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140 Cards in this Set

  • Front
  • Back
Difine 3 essencial characteristics of accounting.
(1) Identification, measurement, and communication of information about (2) economic entities to (3) interested persons.
Define Financial Accounting.
The process that results in the preparation of financial reports for the enterprises as a whole for use by both internal and external parties.
Define Managerial Accounting.
The process of identifying, measuring, analyzing, and communicating financial information to internal decision makers.
What are the major financial statements?
(1) Balance Sheet
(2) Income Statement
(3) Statement of Cash Flow
(4) Statement of Owner's (Shareholder's) Equity,
Define Accounting Profession.
Accounting profession has the very significant responsibility of measuring company performance accurately and fairly on a timely basis.
What is Capital Allocation?
The system that the capital is allocated from investors or financial institutes to companies in the debt & equity markets or marketplace. In return, the companies provide financial reporting to the investors and/or financial institutes.
Who are Stakeholders?
Parties who have something at stake in the financial reporting environment. Users are more broadly defined; Anyone who prepares, relies on, reviews, and monitors financial information.
What is the objective of Financial Reporting?
To communicate information that is useful to investors, members, contributors, creditors, and other users in making their resource allocation decisions and/or assessing management bias.
What kind of information that Financial statements provide?
(1) An entity's economic resources, obligations, and equity/net assets.
(2) Changes in an entity's economic resources, obligations, and equity/net assets.
(3) The economic performance of the entity.
What is Management Bias?
Aggressive financial reporting that biased to meet expectation of parties outside of the entity.
What is User's needs?
The objective of financial reporting is to provide useful information to users. However, meeting all users' needs is more challenging when coupled with the potential for management bias.
What is GAAP?
Generally Accepted Accounting Principles. (Set of standard) It is generally accepted and universally practiced, developed by AcSB in Canada. GAAP helps reduce management bias by providing direction as to how event should be accounted for.
Quote 4 organizations that develop financial reporting standards.
(1) AcSB (CICA handbook=source of GAAP)
(2) OSC
(3) FASB (US)
(4) ISAB (International)
Explain AcSB.
(1) Develop CICA handbook which is the source of GAAP.
(2) To ensure that the framework for measurement and reporting facilitates the global flow of capital and serves the public interest by enhancing relavance, quality, credibility of informatiln. "Due Process"

(3) AcSOC -> Monitor AcSB activities
(4) EIC(Emergency Issues Comission)-> To react more quickly to current issues. "EIC Abstracts"
What is OSC?
Ontario Securities Commission monitors the capital marketplace.
What is GAAP hierarchy?
GAAP has two sources.
(1) Primary source
(2) Other source

Primary source has to be looked at first.
What is Professional Judgment?
There cannot be a rule for every situation. Thus Canadian standards are based on general principals rather than specific rules. The basic premise is that professional accountants will be able to apply these principals appropriately to any situations.
What are the challenges facing financial reporting?
(1) Globalization of companies & capital markets
(2) Impact of technology
(3) Changing nature of economy
(4) Increased requirement for accountability
(5) Balance Scorecard Model
4 Reasons for Conceptual Framework. (1)
To be useful, standard setting should build on and relate to an established body of concepts and objectives.
4 Reasons for Conceptual Framework. (2)
New and emerging practical problems should be more quickly solved by referring to an existing framework of basic theory.
4 Reasons for Conceptual Frameworks.(3)
It should increase financial statements users' understanding of and confidence in financial reporting.
4 Reasons for Conceptual Frameworks.(4)
It enhances comparability among company's financial statements.
What is Basic Objectives of Conceptual Framework?
Top two layers of the triangle.

