Test 1 Flashcards
The Upside-Down Triangle
Who are the three people we build financial statements for?
1) Investors
2) Creditors (lenders)
3) Whoever else is interested
What are the qualitative characteristics of financial statements?
1) Relevance
2) Faithful Representation
3) Enhancing Qualities
What is the constraint?
Cost
(you can only do so much before it gets too expensive)
What are the categories under Relevance and what do they mean?
1) Predictive Value: helps users form expectations about the future
2) Confirmatory Value: helps confirm or correct prior expectations
3) Materiality: info that changes a user’s decision
What are the categories under Faithful Representation and what do they mean?
1) Completeness:
2) Neutrality:
3) Free from Error:
What are the Enhancing Qualities?
1) Comparability
2) Verifiability
3) Timeliness
4) Understandability
What is the economic entity assumption?
Financial statements are made for one company
What is the going concern assumption?
Company will continue to exist next year
What is the monetary unit assumption?
Must be done in one currency
What is the periodicity assumption?
Financial statements must be made periodically
What is the measurement principle?
AKA historical cost
Items are recorded at the cost of purchase
What is the revenue recognition principle?
Recognized when transfer of control is to customer, when contract is sufficiently completed
Before transferred, considered Unearned Revenue, which is recorded as a Liability
What is the expense recognition principle?
AKA matching principle
Expenses are recorded in the same period as revenues
What is the full disclosure principle?
nothing is left out
What are the four assumptions?
Economic Entity
Going Concern
Monetary Unit
Periodicity
