Financial Accounting and Reporting 1

Study Notes

Materiality and Aggregation: Immaterial amounts should be grouped into one line item on financial statements to maintain clarity.
Entity Concept: Business is viewed as a separate entity from its owners and employees. For example, money deposited in an owner's bank account is not part of the company’s cash.
Monetary Principle: Uses money as the measurement unit; transactions must be quantifiable in financial terms, assuming the stability of money's value over time.
Cost Principle: Assets must initially be recorded at their original acquisition cost, ensuring accurate financial representation.
Objectivity/Reliability: Financial data should be verified through documented evidence, such as invoices, ensuring confidence in the truthfulness of financial statements.
Going Concern Principle: Assumes that a business will continue to operate indefinitely unless proven otherwise, enabling ongoing contract fulfillment.
Materiality Principle: Allows for flexibility in GAAP adherence when items are not significant enough to impact the financial statement's fairness.
Disclosure Principle: Requires transparency of significant information related to financial statement preparation to avoid misleading representations.
Accounting Equation: Assets = Liabilities + Owner’s Equity; highlights the balance between resources, creditor's equity, and owner's contributions.

Transaction: Represents a completed action expressible in monetary terms.
Assets: Resources controlled by an entity due to past transactions, expected to yield future economic benefits.

Current Assets: Expected realization within 12 months or the operating cycle; includes cash, accounts receivable, and inventories.
Non-Current Assets: All assets not classified as current, such as property, plant, and equipment (PPE). Criteria for PPE include physical existence, permanence, depreciation, use in operations, and not being for sale.

Definition: Present obligations from past transactions leading to future resource outflows.
Classifications:
- Current Liabilities: Expected to be settled within the operating cycle (e.g., notes payable, accounts payable).
- Non-Current Liabilities: Liabilities not classified as current (e.g., mortgage payable, bonds payable).

Definition: Residual interest in assets after deducting liabilities. Affected by revenue and owner contributions; decreases with expenses and withdrawals.
Types of Equity:
- Owner’s Capital: Resources invested by the owner.
- Owner’s Drawing: Records withdrawals of cash or non-cash assets by the owner.

Format: Uses "as of" to indicate the date; assets arranged according to liquidity.
Considerations: Deduct allowance for bad debts from accounts receivable to ascertain net realizable value.