1. User Needs

2. Objectives of financial report (goals & purposes)
What are in fundamental concepts of Conceptual Framework?
1. Qualitative characteristics

2. Basic Elements
What concept is underlying in fundamental concepts of Conceptual Framework?
Decision Usefulness
What is Qualitative characteristics?
5 essential characteristics to answer questions such as: which information should be presented? or Which alternative provided the most useful information for decision making?
What are 5 Qualitative characteristics?
1. Relevance
2. Reliability
3. Understandability
4. Comparability
5. Consistency
What is Basic Elements of Conceptual Framework?
Elements of Financial statements that include Assets, Liability, Equity, Revenues, Expenses, Gains, Losses and Other income. They are directly related to measuring a company's performance and financial status.
What are 3 components of Foundational Principals and conventions in Conceptual Framework?
1. Basic Assumptions
2. Basic Principles
3. Constraints
4 Basic Assumptions
1. Economic Entity
2. Going Concern
3. Monetary Unit
4. Periodicity
4 Basic Principles
1. Historical Cost
2. Revenue Recognition
3. Matching
4. Full Disclosure
4 Constraints
1. Uncertainty (Conservatism)
2. Cost-Benefit Relationship
3. Materiality
4. Industrial Practice
Explain Relevance of Qualitative Characteristic.
To be relevant. accounting information must make a difference in a decision. Relevant information has predictive value and feedback value and be timely.

(Jyu you sei)
Explain Reliability of Qualitative Characteristic.
Accounting information is reliable to the extent that it is verifiable, is a faithful representation of the underlying economic reality, and is reasonably free of error and bias(neutral).
Explain Understandability of Qualitative Characteristic.
For information to be useful, there must be a connection between users and the decisions they make. This connection, understandability, is the information quality that permits reasonably informed users to perceive its significance.
Explain Consistency of Qualitative Characteristic.
When an entity applies the same accounting treatment to similar situations, from period to period, the entity is considered to be consistent in its use of accounting standards.
Explain "Foundational Principles and Conventions"
These concepts help explain which, when and how financial elements and events should be recognized, measured, and presented by the accounting system.
Explain Economic Entity of Basic Assumptions.
A company's business activity can be kept separate and distinct from its owners and any other business unit. (In case of group enterprise, GAAP allows to present consolidated financial statements.)
Explain Going Concern of Basic Assumptions.
This assumes that the business enterprise will continue to operate foreseeable future.
Explain Monetary Unit of Basic Assumptions.
Money is the common denominator of economic activity and provides an appropriate basis of accounting measurement and analysis. Thus, the monetary unit is the most effective means of expressing to interested parties changes in capital and exchanges of goods and services.
Explain Periodicity of Basic Assumptions.
An enterprise's activities can be divided into artificial time period. These time periods vary, but the most common are monthly , quarterly and yearly.
Explain Historical Cost of Basic Principles.
GAAP requires that F/S be prepared using historical cost basis of measurement whereby transactions re initially measured at the am out of cash or cash equivalent paid or received or the fare value ascribed to them when they too place.
Explain Revenue Recognition of Basic Principles. When is Revenue generally recognized?
1. Performance is earned.
2. Measure-ability is reasonably certain,
3. Collectibility is reasonably assured.

Revenues are realized when products, services, merchandises or other assets are exchanged for cash or claims to cash.
Explain Matching of Basic Principles.
Expenses are recognized on the I/S not when wages are paid, or when the work is performed, or when a product is produced, but when the work (or service) or the product actually makes its contribution to revenue.
Explain Full Disclosure of Basic Principles.
Anything that is decision relebant should be included in the F/S. The principle recognizes that the nature and amount of information included in Financial reporting reflects a series of judgemental trade- trade offs.
Explain Uncertainty of Constraints.
Excessive uncertainty makes recognition difficult or impossible. Elements are recognized in the F/S if they arise from events that are likely or probable and measurable.
Explain Cost-Benefit Relationship of Constraints.
The cost of providing the information must be weighed against the benefits that can be derived from using the information.
Explain Materiality of Constraints.
It must make difference or it need mot to be disclosed. The point involved here is one of relative size and importance.
Explain Industry Practice of Constraints.
Sometimes unique nature of a specific industry requires unique accounting. Ensure that the resulting statements are consistent with primary source of GAAP and Conceptual Framework.
Explain Event.
Generally, the source of cause of changes in assets, liability, and equity. A happening of consequence.
Explain Transaction.
An external event involving a transfer or exchange between two or more parties.
Explain Account.
A systematic arrangement that accumulate transactions and other events.
Explain Permanent Account.
Accounts that appear on the B/S. Assets, Liabilities, and Equity. They are left open periodically.
Explain Temporary Account.
Accounts that appear on the I/S (except for Dividends). Expenses, Revenues, and dividends. They are closed periodically.
Explain Ledger.
The book containing the accounts. Each account has a separate page. General ledger is the collection of all accounts.
Explain Journal.
The book of original entry where transactions and other events are initially recorded.
Explain Posting.
The process of transferring the essential facts and figures from the book of original entry (journal)to the ledger accounts.
Explain Trial Balance.
A list of all open accounts in the ledger and their balances. A trial balance take immediately after all adjustments have been posted is called Adjusted Trial Balance. Another trial balance is Post-Closing Trial Balance.
Explain Adjusting Entries.
Entries made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis so that correct F/S can be prepared.

