ACCT 217 Midterm Exam 1 Review Session
Chapter 1 & 2
Example 1: Match these fundamental and enhancing qualitative characteristics of useful financial information to
their correct definitions:
1. Comparability
2. Completeness
3. Confirmatory value
4. Faithful representation
5. Free from material error
6. Materiality
7. Neutrality
8. Predictive value
9. Relevance
10. Timeliness
11. Understandability
12. Verifiability
13. Cost Constraint
14. Going Concern
a) Information that has predictive and confirmatory value and is material has this fundamental
qualitative characteristic.
b) Information that is complete, neutral, and free of material error has this fundamental qualitative
characteristic.
c) Public accountants perform audits to determine this enhancing qualitative characteristic.
d) This quality requires that we should not select information to favor one position over another.
e) This enhancing qualitative characteristic describes information that a reasonably informed user
can interpret and comprehend.
f) When information provides a basis for forecasting income for future periods, it is said to have
this quality.
g) This enhancing qualitative characteristic requires that similar companies should apply the same
accounting principles to similar events for successive accounting periods.
h) This quality results in information that has nothing important omitted.
i) This restriction requires that the value of the information presented should be greater than the
cost of providing it.
j) This quality describes information that confirms or corrects users’ prior expectations.
k) This enhancing qualitative characteristic requires that information be available to decision
makers before it loses its ability to influence their decisions.
l) Faithful representation means that information is complete, neutral, and this third quality.
m) This quality allows items of insignificance that would not likely influence a decision not to be
disclosed.
, n) This principle assumes during and beyond the next fiscal period a company will complete its
current plans, use its existing assets, and continue to meet its financial obligation.
Income Statement
The purpose of an income statement is to report a company's net income during the year. To do this, revenues and
expenses are reported on this statement. It is important to note that the income statement only relates to a set period
of time. For example, if a company releases their financial statements once a year, the income statement would only
cover the revenues and expenses incurred during that year.
Process:
1. Find “income before income tax” by subtracting all the expenses (except income tax expense) from the
revenue.
2. Find the income tax expense if not given, and subtract it from the “profit before income tax” to arrive at
your Net income. This is usually a percentage of the “profit before income tax”
Example 2: Given the following accounts for Company A, prepare an income statement. Company A’s year end is
Dec 31.
Service revenue $50,000
Supplies expense $5,000
Salaries expense $20,000
Rent expense $12,000
Depreciation expense $2,000
Interest expense $566
Tax Rate 40%
Note: We will cover the concept of depreciation later in the course, so don’t worry if this is an unfamiliar line item.
Statement of Changes in Equity
(Statement of Retained Earnings under ASPE)
The purpose of this financial statement is to show the movements in two main components of Shareholders Equity
during the year: Common Shares and Retained Earnings. This statement will only cover a designated period of time
(same as that of the income statement).
Process:
1. Find the total change in common shares during the year. Take the beginning balance in common shares and
any common shares that were issued during the year.
2. Find the total change in retained earnings. Start with the beginning balance in retained earnings, add net
income or subtract net loss from the income statement, and subtract dividends.
*Please make sure you understand why dividends are reported in the statement of changes in equity and not the
income statement. This is because dividends are a distribution of retained earnings to shareholders. Dividends are
NOT an expense incurred to generate revenue. This is a very common area of confusion where students tend to
make errors on the exam.
Example 3
Using the information provided, prepare a statement of changes in equity. Use the net income calculated from
example 1.
● At the start of the year, Company A had $60,000 in its common shares account and $40,000 in its retained
earnings.
● During the year, 1,000 shares were issued at a price of $25/share.
, ● Company A declared and paid out dividends of $5,500 during the year.
