Chapter 2 - Enhancing Qualitative Characteristics PDF

# Chapter 2 - Enhancing Qualitative Characteristics - **Comparability:** Comparing financial statements across different periods of the same company and between entities. - **Verifiability:** The financial information is presented in its faithful representation for independent professionals who ver...

# Chapter 2 - Enhancing Qualitative Characteristics - **Comparability:** Comparing financial statements across different periods of the same company and between entities. - **Verifiability:** The financial information is presented in its faithful representation for independent professionals who verify it. - **Timeliness:** Financial information needs to be available to users in time to support decision-making while keeping the information in its economic context. - **Understandability:** Report information that is understandable (clear & concise) for businesses to educate individuals, but do not oversimplify complex information. - **Materiality:** If an omission or misstatement affects the decision. - **Cost or Cost-benefit constraint:** Information that costs more than it adds to the decision-making should **not** be included. ## Assumptions - **Going concern:** The company is expected to operate long enough to use all its assets (buildings) and pay all debts. - **Time period:** Information is provided yearly, but with smaller segments of information (month & quarter) to support users' needs. - **Stable Monetary Unit:** Financial reports are prepared on a historical basis without consideration of inflation and must be in a single monetary unit. - **Separate-Entity:** The company's record *must* be separated from owners' records. ## Accounting Equation **Assets - Liabilities = Shareholders' Equity** ## Measurement - **Historical Cost:** Items recorded at the amount paid for them. - **Fair Value:** Items recorded at market value or adjusted to market prices. # Chapter - Financial Statements - **Statement of Income:** - Reports revenues - expenses for a period of time. - **Corporation Statement of Income** - **Sales - Cost of goods sold = Gross Profit (credit)** - **Revenue:** - Service revenue - Both = Operating Expenses (debit) - **Income from operation = Operating expenses - Gross Profit/Revenue** - Other income and expenses - Interest income - Interest expense - **Income before income tax = Other income and expenses + income from operations** - Income tax expense - **Net Income (double line) = Income before income tax - income tax expense** - **Statement of Changes in Equity:** - Reports specific elements related to the owners (shareholders) - For a period of time - **Corporation Statement of Changes in Equity** - 1. Preferred/Common Shares - 2. Common Shares - 3. Retained Earnings - 4. Total Equity - Balance of beginning of month - Net Income - Dividends declared (negative) - Issued common shares - Balance of end of month (double underline) - **Statement of Financial Position:** - Reports Assets, Liabilities and Equity (A = L + E) - For a point of time - **Assets:** - Present resources / company-controlled - Potential to produce economic benefits - **Current assets:** Expected to be used within a year - Listed in order of liquidity - Examples: Cash, Accounts receivable, Inventory, Supplies, Insurance or investments. - **Non-current assets:** Used over more than one year (Depreciation negative). - Examples: - Investments (not to trade/may be in debt or in shares). - Property, Plant and Equipment (buildings, Furniture, equipment, land). - Intangible Assets and Goodwill (trademarks, copyrights, patents, software). - **Liabilities:** - Present obligation to pay / transfer an economic resource in the future from past transaction. - **Current Liabilities:** Expected to be paid within one year. - Examples: Accounts payable, Deferred Revenue, Salaries, interest, bank-loan (depends). - **Non-Current Liabilities:** Expected to be paid over one year. - Examples: Bank-loan (depends), Bonds, Mortgage, Leases, Pensions. - **Shareholders Equity (double underline):** - Ownership in the corporation. - Owners called Shareholders. - Examples: Common Shares (voting) / Preferred Shares. - Retained Earnings: Net income (loss) - retained earnings. - Accumulated other Comprehensive Income (AOCI) - Strategic investments # Chapter Accounting Information System - Accountants collect and process transaction data and communicate financial information. - Complexity depends on: type of business, size of company, amount of data, information requirements. - **Accounting Equation Expanded:** - Shareholders' Equity > Common Shares - > Retained Earnings - Revenues (+) - Expenses (-) - Dividends Declared (-) - **ALORE:** Assets/Expense (DEBIT) LR (CREDIT) O(Shareholder) (Credit) - T - Account Total - Debit: Greater sum is on the left the account has DEBIT balance - Credit: Greater sum is on the right the account has CREDIT - **4 Steps in Recording:** - Analyze: Accounts that will be impacted in the accounting equation (decrease or increase) - Record (journal entry) - Post (transfer to general ledger) - Prepare - Analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts. # Chapter Accrual Accounting Concepts ## IFRS Revenue Recognition 1. Identify the contract. 2. Identify performance obligations. 3. Determine the transaction price. 4. Allocate the price to the performance obligation. 5. Recognize revenue as the company satisfies each performance obligation. - **Accrual Accounting:** Revenue recognized when performance is completed, expenses recognized when good consumed to support business process. - **Adjusting Entry:** No cash, the prepaid turns to credit. - **Post-closing trial balance:** Is shown in common shares.