Com351 Midterm 1

Verafibility

Accounting information is included if it will make a difference in users' decisions.

Materiality

Accounting information can be determined to be free of material error.

Relevance

Accounting information is included if it will make a difference in users' decisions.

Predictive Value

Accounting information helps users make predictions about the outcome of past, present, and future events.

Comparability

Accounting information about one company can be evaluated against the accounting information from another company.

Neutriality

Accounting information is included if its omission or misstatement could influence the economic decisions of users. This is an important component of relevance.

Faithful representation

All the accounting information that is necessary to faithfully represent economic reality is included.

Neutrality

Accounting information cannot be selected, prepared, or presented to favour one set of interested users over another.

Timeliness

Accounting information must be available to decision-makers before it loses its ability to influence their decisions.

Understandability

Accounting information is prepared on the assumption that users have a reasonable understanding of accounting and general business and economic conditions.

Confirmatory value

Accounting information provides a basis to evaluate a previously made decision.

Completeness

Accounting information includes everything it needs to and nothing important is omitted. This is an important component of faithful representation.

What are the basic forms of business
organizations?

Sole proprietor, Partnership, Private or Public corperation

What is a Sole Proprietor

A business owned by one person, its easy to setup but has a limited life with the owner having unlimited liability. Income tax is paid on the owners personal tex return, and there is No legal financial accounting filing requirements l

What is a Partnership?

It is two or more people in a business, where there is a formal legal agreement. The business has a limited life, and both partners have unlimited liability. They both pay income tax on their individual tax returns and there is No legal financial accounting filing requirements l

What are Private corporations?

A private corporation is a legal entity that is recognized as a person under the law. It has its own legal rights, responsibilities, and obligations separate from its owners (shareholders). The shareholders have limited liability. The shares of the corporation are sold privately and the corporation has an indefinite life. It has inc or ltd in the title and the corporation pays its own tax.In Canada, uses Accounting Standards for Private Enterprises (ASPE) for financial reporting OR Can elect to use International Financial Reporting Standards (IFRS) for financial reporting

What is a Public corporation?

A public corporation is a legal entity recognized as a person under the law. It has its own legal rights, responsibilities, and obligations separate from its owners (shareholders).The shareholders have limited liability. The shares of the corporation are sold publicly on the stock exchange and must follow laws from exchange commisons due to public markt tarding.The corporation has an indefinite life. It has inc or ltd in the title and the corporation pays its own tax.In Canada, uses International Financial Reporting Standards (IFRS) for financial reporting 

What is accounting?

Accounting identifies and records the economic events of an organization and communicates the results to interested users.

Who are internal users of financial information and what do they do

Senior management,managers, HR, production and other functional areas in a business who -use financial information to support decision-making in the company.

Who are external users of financial information and what do they do

Investors and creditors

Investors(owners) use accounting information to make decisions to buy, hold, or sell their ownership interest .

Creditors, such as bankers (also known as lenders) and suppliers, use accounting information to evaluate the risks of lending money or of selling on credit.

 

What is GAAP?

Generally accepted accounting principles

What is the objective of financial reporting?

provide information useful to existing and potential investors and creditors in making decisions about providing resources to the company.

What are the two fundamental qualitative characteristics of financial reporting?

To have Relevance and faithful representation.

What is Relevance?

information provided in financial statements should be important enough to affect the decisions of users, either by helping them predict future outcomes or by confirming past expectations. The concept of materiality plays a crucial role in determining what information is relevant because it focuses on the significance of the information in the context of decision-making.

What is Faithful Representation?

faithful representation in accounting and financial reporting means that the information presented in financial statements should be a reliable and accurate representation of the economic reality of the business. It should be complete, neutral (with a degree of prudence), and free from material errors to ensure that users can trust the information and make informed decisions based on it. This principle helps maintain the integrity and transparency of financial reporting, which is critical for stakeholders and investors.

What are the 4 enhancing Qualitative characteristics in financial reporting?

Verifiability info must be audited and supported by documents. Like if they have receipts or proof that happened. Estimates can be verified if they keep documents

Comparability if a company uses the same policies year after year.

-   Understandability is terminology that the users can read it’s nice to have quality. They should be able to interpret who has a decent education.

Timeliness. It should be released at a time when the info can be useful to the public in a timely matter.

What are the 4 assumptions that help in providing a consistent framework for accounting practices

Going concern assumption, time period assumption, Stable monetary unit assumption and Separate entity assumption

Explain the Going concern assumption

The going concern assumption assumes that a business will continue to operate indefinitely. it allows us to report certain assets as current assets that will be used or sold in one year and non-current ones that will be sold in future. We then can classify certain liabilities as current and non-current in future. Small businesses can also be called going concern.

