Accrual Accounting

Question 1

What is a cash cycle and what are the 3 cash cycle used in accounting?

Answer 1

A cash cycle is the set of transactions that converts cash inflows into outflows and vice versa.

-financing cycle: the process of receiving funds from investors using the funds for operations and returning funds to investors

-operating cycle: the process of purchasing inventory, producing goods/providing services, receiving cash from customers and so on

-investing cycle: the process of purchasing assets, obtaining benefits from the property and receiving cash from the disposition of property

Question 2

What is the difference between cash accounting and accrual accounting

Answer 2

-cash accounting shows only cost during years one and two with large profit in year 3 ( example)

-accrual accounting: shows revenues and cost earned evenly over three years

Question 3

What is the definition of accrual accounting

Answer 3

Basis of accounting that records economic events when they happen rather than only when cash exchanges occur.

-the consensus today is that accrual accounting should be used to prepare financial statements under IFRS and ASPE even if it is more time consuming.

Question 4

In order to accurately represent the economics event as they occur in the financial statements the company must record:

Answer 4

-accruals: accounting entries to record events in a different period than cash flows, to reflect events before or after cash flows are received

-deferrals: accounting entries to record events or transactions after the cash flows

Question 5

Since accrual needs a lot of estimates what should be the goal when presenting the financial statement

Answer 5

-the goal should be unbiased financial statements, an outcome that would result from taking an average or consensus from a sample of disinterested accountants

-IFRS used to use the phrase true and fair now taken to mean present fairly

Question 6

What is the cut off?

Answer 6

Cut off is defined as the point in time at which one reporting periods ends and the next begins

Question 7

What is the subsequent events periods?

Answer 7

It is the period between the cut off date and the date when the company authorizes its financial statements

Question 8

What should we do with the events that happen during the subsequent events periods?

Answer 8

When determining how to treat information obtained during subsequent events period we need to consider if it relates to an event that should be recognized at the cut off date or not

-at the cut off date we recognize events/transactions that have taken place up to the cut off date

-we can use information available from either the reporting period or subsequent period to measure the event/transaction

Question 9

What happens if we determine a transaction should not be recognized at the cut off date and it is material?

Answer 9

It can be disclosed in the financial statements as a subsequent event

Question 10

Given the nature of accrual accounting we should expect changes over time. What are the three corrections that might be needed?

Answer 10

-correction of errors
-changes in accounting policy
-changes in estimates

Question 11

Describe the corrections of errors

Answer 11

This occurs when a company reports an incorrect amount, given the information at the time the information was reported

-to correct an error the company must make a retrospective adjustment with restatement

•which means that prior year financial statement must be restated in order to remain comparative

Question 12

Describe the changes in accounting policy

Answer 12

This type of change occurs when management decides to make a change in a certain accounting policy

-this change is also accounted for by a retrospective ajustement with restatement

-this effect of the change will be applied to all years affected to show financial statements with new accounting policy

Question 13

Describe changes in estimates

Answer 13

When financial statements are prepared, it is based on the best information available at the time

-over time new information become available that could make other estimates more accurate

-this change is accounted for as a prospective adjustment

Question 14

Look at the graph describing the accounting changes page 18 chapter 3

Answer 14

-

Question 15

Statement of financial position provides information about resources and claims at which point in time?

Answer 15

A fixed point in time ( the end of the fiscal period)

Question 16

Statements of comprehensive income provided what and at what point in time

Answer 16

It provides information about performance on accrual basis for a certain period (the reporting period)

Question 17

Cash flow statement provides what at what time

Answer 17

It provided information about a company’s operating, financing and investing activities for a certain period

Question 18

Statement of changes in equity provide what at what time

Answer 18

Provides information about changes in resources and claims not due to performance for a certain period

Question 19

What must be included in the income statement

Answer 19

-classification of expenses:
• either by nature or function

-additionsl disclosure required:
•basic and diluted earnings per share
•discoutinued operation

Question 20

In the statement of comprehensive income: IFRS

IAS states that theres a minimal line items that need to be presented what are they and in the right order

Answer 20

1. Revenue
   Operating expenses
2. Finance costs
3. Share of profit or loss of associates
4. Tax expenses
   ———————-
5. Profit or loss (net income)
6. Other comprehensive income
   ————————
7. Total comprehensive income

Question 21

In which order a company will present his income statement under ASPE?

Answer 21

1. Revenue
   Operating expenses
2. Finance costs
3. Share of profit or loss of associates
4. Tax expense
   ———————————
5. Profit or loss (net income)

Question 22

What are the 2 different ways an operating expense section can be presented?

Answer 22

-classified by nature: grouped by sources of the expenses

-classified by function: grouped by the purpose of the expense

Question 23

What is the multi-step income statement format?

Answer 23

-It presents various subtotals such as gross margin and operating profits

-separates operating and non operating activities which makes this option more comparable

Question 24

Describe the single step income statement format

Answer 24

It omits subtotal and show only net income and other comprehensive income, so generally the simpler option

Question 25

How should we present the discontinued operations?

Answer 25

-discontinued operations and other non current assets held for sale must be presented separately on the income statement

-company must distinguish between the income/loss from these operations and disposal of the assets

-both items should be presented net of tax

Question 26

What are the 5 items that are not included in the main section of the income statement?

Answer 26

-unrealized gains and losses on FVOCI investment

-some translations gains and losses on foreign exchange

-unrealized gains and losses on cash flow hedged

-revaluation of property plant and equipment

Those are other comprehensive income (oci)

Question 27

Where would be the oci in the income statement?

Answer 27

It would be right after net income

Question 28

What does the statement of changes in equity shows?

Answer 28

It shows the transactions that explain the changes of the components of equity during the periods

Question 29

What are the different items in a statement of change in equity?

Answer 29

-Contributed capital: fund provided by owners

-retained earnings: income/loss for the period and dividends paid. Includes effects of changes in accounting policies and correction of errors

-reserves: shows amounts that are included in the other comprehensive income section of the income statement

This statement is only required under IFRS. ASPE only requires statement of changes in retained earnings

Question 30

What does a balance sheet shows

Answer 30

It shows a companys financial position at a point in time, at the end of the fiscal period

Question 31

What are some important consideration in a balance sheet

Answer 31

-Shows the total asset equal to total liabilities and shareholders equity

-assets and liabilities are presented as current and non current

-generally presented based on liquidity but flexible if there are different industry practiced

-separate categories are required for all material classes of similar transactions

Question 32

How do we consider an asset as current?

Answer 32

-it us expected to be realized, sold or consumed within one year

• it is held for trading

-it is cash or cash equivalent

If not, will be classified as non current

Question 33

How do we consider a liability as current

Answer 33

-it is due within one year

-it is held for trading

If not, will be classified as non current

Question 34

In which order the items in a balance sheet must be presented?

Answer 34

In order of liquidity

Question 35

Look at the appendix for all definition of each accounts

Answer 35

-cash and cash equivalent
-short term investment
-Account receivable
-inventory (accounting policy)
-prepaid expenses
-long term investments
-property plant and equip
-intangible assets
-other assets
-trade and other payables
-provisions
-financial liabilities
-non-current liabilities
-contributed capital
-retained earnings
-accumulated oci (reserves)
-non-controlling interest