Accounting Lecture Analysis of Financial Statements

Question 1

Explain the Accounting Process:

Answer 1

Question 2

How are business transactions affecting Accounting Entries?

Answer 2

Question 3

What are the Accounting Principles?

Answer 3

• Accounting entity
• Accounting period
• Matching (or accruals)
• Monetary measurement
• Historic cost
• Going concern
• Conservatism
• Consistency

Question 4

What are the objectives of Financial Statemens?

Answer 4

To provide information about the financial position, performance and changes in financial position (i.e. cash flow) of an entity that is useful to a wide range of users in making economic decisions (i.e. ‘decision usefulness’)

To show the results of the stewardship or accountability of management for the resources entrusted to them by shareholders.

Question 5

What are the qualitative Characteristics of the Financial Statements?

Answer 5

• Understandability
• Relevance
• Reliability
• Comparability

Question 6

What is the equation for Net Assets?

Answer 6

Net Assets = Total assets – Total Liabilities = Equity

Question 7

How does Accrual Basis of Accounting work

Answer 7

You have a Prepayment which is to be treated as an asset, when it accrues fo the period you expense it

Question 8

What are Provisions?

Answer 8

Estimates of possible liabilities that may arise, but where there is uncertainty as to timing or the amount of money.

Question 9

How does Depreciation work and affect bot IS and BS?

Answer 9

Question 10

What is the formula for Equity Employed?

Answer 10

Equity employed = (Long term liabilities + OE)

Question 11

What special Treatment does R&D fall under?

Answer 11

Research is treted as an expense.

Expenditures on development may be recognized as assets only if it can be proven taht they are likely to generate future income.

Question 12

What is Goodwill? And What is so special about it?

Answer 12

Can only be determined at the time of the acquisition accounts for technology, brand value, potential future profits (not amortized, is subject to an annual test for impairement) Private companies can dereciate or amortize goodwill

Question 13

Leased equipment?

Answer 13

Operating leases: rental expense
Finance leases: treated as if the asset is owned

Question 14

How is goodwill being accounted for?

Answer 14

+Statement of Comprehensive Income:

• expense each year - €30,000

Statement of Financial Position:

• Goodwill
• Less provision for Amortization:

€300,000

30,000

=

€270,000

Question 15

What are the two alternative Forms of structuring an Income Statement?

Answer 15

Direct method, disclosing major classes of gross cash flows receipts and payments; and

• Indirect method, whereby profit or loss is adjusted for the effect of non-cash transactions

Question 16

Why do cash flows from operating Activities differ from operating Profit?

Answer 16

epreciation, which as a non-cash expense is added back to profit (since operating profit is the result after depreciation is deducted);

increases (or decreases) in working capital (e.g. changes in Receivables, Inventory, Prepayments, Payables and Accruals), which reduce (or increase) available cash.

Question 17

What are the two major Items from Investig and Financing Activities?

Answer 17

• apital expenditure or the disposal of non-current assets (cash flows from investing)
• borrowings and repayments of debt; and
• changes in shareholders’ equity (cash flows from financing)

all of which affect cash flow, but not profit.