Ch 2. Analyzing Transactions and Their Effects on Financial Statements

What are accounting standards?

• provides companies with a broad set of rules to be followed when preparing their financial statements

• enhance usefulness of financial information, ensures understanding of information

• allows for evaluation and comparison of financial statements between companies

Do all Canadian companies use the same accounting standards?

No

• all Canadian public companies are required to prepare financial statements using IFRS

• private companies generally follow ASPE, but can use IFRS

IFRS stands for?

ASPE stands for?

International Financial Reporting Standards

Accounting Standards for Private Enterprises

What does it mean when a company is interlisted?

when a company is listed on multiple stock exchanges, meaning its shares trade on more than one stock exchange

Who sets the accounting standards used in Canada?

• the Canadian Accounting Standards Board (AcSB) is responsible for developing and establishing the accounting standards used by Canadian companies

• they are responsible for public and private

• the responsibility for ongoing development of IFRS belongs to International Accounting Standards Board (ASB)

How do the standard setters determine what constitutes useful financial information?

• IASB and IFRS have developed conceptual frameworks of financial reporting

• number of objectives in mind, to assist

  • organizations as they develop new financial reporting standards

  • accountants in determining how to account for items for which no specific accounting standards have been developed

  • users in their interpretation of the information contained in the financial statements

IASB identified four other qualitative characteristics that increase the usefulness of financial information

• comparability

• verifiability

• timeliness

• understandability

standard setters consider whether information has - or -

predictive value, confirmatory value

predictive information

information that users can use as the basis for developing expectations about the company’s future

information is considered to be material if it, or its absence, would - of a financial statement user

impact the decisions

to be representationally faithful information, it must be (three things)

complete, neutral and free from error

fundamental qualitative characteristics

• relevance

  • predictive value

  • confirmatory value

  • materiality

• faithful representation

  • completeness

  • neutrality

  • freedom from error

enhancing qualitative characteristics?

constraints?

comparability, timeliness, understandability

cost constraint

going concern basis?

going concern assumption?

expectation that a company will continue operating for the forseeable future, at least 12 months

assumption that a company will continue to operate for the forseeable future, meaning that it will be able to realize its assets and discharge its liabilities through the normal course of its operations

cash basis of accounting?

the accounting basis, used by some entities, that recognizes revenues whenever cash is received and expenses when cash is paid, regardless of whether the revenues have been earned or expenses incurred

under cash basis of accounting,

revenues are recorded when the cash is -

expenses are recorded when the cash is -

received

paid

accrual basis of accounting?

the accounting basis, used by almost all companies, that recognizes revenues in the period in which they are incurred, and not necessarily in the period when the related cash inflows and outflows occur

under accrual basis of accounting

revenues are recorded when they are -

expenses are recorded when they are -

earned

incurred

what is the accounting equation template approach to recording transactions?

template approach or synoptic approach

template approach or synoptic approach

the most basic of accounting systems, which uses the accounting equation for transaction analysis and recording

when using the accounting equation to analyze and record transactions, (three things)

• every transaction must affect at least two accounts

• each line must balance

• each entry in the retained earnings column must be accompanied by an entry in the final column indicating whether it results from a revenue, an expense, or the declaration of a dividend

how do we know if the company was profitable during the accounting period?

look at statement of income

how can we tell if the equity position of shareholders changed during the accounting period

look at statement of changes in equity

how do we determine the company’s financial position at the end of the accounting period

classified statement of financial position

• statement of financial position in which the assets and liabilities are listed in liquidity order and are categorized into current or non-current sections

working capital =

current assets - current liabilities

how can we tell if the company’s cash position changed during the accounting period

cash flows from operating activities normally generate a net - of cash

cash flows from investing activities normally generate a net - of cash

inflow, outflow