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Chapter 2

Chapter 2 Midterm Review - MGAB01.docx

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Financial Accounting
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G.Quan Fun

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Chapter 2: Transaction: an exchange between a business and one or more external parties to a business or a measurable internal event, such as adjustments for the use of assets in operations. Account: a standardised format that organizations use to accumulate the monetary effects of transactions on each financial statement item. Overview of accounting concepts: Primary objective of external financial reporting: provides useful economic info about a business to help external parties make sound financial decisions. - Primary Qualitative Characteristics: a) Relevance: Timely, predictive and has feedback value b) Faithful Representation: Accurate, Unbiased and verifiable - Secondary Qualitative Characteristics: a) Comparability: across businesses b) Consistency: Overtime c) Understandability Accounting Assumptions: - Separate entity: business transactions are separate from the transactions of the owners. - Unit of measure: accounting info should be measured and reported in the national monetary unit. - Continuity (going concern): businesses are assumed to continue to operate into the foreseeable future without forced liquidation. - Periodicity: the long life of a company can be reported in shorter periods. Accounting Principle: - Cost principle (historical cost): requires assets to be recorded at the historical cash-equivalent cost, which is cash paid plus the current monetary value of all non-cash considerations also given in the exchange. - Objectivity: amount used in recording transactions are to be based on objective evidence rather than subjective judgements. - Revenue recognition: revenue is required to be assigned to the accounting period which is earned - Matching: revenue and expenses are required to be matched - Full disclosure: events that make a difference to users should be disclosed. Elements of the classified statement of financial position: a) Assets: economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained.  Current assets: assets that will be used or turned into cash 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: assets that are considered to be long term (>1 year) (i.e property, plant and equipment, goodwill, intangible as
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