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120 Cards in this Set
- Front
- Back
Accounting |
an information system that identifies, records and communicates the economic events of an organization to interested users |
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describe institutional users of accounting |
Includes pension, mutual, endowment and other funds that invest on the behalf of others |
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describe private users of accounting |
individuals who purchase share in companies |
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describe lenders and creditor users of accounting |
suppliers, banks commercial credit companies, and other financial institutions that lend money to companies |
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What do security analysts do (2) ? |
1. forecast earnings and other key financial numbers
2. recommend stocks |
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Where do security analysts get their information (7)? |
1. Published financial statements (10k, 10Q and 8K)
2. Company Websites
3. Earnings calls
4. Management forecasts and other voluntary disclosures
5. Industry information
6. Business periodicals
7. Information Services |
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define the objective of financial reporting |
provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers |
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According the the FASB what two fundamental qualities should useful information possess? |
Predictive value
Confirmative value |
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define Relevance |
the information has a direct bearing on a decision. In other words, if the information were not available, a different decision would be made. |
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What must information have to be relevant? (2 possible) |
one or both of the following:
1. Predictive Value
2. Confirmative Values |
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define predictive value |
information has predictive value if it helps captial providers make decisions about future actions |
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define confirmative value |
information has confirmative value if it confirms or changes previous evaluations |
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What is relevant information subject to? |
The materiality constraint |
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define the materiality constraint that relevant information is subject to. |
information is material if its omission or misstatement could influence the user's economic decisions taken on the basis of the specific entity's financial statements. |
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define materiality as it pertains to the materiality constraint that relevant information is subject to (define and 3 rules) |
Materiality is related to both the nature of an item and its size or misstatement. 1. the materiality of an item normally is determined by relating its dollar value to an element of the financial statements, such as net income or total assets
2. As a rule of thumb, when an item is work .5-2% of total assets, .5-2% of total revenue; or 5-10% of net income, accountants treat it as material.
3. However, many small errors can add up to a material amount. |
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define 'faithful representation' as a quality of useful information |
that information accurately depicts what really happened. To provide a faithful representation, information must be: 1. Complete
2. Neutral
3. Free from error |
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define 'complete' as it pertains to faithful representation (a quality of useful information) |
complete: provides all information necessary for a reliable decision |
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define neutral as it pertains to faithful representation (a quality of useful information) |
neutral: free from bias intended to achieve a certain result or to bring about a particular behavior |
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define 'free from error' as it pertains to faithful representation (a quality of useful information) |
free from error: information meets a minimum level of accuracy so it does not distort what is being reported. |
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List the Quality of Useful Information (6) |
1. Relevance
2. Faithful representation
3. Comparability (Enhancing)
4. Verifiability (Enhancing)
5. Understandability
6. Timeliness |
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define Comparability as it pertains to qualities of useful information |
results when different companies use the same accounting principles. 1. included within comparability is consistency. |
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define consistency as it pertains to comparability as it pertains to qualities of useful information |
consistency means that a company uses the same accounting principles and methods from year to year |
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define verifiability as it pertains to qualities of useful information |
information is verifiable if independent observers, using the same methods, obtain similar results. |
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define understandability as it pertains to the qualities of useful information |
information has the quality of understandability if it is presented in a clear and concise fashion |
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define timeliness as it pertains to the qualities of useful information |
for accounting information to have relevance, it must have timeliness |
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List the assumptions in financial reporting (4) |
1. Monetary Unit
2. Economic Entity
3. Periodicity
4. Going Concern |
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define Monetary Unit as it pertains to the assumptions in financial reporting |
requires that entity accounts for and reports its financial results primarily in terms of the national monetary unit. |
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define Economic Entity as it pertains to the assumptions in financial reporting |
All the business transactions should be separate from the business owner's personal transactions |
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define Periodicity as it pertains to the assumptions in financial reporting |
the entity's activities are spearated into periods of time such as months, quarters or years. Transactions must be accounted for within the time period they occur |
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define going concern as it pertains to the assumptions in financial reporting |
financial statements are prepared under the assumption that the company will remain in business indefinitely unless there is suffcient evidence otherwise. |
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List the Principles in Financial Reporting |
1. Historical Cost or Fair Value
2. Revenue Recognition
3. Expense Recognition
4. Full disclosure |
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define Historical Cost as it pertains to the Principles in Financial Reporting |
aka Cost Principle: dictates that companies record assets at their historical cost. |
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define Fair Value as it pertains to the Principles in Financial Reporting |
