Chapter 2 Study Guide

25 views1 pages
Published on 29 Jun 2011
School
UTSC
Department
Financial Accounting
Course
MGAB01H3
Professor
Chapter 2
·objective of financial reporting: to provide useful economic information to external users for
decision making and for asses s ing future cash f lows
·Qualitative characteristics
relevancy
: makes a difference in a decision, predictive value, feedback/confirmator y value
faithful representation
: complete, neutral, reasonably free from error or bias
comparability: across companies
verifiability: similar results under independent measures
timeliness: information must be available before it loses its usefulness
understandability: allows reasonably informed users to see the significance of the information
·Assumptions
Separate entity: activities of the business are separate from activities of owners
Continuity: the entity will not go out of business in the near future
Unit of measure: accounting measurements will be in the national monetary unit
·Principle
Historical cost
: cash equivalent cost given up is the basis for the initial recording of elements
·Current assets: assets tha t will be used or tur ned into cash, normally within one year. Inventory is
always considered to be a current asset, regardless of t he time needed to produce and sell it.
·Non-cur rent assets: are considered to be long term because they will be us ed or tuned into cash
over a period longer t han the next year
·Current liabilities: probable debts or obligations of the entity tha t result form past transactions,
which will be paid in cash (or other current assets) or satisfied by providing service for the coming
year. (* accrued liabilities; income tax payable)
·Non-cur rent liabilities: a companys debts or obligations that have maturities that extend beyond
one year from the statement of f inancial position date. (* deferred income tax liabilities; provision)
·Shareholders equity (owners equity or stockholders equity) is the financing provided by the
owners and the operations of the business
share capital (or capital stock);
Retained earnings: accumulated earning that have not been declared as dividens
Other components
·External events: exchange of assets and liabilities between the business and one or more other
parties. (e.g. bor row cash from the bank)
·Internal events: not an exchange between the business and other parties, but have a direct effect on
the accounting entity (e.g. loss due to f ire damage)
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Document Summary

Objective of financial reporting: to provide useful economic information to external users for decision making and for assessing future cash flows. Principle (cid:0) historical cost: cash equivalent cost given up is the basis for the initial recording of elements. Current assets: assets that will be used or turned into cash, normally within one year. Inventory is always considered to be a current asset, regardless of the time needed to produce and sell it. Non-current assets: are considered to be long term because they will be used or tuned into cash over a period longer than the next year. Current liabilities: probable debts or obligations of the entity that result form past transactions, which will be paid in cash (or other current assets) or satisfied by providing service for the coming year. (* accrued liabilities; income tax payable)

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