Business Entities and Accounting Principles

These flashcards cover important concepts regarding business entities, financial reporting, and accounting principles, helping to prepare for related exams.

What is a sole proprietorship?

A business owned by one person where there is no legal distinction between the owner and the business.

What is a key characteristic of a partnership?

It is a business with multiple owners who share profits and risks equally.

What distinguishes a corporation from other business entities?

A corporation is legally separate from its owners, limiting personal loss to the amount invested in the business.

What is double taxation in the context of corporations?

The same income is taxed twice—once at the corporate level and again at the individual level when distributed to owners.

What is the objective of general purpose financial reporting?

To provide financial information to investors, lenders, and other creditors to assist in decision-making.

What are the fundamental qualitative characteristics of useful financial information?

Relevance and faithful representation.

What does the term 'materiality' refer to in financial reporting?

The significance of financial information that may affect user decisions.

What is verifiability in financial reporting?

The ability for knowledgeable observers to confirm the information presented.

What does the statement of financial position record?

It records an entity's assets, liabilities, and equity.

What is meant by 'going concern' assumptions?

The assumption that an entity will continue its operations for the foreseeable future.

What is a consolidated financial statement?

A financial statement that combines the data of a parent company and its subsidiaries.

What does 'derecognition' mean in the context of financial reporting?

The removal of an asset or liability from the statement of financial position.

What is historical cost in financial measurement?

It refers to the transaction price at the time the element is recognized.

What does the conservatism principle suggest in accounting?

To account for potential losses when uncertainties are present, prioritizing caution.

What is the accrual principle?

To record sales when they occur, ensuring transactions are recognized in the period they happen.

What is the matching principle in accounting?

Expenses should be recorded in the same period as the revenues they help generate.

What does the consistency principle state?

Businesses should use the same accounting methods from one period to the next.

What is the materiality principle?

Significant transactions should be detailed, while minor transactions can be omitted.

What does the objectivity principle state about financial statements?

Financial statements should be based on objective evidence rather than personal opinions.

What is the money measurement concept?

Only transactions in monetary terms should be recorded, while non-monetary factors are excluded.

What are enhancing qualitative characteristics in financial reporting?

Comparability, verifiability, timeliness, and understandability.

What types of entities can report financial statements?

Single entity, portion of an entity, or more than one entity (parent and subsidiaries).

What is a combined financial statement?

It shows financial information for entities not linked by a parent-subsidiary relationship.

What does the term 'economic resources' refer to in financial reporting?

The assets that a business holds that have value and can provide future economic benefits.

What influences how assets and liabilities are valued in the going concern concept?

The expectation that a business will continue its operations indefinitely.

What are the two types of values used in current measurement?

Fair value and value in use.

What critical component of financial statements reflects profit or loss?

The income statement or statement of financial performance.

What is the role of financial statements in decision-making?

They provide essential information for evaluating the financial position and performance of an entity.

What constitutes capital maintenance in accounting?

The concepts ensuring that capital is preserved in financial reporting.

What is the primary focus of qualitative characteristics in financial information?

To ensure that information is useful to users in their decision-making processes.

How does financial reporting relate to past cash flow?

Financial performance reflects past cash flow impacts on an entity's financial condition.

What is the purpose of aggregation in financial statements?

To group similar items together without excessive detail while avoiding misleading summaries.

What are the different types of financial statements required for reporting?

Statement of Financial Position, Statement of Financial Performance, and other relevant statements.

What elements are included in the statement of financial position?

Assets, liabilities, and equity.

What principle states that not every financial detail is equally important?

The materiality principle.

What type of businesses typically operate as sole proprietorships?

Hobby businesses and small local businesses.

What advantage do partnerships have over sole proprietorships?

Access to more resources and sharing of profits and risks.