Continuity Assumption There is an assumption that the life of an entity will be long enough to fulfill its financial and

legal obligations. Any evidence to the contrary must be reported in the financial statements of an entity Historical cost principle Assets and liabilities are recorded at their actual historical cost. When an asset is written off, the loss is recorded as the historical cost of the asset less any accumulated depreciation. Land and building with respective appraised values of $60,000 and $1 0,000 were purchased for $!!,000 and $160,000. "oth assets will be recorded at the respective costs of $!!,000 and $160,000. #f a company uses current mar$et value to report the value of its assets on the balance sheet, the company would be violating which principle% Objectivity principle Accounting records must be designed and kept on objective rather than subjective evidence. Underlying verifiability must exist for the information contained in the financials. The historical cost must be verifiable through legitimate proof of purchase states that a company&s financial information be based on verifiable data. #e. 'imberly (isher purchases e)uipment for *ola *ompany and records the transaction based on an invoice prepared by the store of purchase. (inancial statement information must be supported by independent, unbiased and verifiable evidence. Revenue Recognition Principle +evenues are recorded when they are earned, regardless of when cash is received. revenue is reali,ed -reported on the boo$s as earned. when everything that is necessary to earn the revenue has been completed. Separate Entity Assumption /he business is an entity that is separate and distinct from its owners, so that the finances of the firm are not co0mingled with the finances of the owners. 1ach economic entity or business of the owner must $eep accounting records and reports that are separate from those of the owner and any other economic entity of the owner. Unit of measure Assumption /ransactions and activities of a business are recorded using amounts of money.

*ola *ompany is a *anadian company and records and reports transactions in *anadian dollars. #t purchased e)uipment from the 2nited 3tates for 23$!4,000 and recorded in the accounting records at the *anadian e)uivalent of *dn$ 5,400.

Current asset Asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 14 months #e. 6repaid insurance, *ash, prepaid interest, property plant and e)uipment, accounts receivable, short term notes receivable, prepaid rent Long Term nvestments An account on the asset side of a company&s balance sheet that represents the investments that a company intends to hold for more than a year. #e. stoc$s, bonds, real estate and cash Property Plant! E"uipment

#e. 3upplies, 1)uipment, Accumulated amorti,ation ntangible Assets 3omething of value that cannot be physically touched, such as a brand , franchise , trademar$ Current Liabilities A company&s debts or obligations that are due within one year #e. 3hort term debt, accounts payable, accured liabilities, debts, interest payable, unearned fees, property ta7es payable, advertising payable Long Term Liabilities +ecorded on the balance sheet, a company&s liabilities for leases, bond repayments and other items due in more than one year. S#are#ol$ers E"uity Firm's total assets minus its total liabilities. !uivalently" it is share capital plus retained earnings minus treasury shares. #hareholders' e!uity represents the amount by which a company is financed through common and preferred shares.

Also known as $share capital$" $net worth$ or $stockholders' e!uity$. %eferre$ revenue +evenue that is considered a liability until it becomes relevant to the business at hand, ie. payment received for wor$ that has not yet been performed. 0cash received prior to being earned Accrue$ revenue +evenue earned in the current accounting period, but which will be collected in a subse)uent period. Also called unreali,ed revenue. %eferre$ e&pense +efers to an item that will initially be recorded as an asset but is e7pected to become an e7pense over time and8or through the normal operations of the business. 9eferred e7penses are sometimes called prepaid e7penses 0ie. *ash was paid for insurance prior to being used Accrue$ E&pense Accrued e7pense refers to an e7pense that has been incurred but not yet paid ' 17amples of accrued e7pense items might be interest that has accrued on an outstanding note that has not been paid, and ta7es that have accrued but not yet been paid. 0ie. *ash will be paid to employees in the future 0ta7es will be paid in the future Accounts Receivable

one of a series of accounting transactions dealing with the billing of a customer for goods and services they have ordered. Accounts payable file or account sub0ledger that records amounts that a person or company owes to suppliers, but has not paid yet -a form of debt., Ratios(

9ebt to e)uity: total liabilities8total shareholder;s e)uity Total asset turnover : net sales8average total assets Return on assets : net income8average total assets Return on e"uity : net income8average shareholder;s e)uity )et profit margin: net income8net sales +eceivable turnover : net sales 8 average net trade receivables Capital ac"uisitions ratio : cash flow from operating activities *ash paid for property and e)uity *uality of income ration : cash flow from operating activities8net income
Accounts receivable <pen accounts owed to the business by trade customers. #ts created when there is a credit sale. )ote receivable A written promise that re)uires another party -ie. *ustomer. to pay the business a specified amount of money called principal at a specific future date, called the maturity $ate. Tra$e receivable *reated in the normal course of business when there is a sale of merchandise or service on credit. )on+tra$e receivable Arises from transactions other than the normal sale of merchandise or service;s. Allo,ance met#o$ "ases bad debt e7pense on an estimate of uncollectable accounts. -a$ $ebt e&pense .$oubtful accounts e&pense! uncollectable accounts e&pense/ /he e7pense associated with estimated uncollectable accounts receivable.

+ecorded through an ad=usting =ournal entry at the end of the accounting period. "ad debt e7pense 0> *redit sales 7 bad debt rate /he bad debt e7pense amount recorded in the end0of0period ad=usting entry often is estimated
based on either 1. a percentage of the total credit sales for the period 4.an aging of accounts receivable Allo,ance for $oubtful accounts .allo,ance for ba$ $ebts! allo,ance for uncollectable accounts/ #s a contra0asset account containing the estimated uncollectable accounts receivable. /he balance in allowance for doubtful accounts is always subtracted from the balance of the asset accounts receivable. /he entry decreases the net boo$ value of accounts receivable and total assets. Percentage of cre$it sales met#o$ "ases bad debt e7pense on the historical perspective of credit sales that result in bad debts. Aging of accounts receivable met#o$ 1stimates uncollectable accounts based on the age of each account receivable. Representational fait#fulness

Agreement between what really happened and the disclosed information.

/he information can be depended upon

/imely information to e7ternal users to limit the possibility of selective lea$age of information. *ompanies announce quarterly and annual earnings through press releases.

 Written public news announcement normally distributed to ma=or news service;s. Timeliness A proprietary rating system used to rate stoc$s while ta$ing into account earnings changes and price performance in order to assess potential price performance over the short term. *ommon mar$et factors are not measured in this stoc$ rating system. Annual reports for privately held companies, are simple documents with 1. financial statements? income statement, balance sheet, statement of retained earnings and cash flow statement 4. related notes -footnotes. and 5. report of independent accountants -auditor;s opinion. usually summari,ed financial data for !0or 10 year period @anagements discussion analysis of financial condition and results of operations.
*uarterly reports "egin with short letter to shareholders. (ollowed by condensed income statement for the )uarter and condensed balance sheet. /hese are unaudited. Ao cash flow statements, statement of reatained earnings and financial statements. Relevance *an influence a decisionB it is timely and has predictive and or feedbac$ value. *an influence decisions by helping them asses the impact of past activities and or predict future events. *omparability 1nables users to identify similarities and discrepancies between two sets of financial reports produced by two different companies. *onsistency *an be compared over time because similar accounting methods have been applied

Applications of the same accounting methods over time Aeutrality +elated to the measurement of presentation and information
2sefulness of accounting information is when its unbiased