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MOS - Accounting and Finance > Midterm #1 > Flashcards

Midterm #1 Flashcards

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1
Q

Why does accounting matter?

A
  • The language of business
  • Economic systems depend on reliable and accurate financial reporting
  • Records the economic events and communicates to interested users
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2
Q

Two types of users of accounting?

A

External and internal

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3
Q

What are internal users?

A
  • People who work for or manage for-profit, non-profit or government organizations
  • People within the company itself to use financial reporting to make decisions (business opportunities, pricing) and assist them in managing and operating the company
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4
Q

What are external users?

A
  • People who are making financial decisions outside of businesses which companies they should allocate their money to
  • They do not have access to accounting information other than what’s already available to the public
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5
Q

What is ethical behaviour?

A
  • Companies have a rules of conduct
  • For accounting information to have value, preparers must have high ethical standards (actions must be legal and responsive)
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6
Q

What are the different forms of business organizations?

A

Proprietorship, Partnership, Corporation

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7
Q

What is a proprietorship?

A

Type of business organization that is owned by one person

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8
Q

What are some true characteristics of a proprietorship?

A
  • Owned by one person
  • Easy to set up
  • Owner has control over business
  • Unlimited liability (responsible for it all)
  • Income is included in individual owners tax return (business income is added to personal tax return)
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9
Q

What is a partnership?

A

Type of business organization owned by 2 or more people

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10
Q

What are some key characteristics of a partnership?

A
  • Somewhat easy to set up
  • Formalized in written agreement (how things are going to be shared)
  • Each partner has unlimited liability
  • Tax on each partner’s personal income tax return
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11
Q

Key characteristics of a corporation?

A
  • Limited liability for shareholders
  • One owner or tons of people
  • Indefinite life
  • May be public or private → depending on whether shares are publicly traded
  • The corporation has its own tax return
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12
Q

What are the different types of businesses?

A

Manufacturing, Merchandising, Service

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13
Q

What is a manufacturing business?

A
  • Uses raw materials, parts, and components to assemble finished goods
  • Makes stuff
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14
Q

What is a merchandising business?

A
  • Sells goods to consumers
  • Sells stuff
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15
Q

What is a service business?

A
  • Performs tasks for the benefit of its customers
  • Does stuff
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16
Q

What are the 3 types of business activities?

A

Financing, Investing, Operating

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17
Q

What are financing activities?

A
  • Obtaining and repaying funds to finance the operation of the business
  • How does a company find money to find their business?
    * Ex. Borrowing money or paying loans (debt)
    * Ex. Selling or repurchasing shares (equity)
  • Shares in exchange for cash
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18
Q

What are examples of inflows from financing activities?

A

Issuing shares, taking out a loan

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19
Q

What are some examples of outflows from financing activities?

A

Paying dividends, repurchasing shares, repaying loans

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20
Q

What are investing activities?

A
  • Obtaining the resources or assets needed to operate the business for long term
  • Buying long term assets that will help your company in the long run
  • Ex. Purchase or sale of investments
  • Ex. Purchase or sale of long lived assets (property, equipment, intangible assets)
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21
Q

What are some examples of inflows from investing activities?

A

Proceeds from selling long-lived assets and shares of other companies

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22
Q

What are some examples of outflows from investing activities?

A

Buying long-lived assets, buying shares of other companies

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23
Q

What are operating activities?

A
  • The main day-to-day activities of the business
  • Ex. Revenues (income coming from increase in asset or decrease in liability), expenses
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24
Q

What are some examples of inflows from operating activities?

A

Revenues, collection of receivables, sale of services or goods

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25
Q

What are some examples of outflows from investing activities?

A

Expenses, payments of payables, purchase of inventory and supplies

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26
Q

What are dividends?

A
  • Payments that distribute a portion of income to share holders
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27
Q

What is goodwill?

A
  • When a company acquires another company, paying a price that is higher than the value of the purchased company’s net identifiable assets
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28
Q

Why are financial statements important?

A
  • They show you the performance over time
  • The business documents that companies use to report the results of their activities to various other groups
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29
Q

What are the four types of financial statements (ASPE)?

A

Income Statements, Statement of Retained Earnings, Balance Sheet, Cash Flow Statement

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30
Q

What are the four types of financial statements (IFRS)?

