Exam 2 471

describe the primary objective of financial reporting

to provide financial information that is useful to captial providers

describe the fair value hiearchy

-1 most desirable- quoted market price in active markets for identical assets or liabilities -2- inputs other than quoted prices that are observable for the assets or liability -3 least desirable- unobservable inputs that reflect the entity's own assumptions about the assumptions market participants would use in pricing the assets or liability developed based on the best infor available in the circumstances

remember and define the classification of elements within the balance sheet

-assets- are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Simply, those are the economic resources of a company -liabilities- are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Simply, these are the obligations of a company -equity- (net assets) for a corporation is the residual interest in the assets of an entity that remains after deducting liabilities stated another way, equity equals total assets minus total liabilities

3 approaches to fair value

-market approach (identical or comparable assets) -income approach (present value) -cost approach (replacement cost)

remember and be able to apply definitions of elements of financial statements

1. assets- future economic benefits obtained or controlled by a particular entity as a result of past transactions 2. liabilities- future sacrafices of economic benefits or provide services to other entities in the future as a result of past transactions 3. equity- the residual interest in the assets of an entity that reamins after deducting its liabilities 4. revenues- INFLOW or other enhancements of assets of an entity or settlemetns of its liability from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central options 5. expenses- OUTFLOW or using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's on going major or central operations 6. gains- are INCREASES that results revenues or investments by owners 7. losses- are DECREASES that result expenses or distributions to owners 8. investment by owners- are increases in equity resulting from transfers to it from other entities to increase ownership interest 9. distribution to owners- are decreases in equity resulting from transferring to it from other entities to increase ownership interest 10. comprehensive income- is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources

remember and be able to apply general recognition criteria

1. definition- the item meets the definition of an element of financial statements 2. measurability- the item has a relevant attribute measure with sufficient reliability 3. relevance- the information about it is capable of making a difference in users decisions 4. reliability- the information is representationally faithful, verifiable, and neutral

identify accounting erros and the 3 basic types of accounting changes and describe the appropriate accounting approaches for them

1. retrospective approach 2. modified restrospective approach 3. prospective approach