indicates that assets and liabilities should be reported as fair value (the price received to sell an asset or settle a liability) |
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define Revenue Recognition as it pertains to the Principles in Financial Reporting |
Part of the Accrual basis of accounting
Revenue is earned and recognized upon product delivery or service completion, without regard to when case is actually received. |
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list 3 Principles in Financial Reporting in the Accrual basis of accounting |
1. Revenue Recognition
2. Expense Recognition
3. Full disclosure |
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define Expense Recognition as it pertains to the Principles in Financial Reporting |
aka Matching Principle: the costs of doing business are recorded in the same period as the revenue they help generate, regardless of when the money is actually paid. |
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define Full Disclosure as it pertains to the Principles in Financial Reporting |
requires that companies disclose all circumstances and events that would make a difference to financial statement users |
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List the 3 Constraints of Accounting |
1. Conservatism constraint
2. Cost constraint
3. Industry Practice Constraint |
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define the Conservatism constraint as it pertains to the Constraints of Accounting |
holds that, when faced with choosing between two equally acceptable procedures or estimates, the accountant uses their judgment to choose the one that is least likely to overstate assets and revenues or understate liability and expenses.
1. can be abused and lead to incorrect or misleading statements
2. should be applied only when their is uncertainty about which accounting procedure or estimate to use |
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define Cost Constraint as it pertains to the Constraints of Accounting |
the cost of providing accounting information should not exceed the benefit that financial statement users will gain from this information |
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define the Industry Practice Constraint as it pertains to the Constraints of Accounting |
one size does not fit all when reporting financial activies. Some industries have peculiar products/services or have special ways of distributing the products/services to customers |
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SEC Regulation FD |
aka Fair Disclosure: requires that companies provide all investors equal access to all important company news
2. Managers and other insiders are prohibited from insider trading |
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define insider trading as it pertains to SEC Regulations FD |
trading their company's shares based on nonpublic (insider) information so that no party benefits from early access |
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Name some ways companies disclose information to satisfy SEC Regulations FD |
1. Press releases
2. SEC Reports (10K, 10Q and 8K) |
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define 10K financial report |
due within 60-90 days of the fiscal year-end.
contains audited financial statements |
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define 10K financial report |
due within 40-45 days of the end of the quarter
financial statements can be unaudited |
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define 8k financial report |
due 4 days of the major event date
financial statements can be unaudited |
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what kinds of information should a 10k include (6)? |
1. Risk factors
2. Selected financial data
3. Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
4. Independent Auditor's report
5. Financial Statements
6. Notes to Financial Statements |
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define 'Risk Factors' as it pertains to the contents of a 10k financial report |
includes information about the most significant risks that apply to the company or to its securities. Companies generally list the risk factors in order of their importance. In practice, this section focuses on the risks themselves, not how the company addresses those risks. Some risks may be true for the entire economy, some may apply only to the company's industry sector or geographic region, and some may be unique to the company |
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What 4 main items does the MD&A cover as part of 10k financial report |
aka Management's discussion and Analysis of Financial Condition and Results of Operations
1. Results of operations
2. Liquidity and capital resources
3. key business risks
4. Critical account policies |
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What is the job of an independent auditor? |
to express an opinion on whether the financial statements and notes present fairly in all material respects, a firm's financial position, results of operations, and cash flow in accordance with generally accepted accounting principles |
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List 5 types of Notes to Financial Statements |
1. A summary of significant accounting policies
2. Additional information about the summary totals found in the statements
3. Disclosure of important information not recognized in the statement
4. Supplementary information required by the FASB or the SEC
5. Voluntary disclosures |
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define the summary of significant accounting policies as it pertains to the types of notes to Financial Statements |
both IFRS and GAAP require disclosures about 1. accounting policies followed
2. judgments that management has made in the process of applying the entity's accounting plicies
3. the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year |
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define the Accounting Equation |
Assets = Liabilities + Owner's Equity |
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define Assets as it pertains to the Accounting Equation |
resources to use to generate revenues |
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define Liabilities as it pertains to the Accounting Equation |
Creditors' claims against resources |
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define Owners' Equity as it pertains to the Accounting Equation |
Owners' claims against resources |
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List the 2 sources of financing for a corporation |
Liabilities and Owners' Equity |
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describe the usefulness of the Balance Sheet (5). |
1. Analyze the company's liquidity
2. Analyze solvency
3. Analyze financial flexibility
4. Evaluating the capital structure
5. Assess risk |
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define analyzing liquidity as it pertains to the Balance Sheet (2) |
how quickly can assets be converted to cash
what ratio helps assess liquidity |
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define analyze solvency as it pertains to the Balance Sheet (2) |
Can the company pay their debts when they mature
ratio |
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define analyze financial flexibility as it pertains to the Balance Sheet (2) |
Can the firm respond quickly to new investment opportunities
Can the firm survive a downturn or other unforeseen or foreseeable problems?
