test 1 Flashcards
accounting is?
the information system that identifies, records and communicates the economic events of an entity to interested users
who are the main users of GPFR
lenders and owners
what is the objective of GPFR
to provide financial information about the reporting entity
GPFR’s are governed by?
GAAP
define specific purpose financial reports
show information required for specific things eg: tax filing, applying for a bank loan
what are generally accepted accounting practises
conventions and doctrines which have evolved over time which financial statements must comply with
what is the purpose of accounting as in the conceptual framework
provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers
what types of qualities come under qualitative characteristics
fundamental and enhancing
what are the fundamental qualities
relevance and faithful representation (completeness, neutrality and free from error)
what are the enhancing qualities
comparability, verifiability, timeliness, understandability
describe a sole trader
i am the business and the business is me, no establishment costs, the business will last as long as the person decides it to, liability is on risk of personal debt, there is no reporting regulation, have to finance yourself
describe a partnership
2+ people, minimal costs, only bound by people, partners can be added or removed, joint and unlimited liability as the partners are liable for each other, mutual agency as one enters contract for all, don’t need to comply with GAAP, unregulated, agreements determine how you share profit, access to funds is better than sole trader
describe companies
allows businesses to grow unlimitedly, seperate legal entity, owners = shareholders, limited liability = legal safeguard, extensive regulation by gaap, company is taxable as a seperate legal entity, life span is perpetual/indefinite
define assets
business resources such as cash, receivables, inventory, land, buildings, equipment and intangible items - A present economic resource controlled by the entity. An economic resource is a right that has the potential to produce economic benefits. The thing being considered must either be controlled or a right to be an asset.
define liabilities
provision of recourse/claim of creditors against resources eg: payables. This is something you borrowed so it is someone else - A present obligation of the entity to transfer an economic resource (rights and obligations is a pair)
define owners equity
provision of recourse/claim of owners against resources, made up of capital (what the owner puts in from investment) and retained earnings (how much you have earnt from your business). It is something you can claim against as it is yours.
what is the accounting equation
A = L + OE
what are the formats of the balance sheet
horizontal/T account or vertical/report
define the periodicity assumption
this is a part of gaap. For comparability, your financial statements must be prepared on equal intervals to allow for equal comparison of the same period of time. This is a fundamental assumption as it makes statements informative.
NZ IAS 1 (test of gaap) says classifications of assets can be based on?
- their nature or function as current or non-current
2. the order of liquidity (how fast can it be realised)
an asset is current where it meets one of:
- expected to be realised in a normal operating cycle
- held to be traded
- realised within 12 months
- cash or cash equivalent
describe going concern
assumes the entity will keep operating for at least another period (financial year = 12 months) so that assets can be current and beyond that year non-current
what is the opposite of going concern and what does it mean
liquidity basis - telling user you will close down in the next 12 months
describe accounts receivables
accrual basis of accounting = gross ar - bad and doubtful debts
inventory could be?
raw materials, consumables, work in progress or finished goods for sale
describe the prudence principle
do not overstate your assets - gaap standard
describe prepayments
cash already paid and the legal right to receive the benefit
define property plant and equipment assets (ppe)
tangible and defined as being held for use in the production or supply of goods and services, for rental to others, or for administrative purpose - expected to be used for more than one period (periodicity)
describe materiality
only account for things that will make a difference and be able to influence the decisions of the users
what do you include in an at cost measurement
any costs which are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner necessary
how do businesses measure their ppe from year 2 onwards
either cost model: initial cost - accumulated depreciation
or
revaluation model: based on market and what you could sell your item for right now
define depreciation
represents wear and tear from ordinary use using useful life as something gets old or outdated
define an intangible asset
an identifiable non-monetary asset without a physical substance such as goodwill, licenses, patents etc.
what is amortisation
the depreciable amount of an intangible asset over its useful life
what is a long term investment
term deposits, security investments like shares and bonds or investment in subsidiaries
what prudence adjustments need to be done on assets?
take bad and doubtful debts off accounts receivable, look at cost vs net realisable value for inventory where costs exceed the net realisable value write the asset down, use the fair value for investments, revalue property plant and equipment using depreciation, revalue intangible assets using amortisation
a liability is current when?
- it expects to settle the liability in its normal operating cycle
- it holds the liabilities primarily for the purpose of trading
- due to be settled within 12 months
- does not have an unconditional right to defer settlement of the liability
in what sequence are liabilities ordered?
by settlement - what needs to be settled first
where do dividends come from
retained earnings
what is a reserve
when something is in between - eg: a piece of land worth $400k is now with $500k so we can report a $100k reserve because it is only assumption based
incomes and expenses may be classified by:
their nature or their function
how do you calculate gross profit
revenue less cost of sales
is dividends an expense?
no, it is paid out from retained earnings
define income
Income is increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.
define expenses
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distribution to holders of equity claims.
what 3 GAAP conventions and principles underpin the consistency of the income statement presentation
realisation convention, accural basis, matching principle
describe the realisation convention
a revenue should be recognised when and only when it is realised
when is a revenue realised?
