SU1: External Financial Statements. Flashcards
Financial Accounting differs from management accounting as it assists management decision-making, planning, and control. therefore it is primarily directed to specific _____ users and doing so need not follow GAAP.
Internal Users
What is the primary objective of financial statements?
communicating financial information, additional information, and other disclosures to external parties
Notes to Financial statements are considered an integral part of financial statements. what does the first footnote generally describe?
Significant accounting policies such as the use of estimates and assumptions
The full set of financial statements includes the following statements _____
- SOFP statement of financial position or balance sheet
- Income statement
- SOCI statement of comprehensive income
- SOCIE statement of changes in equity
- SOCF statement of cash flows
The information presented in financial statements MUST BE _____ represented
Relevant and faithful
Relevance
Information is relevant if either it can be used as input in processes used to identify future outcomes (i.e. it has predictive value) or it can confirm past evaluations about the economic phenomenon (i.e. it has confirmatory value) or both. For example, disclosure about the current year’s revenue is useful in making predictions about revenue in the next year but it also helps in confirming whether last year’s prediction was correct. Similarly, an impairment charge revises a user’s valuation of an entity’s net assets, and so on.
Faithful representation
Faithful representation is achieved when the financial information represents not just the legal form but the underlying economic substance of transactions. This is achieved when the information is complete, neutral, and free from error.
The information presented in financial statements should be _____ with similar information for other entities and the previous years of the same entity, this allows users to understand similarities and differences.
Comparable ( element of comparability)
Financial statements are prepared under ___________ assumption which means the entity is assumed to continue operation indefinitely. [ which means the entity is not going to be liquidated in the near future.]
Going-concern
The recording of the financial effects of transactions and other events and circumstances WHEN THEY OCCUR rather than when their associated cash is paid or received is called which basis of accounting?
Accrual basis of accounting
Under the accrual basis of accounting, revenues are recognized in the period in which they are _____. And Expenses are recognized in the period in which they are _____. Such recognition has nothing to do with receipt/ payment of Cash.
Earned ( Revenues)
Incurred ( Expenses)
A company’s ability to pay off short term liabilities is called _____
Liquidity
Some relevant ratios are
> Current Ratio = Current Assets / Current Liabilities
> Quick Ratio/ Acid Test Ratio = ( Current Assets - Invetory ) / Current Liabilities or
> Quick Ratio/ Acid Test Ratio = ( Cash & Cash Equivalent + AR + Marketable securit. ) /Current Liabilites
An entity’s ability to access & restructure its financing at a low cost is called _____. It Lessens under-investment problems in a situation where access to capital is limited and it helps to avoid financial distress
Financial flexibility [ Important term is VOFF Value of Financial Flexibility for shareholders
The specific mix of DEBT & EQUITY to finance the Cost of sales, assets, and operations is called _____
Capital Structure
When a company or a government is expanded so much that it loses focus on core competence and to focus on core competency it disposes of ALL or SOME of its assets by SELLING, EXCHANGING, or CLOSING them down or through BANKRUPTCY is called _____. This is done to cust costs, repay debts enhance shareholder value.
DIVESTITURE
Treasury stock/ Treasury shares/ Reacquisition of stock shares through repurchase programs is done to
Benefits
- Repurchasing leaves fewer outstanding shares in the market thus boosting the stock financial matrix-like EPS
- Reward investors while protecting the stock’s price unlike the distribution of dividends to investors stock prices are often adjusted.
- For having tax benefits. The sale of stocks is taxed at lower rates as compared to the Dividend Income of Investors
- Can off set the increased number of outstanding shares from the exercise of employees stock option
The creation of an independent company through the sale/ distribution of new shares of an existing company or division of a parent company is called ______. By doing so the value of the newly formed company is increased.
Spin-Off