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define Evaluating the capital structure as it pertains to the Balance Sheet (2) |
how much of the assets have been financed by debt
how much of the assets have been contributed by shareholders |
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List 3 limitations of the Balance Sheet |
1. Most assets and liabilities are reported at historical cost not current or market value
2. Use of judgments and estimates
3. many items of financial value are omitted |
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List 6 fundamental Accounting Concepts Underlying Recording of Balance Sheet Transactions |
1. Comparability/consistency
2. Economic Entity Assumption
3. Going Concern Assumption
4. Historical Cost principle
5. Conservative Constraint
6. Materiality |
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define comparability/consistency as it pertains to the fundamental accounting concepts underlying recording of balance sheet transaction |
present 2 years of balance sheets; no changes in accounting policies unless compelling reason |
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define economic entity assumption as it pertains to the fundamental account concepts .... |
balance sheet should only include assets, liabilities, and owners' equity of ONE entity |
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define Going Concern Assumption as it pertains to the fundamental accounting concepts.... |
balance sheet prepared under the assumption that the company is going to stay in business for the "foreseeable future" (typically 1 year) |
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define Historical Cost Principle as it pertains to the fundamental accounting concepts.... |
record at original cost because that number is reliable |
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define Conservatism Constraint as it pertains to the fundamental accounting concepts....BS |
don't overstate assets or understate liabilities |
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define Materiality as it pertains to the fundamental accounting concepts...BS |
items on balance sheet should be economically meaningul. |
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see Classified Balance Sheet on slide 40 Class 2 |
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define Asset as it pertains to the Balance Sheet |
Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events |
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define liability as it pertains to the Balance Sheet |
Probable future sacrifice of economic benefit arising from a present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events |
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define equity as it pertains to the Balance Sheet |
residual interest in the assets of an entity that remains after deducting its liabilities |
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define Valuation |
the process of assigning a value to an item in the financial statements once it is determined it should be recognized. |
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2 rules of valuation |
1. should be reliable: independent parties can agree on the value AND
2. should be relevant: reflects information that financial statement users care about |
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What 4 asset categories are on the Classified Balance Sheet |
1. Current assets
2. investments
3. Property, plant and equipment
4. Intangible assets |
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how are the 4 categories of assets listed on the Classified Balance Sheet |
in the order of how easily they can be converted into cash |
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What other way can you list investments, intangible assets and other misc assets on a Balance Sheet |
Other assets |
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define current assets |
include cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or its normal operating cycle, whichever is longer |
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define a normal operating cycle |
the average time it nees to go from spending to receiving cash |
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list 5 kinds of current assets |
Cash
investments
Receivables
Inventories
Prepaid expenses |
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List the 5 major categories of Long-Term Investments on the Balance Sheet |
Investments
Property, plant and equipment
Long term Notes Receivable
Intangibles
Other Assets |
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what is included in the major category investments under Long-Term Investments on the Balance Sheet |
in other firms stocks and bonds (passive or influence control) IFRS: stock is referred to as Shares
Land held for future use
Plant or equipment not used in business
Long-term notes receivable |
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what is included in the major category Property, plant and equipment under Long-Term Investments on the Balance Sheet |
land
buildings
machinery and equipment
furniture, etc
less accumulated depreciation |
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what is included in the major category Intangibles under Long-Term Investments on the Balance Sheet |
patents, copyrights, trademarks, franchises, goodwill |
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define Current Liabilities as it pertains to the Balance Sheet |
obligations the company is to pay within the next year or operating cycle, whichever is longer
they are listed in the order of payment date or magnitude |
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List 7 types of Current Liabilities from the Balance Sheet |
accounts payable
salaries and wages payable
notes payable
interest payable
income tax payable
unredeemed giftcards/unearned income |
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List 5 categories of Long-Term Liabilities on the Balance Sheet |
Long-term debt
Capital lease obligations
Deferred income taxes
