ACC Additional Theory Questions Essay

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Chapter 2
1. The primary objective of financial reporting is to communicate information to permit users of the information to make informed decisions.
2. Qualitative characteristics make accounting information useful.
Understandability: the quality of accounting information that makes it comprehensible to those willing to spend the necessary time.
Relevance: the capacity of information to make a different decision.
Reliability: the quality that makes accounting information dependable in representing the events that it purports to represent.
Comparability: for accounting information, the quality that allows a user to analyze two or more companies and look for similarities and differences.
Consistency: for accounting information, the quality that allows a user to analyze two or more accounting periods for a single company.
Materiality: the magnitude of an accounting information omission or misstatement that will affect the judgment of someone relying on the information.
Benefit versus cost constraint.
3. Depreciation: the process of allocating the cost of a long-term tangible asset over its useful life. Also termed amortization.
4. Materiality: the magnitude of an accounting information omission or misstatement that will affect the judgment of someone relying on the information.
5. Benefit versus cost constraint: the benefits of accounting information should exceed the costs of providing the information.
6. Classified balance sheet is helpful in evaluating the liquidity of a business.
7. Current assets: cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year. eg, cash, accounts receivable, inventory prepaid expense.
Non-current assets: any assets that do not meet the definition of a current asset.
Current liabilities: an obligation that will be satisfied within the operating cycle or within one year if the cycle is shorter than one year.
Long-term liabilities: any obligation that will not be paid or otherwise satisfied within the next year or the operating cycle.
Shareholders equity: represents the owners’ claims on the assets of the business.
8. It is useful in any analysis of a company’s financial position by separating both assets and liabilities into those that are current and those that are non-current.
9. Income statement is used to summarize the results of operation of an entity for a period of time.
Single-step income statement: an income statement in which all expenses are added together and subtracted from all revenues.
10. The statement of retained earnings provides a link between the income statement and balance sheet. Beginning retained earnings, net income, dividends declared and paid and retained earnings are included.
11. The statement of cash flows classifies cash inflows and outflows as originating from three activities: operating, investing and financing.
12. Income statement should be completed first. Income statement->Balance sheet->statement of retained earnings->cash flows statement.

Working capital: current assets – current liabilities
Current ratio: current assets/current liabilities
Profit margin: net income/sales or revenue

Chapter 3
1. Event: a happening of consequence to an entity.
Transaction: any event that is recognized in a set of financial statements.
2. External event: involves interaction between the entity and its environment. eg, the payment of wages to an employee, hiring of a new employee.
Internal event: occurs entirely with in the entity. eg, the use of a piece of equipment. When an event is recognized in a set of financial statement then it is a transaction.
3. Source document provides the evidence needed in an accounting system to record a transaction.

Chapter 4
1. When economic events affect on the financial statement.
2. Recognition: the process of including an item in the financial statement of an entity.
3. Historical cost: the amount paid for an asset and used as a basis for recognizing it on the balance sheet and
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