Chapter 1: Introduction & Basics

Question 1

IFRS:

Answer 1

International Financial Reporting Standards (former: IAS, International Accounting Standards).

Question 2

IASB:

Answer 2

International Accounting Standards Board.

Question 3

US GAAP:

Answer 3

United States Generally Accepted Accounting Principles.

Question 4

HGB:

Answer 4

Handelsgesetzbuch (German Commercial Code, GCC).

Question 5

Local GAAP:

Answer 5

(national / local generally accepted accounting priniciples, in Germany: HGB).

Question 6

Income Taxes:

Answer 6

Taxes imposed on taxable net profit (in Germany: Trade taxes, Corporate Taxes, Income taxes,
solidarity surcharge).

Question 7

Financial Statements (FS):

Answer 7

Financial statements are written records that convey the business activities and the financial performance of an entity.

Question 8

“Translate” the following US GAAP terms into IFRS:
-Balance Sheet
-Income Statement
-Cash Flow Statement
-Notes & Disclosures

Answer 8

-Statement of Financial Position
-Statement of Profit and Loss and Statement of Comprehensive Income
-SAME
-SAME

Question 9

What is the purpose of accounting?

Answer 9

The purpose of accounting is to identify, record and communicate the economic events and business transactions of a business unit to interested users (stakeholders).

Question 10

What are the main steps that encompass the overall accounting process?

Answer 10

1. Identification (Selection of business transactions)
2. Recording/Measuring (Recording of the different journal entries, classifying and analyzing as well)
3. Communication/ Financial Reporting (Preparation of accounting reports/analysis and interpretation of accounting figures to users)

Question 11

Cash Outflows:

Answer 11

Outflow of money, whether an outflow in currency or in a bank account.

Question 12

Cash Inflow:

Answer 12

Inflow of money, whether an inflow in currency or in a bank account.

Question 13

Give 3 examples of cash outflows:

Answer 13

Examples of cash outflows include: : payment of wages & salaries, payments to suppliers and repayment of debt.

Question 14

Give 3 examples of cash inflows:

Answer 14

Examples of cash inflows include: Tax refunds, Sale of goods and sale of used equipment.

Question 15

Monetary Net Assets (MNA):

Answer 15

Liquid Assets + Receivables – Payables

Question 16

What do expenditures do with the Monetary Net Assets (MNA)?

Answer 16

Expenditures lead to a DECREASE of the monetary net assets.

Question 17

What do proceeds/receipts do with the Monetary Net Assets?

Answer 17

Proceeds/receipts lead to an INCREASE of the monetary net assets.

Question 18

What are liquid assets?

Answer 18

Liquid assets refer to cash on hand, cash on bank deposit, and assets that can be quickly and easily converted to cash.

Question 19

Expenses (or: costs):

Answer 19

Costs of consumptions/usage of economic benefits (resources) within one reporting period.
Expenses reduce the net assets (= equity) of a company

Question 20

Give some examples of expenses:

Answer 20

Some examples of expenses include: Salaries & wages, material expenses and interest expenses.

Question 21

Income (therein: revenues from „core“ business):

Answer 21

Increase of economic benefits (resources) earned within one
reporting period. Income and revenues increase net assets (= equity) of a company

Question 22

Give some examples of Income:

Answer 22

Examples of income include:
Revenues from the sale of goods or services rendered, interest income and rental or lease
income.

Question 23

Net cashflow of a reporting period (= change of liquid assets):

Answer 23

Cash Inflows – Cash outflows

Question 24

Net profit (or net loss) of a reporting period:

Answer 24

Income – Expenses

Question 25

Equity Formula:

Answer 25

Assets – Liabilities (= Net assets)

Question 26

Equity Constitution:

Answer 26

Common Stock (Paid-in capital) + Retained Earnings

Question 27

What increases equity?

Answer 27

-Revenue/Income
-Capital Contributions

Question 28

What decreases equity?

Answer 28

-Distributions (e.g. dividends)
-Expenses

Question 29

Define expenditures:

Answer 29

Expenditures decrease monetary net assets

Question 29

Define proceeds:

Answer 29

Proceeds increase monetary net assets

Question 30

Define Expenses

Answer 30

Expenses occur when economic benefits are consumed in one accounting period

Question 30

Define income:

Answer 30

Income result in an increase of economic benefits earned within one accounting period.

Question 30

Outline 2 examples of profit-neutral business transactions:

Answer 30

-Receivables being transformed into cash
-Payment of debt (decrease in both assets and liabilities)

Question 31

Outline at least 2 examples of business transactions that impact the P/L statement:

Answer 31

-Sale of products
-Depreciation expense
-Payment of salaries
-Payment of rent

Question 32

Outline 2 journal entries for:
-Asset changes
- Asset/liability increases
-Asset/liability decreases

Answer 32

-Asset changes: Dr Cash; Cr Receivables
-Asset/liability increase: Dr Cash; Cr bank loan
-Asset/liability decrease: Dr. bank loan; Cr cash

Question 33

Which entities are required to apply the IFRS in Germany?

Answer 33

All banks, stock corporations and entities of public interest (e.g. state-owned entities or Rohstoffunternehmen) are required to prepare financial statements in accordance to the IFRS.

Question 34

1. The objective of IFRS financial reporting places most emphasis on:

Answer 34

Reporting to capital providers.

Question 35

2. IFRS general purpose financial statements are prepared primarily for:

Answer 35

External users.

Question 36

3. IFRS is comprised of:

Answer 36

-International Financial Reporting Standards
-International Accounting Standards
-International Accounting Standards
Interpretations

Question 37

4. The purpose of the Conceptual Framework for Financial Reporting is:

Answer 37

-to assist the IASB in setting IFRSs
-to assist preparers of financial statements in applying IFRSs
-to assist auditors in forming an opinion on whether financial statements comply with IFRSs
-to assist users of financial statements in interpreting IFRS financial statements

Question 38

5. Which of the following could most closely be associated with the objective of financial
   reporting:

Answer 38

Transparency and neutrality

Question 39

6. Expenses are recognised in the P&L:

Answer 39

Using the accrual basis—items are recognised as assets, liabilities, equity, income or expenses when they satisfy the
definitions and recognition criteria for those items?

Question 40

7. The Conceptual Framework:

Answer 40

is in the hierarchy that management must in the absence of a specific IFRS requirement apply in developing an accounting
policy that results in information that is relevant

Question 41

8. What is the authoritative status of the Framework?

Answer 41

If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the Framework. In the
absence of a Standard or an Interpretation that specifically applies to a transaction, management should consider the
applicability of the Framework in developing and applying an accounting policy that results in information that is relevant and reliable.

Question 42

9. What is the objective of financial statements according to the Framework?

Answer 42

To provide information about the financial position, performance, and changes in the financial position of an entity
that is useful to a wide range of users in making eco

Question 43

10. Which of the following are underlying assumptions of financial statements?

Answer 43

Accrual accounting and going concern.

Question 44

11. When should an asset that meets the definition of an element be recognized, according to the Conceptual Framework

Answer 44

When it is probable that any future economic benefit will flow to the entity, the economic benefit is a result of past
business transaction, is under control of the reporting entity and provides us