Pension and other post-retirement obligations
Other liabilities |
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what makes up long-term debt on the balance sheet (4) |
loans, notes, bonds and mortgages |
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what makes up capital lease obligations on the balance sheet |
represent leases of plant asssets which are equivalent to debt-financed purchases |
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what makes up Deferred income taxes on the Balance Sheet |
income tax expected to be paid in the future years on income already reported on the income statement |
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what makes up Pension and other post-retirement obligations in the Long-term Liablities of the Balance Sheet |
relate to a compnay's promise to pay benefits after the employee's retirement |
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What comes after Long-term Liabilities on the Balance Sheet |
Commitments and contingencies |
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What 3 major categories make up Stockholders' Equity on the Balance Sheet |
Contributed capital
Retained Earnings
Accumulated other comprehensive income |
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what makes up contributed capital under Stockholders' Equity on the Balance Sheet (4) |
Common Stock (at par)
Preferred stock (at par)
Additional paid-in capital
Treasury stock |
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define common stock (at par) as found under Stockholders' Equity on the Balance Sheet |
common stockholders have the most risk and have the potential to reap the greatest return
IFRS: referred to as share capital-ordinary |
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define Preferred stock (at par) as found under Stockholders' Equity on the Balance Sheet |
Preferred stockholders usually have a fixed return on their investment
Have fewer ownership rights than common stockholders
Have lower risk than common stockholders |
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define Additional paid-in capital as found under Stockholders' Equity on the Balance Sheet |
the amount paid above par for stock |
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par |
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define Treasury stock as found under Stockholders' Equity on the Balance Statement |
the company's own shares that have been repurchased |
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define Retained Earnings as found under Stockholders' Equity on the Balance Sheet |
amount of income left in the firm less dividends |
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define Accumulated other comprehensive income as found under Stockholders' Equity on the Balance Sheet |
Reports the movement of market prices from certain investments and certain exchange rates
may arise from 1. foreign currency translation adjustments 2. Unrealized gains and losses on available-for sale-securities Unrealized gains and losses on derivaties |
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foreign currency translations adjustments |
arise from the change in equity of foreign subsidiaries as a result of changes in foreign currency exchange rates |
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Unrealized gains and losses on available-for-sale securities |
unrealized gains and losses are fluctuations in the market prices of securities before they are sold |
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Unrealized gains and losses on derivatives |
derivatives are financial instruments that derive their value from the movement of a price, an exchange rate, an interest rate, or an interest rate associated with another item |
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What order do IFRS companies present statement of financial position information |
1. Noncurrent assets
2. Current assets
3. Equity
4. Noncurrent liabilties
5. Current liabilities |
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IFRS requires a classified statement of financial position expcept in very limited situations |
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IFRS follows the same guidelines as GAAP for distinguishing between current and noncurrent assets and liabilities |
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Under IFRS, current assets are usually listed in the reverse order of liquidity |
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Some companies report the subtotal net assets, which equals total assets minus total liabilties |
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define business transactions. |
economic events that should be recorded in the accounting records. |
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what are the three steps to recognizing business transactions |
recognition valuation classification |
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define recognition as it pertains to business transactions |
refers to the decision as to when to record a business transaction. |
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define valuation as it pertains to business transactions |
is the process of assigning a monetary amount to business transactions and the resulting assets and liabilities. GAAP requires Fair Value Valuations |
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define Fair Value as it pertains to Valuation of business transactions |
the exchange price of an actual or potential business transaction between market participants. |
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define the cost principle |
recording transactions at the exchange price at the point of recognition |
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define Classification as it pertains to business transactions |
the process of assigning all the transactions in which a business engages to appropriate categories, or accounts. |
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list the 2 steps of Transaction Analysis |
1. Identify and classify accounts and effects 2. Verify accounting equation is in balance |