intra Flashcards
Going concern assumption (accounting principles)
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.
Business entity concept
- 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.
Monetary unit assumption
Financial statements are presented without taking into account changes in the purchasing power of money over time.
The reporting period (Time period or Separation of accounting periods)
We separate accounting periods over independent time
It is the division of time into exercises.
Financials periods are independent from one another.
Accrual accounting
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.
Relevance
To be useful, information must have the ability to influence the decisions of a user of the financial statements.
Relevance is influenced by:
Materiality
Information is material if its omission or inaccuracy is likely to influence the decisions made by users.
Predictive value and/or Confirmatory value
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)
Comparability
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.
Related concept: permanence of methods
The use of the same methods for the same elements, from one period to another in the same accounting entity.
Verifiability
Knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.
Timeliness
Information should be available to decision makers in time to be capable of influencing their decisions
Understandability
Information should be understandable by users (assumed to have a reasonable knowledge of business and economic activities).
Pre-eminence of substance over form
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
Cost constraint
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
Asset recognition (financial statement component)
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
Liability Recognition (financial statement component)
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
Products recognition (financial statement component)
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
Charges recognition (financial statement component)
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
Historical cost
Amount paid when an asset was acquired.
Fair value
The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
