Accounting Chapter 1 Overview

What is the definition of accounting?

What are the three important activities in accounting?

Only accountable events are recognized in the identifying process.

What are the two types of events in accounting?

Which of these is NOT a measurement base used in accounting?

What is the most commonly used measurement base in accounting?

What is the primary governing body for general purpose accounting information?

What are the two parts of the double-entry system?

The stable monetary unit concept assumes that purchasing power remains stable over time.

The time period concept divides the life of the business into small, equal time periods.

The materiality concept states that information is material if it could influence economic decisions.

The cost-benefit concept suggests that the benefits of providing information should always exceed the costs.

The accrual basis of accounting recognizes transactions when cash is received or paid.

The historical cost concept determines an asset's value based on its current market price.

The concept of articulation emphasizes the interconnectedness of all components within a set of financial statements.

The full disclosure principle states that financial statements should provide maximum detail, regardless of the costs involved.

The consistency concept emphasizes using the same accounting practices for all businesses.

The matching concept recognizes expenses when they are incurred, regardless of when revenue is earned.

The residual equity theory applies only to businesses with a single class of shares.

The fund theory focuses on managing and protecting the assets of the entity.

The realization concept involves converting non-cash assets into cash or claims on cash.

Prudence (conservatism) emphasizes a cautious approach when making estimates, preventing overstatement of assets and income.

Financial accounting focuses on providing general-purpose financial statements to external users.

Management accounting provides specific financial reports that are primarily used by the entity's management.

Cost accounting systematically records and analyzes the costs associated with the production of goods or services.

Auditing involves evaluating the consistency of financial statements with established accounting standards.

Tax accounting involves preparing tax returns and providing tax advice to individuals and businesses.

Government accounting primarily focuses on the efficient allocation of public funds.

The practice of public accountancy involves providing accounting services exclusively to non-profit organizations.

The practice of commerce and industry involves accounting positions within companies that are not publicly traded.

The practice of education/academe primarily involves teaching accounting and finance to students.

The practice in the government involves accounting roles within both federal and local government agencies.

The conceptual framework for financial reporting sets forth the basic principles that underlie the preparation and presentation of financial statements.

What is the primary objective of general-purpose financial reporting?

A secondary objective of financial statements is to provide insights into the effectiveness of the entity's management.

Who are considered the primary users of general-purpose financial reports?

Financial statements are designed to meet the specific needs of all users, including both primary and secondary users.

Qualitative characteristics of financial information emphasize the importance of accuracy and reliability.

Relevance refers to the ability of financial information to influence decisions made by users.

Faithful representation implies that financial information is complete, neutral, and free from error.

Enhancing qualitative characteristics help improve the usability and understandability of financial information.

An asset is a resource controlled by the entity as a result of past events, and from which future economic benefits are expected to flow to the entity.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources.

Equity represents the residual interest in the assets of the entity after deducting its liabilities.

Income includes only revenues, while expenses include only losses.

PAS 1 prescribes the basis for the presentation of general-purpose financial statements, ensuring consistency and comparability across entities.

A complete set of financial statements includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, notes, comparative information, and an additional statement of financial position as needed.

The fair presentation concept requires entities to prepare financial statements in accordance with PFRSs, ensuring that the statements are accurate and reflective of the underlying economic activities.

An entity is considered a going concern if it plans to liquidate or cease trading in the near future.

Accrual basis accounting records transactions only when cash is received or paid, providing a clear picture of the entity's cash flow.

Materiality and aggregation require that similar items are presented separately in the financial statements, to help users understand the entity's financial position more effectively.

Offsetting allows entities to combine assets and liabilities, income and expenses, as long as the combined amount is material.

Entities are required to present comparative information from the previous period for all amounts reported in the current period's financial statements.

Consistency of presentation encourages entities to change the presentation and classification of items in the financial statements from one period to the next, to keep the information up-to-date and more relevant.

A statement of financial position can be classified into current and noncurrent items, or presented in an unclassified format, based on liquidity.

An entity is required to classify an asset as current when it expects to realize the asset, or intends to sell or consume it within twelve months of the reporting period.

A liability is classified as current when the entity expects to settle the liability within twelve months of the reporting period.

Deferred tax liabilities and assets are presented as noncurrent items in a classified statement of financial position, regardless of their expected dates of reversal.

Entities can choose to present income and expenses in a single statement, or in separate statements for profit or loss and other comprehensive income, providing flexibility for presentation.

Total comprehensive income includes all components of profit or loss, and other comprehensive income, providing a complete picture of the entity's financial performance.

The nature of expense method classifies expenses based on their nature, such as cost of goods sold, selling expenses, and administrative expenses.

Inventories are assets held for sale in the ordinary course of business, or used as materials or supplies in the production of goods or services.

Inventories are measured at the lower of cost and net realizable value, ensuring that they are not overvalued in the financial statements.

The cost of inventories includes all costs incurred in bringing the inventories to their present location and condition, ensuring a comprehensive picture of the costs associated with acquiring and preparing goods for sale.

Net realizable value is determined by subtracting estimated selling costs and estimated completion costs from the estimated selling price, providing a realistic assessment of the potential revenue that can be generated from selling the inventories.

The specific identification method is best suited for inventories that are unique or easily identifiable, ensuring that the cost of goods sold is accurately matched to the specific units sold.

The FIFO method assumes that the oldest inventory items are sold first, leading to a more accurate representation of the costs of goods sold, particularly in times of inflation.

The weighted average cost method calculates the average cost of all inventories purchased during the period, providing a smoothed-out cost of goods sold, particularly useful in times of fluctuating costs.

The carrying amount of inventory sold is recognized as an expense in the period in which the related revenue is recognized, ensuring that the cost of goods sold is appropriately matched to the revenue generated.