Chapter 1: Introduction to FA

Question 1

What are the three forms of accounting?

Answer 1

1. Tax accounting: provides information for tax authorities
2. Management accounting: provides information for people within the organisation
3. Financial accounting: provides information for people outside the organisation

Question 2

What are the five main differences between MA and FA?

Answer 2

1. Type of report
2. Level of detail
3. Regulations
4. Time focus
5. Type of information

Question 3

What are the two accounting standards?

Answer 3

1. IFRS (international financial reporting standards)

2. GAAP (General Accepted Accounting Principles)

Question 4

What are the five elements of the accounting framework?

Answer 4

1. Objective
2. Qualitative characteristics
3. Constraints
4. Assumptions
5. Elements

Question 5

What are the fundamental qualitative characteristics?

Answer 5

1. Relevance

2. Faithful representation

Question 6

What are enhancing qualitative characteristics?

Answer 6

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

Question 7

What is adverse selection and moral hazard?

Answer 7

Averse selection: One party has an information advantage over another party

Moral hazard: One party cannot observe actions relating to the fulfillment of the contractural terms by the other party

Question 8

What are the three types of actives companies do?

Answer 8

1. Operating activities
2. Investing activities
3. Financing activities