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Chapter 2

Chapter 2 Study Guide

Financial Accounting
Course Code
Douglas Kong

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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
: 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
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
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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