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Intermediate financial accounting 1

Tutorial 1
E-mail: samsit@hku.hk
Consultation: By appointment
Venue: 609, KKL

Recap-Qualitative Characteristics
 Relevance=Confirmatory value & Predictive value – Predictive value=it helps
users predict a company’s future cash flows. Confirmatory value= it helps
investors confirm or change their prior assessments regarding a company’s cash
flow generating ability. + Materiality -- Omitting or misstating this item would
affect users’ decisions. Dollar size or nature
 Faithful Representation= Complete-- it includes all the information necessary for
faithful presentation of the economic phenomenon. + Free from error -- there are
no errors or omissions in the description of the amount or the process used to
report the amount. + Neutrality – it is free from bias.
 Comparability – helps users see similarities and different events and conditions
 Consistency – practices over time permits valid comparisons among different
reporting periods. (eg. FIFO, straight line depreciation method)
 Verifiability – implies that different knowledgeable and independent measurers
would reach consensus. (eg. Bank confirmation, creditor confirmation, etc)
 Timeliness - Information is timely when it is available to users early enough to
allow them to use it in their decision process
CCTVU-enhancing qualitative characteristics
 Understandability – Means that users must be able to comprehend the
information within the context of the decision being made. Users with
reasonable understanding of business.
Layman Reasonable Expert

 Going concern assumption - presumes a business entity will continue to

operate indefinitely. 1. Going concern(HKAS1) 2. Adaption of accrual basis of accounting
 Monetary Unit assumption- requires financial statement elements to be
measured in nominal units of money.
 Periodicity Assumption -allows a company’s life to be divided into artificial
time periods to provide timely information. 12 months/1 year(in general)
 Matching Principle - refers to the practice of first recognizing revenue and
recognizing all expenses that were incurred to generate that revenue.
 Expenses - are outflows or using up of assets or incurrences of liabilities from
providing goods or services.
 Expenses recognition – depends on whether the association between revenue
and expense is direct or indirect.
E1-4 Concepts; terminology; conceptual framework
1. Predictive value o. Information is useful in predicting the future.
2. Relevance h. Pertinent to the decision at hand.
3. Timeliness g. Information is available prior to the decision.
4. Distribution to a. Decreases in equity resulting from transfers
owners to owners.
5. Confirmatory j. Information confirms expectations.
6. Understandability e. Users understand the information in the
context of the decision being made.
7. Gain n. (Results if an asset is sold for more than its book value.)
Increases in equity from peripheral or incidental transactions of
an entity.
8. Faithful f. Agreement between a measure and the
representation phenomenon it purports to represent.
9. Comprehensive k. The change in equity from non-owner
income transactions
10. Materiality p. Concerns the relative size of an item and its
effect on decisions.
11. Comparability c. Important for making interfirm comparisons.
12. Neutrality m. The absence of bias.
13. Recognition l. The process of admitting information into
financial statements.
14. Consistency d. Applying the same accounting practices over
15. Cost b. Requires consideration of the costs and value
effectiveness of information.
16. Verifiability i. Implies consensus among different
Expenses Recognition
Revenue-Revenue Recognition Criteria


directly associated with

revenue generating activities:
Cost of goods sold Less directly associated with
revenue generating
activities: Operating
expense(recognized as

E1-8 Basic assumptions and principles
Identify the basic assumption or broad accounting principle that was violated in each of the
following situations.
1. Pastel Paint Company purchased inventory at a price of $250,000. Because the value of the
inventory has appreciated to $400,000, the company has valued the inventory at $400,000
in its most recent statement of financial position. History cost principle
2. Atwell Corporation has not prepared financial statements for external users for over three
years. The periodicity assumption Terms of sales contract: FOB, shipping point or destination
3. The Klingon Company sells farm machinery. Revenue from a large order of machinery
from a new buyer was recorded the day the order was received. Revenue recognition
criteria Tangible goods: at the point of the transfer risk and rewards of ownership
4. Don Smith is the sole owner of a company called Hardware City. The company recently
paid a $150 utility bill for Smith’s personal residence and recorded a $150 expense. The
economic entity assumption No production is generated at the point of ownership
5. Golden Book Company purchased a large printing machine for $1,000,000 (a material
amount) and recorded the purchase as an expense. Expense recognition; materiality
6. Ace Appliance Company is involved in a major lawsuit involving injuries sustained by
some of its employees in the manufacturing plant. The company is being sued for
$2,000,000, a material amount, and is not insured. The suit was not disclosed in the most
recent financial statements because no settlement had been reached. Presentation and
disclosure Potential of the material impact on the financial statements
Rm 609, KKL
Monday: 13:30-14:20 & 15:30-16:20
Wednesday: 14:30-16:20
Sam Sit
e-mail: samsit@hku.hk,
Phone No.: 3917-4670
Consultation: by appointment