short answer questions accounting

Explain the periodicity assumption

The periodicity assumption allows a company's economic activities to be divided into artificial time periods for financial reporting purposes.

What does the economic entity assumption mean?

The economic entity assumption requires that a business be accounted for separately from its owners and other entities.

What is meant by relevance in financial reporting?

Information is relevant if it can influence users' economic decisions by helping them predict or confirm outcomes.

Why is conservatism not considered a qualitative characteristic under the current Conceptual Framework?

Conservatism is no longer a qualitative characteristic because it can bias information and conflict with faithful representation.

Who are the primary users of financial accounting information?

Financial accounting information is primarily used by external users such as investors, creditors, and regulators.

What information is reported on the Statement of Financial Position?

The Statement of Financial Position reports a company's assets, liabilities, and equity at a specific point in time.

What is Management Discussion and Analysis (MD&A)?

MD&A is supplementary information included in the annual report that explains management's perspective on the company's performance and financial position.

Explain the income model of measurement

The income model measures value based on the present value of future cash flows expected by the entity using company-specific estimates.

Why is the income model considered more subjective than the market model?

The income model is more subjective because it relies on estimated future cash flows and discount rates that require judgment.

Explain the market model of measurement

The market model measures value based on observable market prices using assumptions of market participants.

What is meant by fair value?

Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.

Explain the difference between fair value and value in use

Fair value is market-based and reflects an exit price, while value in use is entity-specific and based on future cash flows expected by the company.

What does the cost model attempt to measure?

The cost model attempts to measure the amount required to replace an asset's service capacity.

Why are future cash flows discounted in present value calculations?

Future cash flows are discounted to reflect the time value of money and the risk associated with receiving cash in the future.

What does the discount rate represent?

The discount rate represents the time value of money and the risk associated with future cash flows.

Why are adjusting entries required at the end of an accounting period?

Adjusting entries are required to ensure revenues and expenses are recorded in the correct accounting period under accrual accounting.

Explain what an accrued expense is

An accrued expense is an expense that has been incurred but not yet paid or recorded by the end of the period.

Why is a prepaid expense initially recorded as an asset?

A prepaid expense is recorded as an asset because it represents a future economic benefit that will be used in later periods.

What is the purpose of closing entries?

Closing entries transfer balances of temporary accounts to retained earnings and reset them to zero for the next period.

What is the purpose of a trial balance?

A trial balance is used to verify that total debits equal total credits before preparing financial statements.