A

Statement of Income, Statement of Changes in Equity, Statement of Financial Position, Statement of Cash Flow

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31
Q

What is a statement of income useful for?

A
  • Report the results of operations for a specific period of time
  • Revenue minus expenses
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32
Q

What are revenues?

A
  • They arise from the sale of a product or service from ordinary activities
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33
Q

What are expenses?

A
  • Costs of assets consumed or services used to generate revenues
  • Decrease in economic resources
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34
Q

What are gains and losses?

A
  • Extra income or expenses arising from one time (or unusual) events that are not in the regular course of operations
  • Ex. Cupcake shop buying real estate
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35
Q

What is the equation for statement of income?

A

(Revenue + gains) - (expenses - loss) = net income

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36
Q

Why do we use Statement of Changes in Equity?

A

It shows the changes in each component of shareholders equity for the period

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37
Q

What is the equation for Statement of Changes in Equity (retained earnings)?

A

Beginning balance of retained earnings (start of the period) +/- net income (revenues-expenses) - dividends = ending balance of retained earnings

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38
Q

What is share capital?

A
  • Amounts contributed by shareholders
  • May have common and preferred classes
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39
Q

What is deficit?

A

More money being spent than earning

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40
Q

What is the equation for Statement of Financial Position? (balance sheet)

A

Assets = Liabilities + Shareholder’s Equity

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41
Q

What is shareholder’s equity?

A

Share capital and retained earnings

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42
Q

What is a Statement of Cash Flow useful for?

A

Report cash receipts and payments for a specific period of time

(They are categorized as operating, financing and investing)

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43
Q

What does GAAP stand for?

A

Generally Accepted Accounting Principles

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44
Q

What is GAAP used for?

A
  • Rules for how financial statements should be prepared

Publicly-traded corporations use International Financial Reporting Standards (IFRS)

Private corporations may use IFRS or Accounting Standards for Private Enterprises (ASPE)

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45
Q

What does the financial reporting framework look like?

A

Level 1 - Objectives of financial reporting (the why)

Level 2 - Qualitative Characteristics of accounting information
Elements of financial statements

Level 3 - Foundational Principles and Conventions (the how)

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46
Q

Why is a conceptual framework useful?

A
  • Aids in creation of standards for the accounting profession
  • Increases financial statement users’ understanding of and confidence in financial reporting
  • Enhances comparability of financial statements of different companies
  • Foundation for solving new emerging problems more quickly
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47
Q

What is conservatism?

A

The principle that net assets and net income should not be overstated

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48
Q

What is prudence?

A

Using caution when exercising judgment to make estimates in case of uncertainty

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49
Q

What is the moral hazard issue?

A

Where certain stakeholders such as accountants and owner-managers have expert knowledge that the rest of the capital marketplace does not.

50
Q

What is the Objective of Financial Reporting?

A

Level 1

The overall objective of financial reporting is to provide/communicate information that is:
* useful to users (e.g. Investors, creditors)
* decision relevant (resource allocation)

Resource allocation decisions are assumed to include assessment of how well management is using entity resources to create and sustain value

51
Q

What are the Fundamental Qualitative Characteristics that support usefulness of information?

A

Relevance and Representational Faithfulness (Reliable)

52
Q

What is Relevance in the context of Fundamental Qualitative Characteristics?

A
  • Has predictive and feedback/confirmatory value
  • Includes information that makes a difference in decision making
53
Q

What is materiality?

A

How important a piece of information is (compare to other pieces of financial statements to determine if it is material/will make a difference)

54
Q

What is Representational Faithfulness in the context of Fundamental Qualitative Characteristics?

A

How faithful does it reflect/represent the underlying economic substance of an event or transaction (accuracy)

Transparency, completeness, neutrality, free from material error, substance over form

55
Q

What are the 4 Enhancing Qualitative Characteristics ?

A

Comparability, Verifiability, Timeliness, Understandability

56
Q

What is comparability?

A
  • Information measured and reported in similar way (company to company, and year to year)
  • Allows users to identify real economic similarities and differences
57
Q

What is verifiability?

A
  • Being able to achieved similar results if same methods are used (consensus)
  • How much money you have in the bank = easy, account receivable (money customers owe us… some customers won’t pay us back = hard)
58
Q

What is timeliness?

