Week 1 Flashcards
What are the 5 parts to the CPA Canada Handbook?
- Part I - International Financial Reporting Standards (IFRS)
- Part II - Accounting Standards for Private Enterprises (ASPE)
- Part III - Accounting Standards for Not-for-Profit Organizations
- Part IV - Accounting Standards for Pension Plans
- Part V - Pre-changeover Accounting Standards
What is the name of the accounting body that sets accounting standards in Canada?
Accounting Standards Board (AcSB)
Which accountings standards are federal, provincial, territorial, and local governments governed by?
CPA Canada Public Sector Accounting Handbook
What are private enterprises governed by?
- IFRS
- ASPE; or
- Disclosed basis of accounting (DBA)
What are not-for-profit organizations (NFPOs) governed by?
- IFRS; or
- ASPE and accounting standards for NFPOs
What is the IFRS conceptual framework and what does it address?
It is a preface to the IFRS describing abstract concepts, however nothing in it overrides the IFRS
It addresses:
- users of financial reporting
- objectives of financial reporting
- qualitative characteristics of financial statements
- going concern
- capital maintenance
- elements of financial statements
- measurement of elements
Who are the main users of financial statements?
Investors and creditors (present and future)
Users can be internal or external.
Who are external and internal users of financial statements?
External Users:
- Investors
- Creditors
- Regulatory Bodies
- Taxing Authorities
- Non-managment employees
Internal Users:
- Managers of the organization
The objective of financial reporting is to provide useful information on….?
- Future cash flows
- Economic resources controlled by entity
- Entity’s performance
- Changes in financial position
- Entity’s financial structure, liquidity and solvency
- Management stewardship
Financial statements are prepared on an accrual or cash basis?
Accrual
What are fundamental qualitative characteristics of information?
- Relevance: makes a difference in a decision. It is tempered by materiality which is an entity-specific aspect of relevance. E.g., $20k is material to company that makes $50k but not one that makes billions.
- Faithful Representation: Accounting information should represent what it says. FR has 3 attributes: completeness, neutrality, and freedom from error.
What are the enhancing qualitative characteristics?
- Comparability: ability to compare one set of financial statement with another.
- Verifiability: different knowledgeable and independent observers measure a transaction and obtain consensus that the reported result is representationally faithful.
- Timeliness
- Understandability: information is useful to users only if they can understand it
- Considers cost versus benefit (?)
What is going concern?
Financial statements are normally prepared with the underlying assumption that the business will continue in operation for the foreseeable future.
What is capital?
Owners’ interest in the business.
What are the 2 main concepts of capital as identified in the conceptual framework?
- Financial concept
- Physical concept
Financial concept takes 2 forms: nominal dollar (based on historical cost) and purchasing power (takes into account inflation).
Physical concept takes into account specific changes in the productive capacity of assets by measuring capital as the change in units of output per day (as an example).
Which concept of capital do most Canadian businesses use?
Nominal dollar financial concept
This is when prices are relatively stable.
What are the elements of financial statements?
- Assets
- Liabilities
- Equity
- Revenues
- Expenses
- Gains or losses
1-3 measure financial position of the entity
4-6 measure financial performance
What are the 4 principal measurement bases identified in the conceptual framework?
- Historical cost: amount paid or fair value
- Current cost: if same or equivalent asset was acquired currently.
- Realizable value: amount that could be obtained by selling the asset.
- Present value: assets are carried at the present discounted value of the future net cash inflows.
Historical cost is the most widely used. However financial statements often use a mix e.g., inventory at the lower of cost and net realizable value. p.15
How is ASPE different from IFRS (framework wise)?
- User group limited
- Qualitative characteristics are understandability, relevence, reliability, and comparability
- Discusses trade off relevance versus reliability - not in IFRS
- Added conservatism (as sub-characteristic of reliabilty)
- Must use nominal captial maintenance only - IFRS gives choice
What are the steps in the accounting cycle?