Explain Time period assumption

The time period assumption, assumes that the economic activities of an entity can be divided into specific, meaningful time periods, such as months, quarters, or years. This assumption is crucial for measuring and reporting financial performance over a defined period.

Explain Stable monetary unit assumption

The stable monetary unit assumption assumes that the currency used in financial reporting (e.g., the U.S. dollar, euro) maintains a relatively stable value over time. This assumption simplifies accounting by ignoring the effects of inflation or deflation. In reality, the value of money can change over time, which can impact the purchasing power of a currency. However, for the sake of simplicity, accountants assume that the value of the monetary unit remains stable when preparing financial statements.

Explain separate entity assumption

The separate-entity assumption states that a business entity's financial transactions and records should be kept separate from the personal financial transactions of its owners or any other business entities.

What are the two main methods of measuring the elements of financial statements?

Historical cost and Fair value

What is historical cost?

a measurement basis that values assets and liabilities at their original acquisition or transaction cost. In other words, when an asset is initially acquired or a liability is incurred, it is recorded on the balance sheet at the historical cost.

What is fair value?

a measurement basis that values assets and liabilities based on their current market value or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. F

What is the order of financial statements?

Statement of income —> Statement of changes in equity —>Statement of Financial Position —> Statement of Cash flow

What does statement of income report?

reports revenues-expenses for a period of time (range) typically 12 months

What does statement of changes in equity report?

reports specific elements related to owners (shareholders) for a period of time (same as the income statement)

What does Statement of financial position report?

reports assets, liabilities and equity (A – L =E). for a point in time. (for the day)

What does the statemnet of cash flow report?

shows how cash was obtained and used for a period of time.

What is included in a financial statement package?

It Contains the auditor's report which tells you if the information is creditable in the financial statements, the 4 the financial statements, and -       Note disclosures that have info that could influence the investor's decisions

What is a gross profit margin?

it is a common financial ratio used to evaluate the profitability of a company. It provides insight into how well a company is managing its production and cost of goods sold relative to its total sales revenue. The formula is Gross profit / Net sales and the larger the better because it indicates that a company is more efficient at managing its production or purchasing costs, which is a positive sign for profitability.

What are assets?

Assets are the resources that a company owns or controls that will provide future economic benefits. These future economic benefits exist because of the asset's ability to generate cash flows for the company. They arise from past transactions.

Whar are current assets?

assets a company expects to convert into cash, sell, or use up within one year of the company's financial statement date or its operating cycle, whichever is longer. they are -usually listed in the liquidity 

What are non-current assets?

Used over more than one year or the business (aka operating cycle). Have many categories as each category measured or treated differently

What are examples of current assets?

Cash, Trading investments, Accounts receivable, inventory, supplise, prepaid insurance

What are examples of non-current assets?

investments: are held for non-strategic purposes, management does not have the intention to sell them in 12 months.

Property, Plant and Equipment: physical, operating the business, land, buildings, furniture

Intangible Assets and Goodwill: no physical form. Trademarks, and software, might have finite lives or indefinite lives. Goodwill is a special one

How do you calculate depreciation of PPE?

Straight line = cost of PP&E / Est. useful life (years) = annual depreciation expense

 Examples: building cost $960,000

Expected to be 24 years

 

960,000/24 = $40,000 ech year

What is an indefinite PPE?

Land and it is not depreciated

What is a liability?

Present duty or obligation to transfer an economic resource in the
future as a result of a past transaction.

what are current liabilities?

Things that are Expected to be paid in one year or the business cycle if longer.
e.g. Accounts payable, salaries payable, intrest payable Deferred revenue,Bank loan payable, and Current portion of long- term debt

What are non-current Liabilities?

 

Things expected to be paid in over one year or the business cycle (not
current)
• e.g. Bank loans, Bonds, Mortgage payable, Leases, Pensions

What is Shareholders equity?

represents the ownership interest in a corporation. It's a critical section of a company's balance sheet, and it's composed of various components, including Share Capital, Retained Earnings, and Accumulated Other Comprehensive Income (AOCI).

What is Share capital?

represents the portion of a company's equity that is raised by selling shares or stock to investors. Shares are units of ownership in the corporation, and individuals who purchase these shares are called shareholders.

What. are the two types of share capital?

• Common Shares: These are the most common type of shares and usually come with voting rights. Shareholders holding common shares have a say in the company's decisions through voting at shareholder meetings.

• Preferred Shares: These shares may come with specific preferences, such as priority in receiving dividends or in the event of a company's liquidation. However, preferred shareholders often do not have voting rights.

What is Retained earnings?

Retained Earnings is an accumulation of a company's profits or losses over time. Each year, the net income (or loss) generated by the company is closed, meaning it's added (or subtracted) to (from) the Retained Earnings account. This represents the portion of earnings that have been retained and reinvested in the business rather than being distributed to shareholders as dividends. Dividends to shareholders are paid out of this account.

