CH08-Financial Accounting and Reporting Flashcards
Financial Statements are used by the board and executive leadership to accomplish ___
- Assess performance
- Set strategy and targets
- Reward staff
Potential investors use F/S to
determine whether or not to invest
Customers and Suppliers use F/S to
assess creditworthiness
Treasury Professionals use F/S to determine the company’s:
- overall liquidity level
- ability to generate revenues and control costs
- Capital structure
Which inventory method is not allowed under IFRS but is allowed under GAAP?
LIFO
GAAP allows LIFO
IFRS prohibits LIFO
The SEC’s Financial Reporting Release No. 1 (FRR 1) officially recognizes accounting standards issued by
the FASB because the SEC’s philosophy is that the PRIVATE sector retains the initiative for establishing and improving accounting standards.
Why is Accrual-Based Income more useful to EXTERNAL decision makers?
b/c it provides a better basis for assessing historical activity and predicting future earnings and cash flows
Title of income statement
“For the Year Ended 2020” OR “Jan 1 - Dec 31, 2020” b/c it is measured over a SPAN of time
What congressional act requires audited financial statements for publicly traded companies?
SOX
US Congress passed SOX in 2002.
SOX established a set of controls over audit procedures and disclosure requirements, and provided an administrative vehicle to implement and oversee them.
Explain Dodd-Frank Act of 2010
- Brought consumer protection under a single authority
- US legislation in response to concerns about the financial services industry in wake of the global financial crisis of 2007-2009.
- Major impact on banks.
“Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010”
Source or Use: Increase Asset
Use
Debit = Use
Source or Use: Decrease Liability
Use
Debit = Use
Source or Use: Increase Liability
Source
Credit = Source
Source or Use: Decrease Asset
Source
Credit = Source
Source or Use: Increase Depreciation
Source
CR Accum Depr = Source
T Accounts of Source vs. Use
Debit = Use
Credit = Source
Contra (Flip) Depreciation
What is a source of funds on the Statement of Cash Flows?
Increase in Liability
CR=Source
Where do patent rights fall on Balance Sheet order?
Patent Rights are Intangible Assets, so after Fixed Assets
What does an independent auditor’s opinion comment on?
whether F/S fairly reflect the firm’s financial position, are comparable to prior periods
(NOT financial fitness, NOT ongoing viability)
Independent auditors perform which tasks
- check that accounting methods used conform to GAAP/IFRS
- all material items are included in F/S and disclosures
- examine internal controls
What is the common financial measure that attempts to more accurately reflect cash operating profitability?
EBITDA
T/F: EBITDA is NOT a US GAAP measure
True
Lenders, creditors and investors usually pay additional attention to which financial statement?
Statement of Cash Flows
What does the Statement of Cash Flows indicate to investors?
firm’s ability to generate cash flow to repay financial obligations as well as dividends to shareholders.
I.e. going concern
Sources of funds:
● Decrease in an asset. The reduction of noncash assets produces funds via an increase in cash flow. For example, as accounts receivable are collected, cash flow increases while the accounts receivable balance is lowered.
● Increase in a liability. Liabilities represent financing, so an increase in a liability increases available funds. Examples include the purchase of inventory using trade credit or a bank loan.
Uses of funds:
● Increase in an asset. A cash outflow occurs when investments in noncash assets occur. For example, a purchase of raw materials increases inventory but uses funds, assuming that the purchase is not made on trade credit.
● Decrease in a liability. Funds are used to repay liabilities. Examples include the use of cash to pay off a loan, redeem a long-term bond, or repay an accounts payable balance.
Cash Flow Statement prep
The statement of cash flows begins with the operating activities section. As a first step, net income is adjusted for depreciation expense. Depreciation expense is added to net income since it is a non-cash expense. Next, any changes in accounts receivable, inventory, accounts payable, or operating accruals are accounted for. These items represent the cash inflows and outflows related to daily operations
Define Functional Currency
Currency of the primary economic environment in which the entity operates.
Normally the majority of business activities are transacted in the Functional Currency.
Under fair value hedge accounting, where are differences in value between the derivative and the hedged item recorded?
Income Statement
Is a subsidiary’s functional currency the same as it’s home currency?
NO
In Government and Not-for Profit organizations the focus of financial reporting is on:
Compliance and Accountability
How do financial statements vary for Government and Not-For-profit companies from For Profit institutions?
Equity is replaced with Fund Balance or Net Worth