A

Want info to stay relevant and have it when you need it (quarterly reporting provides info on a more timely basis)

59
Q

What is understandability?

A
  • Allows reasonably informed users to see the significance of the information
  • Provides “enough” information so that it is clear
60
Q

What are trade-offs?

A

When characteristics are temporarily sacrificed for better information in the future

61
Q

Assets have three key characteristics…

A
  • They involve some economic benefit to the entity (if there is a future economic benefit)
  • Entity has a control over that benefit
  • Results from a past transaction or event
62
Q

Liabilities have three key characteristics…

A
  • They represent a present duty or responsibility
  • Entity is obligated to give money and cannot avoid the duty or responsibility
  • Obligation results from a past transaction or event
63
Q

What does equity represent?

A

What’s left over of our assets after the liabilities are paid

64
Q

What is recognition vs. derecognition?

A

Recognition is including an item on the financial statements (FS)

Derecognition is removing something from the FS (for assets its when control is given up and for liabilities its when the obligation is extinguished)

65
Q

What are the 4 principles of Recognition/Derecognition?

A
  1. Economic Entity Assumption
  2. Control
  3. Revenue recognition
  4. Matching principle
66
Q

What is the economic entity assumption?

A

A business activity is separate from the owner’s personal activity.
(Ex. going to dinner with a client)

67
Q

What is control?

A

If two corporations are controlled by the same person/party, then their FS are consolidated (report their statements together)

68
Q

What is Revenue Recognition?

A

Revenue realized when earned & when risks/rewards have passed to purchaser
(Ex. I should report revenue when the job is done, and the cash is received afterwords)

69
Q

What is Matching Principle?

A

Matching principle- Expenses are matched/recorded in the same period as the revenues they help produce, cause and effect relationship

(Ex. the timing of expenses should be matched/recorded at the same time as revenues… I payed utility bill for the month of Jan in Feb, and it relates to Jan revenue)

70
Q

What is depreciation?

A

Allocate cost of a fixed asset over its useful life (not just using a delivery asset for this year, but using it for the next 10 years, so I will pay it off over the next 10 years)

Cost of asset/# of years

71
Q

What are the 5 measurement principles?

A
  1. Periodicity assumption
  2. Monetary unit
  3. Going concern
  4. Historical cost
  5. Fair value
72
Q

What is Periodicity assumption?

A

Economic activity of a business can be divided into artificial time periods (month, quarter, year)

73
Q

What is Monetary Unit?

A

Use money to measure economic transactions. Assume currency is stable year over year (in CAN & USD- ignore inflation)

74
Q

What is Going Concern?

A

Assume a business will continue to operate in the foreseeable future

75
Q

What is Historical Cost?

A

Record certain elements of the FS at their cost when bought (i.e. property, plant & equipment)

76
Q

What is Fair Value?

A

Record certain elements of the FS at their estimate price (Accounts receivable, short term investments)

77
Q

What is Accrual Accounting?

A

Records cash transaction + noncash transactions, only once the cash is given

78
Q

What is Full Disclosure Principle?

A
  • Anything that is relevant to users’ decisions should be included in financial statements

Disclosure may be made:
* Within the main body of the financial statements
* As notes to the financial statements
* As supplementary information, including Management Discussion and Analysis

79
Q

What are the 3 Profitability Ratio?

A

Earnings per share (how much profit for single share)

Price earnings ratio (how much you’re willing to pay per dollar of earnings)

Gross Profit (revenue - inventory costs = gross profit)

80
Q

How do we calculate Earnings per share?

A

Net profit after tax / number of issued common shares

81
Q

How do we calculate Price Earnings ratio?

A

Market price per share / earnings per share

82
Q

How do we calculate Gross Profit?

A

Revenue - inventory costs = gross profit

83
Q

How to measure liquidity?

A

Current Ratio = Current Assets / Current Liabilities

84
Q

What is liquidity?

A

Measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash

85
Q

What is solvency?

A

Measuring a company’s ability to survive over the long term by having enough assets to settle its liabilities as they fall due

Assets - liabilities

86
Q

How do we calculate Debt/Total Assets ratio?

A

Total liabilities / Total Assets

87
Q

What is an operating cycle?