It is needed to ensure that the revenue recognition and matching principles are followed. Needs to be done every time F/S are prepared.
What are the accounts with Debit normal balance?
Assets, Expenses and Dividends

when it increases, debit. When it decreases, credit.
What are the accounts with Credit normal balance?
Liability, Equity, and Revenue.

When it increases, credit. When it decreases, debit.
Explain Double-Entry Accounting.
Always two accounts are effected by a transaction.
Explain the accounting cycle. (1-5 steps)
1. Identify and recording transactions and events.
2. Journalizing. (Recording entries to general journals, sales journals,cash receipt journals...etc)
3.Posting (transferring entries from Journals to general ledger monthly and subsidiary ledger daily)
4.Trial balance preparation.
5.Adjustments. (accruals, prepayments, estimated items)
Explain the accounting cycle. (6-10 steps)
6. Adjusted Trial Balance
7. F/S preparation
8. Closing (temporary accounts)
9. Post-Closing Trial Balance
10. Reversing Entries
What is 3 types of business model?
1. Financing
2. Investing
3. Operating

1 and 2 are looked by B/S.
3 is looked by I/S.
all of them are looked by SFC.
Explain I/S.
It helps users allocate their resources and assess management stewardship of the companies' resources in a number of ways.
3 points of usefulness of I/S.
1. Evaluate past performance.
2. Assist in predicting future performance.
3. Assess potential risk in achieving future cash flow.
Summary of Usefulness of I/S.
I/S provides feedback, predictive value, and assisting stakeholders in understanding the business.
3 points of Limitation of I/S.
1. Items are excluded if they cannot be reliably measured.
2. Amounts reported are affected by accounting method used.
3. Use of estimates. (it can be too optimistic)
What is Quality Earnings?
Quality Earnings means that integrity of information and sustainability of earnings are well presented transparently and understandability. Higher Quality Earnings have greater predictive values.
Explain Revenue.
Increase in economic resources either by way of;
1. inflows
2. enhancements of assets
3. settlement of liabilities from its ordinary activities
Explain Expense.
Decreases in economic resources by;
1. outflows
2. reduction of assets
3. incurrence of liabilities, resulting from ordinary revenue generating activities.
Explain Gain.
Increases in equity (Net Assets) from peripheral or incidental transactions.
Explain Loss.
Decreases in equity (Net Assets) from peripheral or incidental transactions.
What have to be presented in the income or gain part of I/S?
1. Revenues
2. Income from investment
3. Finance income
4. Income from leases
5. Government assistance
6. Amortization
What have to be presented in the Expense or Loss part of I/S?
1. Goodwill impairment
2. R&D cost
3. Exchange gains or losses
4. Interest expense
5. Unusual items
6. Income taxes
Major I/S required from AcSB.
1. Continuing Operation
2. Discontinued Operation
3. Extraordinary Items
4. Net Income
5. Earnings Per Share
2 ways of presenting continuing operations
1, Single Step
2. Multiple Step
Explain Single Step.
1. Revenues (Net sales + Other revenues)
2. Expenses (CGS, Selling Exp, Admin Exp..etc)
3. Income Tax (on income from continuing operation only.)
4. Income from continuing operation.
Explain Multiple Step.
1. Operating Section
(Net sales, CGS, Gross Margin, Selling Exp, Admin Exp, Operating Income)
2. Non-operating Section
(Other revenues, Other expenses)
3. Income Tax (on income from continuing operation only.)
4. Income from continuing operation.
Explain Condensed Income Statement.
Condensed I/S = I/S + Supplementary schedules of Expenses.
What are Irregular Items in I/S?
1. Discontinued Operations
2. Extraordinary Items
3. Unusual Gains and Losses
4. Changes in Estimates within current period
What are Irregular Items in SRE?
1. Changes in accounting policies (ex.FIFO -> LIFO)
2. Prior years income errors (if the error is material, it is corrected at the beginning of Retained Earning balance as an adjustment)
Explain Discontinued Operation.
To qualify, the segment must be significant and separate component of business. Thus, assets and operations must be distinguishable from other assets and operations. (subsidiary is in this category.)
Explain Extraordinary Items.
All 3 criteria must be met.
1. Infrequent, unusual, atypical
2. Material amount
3. Do not depend on decisions by management or owner.

