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FRA > Book 2 > Flashcards

Book 2 Flashcards

1
Q

What is a company’s liquidity?

A

It is the ability of a company to meet its short-term obligations.

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2
Q

What is a company’s solvency?

A

It is the ability of a company to meet its long-term obligations.

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3
Q

Are financial statement footnotes audited?

A

Yes they are.

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4
Q

Is the MD&A section audited?

A

No, it’s not audited.

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5
Q

What is the MD&A framework under IFRS?

A
  • The nature of the business.
  • The management objectives and strategies.
  • The company’s significant resources, risks, and relationships.
  • The results of the operations.
  • The critical performance measures.
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6
Q

What are the objectives of an audit?

A
  • To obtain reasonable assurance about whether the financial statement as a whole is free from material misstatement.
  • To report on the financial statements and communicate as required by the ISAs, in accordance with the auditor’s findings.
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7
Q

What is an unqualified audit opinion?

A

It states that the financial statements have been presented fairly in accordance with applicable accounting standards.

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8
Q

What is a qualified audit opinion?

A

It states that the financial statements have been presented fairly but do contain exception(s) to the accounting standards. The audit report provides further details and explanations relating to the exception.

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9
Q

What is an adverse audit opinion?

A

It states that the financial statements have not been presented fairly and significantly deviate from acceptable accounting standards.

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10
Q

What is a disclaimer audit opinion?

A

It is when the auditor, for whatever reason, is not able to issue an opinion on the financial statements.

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11
Q

What are internal controls?

A

It seeks to ensure the reliability of processes used by the company in preparing its financial statement.

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12
Q

What are interim reports?

A

They contain the 4 financial statements and footnotes but are not audited. They are made annually and quarterly.

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13
Q

What are the proxy statements?

A

They are distributed to shareholders when there are matters that require a shareholder vote.

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14
Q

What are the press releases?

A

They provide current information about the company.

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15
Q

What are the external sources of information?

A

It provides information about the company. The industry that the company operates in, and the company’s competitors.

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16
Q

What is the financial statement framework?

A
  • Define the purpose and context of the analysis: determines the approach, tools, data sources, and format used to present results.
  • Collect data: acquires the necessary information to answer the questions that were defined in the previous stage.
  • Process data: converter data into metrics.
  • Analyze/interpret the processed data
  • Develop and communicate conclusions: format the data according to standards.
  • Follow up: doing periodic reviews to determine whether previously drawn conclusions remain valid.
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17
Q

What is the International Accounting Standards Board (IASB)?

A

It provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit. Relies on standards, rules, and regulations. It is a standard-setting body under IFRS.

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18
Q

What is the purpose of financial statements?

A

It is to provide information to a host of users.

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19
Q

What are the roles of regulatory authorities?

A

It is to enforce financial reporting requirements and can overrule private sector standard-setting bodies. Examples are SEC in the USA and FSA in the UK.

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20
Q

Do standard-setting bodies have authority?

A

No, unless their standards are recognized by regulatory authorities.

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21
Q

What is the goal of the IFRS?

A

It is to develop and promote the use and adoption of a single set of high-quality financial standards.

22
Q

What is the role of the IFRS interpretations committee?

A

It is responsible for reviewing accounting issues that arise in the application of IFRS and are not specifically addressed by IFRS.

23
Q

What is the IFRS advisory council?

A

It provides advice for the LASB on agenda decisions and priorities, among other items.

24
Q

What is the FASB?

A

It issues new and revised standards with the aim of improving standards of financial reporting so that information provided to users is useful for decision-making.

25
Q

What is the International Organization of Securities Commission (IOSCO)?

A

It is not a regulatory authority, but its members regulate a large portion of the world’s financial capital markets. Its objectives are the protection of investors, ensuring that markets are fair, efficient, and transparent, and to reduce systematic risk.

26
Q

What are the securities offering registration statements?

