Terms To Memorize Flashcards
Recognition
Process of including an item on entity’s balance sheet or income statement
Derecognition
Process of removing something from the balance sheet or income statement
Economic Entity assumption
Separates the transaction carried out by the business from its owner
Legal entity
The relevant unit for an incorporated company
Accrual accounting
Records cash transactions and non cash transactions
Revenue recognition principle
Means that the companies revenues are recognized when the service or product is considered delivered to the customer - not when the cash is received.
Matching Principle
The expense should be reported in the same period in which the corresponding revenue is earned.
Depreciation
Allocation of an assets full purchase price to match cost to revenues over the entire estimated useful life instead of expensing full cost in the year purchase
Accumulated depreciation
Shows the total amount of depreciation taken to date
Measurement
All elements in financial statements must be measurable to be recognized
Periodicity Assumption
Economic activity of an entity can be divided into artificial time periods for reporting purposes (One month, one quarter, one year)
Monetary unit assumption
Assumption that money its self is treated as a unit of measurement
Going Concern Assumption
Assumption that a business enterprise will continue to operate in the foreseeable future
Historical cost principle
Requires that an asset be reported as its cash or cash equivalent cost at the time of purchase, including any additional expenses incurred to get the asset in place and prepared for use.
Fair Value Principle
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Full disclosure principle
Anything that is relevant to user’s decisions should be included in statements
Order of assets to appear on a Canadian statement of financial position
Current assets, long term investments, property plant and equipment, intangible assets, goodwill
High price - earnings ratio
Indicates that investors believe that current profit levels will persist or increase
Current ratio calculation
Current assets / current liabilities
Debt to total assets calculation
Total liabilities / total assets
Basic earnings per share calculation
Income available to common shareholders/weighted average number of common shares
Price earnings ratio
Market price per share/ companies earnings per share
Accounting
Identifies and records the economic events of an organization and communicates its interests to users
Internal users
People who work for the company
- managers
- financial directors
External users
- Investors
- Creditors
- Lenders
Proprietorship
- Owned by one person
- Unlimited liability
- Income included on owner’s own tax return
Partnership
- Owned by more than one person
- Formalized in written agreement
Corporation
- Business organized as a separate legal entity
- indefinite life
- Public or Private
Manufacturing business
Makes & sells products
Merchandizing business
Sells goods to consumers
Service business
Performs tasks for the benefit of consumers
Financing activities
Obtaining funds to finance the operations of a business
Investing activities
Obtaining the resources or assets needed to operate the business for the long term
Operating activities
Main day to day activities of a business
Net earnings/net profit calculation
Revenues + gains - expenses - losses
Accounting equation
Assets = Liabilities + equity
Private companies usually use…
ASPE
Publicly traded corporations use…
IFRS
Conceptual framework order:
1) Objectives of financial reporting (the why)
2) Qualitative characteristics of accounting information
3) Elements of financial statements
4) Foundational principles & conventions (the how)
Compatibility
Information measured and reported in a similar way
Verifiability
Can be verified
Timeliness
The more current the information is the better
Understandability
Provides enough info so it is clear
Revenues
Increase in economic resources resulting from ordinary activities
Expenses
Decrease in economic resources resulting from ordinary activities
Gains
Increase in economic resources resulting from incidental activities
Losses
Decrease in economic resources resulting from incidental activities
Liquidity
Measure the short-term ability of the company to pay it maturing obligations and to meet unexpected needs for cash
Debits
Assets, expenses, dividends
Credits
Liabilities, shareholders equity, common shares, retained earnings, revenues
