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RSM220H1 Study Guide - Final Guide: Accrual, Deferral, Net Income

Rotman Commerce
Course Code
Dragan Stojanovic
Study Guide

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Chapter One: The Cdn Financial Reporting Environment
AcSB (Canadian Accounting
Standards Board)
GAAP for private entities, not-for-
profit corporations, pension plans
CICA Handbook
• “due process”
• EIC (EIC Abstracts)
IASB (International
Accounting Standards Board)
GAAP for public companies (IFRS) • Original IASC
• IASC Foundation
• IFRIC (IFRIC Interpretations)
• SAC (Standards Advisory Council)
FASB (Financial Accounting
Standards Board)
GAAP for U.S. entities • SEC
Funding should be (according to IASB): BCOC
Broad-based: It should not rely on one
or a few sources.
Compelling: Constituents should not be allowed to benefit from the standards without contributing to the
process of standard setting.
• Open-ended: Financial commitments for funding should not be contingent upon any particular outcomes that
may infringe upon independence in the standard-setting process.
Country-specific: Funding should be shared by the major economies on a proportionate basis.
Chapter Two: Conceptual Framework
(1)Objectives of Financial Reporting: goals/purposes
(2a) Qualitative Characteristics: bridge b/w level 1 and 3
i. FUNDAMENTAL Qualitative Characteristics
a. Relevance
i. Predictive/feedback value
b. Representational Faithfulness
i. Neutral, complete, free from material error/bias
ii. Transparency
ii. ENHANCING Qualitative Characteristics
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability
a. Materiality
b. Trade-offs
c. Cost vs. Benefits
(2b) Elements of Financial Statements: bridge b/w level 1 and 3
a. They involve present economic resources (scarce/capable of producing cash flows)
b. The entity has right or access to these resources where others do not (restricted/enforceable)
v. LIABILITIES (also—constructive obligations)
a. They represent an economic burden or obligation
b. The entity has a present obligation which is enforceable
vi. EQUITY: net assets is a residual interest in the assets of an entity that remains after deducting
its liabilities (i.e. net worth)
vii. REVENUES: Increases in an economic resources either by:
a. Inflows
b. Enhancement of entity’s assets
c. Settlement of liabilities resulting from the entity’s ordinary activities
viii. EXPENSES: Decrease in economic resources either by:
a. Outflows
b. Reduction in assets

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c. Incurrence/creation of liabilities from entity’s ordinary revenue-generating activities
ix. GAINS: increases in equity (net assets) from an entity’s peripheral or incidental
transactions and from all other transactions and other events and circumstances affecting the
equity during a period, except those that result from revenues or investments by owners
x. LOSSES: decreases in equity (net assets) from an entity’s peripheral or incidental
transactions and from all other transactions and other events and circumstances affecting the
entity during a period except those that result from expenses or distributions to owners
xi. COMPREHENSIVE INCOME: net income + other comprehensive income
(3) Foundational Principles: implementation
a. Economic Entity Assumption: can identify an economic activity w/ a particular unit of
accountability (legal unit and subsidiaries)
b. Control. Components:
i. There is power to direct the entity’s activities. The reporting entity must be able to make
strategic decision for the entity.
ii. Only one entity has the power to direct the activities of the entity in question. Control
precludes the sharing of power.
iii. Power need not be exercised or absolute. Reporting entity must have ability to control
other entity, it need not exercise that control.
iv. The reporting entity should have access to the benefits from the entity.
c. Revenue Recognition and Realization (ref. page 6)
i. Revenue Recognition Principle:
1. Risks and rewards have passed or the earnings process is substantially
2. Measurability is reasonably certain
3. Collectability is reasonably assured
ii. Contract-based Approach:
1. Contract recognized when:
a. The entity becomes party to the contract
b. The resulting rights and obligations are measureable (inc. credit risk)
2. Resulting revenues recognized when:
a. Control over the goods passes
b. Performance obligations are settled
d. Matching: Efforts (expenses) matched with accomplishment (revenues) – when reasonable
a. Periodicity: Enterprise’s economic activities can be divided into artificial time periods.
b. Monetary Unit: Money is the common denominator of economic activity; appropriate basis
for accounting measurement and analysis.
c. Going Concern: Assumption that business will continue to operate for foreseeable future
d. Historical Cost: 3 assumptions:
i. It represents a value at a point in time
ii. It results from a reciprocal exchange (i.e. two-way)
iii. The exchange is with an outside party
e. Fair Value: “the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction b/w market participants at the measurement date” – exit price (market-
based vs. entity-specific – synergies)
a. Full disclosure: detailed enough and condensed enough
• Management remuneration arrangements; debt covenants; EPS
• Principle-based (IASB/CdnGAAP) vs. Rules-based (FASB); Financial Engineering
Chapter Three: Accounting Information System

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Assets = Liabilities + Common
+ Retained
- Dividends + Revenues - Expenses
DR. + CR. - DR. - CR. + DR. - CR + DR. - CR. + DR. + CR. - DR. - CR. + DR.+ CR.-
The Accounting Cycle:
1. Identification and measurement of transactions and other events; external vs. internal
2. Journalization; general journal
3. Posting; journal general ledger
4. Trial balance preparation
5. Adjustments – revenue recognition principle and proper matching
1. Prepaid Expenses. Expenses paid in cash and
recorded as assets before they are used/consumed.
3. Accrued Revenues. Revenues earned but not yet
received in cash or recorded.
2. Unearned Revenues. Revenues received in cash
and recorded as liabilities before they are earned.
4. Accrued Expenses. Expenses incurred but not yet
paid in cash or recorded.
Adjusting Entry: Prepaid Expenses Adjusting Entry: Unearned Revenue
Asset Expense Liability Revenue
entry (-)
entry (+)
entry (+)
entry (+)
Adjusting Entry: Accrued Revenue Adjusting Entry: Accrued Expenses
Asset Revenue Expense Liability
entry (+)
Entry (+)
entry (+)
entry (+)
6. Adjusted trial balance
7. Statement preparation
8. Closing
a. Income Summary:
• Revenue accounts (credit +) Income Summary for Revenue (credit +)
• Expense accounts (debit +) Income Summary for Expense (debit +)
• Income Summary $XXX (usually credit balance)
Retained Earnings $XXX
b. Inventory: Perpetual and Periodic
9. Post-closing trial balance
10.Reversing Entries
Chapter 4: Reporting Financial Performance: INCOME STATEMENT:
1. Evaluate the enterprise’s past performance and profitability.
2. Provide a basis for predicting future performance.
3. Help asses the risk or uncertainty of achieving future cash flows.
1. Items that cannot be measured reliably are not reported in the income statement.
2. Income numbers are affected by the accounting methods that are used.
3. Income measurement involves the use of estimates.
4. Differing views on how to account for net income.
Quality of earnings:
1. Content:
a. Integrity of the information: whether it reflects underlying business fundamentals
b. Sustainability of the earnings
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