A

It is a required disclosure that a company provides if it wants to issue new securities. It shows disclosures about the securities and the relationship of these new securities to the issue’s other capital securities.

27
Q

What are the 10-K, 20-F, and 40-F forms?

A

They must be filled annually and they give a comprehensive business overview and disclose important financial data.

28
Q

Are financial reports required by the SEC?

A

No, they are made for shareholders.

29
Q

What are 10-Q and 6-K forms?

A

U.S. companies file form 10-Q quarterly, and non-U.S. firms file form 6-K semiannually. They require unaudited financial statements, MD&A reports, and disclosure of any nonrecurring events.

30
Q

What is proxy statements/Form DEF-14A?

A

It is an authorization from a shareholder to grant another party the right to vote on her behalf. It includes details of proposals that require a shareholder vote, Ownsership stakes of senior management and principal owners, directors’ biographies, and executive compensation disclosures.

31
Q

What is the 8-K form?

A

This form must be filed for significant events that include the acquisition or disposal of corporate assets, changes in management or corporate governance, changes in securities and trading markets, and matters related to accountants and financial statements.

32
Q

What is the form 144?

A

It is filed to announce a possible sale of restricted securities or the sale of securities held by affiliates of the issuer.

33
Q

What are 3,4,5, and 11-K forms?

A

They are used to examine purchases and sales of securities by management, directors, employees, and other affiliates of the company.

34
Q

What is the relevance of the information?

A

The information presented in the financial statements should be useful in making forecasts.

35
Q

What is the criterion of materiality?

A

Information should be timely and sufficiently detailed with no material omissions or misstatements of information that could make a difference to users’ decisions.

36
Q

What is the faithful representation?

A

Information is:
- Complete: all information is included.
- Neutral: Information is free from any bias.
- Free from error: no error of commission or omission in the description of the economic phenomenon.

37
Q

What is comparability?

A

The presentation of financial statements should be consistent over time and across firms to facilitate comparisons.

38
Q

What is verifiability?

A

Different knowledgeable and independent observers should be able to verify that the information presented faithfully represents the economic phenomena that it is supposed to represent.

39
Q

What is timeliness?

A

Information should be available to users in a timely manner.

40
Q

What is understandability?

A

Users with basic business knowledge should be able to understand the information.

41
Q

What are the constraints on preparing financial statements?

A
  • Tradeoff: since there are estimated expenses, the verifiability of the statements is reduced.
  • Cost: there is a cost in providing useful financial information.
  • Intangible aspects: some things like reputation or brand name cannot be quantifiedé
42
Q

What is the accrual basis?

A

Transactions should be recorded on the financial statements when they actually occur, which is not necessarily when the related exchange of cash occurs.

43
Q

What is the going concern assumption?

A

It is the assumption that the company will continue operating for the foreseeable future.

44
Q

What is the historical cost?

A
  • For an asset: it refers to the amount that it was originally purchased for.
  • For liabilities: refers to the amount of proceeds that were received initially in exchange for the obligation.
45
Q

What is the amortized cost?

A

It is a historical cost adjusted for amortization, depreciation or depletion, and/or impairment.

46
Q

What is the current cost?

A
  • For an asset: refers to the amount that the asset can be purchased for today.
  • For a liability: refers to the undiscounted amount of cash that would be required to settle the obligation today.
47
Q

What is the realizable value?

A
  • for assets: refers to the amount that the asset can be sold in an ordinary disposal today.
  • For liabilities: refers to the undiscounted amount of cash expected to be paid to settle the liability in the normal course of business.
48
Q

What is the present value?

A
  • For asset: refers to the discounted value of future net cash flows expected from the asset.
  • For liabilities: refers to the present discounted value of future net cash outflows that are expected to be required to settle the liability.
49
Q

What is fair value?

A

It is an exit price, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

50
Q

Where should you find disclosure about certain items of the statement?

A

In the financial statement footnotes.

FRA (18 decks)

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