- job is done
- amount of revenue generated can be objectively determined
- reasonably certainty the amount owing will be received
- any other outstanding items can be determined with reasonable certainty
GAAP uses cash accounting, true or false
false - accrual accounting
profit goes into _____ and dividends come out of it
retained earnings
describe matching principle
expenses and revenue relate and should be recognised in the same period as there is a relationship and we spend money to make money
what are the 4 GAAP inventory flow assumptions
individual identification, first in first out, weighted average cost with a periodic system or weighted average cost with a perpetual system
how does the individual identification inventory flow assumption work?
tell me every individual thing you have sold - makes sense but not very easy for everyone to apply
how does the first in first out inventory flow assumption work?
assumes the oldest inventory is sold first
how does the weighted average cost (WAC) with a periodic system inventory flow assumption work?
after the period finishes, calculate total costs and divide by how many things you bought. then multiply this by the number of things sold for COGS and do the same for how many you sold for inventory
how does the WAC with a perpetual system inventory flow assumption work?
you are benefitted by the perpetual system because you can see inventory levels, COGS and sales at any time you want
how does an organisation choose which inventory flow assumption to use?
Because of faithful representation businesses have to determine which one suits their pattern and business to faithfully represent their reality. When a business makes the choice, they are accountable.
what is a perpetual inventory system
a. Every purchase and sale is recorded, every in and every out
what is a periodic inventory system
a. Not everything is recorded at the time, rather it is done periodically by doing a stocktake every week, month etc.
define depreciation
the systematic allocation of the depreciable amount of an asset over its useful life.
what four factors need to be considered when calculating depreciation
- The cost (or other value) of the assets
- The useful life of the asset
- The estimated residual value of the asset
- The depreciation method
how do you calculate depreciation using the straight line method
divide the cost by the useful life to get the depreciation for each year. every year the depreciation expense is the same
how do you calculate depreciation using the accelerated or diminishing value depreciation method
take the rate and multiply it by the opening carrying amount to get the annual depreciation for the first year. After that multiply the percentage by the closing carrying amount from the previous year. the annual amounts of depreciation should reduce year by year
how do you calculate depreciation using the unit of production method
use the number of jobs an asset can do and divide the cost by it. this gives you the amount to write off per job/use
how do organisations choose a depreciation method?
choose a method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity - faithful representation
the cash flow statement is ___ ___ rather than accrual based like the other statements
cash based
what is cash flow from operating activities
from ordinary operations such as cash received from customers (sales), payment to suppliers and employees, interest paid etc.
what is cash flow from investing activities
flows from acquisition and disposal of property, plant and equipment and lending money and collecting repayments
what is cash flow from financing activities
flows from issuing debt and repayments or obtaining cash from shareholders and providing them with return on their investment
how is the cash flow statement useful
good check on the balance sheet, highlights the difference between profit and net cash provided by operating activities, shows ability to pay dividends and meet obligations and ability to generate future cash flow
what do cash flows from operating activities tell us?
the business strategy - the quality of the firms operating profit and evaluates liquidity and insolvency
what do cash flows from investing activities tell us?
if the business is looking to the future or not - if yes it will be negative as they are investing in ppe etc.
what do cash flows from financing activities tell us?
helps to predict future cash flows by providers of funds eg: issuing shares, repaying loans or giving more share options
why are the profit and cash flow from operating activities different
income statement includes accruals and depreciation and other calculations in it are ‘fake’ as they are judgements to put a number in not real
what other statement does the statement in changes of equity link to
statement of financial position
retained earnings is topped up with ___ and paid out with ___
profit, dividends
the total equity in the statement of changes in equity is the same as the equity section of which statement
the balance sheet
describe agency theory
when shareholders give money to an organisation the executive becomes the agent of this money which could be an issue as we are all self-interested.
describe information asymmetry
directors know more than shareholders and the shareholders have to be able to rely on the other party so an audit is required.
who are the big four
kpmg, pwc, deloitte and ey
who has to be audited (general)
any organisation that has public accountability (public funds) or prepares GPFR as they have to be checked for GAAP - includes issuers, companies and charities
who are audits prepared for
shareholder
what is audited
only statements, notes and other relevant accounting policies and information
what are the 4 opinions that can be given in an audit
unmodified, qualified, adverse, disclaimer
what is an unmodified opinion in an audit
the best - meets GAAP and presents fairly
what is a qualified opinion in an audit
partially non-compliant
what is an adverse opinion in an audit
almost completely negative - do not rely - very bad opinion
what is a disclaimer opinion in an audit
auditor can’t do their job as there is not enough information given
how should the evidence for audit be described if it is good
sufficient and appropriate
what are the 5 fundamental principles of ethics for auditors
integrity, objectivity, professional competence and due care, confidentiality, professional behaviour
describe the integrity principle for auditors
you have to be honest to be able to audit
describe the objectivity principle for auditors
cant be influenced in any way
describe the professional competence and due care principle for auditors
have to pass exams and keep up with technology because you cant be lazy
describe the confidentiality principle for auditors
you cannot share a clients information
describe the professional behaviour principle for auditors
you represent a profession so getting drunk etc cannot be accepted
what adds to or takes away from the share capital column of the statement of changes in equity
issue of new shares adds to it
what adds to or takes away from the retained earnings column of the statement of changes in equity
profit tops it up and dividends is taken away
what adds to or takes away from the total equity column of the statement of changes in equity
this is the horizontal sum of the values in the table
describe monetary unit assumption
we want things to be measurable in terms of a dollar amount
