Accounting and Principles Flashcards
What is accounting?
Answer: Accounting is the process of recording, summarizing, and reporting financial transactions to provide information useful for decision-making.
What are the three main types of financial statements?
- Income Statement: Shows profits or losses over a period.
- Balance Sheet: Shows the company’s financial position at a specific date.
- Cash Flow Statement: Shows cash inflows and outflows over a period.
Benefit of income statement?
Tracks Profitability: Helps assess whether the company is generating a profit or incurring a loss over a specific period.
Decision-Making: Provides data to make decisions on expenses, revenue strategies, and pricing.
Investor Confidence: Offers potential investors and stakeholders insight into the company’s ability to generate revenue.
Trend Analysis: Enables tracking of financial performance trends over time.
Benefit of balance sheet?
Snapshot of Financial Health: Shows the company’s assets, liabilities, and equity at a specific point in time, offering a clear view of financial stability.
Debt Management: Highlights the company’s ability to meet its short-term and long-term obligations.
Investment Assessment: Assists investors in evaluating whether the company is financially sound and worth investing in.
Liquidity Insights: Indicates the company’s liquidity position, i.e., how easily it can convert assets into cash.
Benefit of cash flow statement?
Tracks Cash Movement: Provides a detailed view of cash inflows and outflows, showing how effectively cash is being managed.
Operational Efficiency: Highlights whether the company’s core operations generate sufficient cash to sustain itself.
Investment Planning: Helps in planning capital expenditure or understanding the cash needed for future investments.
Avoiding Insolvency: Ensures the company has enough liquidity to avoid running out of cash.
What are assets?
Answer: Assets are resources owned by a business that have economic value, such as cash, inventory, property, and equipment.
What are liabilities?
Answer: Liabilities are obligations or debts a business owes to others, such as loans, accounts payable, or accrued expenses.
What is the difference between revenue and profit?
Answer:
Revenue: The total income generated from sales of goods or services.
Profit: The amount left after deducting all expenses from revenue (also called net income).
q: What are Generally Accepted Accounting Principles (GAAP)?
GAAP refers to the set of accounting standards, principles, and procedures that companies must follow when preparing financial statements. These rules ensure consistency, transparency, and comparability across financial reports.
How is property typically treated in an entity’s accounts under GAAP?
Under GAAP, property is recorded as a fixed asset (non-current asset) on the balance sheet. It is initially recorded at cost and then depreciated over its useful life, except for land, which is not depreciated. Impairment adjustments may also be applied if the asset’s value decreases.
How does depreciation affect property accounting under GAAP?
Depreciation spreads the cost of a property asset over its useful life. Common methods include:
Straight-line depreciation (equal expense over time).
Reducing balance method (higher depreciation in earlier years).
Units of production method (based on usage).
What are International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)?
IAS and IFRS are globally accepted accounting standards set by the International Accounting Standards Board (IASB). IFRS replaced IAS, and these standards ensure consistency in financial reporting across different countries.
How does IAS/IFRS treatment of property differ from National GAAP?
Under IAS 16 (Property, Plant & Equipment):
Property is initially recorded at cost.
It can be measured later using either the cost model (depreciation applied) or revaluation model (adjusted to fair value periodically).
Under GAAP, property is usually measured at historical cost minus depreciation, with limited revaluation options.
Under IAS 40 (Investment Property):
Investment properties can be valued at fair value, with gains/losses recognized in the income statement.
Under GAAP, investment property is usually recorded at cost less depreciation, unless an impairment occurs.
Why is IAS/IFRS preferred over National GAAP in some countries?
IFRS provides greater comparability for international investors, ensures fair value reporting, and enhances financial transparency.
What are the key components of an entity’s financial statements?
The three main financial statements are:
Balance Sheet (Statement of Financial Position): Shows a company’s assets, liabilities, and equity at a point in time.
Profit and Loss Statement (Income Statement): Reports revenue, expenses, and profits/losses over a period.
Cash Flow Statement: Tracks cash inflows and outflows from operating, investing, and financing activities
What is the difference between capital expenditure (CapEx) and operating expenditure (OpEx)?
capex: Costs incurred in acquiring or improving property, recognized as an asset
.OpEx: Regular expenses like repairs and maintenance, charged to the income statement immediately.
What is the role of an auditor in financial reporting?
An auditor independently examines an entity’s financial statements to ensure they are accurate, fair, and comply with accounting standards.
What are the key responsibilities of an auditor?
Assessing the accuracy of financial statements.
Checking compliance with GAAP or IFRS.
Identifying financial risks and misstatements.
Providing an audit opinion (Unqualified, Qualified, Adverse, or Disclaimer).
What are the different types of audits?
Internal Audit: Conducted within the company for risk management.
External Audit: Performed by independent auditors for regulatory compliance.
Forensic Audit: Investigates fraud and financial misconduct.