Mirela Enterprises
Statement of Changes in Equity
For period ended May 31, 2023
Common Shares Retained Earnings Total
Balance, Jan 1 $60 000 $40 000 $100 000
Common shares issued 25 000 0 25 000
Net income 0 6260 6260
Dividends 0 (5500) (5500)
Balance, May 31 $85 000 $40 760 $125 760
Chapter 1 & 2
Example 1: Match these fundamental and enhancing qualitative characteristics of useful financial information to
their correct definitions:
1. Comparability
2. Completeness
3. Confirmatory value
4. Faithful representation
5. Free from material error
6. Materiality
7. Neutrality
8. Predictive value
9. Relevance
10. Timeliness
11. Understandability
12. Verifiability
13. Cost Constraint
14. Going Concern
a) Information that has predictive and confirmatory value and is material has this fundamental
qualitative characteristic.
b) Information that is complete, neutral, and free of material error has this fundamental qualitative
characteristic.
c) Public accountants perform audits to determine this enhancing qualitative characteristic.
d) This quality requires that we should not select information to favor one position over another.
e) This enhancing qualitative characteristic describes information that a reasonably informed user
can interpret and comprehend.
f) When information provides a basis for forecasting income for future periods, it is said to have
this quality.
g) This enhancing qualitative characteristic requires that similar companies should apply the same
accounting principles to similar events for successive accounting periods.
h) This quality results in information that has nothing important omitted.
i) This restriction requires that the value of the information presented should be greater than the
cost of providing it.
j) This quality describes information that confirms or corrects users’ prior expectations.
k) This enhancing qualitative characteristic requires that information be available to decision
makers before it loses its ability to influence their decisions.
l) Faithful representation means that information is complete, neutral, and this third quality.
m) This quality allows items of insignificance that would not likely influence a decision not to be
disclosed.
, n) This principle assumes during and beyond the next fiscal period a company will complete its
current plans, use its existing assets, and continue to meet its financial obligation.
Income Statement
The purpose of an income statement is to report a company's net income during the year. To do this, revenues and
expenses are reported on this statement. It is important to note that the income statement only relates to a set period
of time. For example, if a company releases their financial statements once a year, the income statement would only
cover the revenues and expenses incurred during that year.
Process:
1. Find “income before income tax” by subtracting all the expenses (except income tax expense) from the
revenue.
2. Find the income tax expense if not given, and subtract it from the “profit before income tax” to arrive at
your Net income. This is usually a percentage of the “profit before income tax”
Example 2: Given the following accounts for Company A, prepare an income statement. Company A’s year end is
Dec 31.
Service revenue $50,000
Supplies expense $5,000
Salaries expense $20,000
Rent expense $12,000
Depreciation expense $2,000
Interest expense $566
Tax Rate 40%
Note: We will cover the concept of depreciation later in the course, so don’t worry if this is an unfamiliar line item.
Statement of Changes in Equity
(Statement of Retained Earnings under ASPE)
The purpose of this financial statement is to show the movements in two main components of Shareholders Equity
during the year: Common Shares and Retained Earnings. This statement will only cover a designated period of time
(same as that of the income statement).
Process:
1. Find the total change in common shares during the year. Take the beginning balance in common shares and
any common shares that were issued during the year.
2. Find the total change in retained earnings. Start with the beginning balance in retained earnings, add net
income or subtract net loss from the income statement, and subtract dividends.
*Please make sure you understand why dividends are reported in the statement of changes in equity and not the
income statement. This is because dividends are a distribution of retained earnings to shareholders. Dividends are
NOT an expense incurred to generate revenue. This is a very common area of confusion where students tend to
make errors on the exam.
Example 3
Using the information provided, prepare a statement of changes in equity. Use the net income calculated from
example 1.
● At the start of the year, Company A had $60,000 in its common shares account and $40,000 in its retained
earnings.
● During the year, 1,000 shares were issued at a price of $25/share.
, ● Company A declared and paid out dividends of $5,500 during the year.
Mirela Enterprises
Statement of Changes in Equity
For period ended May 31, 2023
Common Shares Retained Earnings Total
Balance, Jan 1 $60 000 $40 000 $100 000
Common shares issued 25 000 0 25 000
Net income 0 6260 6260
Dividends 0 (5500) (5500)
Balance, May 31 $85 000 $40 760 $125 760