What is Accumulated Other Comprehensive Income (AOCI):

Accumulated Other Comprehensive Income (AOCI) accounts for items that impact a company's financial position but are not included in net income. These items are "comprehensive" because they include gains or losses that are not part of the regular income statement. Each reporting year, items of other comprehensive income are closed and added (or subtracted) from the AOCI account. Common items found in AOCI include unrealized gains or losses on investments, foreign currency translation adjustments, and changes in the fair value of certain financial instruments.

What is the Accounting information system?

-This is the system through which accountants collect and process transaction data and communicate financial information.The complexity of the system varies depending on the type of business, size of company, amount of data, and information requirements. A small company would have a very simple one

what is the accounting equation?

Assets = Liabilities + SE

equation must always be balanced!

Explain the T account

Debit on the left and credit on the right

If the left side sum is greater than the left its called the debit balance

If the right side sum is greater than the left side that’s a credit balance

In the T account what are assets normal side?

Asset usually has more on the left side than right   = debit balance

In a T account what are Liabilities and SE normal side?

Liabilities and equity usually have more on the right side = credit balance

What are the 4 steps while recording?

1)    Analyze the transaction

Determine the accounts that will be impacted in the accounting equation.Will the transaction increase or decrease each account?Given the normal balance, will the increase or decrease be a DEBIT (DR) or CREDIT (CR)

2)    Journalize the transaction

A “Journal” is an accounting document each transaction are recorded in date order.The (General) Journal is the most common type It typically has columns for the date, the account names, the debit amount and the credit amount.There may also be specialized journals (Cash receipts, cash disbursements, etc.)

 

3)    Post to the General Ledger

Þ   We will use t-accounts to represent the accounts in the General Ledger. Transactions are usually recorded through an accounting information system which collects information from the journals and posts to the General Ledger.

 

4)    The Trail Balance

A list of all the accounts and their balances at a specific point in time.(to catch errors and prepare for financial
statements

What are the revenue recognition standards for identifying the contract?

the company must identify and establish the existence of a contract with a customer. It's important to note that every sale of a good or service between a customer and a corporation is considered a contract. Contracts can be written or verbal, but all terms and conditions must be clear.

What are the revenue recognition standards?

Identify contracts, identify performance obligations, determine the transaction price, Allocate the price to perform obligations, and recognize revenues as the company satisfies each performance obligation

What are the revenue recognition standards for identifying performance obligations?

Performance obligations represent the promises in the contract to transfer goods or services to the customer. For the transfer of goods, this is relatively clear. For the transfer of services, it may involve identifying whether there is a single performance obligation or multiple obligations. Each obligation should be identified within the contract.

What are the revenue recognition standards for determine the transaction price

In this step, the company determines the transaction price, which is the amount of consideration (something of value, not just cash) that it expects to receive in exchange for transferring the promised goods or services to the customer. It should be the amount the company expects to be entitled to in exchange for providing the goods or services, taking into account variable elements such as discounts or rebates.

What are the revenue recognition standards for Allocate the price to perform obligations

Once the performance obligations and transaction price are identified, the company allocates the transaction price to each of the identified performance obligations. This allocation is typically based on the standalone selling prices of the goods or services if they are sold separately. If standalone selling prices are not available, estimation methods are used

What are the revenue recognition standards for recognize revenues as the company satisfies each performance obligation

Revenue is recognized as the company satisfies each performance obligation. As each service is provided or each good is delivered, the company recognizes revenue equal to the allocated transaction price for that specific obligation. This step ensures that revenue is recognized as the company fulfills its obligations, rather than recognizing all revenue upfront.

What is expense recognition?

Expense recognition, also known as expense accounting or the matching principle, is a fundamental accounting concept that governs when and how expenses are recorded in a company's financial statements.

How do you recognize expenses?

Expenses arise from the day-to-day operations of a business. These transactions can include costs associated with purchasing inventory, paying employee salaries, incurring rent or utility expenses, and other expenditures necessary to operate the business.They are recognized when they provide a current benefit to the company, such as using up resources or services that help generate revenue or maintain the business's operations.

what is accrual accounting?

Accrual accounting is an accounting method that recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid.

What is never in adjusting journal entries?

Cash

What are adjusting entries?

Adjusting entries are a crucial part of the accounting process and are made at the end of an accounting period (typically a month, quarter, or year) to ensure that the financial statements accurately represent a company's financial position and performance.It's important to note that adjusting entries are made to adhere to the accrual accounting principle, which aims to match revenues and expenses in the same accounting period. This principle ensures that financial statements provide an accurate and fair representation of a company's financial performance, even when cash transactions have not yet occurred.

What are the chracteristics of adjusting entries?

