Lecture 1-2

Question 1

• Objective of Financial Reporting to External Users

Answer 1

– To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

Question 2

• Qualitative Characteristics of Useful Information

Answer 2

– Primary:
* Relevance: Can influence a decision; timely, with predictive or feedback value
* FaithfulRepresentation(Reliability):Information is complete, neutral, and free from error
– Secondary:Comparability,Verifiability,Timeliness,Understandability

Question 3

Seperate entity, going concern, stabe monetary unit, time period

Answer 3

Recognition,Measurement,andDisclosureConcepts – Assumptions
* Separate Entity: Business transactions are separate from transactions of owners
* Going Concern: Business will continue to operate into the foreseeable future
* Stable Monetary Unit: Information reported using national monetary unit
* Time Period: Long life of a company can be reported in shorter periods
– Principles
* Cost Principle: B/S elements recorded at cash-equivalent value on transaction date
* Revenue Recognition: Record revenue when measurable, realizable, and earned
* Matching Principle: Expense recorded when incurred in earnings revenue
– Constraints: Materiality, Conservatism, Cost-Benefit

Question 4

Internal vs external events

Answer 4

External Events – Exchanges of assets and liabilities between the business and one or more other parties
– Purchase of a machine from a supplier
– Sale of merchandise to customers
– Borrowing cash from a bank
– Investment of cash in the business by the owner

• Internal Events – Do not involve other parties, but do have direct and measurable effects on the company
  – Using up insurance paid for in advance
  – Using building and equipment over several years – Losses due to catastrophe

Question 5

Account and structure of an account

Answer 5

Account: A specific accounting record in which the results of transactions are accumulated
* Structure of an Account: – Beginning Balance
– Increases/Decreases – Ending Balance