(ex. natural disaster)
What is Net Tax.
In order to present Extraordinary Items in I/S, Net Tax is used. it means loss or gain after minus taxes.
Explain Unusual Gains and Losses
Unusual gains and losses are those that do not meet criteria of Extraordinary Items, but are material in amount. (Principle: Materiality)

ex: writedown of inventory, gains and losses from fluctuation of foreign exchange, gains and losses from sales of PP&E. Usually things related to market value.
Explain Changes in Estimates.
ex: change Bad Debt Expense estimates from at 1% to at 2% of sales, change useful life of an equipment from 6 years to 8 years.
What is Earnings Per Share?
It indicates dollar earned per common share, NOT dollar paid back to investors.

EPS = (Net Income - Preferred dividends)/ weighted average of common shares outstanding.
Explain Comprehensive Income.
All changes in Equity during a period except for those resulting from contributions from owners and distributions by the owners. It is presented in both I/S and SRE.

1. All net income components
2. Other Comprehensive Income (OCI)
Explain Other Comprehensive Income (OCI).
OCI is gains and losses that jumps over net income but affect shareholder's equity.

Accumulated Other Comprehensive Income (AOCI) = Beginning balance of equity component in B/S + OCI in current period
3 points of Usefulness of B/S.
1. Liquidity
2. Solvency
3. Financial Flexibility

By providing information about assets, liabilities, and equity, the B/S provides a basis for calculating rates of return on invested assets and evaluating the company's capital structure.
What is Liquidity in B/S?
Available money on hand to pay bills when they are due and to take care of unexpected needs for cash.
What is Solvency in B/S?
Ability to pay for obligations.
What is Financial Flexibility in B/S?
Ability to respond to unexpected needs and opportunities.
3 points of Limitations of B/S
1. Many assets and liabilities are stated at historical cost. (reporting at current fair value may be more relevant.)
2. Judgment and Estimates are used.(Soft numbers are less reliable.)
3. B/S omits many items that cannot be recognized objectively. (ex: unrecognized assets)
Component of Assets
1. Current Asset
2. Long-term Assets
3. PP&E
4. Intangible Assets
5. Other Assets
Component of Liability and Owner's Equity.
1. Current Liabilities
2, Long-term Liabilities
3. Owner's Equity
-Capital shares
-Contributed surplus
-Retained earnings
-Accumulated Other Comprehensive Income
Explain Current Assets.
Expected to be used, Sold or converted to cash within a year.

1. Cash and Cash equivalent
2. Temporary Investment (short term)
- Hold-to-maturity securities
- Trading securities
- Available-for-sale securities
3. Receivables
4. Inventories
5. Prepaid Expenses
Explain Long-Term Investment.
Expected to hold for more than 1 year. (simply as Investment) 4 common types:

1. Investments in securities, such as bonds, common shares, or long-term notes.
2. Investments in tangible fixed assets not currently used in operations such as land held for speculation.
3. Investments set aside in special funds such as sinking fund, pention fund, plant expansion fund.
4. Investments in non consolidated subsidiaries or affiliated companies.
Explain PP&E,
Property, Plan and Equipment used in ongoing business operations to generate income. They are reported at cost or amortized cost. Disclosure notes that include accumulated amortizations, basis of valuation, nature of any lien held against the assets are required.
Explain Intangible Assets.
Capital assets without physical substance, held to generate revenues, such as patent, copyright, goodwill and franchises. High degree of uncertainty regarding future benefit.