- Identifying and measuring transactions and other economic events (e.g., sale of merchandise)
- Journalizing the transactions
- Posting the transactions to the general ledger (G/L)
- Preparing a trial balance that summarizes all of the account balances in the G/L
- Preparing adjusting journal entries for accruals and adjustments in order to ensure that all balances reflect the economic events that transpired during the operating period
- Preparing an adjusted trial balance that summarizes the updated account balances in the G/L
- Preparing a set of financial statements for the reporting period
- Closing the (temporary) revenue and expense accounts out to retained earnings
- Preparing a post-closing trial balance
- Journalizing reversing entries
What are reversing journal entries for?
To reverse certain journal entries that have been made in the previous accounting period.
E.g., if you made an accrual during the previous accounting period, the company woudl set up a reversing journal entry in the current period.
What is the governing standard that stipulates the requirements with respect to the preparation of financial statements?
IAS 1 Preparation of Financial Statements
What are the required financial statements under IFRS?
- Statement of financial position (balance sheet)
- Statement of profit or loss (income statement) and other comprehensive income.
- Statement of changes in equity
- Statement of cash flow
- Notes to financial statements
Alternative titles may be used.
Note: statement of profit or loss and other comprehensive income is also known as just statement of comprehensive income. It may be one statement or two.
What are the required financial statements under ASPE?
- Balance sheet
- Income statement
- Statement of changes in retained earnings
- Cash flow statement
- Notes to financial statements
Name common components of other comprehensive income.
- Changes in revaluation surplus
- Remeasurements of defined benefit pension plans
- Gains and losses from investments in equity instruments designated at fair value through other comprehensive income
- Gains and losses on financial assets measured at fair value through other comprehensive income
What is the statement of changes in equity?
Essentially a table that reconciles the changes in all equity accounts, including retained earnings, for the period, usually a year.
What is included in the statement of changes in equity?
- Total comprehensive income
- Retrospective application or restatement
- Reconciliation of movements (diff between beginning and ending amount for period) for each component of equity resulting from profit or loss, other comprehensive income, or transactions with owners in their capacity as owners.
What is the formula for retained earnings?
Retained earnings = Assets - Liabilities - Ordinary share capital - Preferred share capital - Accumulated other comprehesive income
What is the calculation for retained earnings?
Retained Earnings
=
Beginning Retained Earnings
+ Net Income
- Dividends
What is the calculation for net income?
Net Income
=
Revenue - COGS - Operating Expenses - Gains and Losses - Other Revenue and Expenses
NOTE: not sure about gains and losses…
Represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company’s total revenue.
What is ITC?
Input Tax Credit
- A tax credit deducted from GST collected on sales where the balance is remitted to CRA.
- It can also be claimed for GST paid on the purchase of items and capital assets that are used in the business.
What are income statement accounts?
General ledger accounts that store transactions relating to revenues, expenses, gains, and losses.
- The other types of accounts are balance sheet accounts
What is the subsequent events period?
The interval between period end and when the financial statements are authorized for use.
- IAS 10
What are 2 categories of subsequent events?
- Those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period). E.g., client goes bankrupt and you find out after year end that you will only get 40% of receivables. Then you adjust.
- Those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period). E.g., A month after year end there is a major earthquake and your plant is damaged. You would not adjust but should disclose it in the notes to financial statements. It must be quantified as well. Make a note if you can’t quantify the impact.
What is the purpose of internal control?
- To safeguard assets of the entity
- To ensure integrity of the financial reporting system.
What are important features of internal control?
- Segregation of duties
- Comparison of records to physical assets (e.g., bank reconciliation)
What are possible reasons for discrepancies between the G/L and bank account?
- Errors (in bank or books)
- Timing differences:
- In books, not bank (e.g., outstanding cheques, deposits in transit)
- In banks, not books (e.g., electronic payments, NSF, service charge)
Are furniture and fixtures current or non-current assets?
Non-current assets
Where does perpetual debt go on the balance sheet?
It is equity!
- Perpetual means infinite (forever)
- Debt means finite (i.e., you won’t pay debt forever)
- Remeber we are supposed to focus on the transactional (perpetual) and not the physical (debt). Substance over form. (see webinar from Jan 17 around 30 mins)
If you take assets and subtract liabilities and subtract equity what should the result be?
Zero
- This is a good check to confirm your balance sheet is done right
