Ch.18 Financial Accounting and Reporting

Question 1

What kinds of insights can be provided by analyzing financial statements?

Answer 1

• How well a company has managed its liquidity
• How effectively it used and financed its assets
• Whether it had a proper balance between debt and equity financing compared to peers
• How well it controlled operating and financing costs
• Whether the profit it earned was satisfactory in relation to the levels of revenue it experience and in the investment in assets that support its operations.

Question 2

What is the IASB?

Answer 2

International Accounting Standards Board

- General accounting standards made up by board members from 9 countries, based in London.

Question 3

What are the basic principles of IFRS?

Answer 3

Laid out by the IASB

• Relevance: must be of value
• Materiality: information must show significant impact
• Faithful Representation: complete, neutral and free from error
• Comparability: Consistency and compatibility with previous years
• Verifiablity: Neutral and unbiased, fairly represent the business.
• Timeliness: Information presented in the time capable for decisions
• Understandability: Makes sense
• Completeness: Complete enough to be usable and reliable

Question 4

What are the four principles of GAAP?

Answer 4

1. Historical-Cost: Assets and liabilities reported a the original costs
2. Full-Disclosure: any info that may influence judgment and decision of a user of the info, must be disclosed.
3. Revenue Recognition:
4. Matching: Expenses must be reported when they are associated with.

Question 5

What are the key differences between IFRS and GAAP?

Answer 5

IFRS is principle based versus rule based GAAP

Companies in the US adhere to GAAP and must comply with IFRS

Question 6

What is shareholders’ equity?

Answer 6

• Represents what would remain if all assets were sold and all creditors paid off
  2 Primary Categories are:
  
  • Contributed Capital: Cash or assets invested by shareholders
  • Retained earnings: Retention of profits or losses, less dividends paid out.

Question 7

Compare and contrast internal and external financial statements.

Answer 7

Internal are used by the owners of the company for management and day to day operations. External are used by investors for financial status of the entity.

Question 8

What are the five types of audit opinions?

Answer 8

Standard unqualified 
Unqualified opinion with explanatory paragraph
Qualified Opinion
Adverse Opinion
Disclaimer of Opinion

Question 9

What are the basic types of financial statements?

Answer 9

Balance Sheet
Income Statement
Statement of Cash Flows

Question 10

What are the two methods of preparing the statement of cash flows?

Answer 10

Direct Method - reports gross cash receipts and disbursements without examining adjustments
Indirect Method - Reflects noncash transactions

Question 11

What is a derivative?

Answer 11

financial instrument that’s value is derived from some underlying financial asset.

Question 12

What is ASC Topic 820?

Answer 12

Clarifies the definition and application of fair value measurement.

Question 13

Describe the basic steps in preparing a foreign currency translation adjustment for financial statement purposes.

Answer 13

• Determine the functional currency of the subsidiary
• Determine whether its the home currency
• Remeasure the currency using historical exchange rates

Question 14

What is the key feature that distinguishes governmental and not-for-profit (G/NFP) organizations from profit-oriented businesses?

Answer 14

refer to equity as Net Worth

Not public