be greater than the costs incurred to produce it.

 Professional judgment is required
 Really useful information?
 Costs vs. Benefits
 Preparers vs. users

Question 16

Asset recognition (financial statement component)

Answer 16

It is a resource controlled by the entity
o as a result of past events
o from which future economic benefits are expected to flow to the entity (ultimately cash flows)
 Ex : stock of raw material

Question 17

Liability Recognition (financial statement component)

Answer 17

o It is a current obligation of the entity
o As a result of past events
o The settlement of which should result in an outflow (transfer) of resources embodying economic benefits to the entity.
Ex: Bank Loan to be paid

Question 18

Products recognition (financial statement component)

Answer 18

These are increases in economic benefits in the form of inflows or increases in assets, or decreases in liabilities,

which give rise to increases in equity (with the exception of contributions from shareholders
Ex : sales of goods

Question 19

Charges recognition (financial statement component)

Answer 19

These are decreases in economic benefits in the form of outflows or decreases in assets, or the occurrence of liabilities,
o which result in a decrease in equity (except for distributions to shareholders)
 Ex: Rent

Question 20

Historical cost

Answer 20

Amount paid when an asset was acquired.

Question 21

Fair value

Answer 21

The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.