Chapter 1: Intro to Financial Accounting

Question 1

Financial statements

Answer 1

Reports accountants prepare, showing how well an organisation performed over a certain period

Question 2

Accounting

Answer 2

Production and transfer of information within an organisation

Question 3

Financial accounting

Answer 3

Info to people outside the organisation, usually to obtain external capital

Question 4

IFRS vs GAAP

Answer 4

IFRS in EU, GAAP in US

IFRS principle based less strict, GAAP rule based more strict

Question 5

Conceptual framework - Objective

Answer 5

Provide financial info about reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions

Question 6

Conceptual framework - Qualitative characteristics

Answer 6

Fundamental - Relevance and faithful representation

Enhancing - Comparability, timeliness, verifiability and understandability

Question 7

Conceptual framework - Constraints

Answer 7

Balance between characteristics

Costs vs benefits

Question 8

Conceptual framework - Assumptions

Answer 8

Accrual accounting

Going concern

Question 9

Conceptual framework - Elements

Answer 9

Assets
Liabilities
Equity
Income
Expenses

Question 10

Qualitative characteristics - Relevance

Answer 10

Info should hold levity in decision making process.
Future outcomes - predictive value
Criticise prior evaluations - confirmative value

Question 11

Qualitative characteristics - Faithful representation

Answer 11

Financial statements should be complete, neutral and free from error

Question 12

1. Comparability
2. Timeliness
3. Verifiability
4. Understandability

Answer 12

1. Comparability - reports should be comparable to previous reports
2. Timeliness - info should be made available in timely fashion
3. Verifiability - Should be transparent, understood by all accountants
4. Understandability - classified characterised and presented in a clear and concise manner

Question 13

Constraints with provision of info to users

Answer 13

1. Balance between qualitative characteristics - hold onto past for comparability or change to improve relevancy
2. Costs vs Benefits - Prep of financial statements time consuming and costly

Question 14

Accrual accounting

Answer 14

Financial events should be recognised the moment they occur, regardless when the cash transaction of an event occurs

Question 15

Going concern

Answer 15

Assumes that the business will remain in existence long enough for all assets to be fully utilised - no reason for liquidate or reduce activities

Question 16

Assets

Answer 16

Economic resources controlled, expected to have inflow of economic benefits

Question 17

Liabilities

Answer 17

Present obligations to a third party that arose from past events, expected outflow of economic benefits

Question 18

Equity

Answer 18

Assets - Liabilities
Share capital - amount of shareholders invested
Retained earnings - net income not distributed among shareholders as dividends

Question 19

Income

Answer 19

Increase in economic benefits over period of time
Revenue - main activities
Gains - incidental benefits

Question 20

Expenses

Answer 20

Decrease in economic benefits over time
Expenses - main activities
Losses - non primary operations

Question 21

Two types Information Assymetry

Answer 21

1. Adverse selection

2. Moral hazard

Question 22

Adverse selection

Answer 22

One party has info advantage over another. e.g. buying used car
Costly signalling can overcome not cheap talk

Question 23

Moral hazard

Answer 23

One party cannot observe actions relating to fulfilment of contractual terms by other party

Question 24

Proprietorship

Answer 24

One owner, responsible for all losses and debts

Question 25

Partnership

Answer 25

Two or more person, personally liable

LLP - only liable for investment (however 1 partner responsible)

Question 26

Corporation

Answer 26

Organisation owned by shareholders, separated by law from their owners