They are usually done at the end of a fiscal period, the compnay does the calculations, it impacts atleast one Statement of Income
account and one Statement of Financial Position account, and it has no external exchange with another party.No external

What are Accrual Cash leads?

Accruals are transactions in which cash hasn't yet changed hands, but a company has incurred an obligation or earned revenue. This could be a prepaid expense or deferred revenue

What is deferred revenue

Deferred revenue, also known as unearned revenue, is the opposite of accruals. It represents cash received in advance of delivering goods or services to a customer.

What are Accrual cash follows?

its when accrued revenue and expenses are used to recognize revenues and expenses when they are earned or incurred, even if cash transactions haven't occurred yet.

What is Accrued Revenue?

Accrued revenue occurs when a company has completed a performance obligation (provided goods or services) to a customer, but no cash has been received at the end of the accounting period.

What is Accured expense?

Accrued expenses represent obligations incurred by a company in the current accounting period but for which payment has not yet been made.

What are accural use assets over time?

Accruals, in the context of assets like property, plant and equipment, and intangible assets, are used to allocate the cost of these assets over their useful lives. This allocation is necessary because these assets provide benefits to a company over time, and it's important to match their costs with the periods in which they are used or consumed.

What is depreciation of PPE?

Depreciation is the method of allocating the cost of tangible assets, such as buildings, machinery, or vehicles, over their estimated useful lives.The straight-line depreciation method is a common approach. It allocates the cost of the asset evenly over its useful life. The formula for straight-line depreciation is as follows:

• Depreciation Expense = (Asset Cost - Residual Value) / Useful Life (in fiscal periods)

What are the three Trail Balances?

Unadjusted Trial Balance: Prepared after all regular business
transactions recorded

Adjusted trail balance: Prepared after all adjusting entries are recorded. Financial statements are prepared from this.

POst-closing trial balance: Prepared after all closing entries
recorded

What is the internal control responsibility of Management?

Secure assets, ensure compliance with laws and regulations, promote effective and efficient operations, and ensure faithful financial reporting.

What is the 5 primary components to control systems?

CRIME

Control activities (policies and procedures)

Risk assessment

Information and communication

Monitoring

Environmnet for control (culture/attitude)

What are control activities?

Control activities are an essential component of an organization's internal control system, designed to ensure that business operations are conducted efficiently and effectively, and that financial reporting is accurate and compliant with regulations. They help prevent errors, fraud, and other issues by establishing guidelines and procedures for employees to follow

What are the 6 control activities?

HR control, Assignment of responsibility, segregation of duties, Documentation, Physical Control and review/reconciliation

What are the limitations of internal control?

It can only provide reasonable assurance: Coast may exceed benefit, human error, collusion between people, and management override

What are examples of misstatements?

Recording expenses as assets, Overstating useful lives of PPE, recording revenue that do not exist or when contracts are not complete, and underestimating expenses or overestimating earnings

What is the fraud triangle?

a triangle that helps explain the factors that contribute to fraudulent behaviour within an organization or by individuals. Opportunity, Financial Pressure and Rationalization

What is Cash?

Coins, currency, cheques, money orders, it can be money on hand or in the bank. it can be debit card or bank card transactions and if the bank will accept it for deposit it is considered cash

What are the 3 Cash receipts and payments?

Physical cash, Cheques and Electronic fund transfers(EFT)

What are Bank overdrafts?

Bank overdrafts are a financial arrangement with a bank that allows an account holder (usually a business or individual) to withdraw more money from their bank account than the account balance, essentially creating a negative balance. They are a type of short-term borrowing from the bank and are typically used for managing cash flow needs. They are considered a liability on the balance sheet (bank indebtedness) of the account holder because they represent borrowed funds.

What do cash controls do?

controls help prevent errors, fraud, and mismanagement of cash.

What are key aspects of cash controls

Avoid: using cheques instead of cash

Authroize: Use POS to track receipts, and get signitures

Responsibilities: assign specific person to handle cash

Physical: Use prenumbered cheques, or securing cash in cash registers, safes, or the bank. It helps protect cash assets from theft or loss

What is petty cash?

Cash that is held onsite to reimburse small amounts like office supplies

What is Cash float?

Cash that is held in the register used to make change for customer bills.

What is goodwill?

Goodwill results when a company acquires another company, paying a price that is higher than the value of the purchased company’s net identifiable assets.

What are intangible assets?

assets that do not have any physical substance themselves but represent a privilege or a right granted to, or held by, a company. Examples of intangible assets include patents, copyrights, and trademarks.

What s investing activities?

Investing activities involve the purchase (or sale) of long-lived assets that a company needs in order to operate. examples furniture, equipment, computers, vehicles, buildings, and land

What is accounts recievable?

accounts receivable are assets because they represent an economic resource—the right to receive the cash that will eventually collected from these customers.