A

The average period of time it takes a business to pay cash to obtain products or services and then receive cash from customers for these products or services.

In a service business, this is the time it takes a business to perform services for customers on account, pay the employees performing the services, and then collect the cash from customers

88
Q

What makes up Shareholder’s Equity?

A

Share capital and retained earnings

89
Q

What makes up liabilities?

A

Current and long-term liabilities

90
Q

What are some examples of current assets?

A

Cash, Trading Investments, Accounts Receivable, Notes Receivable, Inventory, Supplies, Prepaid Expenses

91
Q

What is a trading investment?

A

Investment in debt securities that are bought with the intention of reselling them after a short period of time in order to earn income from fluctuations in their price

92
Q

What is accounts receivable?

A

Amounts owed to a company by its customers who purchased products or services on credit “on account”, sale invoices

93
Q

What is notes receivable?

A

Amounts owed to a company by customers or others supported by a written promise to repay, loans

94
Q

What is Property, Plant, and Equipment?

A
  • Tangible assets with relatively long useful lives
  • Assets used in operating the business
    Ex. Land, building, machinery, delivery equipment, furniture and fixtures
95
Q

What is the carrying amount of an asset?

A

The difference between the cost of the asset and its accumulated depreciation.

96
Q

What are some types of assets that aren’t depreciated? (have an indefinite life)

A

Land, goodwill, assets under construction

97
Q

What is notes payable?

A

Written promises to repay/written documents

98
Q

What is interest payable?

A

When you owe interest

99
Q

What is salaries payable?

A

When you have to pay your workers (the time when you haven’t paid your workers)

100
Q

Accrued liabilities

A

Expenses that I am using up, but haven’t pay for yet

Ex. Utility bill

101
Q

What is deferred revenue/unearned revenue?

A

Revenue we collect in advance but in advance of performing the service (owing someone a service)

102
Q

What is shareholder’s equity?

A
  • Investment of cash (or other assets) in the business by the shareholders in exchange for preferred or common shares
  • Money that people have paid of our shares to us
103
Q

Retained earnings

A

Earnings kept for use in the business
(Not paid out as dividends)

104
Q

What type of economic events must be recorded on financial statements?

A

Only those that change assets, liabilities or shareholders’ equity

105
Q

What happens when theres an increase in common shares or revenue?

A

Increase shareholder’s equity

106
Q

What happens when there’s an increase in expenses or dividends?

A

Decrease shareholder’s equity

107
Q

What is on the left of the T-account?

A

Debit

108
Q

What is on the right of the T-account?

A

Credit

109
Q

What does it mean when an account has a debit balance?

A

When totalled, the debits exceed the credits (greater sum on left side)

110
Q

What does it mean when an account has a credit balance?

A

When totalled, the credits exceed the debits (greater sum on right side)

111
Q

Do assets have a credit normal or debit normal balance?

A

Debit normal

112
Q

Do liabilities and shareholder’s equity have a credit normal or debit normal balance?

A

Credit normal

113
Q

Are expenses and dividends credit or debit normal balance?

A

Debit

114
Q

Are common shares, retained earnings and revenues credit or debit normal?

A

Credit

115
Q

What are the accounting cycle steps?

A
  1. Analyze business transactions
  2. Journalize the transactions
  3. Post to general ledger accounts
  4. Prepare a trial balance
116
Q

What is Step 1 of the accounting cycle?

A
  • Analyze each transaction to determine its effect on accounts (if any)
  • Evidence comes from a source document
117
Q

What is Step 2 of the accounting cycle?

A
  • Record transaction as a journal entry in the general journal
  • Accounting record where the transactions are recorded in chronological order
  • General journal is most common
118
Q

What is Step 3 of the accounting cycle?

A

Transfer information to appropriate accounts in the general ledger (Entire group of accounts maintained by a company)

Contains all the asset, liability, and shareholders’ equity accounts

Posting is the process of transferring information from the general journal to the general ledger accounts (increase and decreases in account in date order)

119
Q

Who are the primary types of users of financial statements?

A

Creditors or investors

120
Q

What is Step 4 of the accounting cycle?

A

Trial Balance

List of all the accounts and their balances at a specific time

Serves to prove the mathematical equality of debits and credits after posting

MOS - Accounting and Finance (3 decks)

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