Finite life - amortized over useful life.
Infinite life - NOT amortized.
Explain Other Assets.
Ex. Deferred charges, non current receivables, property held for sale.

Disclosure required.
Component of Owner's Equity.
1. Capital Assets
2. Contributed Surplus
3. Retained Earnings
Explain Working Capital.
WC = Current Assets - Current Laiab.

It indicates Short term liquidity.
Explain SCF.
It presents:
1. where the cash came from
2. what the cash used for
3. what was the changes in the cash balance.
3 components of SCF.
1. Operating Activities
2. Investing Activities
3. Financing Activities
examples of Operating Activities in SCF.
Inflow: collections of revenues in including interests.

Outflow: payment of expenses including interests.
examples of Investing Activities in SCF.
Inflow: Disposals of PP&E, sales of securities, collections of loans made to others.

Outflows: Purchases of PP&E, purchase of securities, loans made to others.
examples of Financing Activities in SCF.
Inflow: Borrowing money from others, contributions by owners, issuance of bonds, securities, and notes.

Outflow: Distributions to owners, Repayment of loans to creditors but not interest, Reacquisition of capital stock, payment of dividends.
3 points of usefulness of SCF.
1. SCF provides insight into 2 areas.
-Financial liquidity
-Financial Flexibility

2. Free Cash Flow
3. SCF answers questions such as
-How much free money left to invest or expand?
- is the company able to pay dividends without seeking external financing?
- will the company be able to maintain its needs capital investment if business operations decline?
Explain Financial Liquidity in SCF.
it indicates whether the company is able to pay off current debt using internally generate cash flow.

Current Cash Debt Coverage Ratio = Net Cash provided by Operating Activity / Average current liability
Explain Financial Flexibility in SCF.
It indicates whether the company can pay its debts if external sources of funds become limited or too expensive.

Cash Debts Coverage Ratio = Net Cash provided by Operating Activities / Average total liability.
Explain Free Cash Flow.
It measures company's financial flexibility.

FCF = Net Cash from Operating Activities - Capital Expenditure - Dividends
Unrealized gain on available for sale securities.
Need NOT to be reported in the Balance Sheet. Only for Statement of Retained Earnings.
What categories are included in Current Assets?
1. Cash
2. Short Term Investment (FMV)
3. Receivables (Notes required)
4. Inventories (Note required)
5. Prepaid Expenses (Non-current Prepaid items are Other Assets)
Unearning Subscriptions.
Long Term OR Current Liability
Unearned Rent
Current Liability
Advances to suppliers
Current Assets
20-year issue of bonds payable that will mature within the next year.
Current Liability
(Monetary & Financial Instrument)
Plant Expansion Funds
Long Term Investment
Accumulated Amortization
Salaries that company's budget shows will be paid o employees within next year.
Need NOT to be reported on the Balance Sheet.
Accrued interest on bonds payable.
Interest Payable -> Current Liability
(Monetary & Financial Instrument)
Organization Cost (Starting Cost)
Other Assets
Fully amortized machine still in use
Equipment(in PP&E) as an asset with zero value. Note Required.
Machinary retired from use and held for sale.
Other Assets
Land held for speculation (investment).
Long Term Investment
Sinking funds
Long Term Investment
Shares owned in affiliate companies.
Long Term Investment
(Financial Instrument)
Pension Funds
Long term Investment
Unexpired Insurance
Current Assets
Cash surrendered value of life insurance
Land held for future use
Investment / PP&E
Cost of buildings in the process of construction
Other Assets
Bank overdraft
Current Liability
Accrued Liability, Deferred Revenues, Unearned Revenues, Unearned Items
Current Liability
Capital Leases
Long term Liability
Bonds Payable, Mortgage Payable, Long Term Warranty estimates
Long term Liability
Subscription received in advance, Fees received in advance, Customer Advances
Unearned Revenue, Thus Current Liability